JF1832: Step-By-Step Guide For Acquiring Properties In NYC #SkillSetSunday with Elliot Bogod

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Most of us know that the real estate market in New York City is both expensive and competitive. Elliot has become a specialist in his market, and he can typically find deals for himself and/or his clients. He even wrote a book on the subject that he has been working 12 years on! If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“Commercial real estate is supported by the economy and the economy is strong” – Elliot Bogod

 

Elliot Bogod Real Estate Background:

  • Real estate author, educator and blogger
  • founder and managing director of Broadway Realty, a New York brokerage
  • Has personally sold over $2 Billion worth of Manhattan residential and commercial real estate
  • Based in NYC, NY
  • Say hi to him at https://broadwayrealty.com/

 


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TransUnion SmartMove’s online tenant screening solution can help you quickly understand if you’re getting a reliable tenant, which can help you avoid potential problems such as non-payment and evictions.  For a limited time, listeners of this podcast are invited to try SmartMove tenant screening for 25% off.

Go to tenantscreening.com and enter code FAIRLESS for 25% off your next screening.


TRANSCRIPTION

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

Elliot Bogod: I’m good, Joe. How are you? I wanna say hi to all your listeners from New York City, Manhattan, and happy to be here.

Joe Fairless: We’re happy that you are joining us, and we are going to be talking about today — this is a special segment, Skillset Sunday, and we’re gonna be talking about today step-by-step guide for acquiring properties in New York City.

A  little bit about Elliot – he’s a real estate author, educator and blogger. He’s a founder and managing partner of Broadway Realty, a New York brokerage. He’s personally sold over two billion dollars (with a B) worth of Manhattan residential and commercial real estate. Based in, of course, New York City.

First, Elliot, do you wanna give the Best Ever listeners just a little bit more about your background? Then we’ll get right into the step-by-step process for acquiring properties in New York.

Elliot Bogod: Sure, Joe. I’m not a New Yorker, I wasn’t born in New York, but I consider myself a New Yorker for 30 years now. I came to New York in 1999, and finished college here in New York, and then started working for a company called Cushman, which is a big brokerage firm. Soon after, I started working for myself, and for my investors and clients.

Broadway Realty is the company I own, and I’ve been a president of Broadway Realty for many years, for over 20 years now. I’m specializing in commercial and residential real estate, and mostly in Manhattan, even though we do some business in other borders of New York.

Joe Fairless: What are some commercial projects that you’ve brokered?

Elliot Bogod: This year a garage building. It’s in the Midtown West, in Hell’s Kitchen, and that deal will be a development deal, which is secured by a storage company, which will develop it into a self-storage facility.

Joe Fairless: Okay, got it.

Elliot Bogod: They got advantage of the zoning, which is a very good zoning for them, for M2 zoning, manufacturing zoning, so they will change the use of it; they will develop it into — instead of a garage, it will be a self-storage facility.

Joe Fairless: What were other potential buyers wanting to do with that piece of property?

Elliot Bogod: You know, this use is a broad use for many commercial users. You cannot do residential, and you cannot do a hotel, but you can do all other uses applicable on the M zoning, which is manufacturing.

Joe Fairless: Got it. So let’s talk about the step-by-step guide… You wrote a new book called “Get Rich in Real Estate: Your Step-by-Step Guide to Acquiring Properties in New York City.” Can you walk us through the outline of your book? Let’s just talk through that a little bit, the step-by-step process.

Elliot Bogod: Sure. The book is about six weeks out, it’s a new book that took me a long time to write; about 12 years, since before the Great Recession we had in the real estate business in New York… Now we are fully recovered, and I believe this recession has changed to a much more stable market. We saw a lot of purchases, a lot of refinancings and a lot of transactions that happened in the New York real estate, and it’s happening this year as well.

We have a strong market, even though the residential part of it I think got softer… But commercial real estate is supported by the economy, and the economy is strong. We see the real estate, which is following the stock market, and the stock market has never been stronger. The job numbers are rising, the actual employment is great, so I think it’s a good time to be in the New York real estate markets.

Joe Fairless: Okay.

Elliot Bogod: My book talks a lot about New York [unintelligible [00:06:32].16] a lot of New York transactions, but this is a model for other real estate markets, and I think that people who do business in other parts of the country – they watch closely and if they see a good deal, they invest in New York real estate, so it helps them.

This book talks a lot about the next happening things, about the New York cycles, about market cycles, and it shows you models and things that will be hot in the next cycles in the markets in New York.

Joe Fairless: Okay. What’s an example of something that will be hot next in New York City?

Elliot Bogod: New York is moved by technology. First we saw dotcoms in the ’90s. Now New York is a big technology hub. We have a lot of companies, such as Google. Google just bought another building in Chelsea, and it all starts with a billion dollars big office building.

So for them, such big multi-million dollar transactions – they move markets, and people look at those transactions and sometimes they secure it for themselves, sometimes they become anchor tenants. We spoke a lot this year about Amazon. Unfortunately for the real estate markets it didn’t happen, but many other companies are looking to get into the New York if they’re not here already.

Amazon, by the way, has a big presence in New York, and we have a lot of people who work for Amazon; it’s a well-paid workforce, and they rent expensive apartments, they also buy expensive apartments… So Amazon workers are very good for the economy, and all the technology sector I think is a very promising sector… So as long as they do well, the real estate market around the industry does really well, for office building as well as residential, and so on.

Joe Fairless: Knowing that that’s the case, that technology is driving the New York City expansion or evolution, how can we as real estate investor capitalize on that?

Elliot Bogod: In New York you can be a small investor who buys just an apartment, a condominium apartment, or you can be a developer who develops big buildings, multifamily buildings and rents them. For those who work in the industry, it’s a great time and a great opportunity to build new housing. It will attract a lot of new buyers, first-time buyers, people who started working in the technology sector.

I think for first-time buyers it’s a big opportunity for both – for developers and investors, people who buy new apartments, who build new condos… They’ll do well in this market.

Joe Fairless: The challenge that a lot of people might be thinking of is “Well, it’s not gonna cashflow, or if it does cashflow, it’s not gonna cashflow very much. I’m gonna have to hope that the market continues to appreciate.” What’s your response to that?

Elliot Bogod: I think that you look at the cap rates in the rental markets today – four, up to five-cap, in the areas that are [unintelligible [00:10:20].24] Brooklyn, Queens… You get debt services for 4%, low fours for developers, and I think that’s what the big moving factor is – they’re getting [unintelligible [00:10:37].08] money at low rates, and that makes it so the banks are still attracted to new developments, and they’re building.

Joe Fairless: You talked about earlier that your book has New York City cycles and market cycles… Let’s talk about New York City cycles – what should we know about the cycles that New York City has gone through, and in particular how that can be applied to the future, as we move forward?

Elliot Bogod: A big downturn in Lehman Brothers in 2008-2009 times – we had few transactions in the years 2009 to 2011. It changed dramatically after 2012. 2015 I think was the highest market in New York… So it gave us a big lesson that the market can change; it can go high or it can go really low, so we saw discounts in the market of 30%-40% from the tops of 2008. That was the top market. The next top market was in  2015, and now we are in a softer market, which is three years after. The prices are still top prices, but it’s a buyers’ market now. Buyers will get good deals if they are careful; they have secured financing, so… Old sellers are listening to buyers now. That’s the situation with the market now, and that’s how it changed.

I talk a lot in my book about the market cycles. The New York cycle is anywhere between 3 to 5 years. The next cycle I think will happen in 2021. That’s when the next [unintelligible [00:12:27].05] market is coming.

Joe Fairless: And what causes it? Because even if it does happen every 3-5 years, it won’t happen just because it’s supposed to. Something triggers it, so what do you think will trigger it in the next three years?

Elliot Bogod: The population growth in New York – New York now is 8,5 million people city, and we have a lot of people looking for upgrading residences, they’re looking for larger apartments, family-size homes… So the residential market has always affected the trends, and that buyers or sellers market. Of course, interest rates is a big factor. This year we had good news about interest rates. They are still low, and it doesn’t look like it’s gonna be increased, even though at the end of the year we can have surprises… But so far, the interest rates are back to the lows.

In the last 3-4 months we had interest rates for mortgages decrease, so I think it’s a good thing for the market. We sold a lot this year, and something that didn’t move last year because of the interest rates, we saw this inventory started selling again. Law interest rates is good for the liquidity.

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

Elliot Bogod: Broadway Realty has a website, broadwayrealty.com. My book is on Amazon – Get Rich in Real Estate, by Elliot Bogod. We’ve got a lot of good coverage already for our book, and people like it; we got a lot of good reviews, and we’ve also got a lot of books sold, so we have a lot of interest in our book.

Joe Fairless: Outstanding. Well, Elliot, thank you for being on the show, having a conversation with us about New York City real estate, the market cycles, where you think the market cycle will end – the current one – and when it will begin, in New York City in particular, and then the technology companies really driving the ongoing evolution of the city and its real estate.

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

Elliot Bogod: Thank you, Joe. Thanks for having me, and good luck to all your listeners, and best of luck in the real estate business. Have great deals and success in real estate.

JF1790: Developing Emotional Fitness To Grow Your Real Estate Business #SkillSetSunday with Carla Blumenthal

Listen to the Episode Below (00:21:13)
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Carla and Joe used to work together in New York City before becoming entrepreneurs in different industries. She has been coaching high achieving men and helping them with business and personal relationships for the past four years. We’ll hear some great insights into emotional fitness, as well as get her best tips and advice that we can put into action. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“There is a six step process to minimize the negative effects” – Carla Blumenthal

 

Carla Blumenthal Real Estate Background:

  • Coach for high achieving men to master their emotions so they can create thriving businesses, relationships, and lives.
  • Over the past four years she’s coached executives and senior leaders across the US in a wide range of professions, including real estate, tech, marketing, entertainment, even an international DJ
  • Clients have included an Emmy-Nominated entertainer, a PR Week 40 Under 40 CMO, a Facebook exec, Fortune 100 executives, CTOs in Silicon Valley, among many others
  • Based in NYC, NY
  • Say hi to her at https://www.carlablumenthal.com/
  • Free Gift for Best Ever Listeners:

 


Evicting a tenant can be painful, costing as much as $10,000 in court costs and legal fees, and take as long as four weeks to complete.

TransUnion SmartMove’s online tenant screening solution can help you quickly understand if you’re getting a reliable tenant, which can help you avoid potential problems such as non-payment and evictions.  For a limited time, listeners of this podcast are invited to try SmartMove tenant screening for 25% off.

Go to tenantscreening.com and enter code FAIRLESS for 25% off your next screening.


TRANSCRIPTION

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

First off, I hope you’re having a best ever weekend. Because today is Sunday we’ve got a special segment for you, like we usually do on Sundays, called Skillset Sunday. Here is the skill that you can acquire once you listen to our conversation – it’s the skill of developing emotional fitness to grow your real estate business.

With us today to talk through that is my dear friend Carla Blumenthal. How are you doing, Carla?

Carla Blumenthal: Joe, I’m so great! I’m so thrilled to be here with you!

Joe Fairless: Well, I am thrilled that you’re here. Carla is a good friend of mine; I’ve known her for many years. We worked together in New York City, and we both have become entrepreneurs, in different fields. Her field is — well, let me tell you a little bit about it. She’s a coach for high-achieving men to master their emotions, so that they can create thriving businesses, relationships and lives. Over the last four years she’s coached executives and senior leaders across the U.S, from a bunch of different professions, including real estate. One of her clients has included an Emmy-nominated entertainer, a person who was a PR Week 40 Under 40 CMO, a Facebook exec etc. She’s based in New York City. You can learn more about her and her company at CarlaBlumenthal.com.

With that being said, do you want to first give the Best Ever listeners a little bit more about your background and your focus? Then we’ll roll right into developing emotional fitness.

Carla Blumenthal: Sure. So I coach high-achieving men on emotional mastery; what that means is that I really believe that your emotions and mindset can either propel your forward in your life and business, or leave you in mediocrity.

I started coaching four years ago, and truly, it found me. My first client was a real estate investor whom I met at a networking event; I explained to him my insights and passions around personal development and the work I do on myself, and really the next day he emailed me asking for me to coach him.

Over the next year I worked with over a dozen men who had a very similar story, reaching out looking for support and helping them through challenges in their relationships and business… And I realized most of the work I had to do, whether it was business-related or relationship-related, actually had to do with their own ability to understand and manage their emotions.

So this really inspired me, and it snowballed into my coaching business, where – like my bio said – I serve men all over the world: CTOs, architects, CMOs, Emmy-nominated entertainers… The list goes on. And really the focus of my coaching is uncovering the emotional and mindset barriers that are stopping people from the full success that they long for in their business and relationships.

Joe Fairless: Normally I hear about the mindset barriers… For me to understand and for people to communicate and get behind, you’re talking about emotional and mindset barriers, and the topic of today is developing emotional fitness to grow your real estate business… So why is emotional fitness important, and what exactly is it?

Carla Blumenthal: Emotional fitness is the skill of understanding how your emotions work, so you can use them to propel you towards your goals. In any business you have to do a lot of things, but some of the main things you have to do is motivate yourself to take action consistently; you have to work with others, build and lead a team, really have successful, lasting relationships with those who can support you… And all of these skills involve mastering yourself and mastering how to influence others. So emotional fitness is really understanding the emotional side of yourself.

Emotional fitness – we can look at it sort of what it’s not… I like to call the opposite of emotional fitness emotional laziness. And there’s really three symptoms of emotional laziness. The first symptom of emotional laziness is really letting your emotions overrule you; perhaps you really anger quickly and start yelling at a contractor when he’s gonna be late with a project… Or we’ve all been in that situation where you get a nasty email and you quickly send a snarky one back. Or maybe it’s in your personal life and you just wanna eat better, but you are eating unhealthy snacks, or ordering pizza when you don’t really mean to. That’s sort of letting emotions overrule you.

Next is avoiding situations or people because of uncomfortable emotions about them. Maybe you start your day looking at your email instead of starting with the most important things for your business. That’s sort of an avoidance process. Or avoiding an important conversation because you don’t wanna rock the boat.

The last way is really suppressing or denying your emotions or what’s going on for you. Maybe you had a deal fall through and you deny your disappointment, or maybe you have  a team member who’s always late, but you bottle up your anger and never communicate it. These are three examples of emotional laziness, and a lot of these can lead to unintended actions – overeating, or overdrinking, or numbing out with Netflix or social media, sort of these stop and start situations with your business. I’ve seen it all.

So it’s helpful to see what emotional fitness is not before we dive into what it actually is. So really emotional fitness is the ability to really skillfully manage all your emotions, so they work for you instead of against you… And it’s not about being happy all the time, it’s about being able to feel different emotions, including both positive and negative, because every emotion serves an important purpose, but it’s about being able to really minimize the negative effects and super-charge the positive ones, so that no matter what happens in your life or business, nothing can take you off your path.

Joe Fairless: How do you minimize the negative in that instance? What are some things you can do?

Carla Blumenthal: Well, I have a whole process on how to minimize…

Joe Fairless: Even better.

Carla Blumenthal: Yeah, so emotional fitness – I really have a six-step process that you can go through to minimize any of the negative effects. Because like I said, you can’t control whether you’re frustrated, or disappointed, or angry. Those are natural things that come up. But what you can do is take them through this process and really be able to choose how you want to respond. So you’re not responding from anger or frustration, but you’re responding based off of your goals and what you want to accomplish.

This six-step process – the first step is to really slow down and see what’s happening. So slow down. Basically, everyone’s running a thousand miles a minute, multi-tasking, and really just trying to reach their goals… But they haven’t trained themselves to recognize that the time to practice anything in their life is right in front of them. So the goal here is just slow down, and any example – maybe that email came through and you’re starting to get angry… So just recognize, “Okay, I’m gonna slow down in this moment.”

The next step is to observe what’s happening in that moment. Literally, our mind is always making meaning, so our goal here is to just be really present and observe the fact of what’s happening. By doing this, you’re taking any meaning or story out of the situation; so you’re just literally observing that email came through, and it said “This, this and this”, and not making a whole story about what it means.

So it’s just really being able to literally observe with curiosity the facts of what is happening. That’s the second step.

The third step is to really assess your thoughts and physiological responses. Starting with your thoughts – are they leaning negative, are they coming up with a story, is self-doubt creeping in? And being able to observe your thoughts and then observe what’s going on in your body. You have sweaty palms, is your chest tight, are your fingers tapping on the table? What’s going on within your body? So next is assess your thoughts and physiological responses.

The next step is to recognize your emotions. There was an interesting study out of UCLA a couple years ago that said that verbalizing your feelings actually makes your sadness, anger and pain less intense. So when you name your emotion, the intensity of the emotion actually goes down.

Joe Fairless: I believe that. That makes sense. I’ll speak for myself – anytime I have something that I am concerned about, if I write it down or talk about it, then it just seems less daunting, because it’s no longer this mysterious thing that’s omnipresent, it’s “Well, it’s now this one specific thing that we’re talking about” with vulnerabilities, as well.

Carla Blumenthal: Totally. That’s the first step – being able to name the emotion; exactly what you said. Whether it’s writing it down, speaking about it with someone… That’s the next step, and you can do this very quickly, to yourself as well.

So naming the emotion, and then the second to last step is pausing. I think this is the most powerful one… Because when you pause, you get to choose how you get to respond, instead of being overruled by your emotions. Like you said, if you’re feeling angry or you’re feeling frustrated about some things, all of your power resides in your ability to choose your response. And when you can really let that sink in, that you don’t need to be overruled by something or you don’t need to supress it, it’s about bringing it forward and pausing and recognizing how you want respond, you get to build your life from there.

And the last step is choosing which response you want to take, and then taking action on it, and creating the meaning for the situation that you want to create.

Joe Fairless: One of my favorite quotes – I think it’s Abraham Lincoln – is “You’ll be as happy as you choose to be.” I just love that. It’s something I wholeheartedly believe. Nothing has meaning in life until we choose to give it meaning, and that’s what this is all about, right?

Carla Blumenthal: Exactly. It’s being able to slow down enough, choose how you want to respond, versus letting something else choose for you, letting the pattern choose for you… And then being able to make the meaning that you want from there.

Joe Fairless: The challenge with this – and I’m sure you’ve heard it before – is… You just gave a six-step process, but we’re talking about emotions, and emotions can be a quicker thing, or maybe there’s something in the moment that’s taking place… How practical is it to go through a six-step process in our head, and then also verbally in some of these steps, whenever you’re in the middle of an event that is high stakes and high emotions?

Carla Blumenthal: That’s the root of what we can get at here, is the power of the pause. Like you said, we can’t control the emotions coming in. We can’t control what comes up for us. What we can do is even if it’s a two-second pause, saying “Oh, I recognize there’s the emotion of feeling frustration. How do I wanna handle this? Am I gonna share my frustration in this way? Maybe I do wanna send that snarky email. Or how do I wanna handle it in this moment, knowing I need to collaborate with this person?” So that power of the pause in the middle of this process is so important… Because it gives us the full power to choose not only our actions, but then really down the line, the meaning that we assign to it.

Joe Fairless: I love the power of the pause… And it sounds like it’s also being very intentional and self-aware of what we’re going through in that moment, what we’re feeling… And then Malcolm Gladwell would say we’re thin-slicing at that point, where we’ve had similar experiences throughout the course of our life, and now we can thin-slice, so in a split second we can identify “Okay, here’s how I wanna approach it, because I have come across these situations before”, whereas without the power of the pause we’re on autopilot and we’re not being as thoughtful or mindful of how we’re reacting.

Carla Blumenthal: Yes, exactly. And when we’re on autopilot, we’re not really choosing our responses, or to be honest, what the end result is.

Joe Fairless: Right. A lot of the success in real estate is about relationships. And if we are building relationships for the long run and continuing to – as Tim Ferriss would say – play the long game, then we’re gonna set ourselves up for success in the short and the long term… And the power of the pause and the six-step process is a great tool for that.

What else that we haven’t talked about as it relates to developing emotional fitness to help us grow our real estate business do you think we should talk about?

Carla Blumenthal: Well, there’s a difference between information and transformation. There’s a difference between intellectually learning something, intellectually reading the six steps, and even listening to podcasts and reading books… But until you are really ready to change, and unless you’re really willing to go beyond the information part and put things into practice, things are gonna be very slow for you and you are not gonna get to the outcomes that you want as quickly. So that’s a big area here – really saying “What’s in the way of me changing?” and being very clear with yourself what the barriers are, even if they’re just sort of made up in your head… What are the barriers for you to make the transformation, to move from information to making the change you want? I think it’s such an important skillset to practice.

Joe Fairless: Is there a legitimate barrier, or are they all just made up?

Carla Blumenthal: Well, there are stories in people’s minds, but they can feel real. One of the things that we often overcome in looking at emotional fitness is when you do want to move into changing. I know a part of your story, Joe, is moving from living in New York City, working in advertising, to being a really successful real estate investor… And I’m sure over your time, I’m assuming you had to really assess your identity, in many ways; who are you, and who are you becoming? Sometimes when we move from information to transformation, we do have to assess our identity, and we do have to be willing to let go of, in many ways, a past part of ourselves, or be very clear about the vision of who you want to become. I know you went through this process.

Joe Fairless: Sure. Yeah, absolutely. I’ve interviewed professional athletes, or former professional athletes who are now in real estate, and they say a similar thing – they say “I was known as X, but now that’s over, and now I want to be Y.” And first off, it’s an ego hit, because they’re going from being on ESPN and having some notoriety, to not… And then also it’s transforming their identity to then take it into a different direction and try and climb a different mountain.

Carla Blumenthal: Definitely. And when you aren’t aware that you’re going through that process, a lot of people self-sabotage. A lot of people don’t recognize that when you’re shifting from one identity to another, so if you’re becoming a real estate investor, or maybe you’re even becoming a dad, or whatever it might be, this is about shifting your thoughts, your emotions, your overall way of existing into the person you wanna become. And if you aren’t aware that you’re going through that process, sometimes you do end up self-sabotaging and taking you back down to your old ways of being, your old identity, your old demeanor.

Joe Fairless: Yeah, change is inevitable, but progress is a choice, right? Change is gonna happen, but if we’re progressing and evolving – well, that’s more of a choice and an intentional thing… So Carla, how can the Best Ever listeners learn more about what you’ve got going on?

Carla Blumenthal: Sure. I have a free gift for the Best Ever listeners. CarlaBlumenthal.com/bestever – you can download a free audio and workbook about mastering productivity and focus by really becoming more emotional fit. Feel free to download that guide for you guys, and also, I’m at CarlaBlumenthal.com as well.

Joe Fairless: Awesome. Well, Carla, as always, I thoroughly enjoyed our conversation. Thank you for being on the show. Best Ever listeners, CarlaBlumenthal.com/bestever, go get that free guide. Carla, I hope you have a best ever day, and we will talk to you again soon.

Carla Blumenthal: Thanks so much!

JF1768: Investing Niche: Providing Furnished Apartments For Short Term & Long Term with Hank Jonap

Listen to the Episode Below (00:19:26)
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Hank and his company work with rental companies to help furnish their apartments and move in great tenants. Typically their tenants stay for multiple years, but they also have month to month lease options available. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“When we’re moving in a unit, we move in that first day, after that, our sales team handles everything” – Hank Jonap

 

Hank Jonap Real Estate Background:

 


Evicting a tenant can be painful, costing as much as $10,000 in court costs and legal fees, and take as long as four weeks to complete.

TransUnion SmartMove’s online tenant screening solution can help you quickly understand if you’re getting a reliable tenant, which can help you avoid potential problems such as non-payment and evictions.  For a limited time, listeners of this podcast are invited to try SmartMove tenant screening for 25% off.

Go to tenantscreening.com and enter code FAIRLESS for 25% off your next screening.


TRANSCRIPTION

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

Hank Jonap: I’m doing very well, thank you. Thanks for having me on the show.

Joe Fairless: Yeah, my pleasure, and I’m glad to hear that. A little bit about Hank – he is the director of real estate for Blueground. He oversees the company’s location expansion strategy, and new space acquisitions. Based in the Big Apple. With that being said, Hank, do you wanna give the best ever listeners a little bit more about your background and your current focus?

Hank Jonap: Sure, absolutely. I’ll tell you a little bit about  Blueground first. Blueground is a real estate tech company offering beautifully-furnished and thoughtfully-equipped apartments, for stays ranging from 32 days to a year, or even longer. Here at Blueground we’re on a mission to create a tech-powered living experience that guests love, homed in an organization where great people are proud to work with these carefully-selected, ideally-located apartments, and upgrade them to be fully furnished homes, so people can show up and really start living from day one. Our vision is really to make people feel at home, wherever they choose to live.

More on a personal note, I started my real estate career out of college on the brokerage side of the business, working with Newmark Knight Frank, [unintelligible [00:03:19].09], then kind of transitioned over to SL Green Realty, who’s a large commercial real estate company here in New York, where I’ve dabbled in everything from property management and instruction project management, and then kind of moved into more of an underwriting and operational, construction side of the business, where I would be evaluating large deals, where the company would potentially be acquiring and creating a value-add situation.

After spending about eight years at SL Green, I ended up in a little bit different of a lifestyle, and moved into the startup culture where I worked for Breather products, who is a flexible workspace solution that is catering to instantaneous workspace and on-demand solutions, whether it’s for a short-term meeting, or a great office for 10, 30, 50 people, that really just provides you great flexibility in your daily work environment.

Joe Fairless: So with Blueground, help me understand a little bit more… Because furnished apartments have existed before Blueground. So what is it about Blueground that’s unique?

Hank Jonap: Blueground offers many unique things, one of them really being just that we have tech at our core, and that really enhances the client experience and the stay, where our clients can really learn a lot about our products through our website, which is the blueground.com, or even through our mobile application.

We really provide a much higher level of experience, from design, to the cultural fit. Our clients really feel at home and are happy to stay in our homes for a very long duration of time. We actually have an average stay of six months and longer in many of our cities, which just tells you that our clients are really happy to be in our apartments, and really appreciate the unique design, and high-quality furniture, and just the living experience we provide to them.

Joe Fairless: Okay, so your units are competing with hotels and Airbnbs then, correct?

Hank Jonap: In some cases. We don’t really overlay much with the hotel world. We have a shorter stay of 32 days, which eliminates the transient nature of the business, when a hotel would be for a handful of days, or a week maybe. Our clients are really staying with us for a longer duration of time.

Joe Fairless: So you’d be competing with maybe an extended stay hotel, or something like that.

Hank Jonap: Correct.

Joe Fairless: Okay, got it. So you mentioned a design and cultural fit… How do you deliver on that value proposition?

Hank Jonap: We’re fortunate enough to have a wonderful design team, that really provides a unique layout and experience for every one of our units, but also [unintelligible [00:06:00].14] into our brand identity. One of the things that makes Blueground so amazing in reference to what we do is that we actually manufacture and streamline all of our own furniture. We’re making high-end furniture that’s unique for our apartments, where we can really just highlight certain details and elevate the experience of the unit… Whether that’s with our furniture, our beds, our couches, as well as fully-equipped kitchens, which is really one of the things that our clients do value, at the end of the day.

Joe Fairless: Huh. What other ways is your company integrated? You mentioned you manufacture your own furniture… Anything else that you do that would be noteworthy?

Hank Jonap: I guess one other thing is that when you compare it to a hotel, people are staying in our units and they really value the additional space, and the ability to not just have a bed and a shower in a hotel room with a TV on the wall; they love the ability to make our units their home, and the ability to stretch our on one of our high-quality sofas, or have dinner at one of our dining tables. The furniture is made to improve and enhance their way of living.

We provide everything to our clients, from their towels and linens… It really makes them feel that they’re in a place they wanna live instead, and not something they happen to just pass through.

Joe Fairless: Got it. So with the manufacturing of your own furniture, I imagine that the price point for the consumer is gonna be in line with more of  a luxury type of extended stay hotel… If there is such a thing. I don’t even know. What type of price point are we talking about for staying here? I know it depends on the area.

Hank Jonap: Yeah, area and city plays a large factor into the price point. Even talking about here in Manhattan, you’re gonna pay a different price point for being in the financial district, to the Upper West Side. But our clients, typically, depending on the duration of stay — if we have a client that’s looking for one of our great units for, say, a 12-month lease, pricing is gonna start around $3,000 for that monthly rate. That includes all of their services. There’s no hidden fees, or anything like that.

Joe Fairless: Cool. And that’s in New York City?

Hank Jonap: That’s correct. But prices range across that platform, across all of our markets.

Joe Fairless: Sure, sure. I lived in New York City for ten years, I get the varying price range for sure. Okay, so your focus is the company’s location expansion, and getting new space acquisitions… Can you talk a little bit about your business model and how you grow your footprint?

Hank Jonap: Sure, so we grow our footprint in many different ways, really depending on the city and our partners. We have a great team of real estate business development associates and managers in all markets, that are out in the market, meeting with different owners, brokers, individual landlords, really trying to tell them that we are the best option for them over your everyday renter… Or coming into units and meeting with landlords to help them stabilize a unit. We’re not a tenant that’s coming in for a year; we’re typically there for 3, 5+ years… But we work with regular rental companies, companies like Related, or Stonehenge, or Pinnacle (New York), but we also work with a lot of the large institutional companies, like Blackrock or Blackstone, that have assets throughout the world.

We also work with various individual investors and condo owners, who are looking to potentially purchase a condo in New York as an investment. To have steady income, they’re able to work with Blueground, who is able to come in, fully furnish their unit, operate this for them, and all they have to do is pretty much sit back and know they’re having steady income on an asset that they can hold on to for many years.

Joe Fairless: And I’ve noticed on your website you’re in about 8-10 markets… The major ones in the U.S, and then some international markets.

Hank Jonap: That’s correct. We’re in nine markets in total, six here in the U.S. We’re currently operating here in New York City, as well as Boston, D.C, San Francisco, L.A. and Chicago. We have approximately about 900 units spread out across the U.S, and a little more than 2,000 globally.

Joe Fairless: What’s the sales pitch to the owner, other than you’ll be there for 3-5 years? …which is significant, because turnover costs, as you know, eat into the bottom line for owners. What else is the value proposition when you’re speaking to owners?

Hank Jonap: Sure. We’re [unintelligible [00:10:25].21] with owners, and basically really able to drive home many different factors. Some of the other ones would be that when we’re moving into a unit, we’re moving in that first day we take possession of it, bring in all of our furniture in there. After that, our operations and our sales team is filling units for extended periods of time. So it’s not a transient type of business, we are not dealing with people coming in and out with suitcases every few weeks. Our clients are coming, and in many cases these are high-end business professionals that are looking to stay in the units for their job. These are their homes; it’s a place for them to come home to, and the average renter than any landlord would be happy to have just needs flexibility in their living situation, and that’s what we do, too – that flexibility that in many cases landlords can’t offer, but can  work with Blueground to expand their offering as a building or as a company.

Joe Fairless: You were originally a broker in your career… What are some things that you learned from that experience that you’re applying to what you do today?

Hank Jonap: Time is everything when dealing with real estate. Time can kill a deal, so the ability to move quickly, to know what works and to be able to close. That’s been something that’s always been true to me. In real estate it comes down to location, so understanding what you’re looking for, having a strategy, and kind of going into it with a purpose is something that allows you (or anybody) to really get the deal done, and to go in knowing exactly what you need to walk away with.

Joe Fairless: What are you looking for in a location whenever you look at growing the footprint?

Hank Jonap: In many cases, we’re looking for accessibility to public transportation, whether that be subways or buses. Our clients wanna have a feel natural air, and like coming into the units, so typically we’re on a floor that’s gonna cater to those elements.

We have many clients that are coming that wanna be close to their office for the convenience factor, but we also have many units that allow the clients and our guests to get away from certain parts of the city, so they can step away to the Upper West Side and have an office in Midtown, be close to the great restaurants, parks or things that are important to them when they’re not working.

So our units can range from great transportation, to great restaurants, to parks and access… That’s really the one thing, that we’re strategically locating in places where the everyday individual wants to be.

Joe Fairless: And that certainly holds true in New York City, but when you get to outside of the bubble of New York City and you go to Dallas, Fort Worth, or Miami, or other cities where most likely people are not gonna be taking public transportation – at least en masse, they’re not taking public transportation; they have a car. What would you look for in those types of cities?

Hank Jonap: In those types of cities, as you said, people are driving. Mass transit isn’t [unintelligible [00:13:15].22] It’s access to parking, in many cases, and allowing people to have the ability to conveniently get around to different parts of the city, or being able to have some space to enjoy life a little bit differently. Now, I can’t get into too much about the markets we’ll be going to, and I do know in some of our locations we are very focused on certain downtown business districts, and the convenience for people to work and live, and kind of bring it all together in a very high-end, unique way.

Joe Fairless: And will you describe your typical customer who is renting from you?

Hank Jonap: We have many different customers, and that’s something that we’re proud to say we have. I would say our average customer is a business professional who might be from a consulting company, or a startup, that is traveling around, trying a new city, or being sent somewhere, that just wants a unique experience, wants something more than just a hotel room… Wants to sample a new city and see what it has to offer, and really kind of just have a different experience than what others might be able to provide them. But at the end of the day, it’s not so much that you try to cater to a certain client, but you’re catering to a certain type of living style.

Joe Fairless: And just so I’m clear on how you deliver on that unique experience – you mentioned there’s a layout for every unit, it’s customized, and you manufacture your own furniture… What else do you do to deliver on that unique experience?

Hank Jonap: Outside of just the design and everything that we provide to our clients, it’s the customer experience. The ability to work with our staff to get additional cleaning services, have us help them with certain things they’re trying to do, or recommendations for restaurants, or things to do in the area. It’s allowing our clients, at the end of the day, to just have a seamless experience. It can take the worrying away of moving, or trying to find a place, or buying furniture… They can literally just show up into one of our units, know exactly what they’re getting, and start living.

Joe Fairless: So you have a concierge. Along with renting the unit, you’ve got someone who serves as a concierge for them.

Hank Jonap: Correct, and that’s all through our tech platform. That’s the nice thing, where everybody today is on their mobile device; you don’t have to go to a lobby and talk to somebody and wait on line. It’s all through our mobile application, where you can get immediate attention from one of our trained staff.

Joe Fairless: Taking a giant step back – based on your experience as a real estate professional and investor, what is your best advice ever for real estate investors?

Hank Jonap: My advice for real estate professionals and investors – it’s a long game; there’s many people that are always looking for the quick dollar in real estate. I always like to look for those — I’ll call it kind of the low-hanging fruit, where something that might not be the best opportunity today, and just a stable thing, but you have to look to the future and know that it’s a safe bet. That’s just something that I’ve always personally realized – you never know what’s gonna happen, but if you’re willing to hold on to it and understand the long-term value in real estate, that’s what I’ve always thought is a great separator from some of the larger players out there.

Joe Fairless: Do you have an example of something you’ve purchased or you’ve been involved in a transaction, where you took that to heart and held on to it for the long run, and it came to fruition?

Hank Jonap: To be honest, personally, no. I’ve been investigating a lot of various opportunities, but I’m a new father, so most of my recent savings has been going to my family and raising my young child. Currently, I’m a renter, and thankfully, I have the ability to stay in some Blueground apartments, which makes me feel like I’m home even when I’m not.

Joe Fairless: Well, congrats on new fatherhood. We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Hank Jonap: Absolutely.

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

Break: [00:17:12].17] to [00:17:55].10]

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

Hank Jonap: I’ve been reading a lot of kids’ books. Other books that I’ve probably read recently is Rich Dad, Poor Dad.

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

Hank Jonap: A mistake I’ve made in business… Sometimes fact-checking. There’s been an opportunity where I checked the date of something that was just a quick oversight, but the date was actually two days out instead of two years out.

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

Hank Jonap: I love giving back to the community by helping, whether it’s charitable donations, or doing various walks and marches for breast cancer, or even over Thanksgiving working at a Food Kitchen, or something of that nature.

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

Hank Jonap: The best way to check out our company and learn more about our great units would be to check out our website, at theblueground.com, where you can see all of our cities, all of our apartments, and learn more about what we have to offer and how we can help [unintelligible [00:18:43].13]

Joe Fairless: Hank, thanks for being on the show, talking about the business model, talking about the value proposition, and how you and your company that you work at deliver on that. I really appreciate your time. I hope you have a best ever day, and we’ll talk to  you again soon.

Hank Jonap: Thanks so much, Joe. I appreciate you having me on.

JF1750: How To Diversify Your Investments Away From Wall Street with Alina Trigub

Listen to the Episode Below (00:20:45)
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Alina had a need of her own, and as many entrepreneurs do she started her own business. She began investing in real estate for herself because of a need to diversify her own portfolio, now Alina also helps other investors do the same. By working with other passive investors she can help others diversify without having to be active. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“There is no Nostradamus to tell us if the recession is going to happen tomorrow or 3 or 5 years from now” – Alina Trigub

 

Alina Trigub Real Estate Background:

  • Founder and Managing Partner of SAMO Financial, a boutique equity firm
  • Help clients over 1,200 doors, over 500 storage units and a $10M mobile home park fund
  • Works with high earners to passively invest in real estate
  • Based in NYC
  • Say hi to her at https://www.samofinancial.com/
  • Best Ever Book: Compound Effect by Darren Hardy

 


If you’re a passive investor wanting to learn more about questions to ask sponsors in order to qualify the opportunities, sponsors, and the markets opportunities are in, visit BestEverPassiveInvestor.com.

We created this site just for passive investors to have a free resource providing the questions to ask and things to think through. BestEverPassiveInvestor.com


TRANSCRIPTION

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

Alina Trigub: Doing great, Joe. Thank you. I’m very happy to be here, and thank you for inviting me.

Joe Fairless: Yeah, looking forward to our conversation. A little bit about Alina – she is the founder and managing partner of  SAMO Financial, which is a boutique private equity firm. She’s helped clients get into over 1,200 doors on multifamily, over 500 storage units, and into a ten-million-dollar mobile home park fund. She’s based in New York City. With that being said, Alina, do you wanna give the Best Ever listeners  a little bit more about your background and your current focus?

Alina Trigub: Absolutely. Thank you, Joe. As Joe mentioned, our clients get into commercial real estate by passively investing with us. I started out my career as a tax accountant in the big four environment, with Ernst&Young, and later on I switched to the technology world and became a liaison between business and technology professions.

This field made me realize that we are, for the most part, working with other people, so if you wanna achieve anything in this world, having a full understanding of how the relationships get established and maintained is absolutely essential for success. With that in mind, and with a personal problem to solve, which was to diversify out of Wall Street, I started my journey of finding a way out of the stock market.

This has been my concern for many, many years, and partially because I’m a former tax accountant, so I always think about taxes… And I have seen a number of significant stock market crashes in my lifetime, and some of the smaller stock market crashes as well… So my main concern was always to find a way to conserve the wealth, and then find a way to save in taxes.

Real estate has been on my mind for many years, and finally I decided to give it  a try, and I started conducting an extensive research, which led me to Bigger Pockets, which in turn led me to find syndications. I started about 5-6 years ago as an equity partner in someone else’s deals, and over time I realized the value and the conservatism of this strategy; not only that it allowed to preserve wealth, it also allowed to save in taxes, and in addition to that, it was giving me residual income.

Out of this business idea was born, I decided to start my own company, whose mission would be to strictly help other investors to preserve their wealth and to build passive income by utilizing the tax saving strategies. So that’s my main concentration today – working with investors, helping them select the appropriate investment based on their needs, based on their interests, whether they wanna diversify, invest in one commercial real estate asset class or the other, and help them understand the tax consequences without giving them advice, just explaining to them what I know and what I’ve seen based on my personal experience with the industry overall.

Joe Fairless: So you’ve helped your investors get into a lot of different opportunities… Are you in all those opportunities, the same ones that your clients are in?

Alina Trigub: I am.

Joe Fairless: So I imagine that you’ve seen some ups and downs on projects… Tell us about a project that didn’t go according to plan.

Alina Trigub: Sure. I’ve seen a project where we started out really well, but then about a year or so into the project we got a notice from the general partners (I was LP in this project) saying that there was apparently a big hole behind the apartment complex and the tenants started using that hole as their garbage dump, so they started dumping garbage… And unfortunately, the people that noticed that garbage pile were not the property management company, but rather the town, and the town imposed a really big fine on the property, and in turn that fine would be a burden for the investors… So the deal sponsor has hired the legal team to fight against the town to lower the fine or get rid of it altogether. While they couldn’t get rid of it altogether, they were able to lower it by almost half. Even with that, it was still a pretty big burden; the dividends weren’t paid to investors for a few quarters, and they had to bear the legal costs in addition to paying the fine to the town… So that was kind of  a challenging disappointment.

Joe Fairless: Do you remember how much the fine was?

Alina Trigub: No, but it was in the hundreds of thousands of dollars. It was pretty big.

Joe Fairless: Dang. So it’s one thing to be fined for people dumping garbage into a hole on the property, it’s another to have a city official discover it and not the property management team discover it… So did you or anyone (to your knowledge) ask the general partner why they didn’t discover this or their on-site staff discover it first?

Alina Trigub: Yeah, the question did come up. We didn’t get a clear answer, and obviously, we weren’t happy with what the property management company was doing overall. After a little while, after the fine was paid off and this was settled, they decided to sell the property altogether. So the property was sold, and it was all more or less hushed out… But they did not give us a clear answer as to why the property management didn’t notice this.

Joe Fairless: Anything that you took away from that experience that you applied to future deals or future general partners that you partnered with?

Alina Trigub: Absolutely. When I talk to future partners that I partner with, and people that I know that I do business with now, I always ask them about the property management company they have, the relationship they established with the property management, and their interview process – what kinds of questions they ask the property management company, whether they stay on top of not only the regional managers, but also the managers that are in charge of each specific property; what kind of follow-ups are done and what kind of reports they’re getting from the property management, to make sure that they’re staying on top of things within the property itself.

Joe Fairless: What are some good answers and bad answers to those questions?

Alina Trigub: The good answers: “Yes, we get weekly meetings with the property management company, and they give us weekly updates, and we travel to the property either every month, or at least every other month.” The bad answers is “Oh yeah, they send us periodic reports. We look at those reports, and sometimes we talk to them once a month.” To me, that’s a red flag. You should be on top of the property management company and be in touch with them every single week, if not more often than that.

Joe Fairless: And do you recommend to your investors that they go check out the properties before investing in them?

Alina Trigub: I offer it to them. It’s not my recommendation. These days with Google Earth they can see the property themselves virtually, and actually the investors that are local to the property sometimes do decide to take a trip and take a look at the property, but if it’s outside of their immediate area, or if it requires a flight, most of them don’t really wanna go. But yeah, I always tell them that it’s open if you’d like to go, join the deal sponsors, take a look at the property. The option is there.

Joe Fairless: So you’re in a lot of doors and units, and you’ve got multifamily, self-storage and mobile home. Of those three, which one was the hardest to gain a firm grasp on in order to be comfortable to not only invest your own money, but also recommend it to others.

Alina Trigub: I don’t know if one or the other was the hardest one, but I would say naturally I started with multifamily because for me personally it was close to home. I could relate to the asset class. I lived in an apartment building at some point in my life for a very long time, so I could understand it much better than the other two classes; I knew what the apartment buildings were about and what to expect from them, I understood the difference between different neighborhoods… I lived in Brooklyn for a very long time, and I’ve seen drastic changes when you literally cross the street from one block to another, so I can relate and understand the difference between going, say, from a D+ area to a C+ area. There’s a huge difference… And so forth.

But over time, and after speaking with a number of my investors, I realized that there is a need to help them to diversify, and not just stick to multifamily  and going to multiple markets, but also go into other asset classes. Naturally, I started doing research and looking into other asset classes, which are the asset classes we can attack forward… And by being a former accountant, I’m very conservative by nature, so I wanted to find something that would be conservative enough to sustain any recessions, if we had any… So storage is the first one I stared looking into, I believe. And again, I’ve done research, I’ve talked to people that have been investing in storages, asked them what is it about that asset class that they like, and some of the things that I was told is that most people, when they’re downsizing – downsizing normally happens, again, during the recessions, when people wanna go from a large house into a small apartment…

They don’t wanna get rid of their stuff, they wanna store it, because they think that it’s a temporary thing; they’re gonna store it for a couple years and then come back and buy another house… And that in most cases never happens. They put their junk in a storage and let it be there for a very long time… So it makes this asset very profitable, especially during recession time, and they continue keeping it in the storage because the rent is not as significant as for the apartments. It’s a much smaller amount. And they just continue keeping the junk, because they never wanna get rid of it, and it stays in storage for a very long time.

I would say a similar concept of being more of a conservative asset class applies to the mobile home park. What I’ve found with mobile home parks is we all have this preconceived notion that a mobile home park is this dilapidated building that’s gonna collapse when the next wind blows its way… But it’s not that anymore. There are mobile home parks that from outside look like regular homes, but they’re just a lot more condensed, a lot more small, and they are built specifically for people that are looking for affordable living. They wanna live in a good, decent area. These are good, working folks, but they cannot afford the high prices of, say, Arizona, where the rents are astronomical, so they go rent or even buy this mobile home park, so they can live there with their kids, and  kids can potentially go to decent schools. That allows them to stay in a decent community.

And again, if you find tenants like that, that will stay with you for a very long time, especially when the mobile homes are owned by the tenants because they don’t wanna pay the price of moving their mobile home from one location to another – to them, it’s a lot more expensive to move than to stick to the same location and maybe pay a small increase in rent for the land that they’re paying.

Joe Fairless: What’s a disadvantage of each of those three?

Alina Trigub: The disadvantage of multifamily is yes, it’s dependent on the location, depending where it’s located; say you’re looking at a D area… While it could be a a good income source, it’s gonna be very labor-intensive. You have to constantly stay on top of either your property manager, or if you’re self-managing, then you have to stay on top of the tenants all the time. It’s very hard to manage the property when it’s in a really bad location.

When it comes to storages, again, storages could be hit or miss, depending on where it’s located and depending on where we are in the economy. Like I mentioned, if the economy is doing well, and people are buying larger houses, then the demand for storage may be not as significant as during the downturns. So that may impact the storage as a class altogether.

With mobile homes – again, the age of the mobile homes has a significant impact on them. If the mobile homes are much older and require a lot of maintenance, then obviously the park doesn’t wanna own them, and the tenants will not be as prone to buy them, because it’s an older home and it will require a lot of work; they will look at homes that are probably newer, or have been built in the last 20-30 years. That’s the disadvantage of the homes that are much older.

Joe Fairless: And out of the three – you have three similar projects that are presented tomorrow. You have the equity for one of those three. How do you decide which of the three to do?

Alina Trigub: In addition to looking at the asset classes, I look at such things as the deal sponsor… What is the track record of the deal sponsor? How long have they been around? Have they gone through at least a cycle or more? Outside of the deal sponsor, I also look at the deal itself – where is it located? For instance, if we take multifamily, the multifamily as an asset class needs to have the infrastructure in place. I’m gonna look whether there is a major airport in the area, does it have colleges and universities in the area? Are there shopping centers nearby? Is the highway easily accessible? What is the job industry doing? Are there jobs coming into the area? Are there people coming to fill in those jobs, so in other words, how high is the demand? What’s the typical vacancy for the area? If all of those components adapt, then that’s the asset class to compare.

Then I go to the next asset class and look at pretty much the same things – what is the demand and what is the breakeven point? That’s another component that I need to look at – what’s the breakeven point for each of the three asset classes, and where it’s gonna lead if we hit the recession tomorrow. Everyone is talking about this recession, but no one can predict — there’s no Nostradamus that can tell us whether the recession is gonna happen tomorrow, or three, or five years from now.

So we need to find ways to mitigate the risks and be able to sustain that poor economy if it happens, and make sure that the asset that we’re buying is still cash-flowing. People can bet on appreciation, but I personally don’t wanna be on appreciation,  for myself or my investors. My main goal is to make sure that, based on the analysis, the asset will continue to cash-flow and the investors will continue to be paid; even if we go through a recession, however many years it is, we can come out and sell it.

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

Alina Trigub: My best advice would be educating yourself prior to taking action. I think it’s extremely important to understand what you are doing and how you’re approaching the business. In my case – well, in syndication – I think it’s absolutely critical, for myself and for others who wanna learn about syndications, to educate themselves, learn the business first, before taking any action.

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

Alina Trigub: Absolutely.

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

Break: [00:16:28].21] to [00:17:12].13]

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

Alina Trigub: The Compound Effect, by Darren Hardy.

Joe Fairless: Best ever deal you’ve done?

Alina Trigub: It was a deal where I invested as an equity partner. After about a year in the deal we got at least half of our principal back, and the dividends were above the expectations, so it’s been phenomenal.

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

Alina Trigub: Our very first investment that my husband and I did – we bought a property without doing the proper due diligence. Basically, our friends had been in it, and we bought the property. It was around Philly area. We just followed that trend – we went ahead, went through the filter and bought property in the same area, and it was an absolute disaster. We had to sell it with a loss. We had everything from people breaking in, to drugs, to stolen pipes… You name it.

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

Alina Trigub: I volunteer by educating kids in underserved communities. There are plenty of such places in New Jersey. I’ve done lectures to these kids on career aspirations, higher education importance, personal development, and I just love to see the sparkle in these kids’ eyes when I say something that touches their trigger points. It’s very rewarding.

I also like to give back through Bigger Pockets. It’s a great community, and I’ve learned a lot by asking other people questions, and now I’m trying to give back by answering other people’s questions.

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

Alina Trigub: Through my website, it’s samofinancial.com. My phone number is there. Or they can find me on any social media – Facebook, LinkedIn… I’m everywhere.

Joe Fairless: Well, thank you so much for being on the show, Alina, and talking about the different types of asset classes that you invest in – multifamily, self-storage, mobile home parks. The pros, as you see, for each of those, as well as a disadvantage, or a potential disadvantage for each of those three… And then talking about the cautionary tale for the one syndication that you were in, where residents were dumping garbage in a big hole, and the town found it before the manager, imposed a fine, well in the six-figure fine, which did hurt the distributions and delay them for a period of time.

That specific scenario I haven’t come across, so it’s always good to hear what could go wrong, so that as operators we know to be proactive and continue to be on-site and make sure we’re checking out the grounds, so that we proactively address those types of things. And then it’s also good from a passive investor – any limited partners who are listening… There are some pretty esoteric things that could come up on a deal where you don’t receive the distributions that you were projected, and here is one of them. I don’t imagine a town fining the general partner because there was garbage being dumped in a hole happens very often across the United States… I think that’s a pretty unique scenario. But there are all sorts of those types of scenarios that could come up, and that’s the point.

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

Alina Trigub: Absolutely. Thank you for inviting me. Great to be here.

JF1743: Finding Commercial Comps Can Be Tough, He’s Here To Help with Michael Mandel

Listen to the Episode Below (00:21:43)
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Michael was in a position that required him to research comps for the company’s deals. He was having trouble finding relevant comps, so he started working on a solution. Enter his company, CompStak, they provide comps nationwide from brokers, appraisers, and research people in real estate brokerage firms to anyone who uses their platform. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“The way you differentiate yourself is through your creativity” – Michael Mandel

 

Michael Mandel Real Estate Background:

  • Co-Founder & CEO of CompStak, the nationwide provider of commercial real estate data and analysis
  • Has provided 2 million comps on 700k properties totaling 10 billion leased SQ. FT.
  • Based in NYC
  • Say hi to him at https://compstak.com/
  • Best Ever Book: Shoe Dog by Phil Knight

 


If you’re a passive investor wanting to learn more about questions to ask sponsors in order to qualify the opportunities, sponsors, and the markets opportunities are in, visit BestEverPassiveInvestor.com.

We created this site just for passive investors to have a free resource providing the questions to ask and things to think through. BestEverPassiveInvestor.com


TRANSCRIPTION

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

Michael Mandel: I’m doing well, thank you.

Joe Fairless: Well, I’m glad to hear it, and welcome to the show. A little bit about Michael – he’s the co-founder and CEO of CompStak, which is a nationwide provider of commercial real estate data and analysis. The company has provided two million comps on 700,000 properties, totaling ten billion leased square feet. Based in New York City, New York. With that being said, Michael, do you wanna give the Best Ever listeners a little bit more about your background and your company’s focus?

Michael Mandel: Absolutely, sure. Before starting CompStak, I was a commercial real estate broker. I was working [unintelligible [00:01:39].15] in New York City. I did office leasing transactions, representing both landlords and tenants, and I did data center deals throughout the country. I started CompStak out of my experience as a broker, because when I was a broker – as probably many brokers who listen to your show could attest – I would spend a lot of time trading data, specifically trading lease comps when I’d get a lot of leasing work… And I was doing that over the phone and via e-mail, and most notably, in our weekly market meeting that we had every Monday morning. Really, it was sitting in one of those market meetings for hours, as we’re trading random comps for other random comps, I realized “This is silly. We’re all sharing this information in the industry…”

I would be calling up other brokers frantically on Sunday night, trying to get information to share in the Monday morning meeting, just so I could sit around this table and hear about deals that were largely irrelevant to what I was working on. And the thought was “Well, all these brokers are trading data… Why don’t we build a database where everybody can put it, so you could find what you need, when you need it?” And that’s what we did.

We basically took that offline process of people sharing information, creating a credit system, where brokers, appraisers and research people can earn credits for sharing data on CompStak, and then use those credits to get other comps back out. So it took what everybody was already doing offline, which was basically tit for tat (you give a comp, you get a comp), and we’ve put it online and made it even more fair. I think that was really well-received in the industry, because it’s just a much more efficient way of doing things.

Joe Fairless: Well, yeah, I love that approach; I love that story, too. It was like an a-ha moment, where you were doing it offline and there was no real system, so then you’ve created one… And props to you, because it’s one thing to be in the middle of that madness initially, and it’s another thing to think “Oh, well this would be a good idea”, and then it’s at a whole other level to actually act on it and do it. What are some challenges you came across during the acting on it and doing it part?

Michael Mandel: Well, there’s constant challenges, and we continue to have challenges… There’s nothing about being an entrepreneur that isn’t challenging. But I think what it came down to is I think people have a conception “Oh, you build a tech product, and then everybody just uses it, and it’s an overnight success.” The truth is that for most tech companies you spend a lot of time doing things manually, and just grinding away until things start to work, and until you sort of hit the flywheel, where it works by itself.

In our case, we were trying to create a marketplace, and when you’re building a marketplace, you’ve got a real chicken or the egg problem. People don’t wanna use CompStak unless there’s valuable on there; but you need the people to get the data, but you can’t get the data without the people… So it was a challenge, and basically, initially it was just me — I remember a distinct memory, sitting at my couch in my apartment, calling up every broker that I knew in the industry and saying “Hey, I’ve got this new thing. I’ve set the login for you. Here’s your login. I want you to send me some comps to put on it.” And getting them to log in and send comps, and then every week calling through the same list of people and saying “Hey, you haven’t logged in this week. Why haven’t you logged in?” or “Hey, you haven’t sent me any comps this week? Why haven’t you sent them?”, until eventually people just started doing it on their own, and finding value on their own. I had to really manually hand-crank that machine to get it going.

Joe Fairless: I have a whole lot of respect for you in that regard. So you got the machine cranked up a little bit… Once you had more people who were on there, what are some major things you’ve tweaked or optimized with the site or the process, that looks different now than originally?

Michael Mandel: Well, we’re one of those companies that what we’re doing is fundamentally still the same as what we were doing in the beginning. We haven’t pivoted; it’s still the same model. I would say we’ve made the interface a lot better, we’ve added analytics to sit on top of this data to allow you to really do some interesting things with it… We’ve added a lot of new ways to search the data and filter it and find what you’re looking for. We’ve had to build out tremendous infrastructure to allow us to process all of the data, because when we started it was just my friends in New York giving us comps, and now we’re bringing in over 50,000 comps a month, each one with anywhere from 15 to 50 data points within it; so we’re bringing in millions of data points a month, and we’re getting all this stuff in scanned PDFs, Word documents, Excel spreadsheets… So there’s been a lot that we’ve had to do on the back-end to scale our infrastructure to be able to do this.

At the end of the day, what’s the most valuable to our members is the data. The data’s gotta be there, and it’s gotta be comprehensive, and it’s gotta be high-quality. There’s a lot of bells and whistles on top of it, but that’s not what drives the value. The value is the data, and that’s what we’ve always focused on.

Joe Fairless: And I’m purely guessing here, but I’d like to guess and then you can tell me what the answer is… My guess is that you’re going to make money through a version where people can pay to get access to this data, so it’ll be free for the brokers and people who upload the stuff, and then for people who aren’t participating in the sharing system, if you want access to that, then you pay. Is that the business model?

Michael Mandel: Actually, it’s very clearly delineated. We have CompStak Exchange, where we have brokers, appraisers and research people in real estate brokerage firms who share data on CompStak, earning credits for sharing that data, and can use the credit to get other data back out. And that is a free platform, it’s been free for seven years, and will continue to be free. As long as you give data, you can get data. And actually, those members cannot pay for data; they have to give to that.

Joe Fairless: Okay.

Michael Mandel: And then we have CompStak Enterprise, where we sell subscription access to our data via our web platform; we also have API deals and integrations. On that site we have some of the world’s largest institutional real estate investors and lenders using that data to make real estate investment decisions and to lend on commercial real estate. Those are — I’ve gotta think about which logos/names I’m allowed to mention… There’s companies like Wells Fargo and most of the other [unintelligible [00:07:50].28] People like Blackstone, and Tishman Speyer, and Brookfield, and SL Green, it is major insurance companies, it is pension funds, sovereign wealth funds… A lot of major institutions that use this data to make their investment decisions and to lend on commercial real estate. And lots of other use cases, too; we have hedge funds that trade on the data, we have insurance companies that do property and casualty insurance underwriting using the data… So there’s lots of interesting use cases of this.

Joe Fairless: Did I hear you correct, you have 50,000 comps a month coming in?

Michael Mandel: Yeah, over 50,000 comps come into the system a month.

Joe Fairless: Okay.

Michael Mandel: And that’s growing constantly.

Joe Fairless: And did I also hear you right,  you’ve been doing for seven years?

Michael Mandel: Yeah.

Joe Fairless: What point were you out of the woods and you were no longer having to manually call people and it took off more organically than having to hand-crank, at least?

Michael Mandel: Sure. Well, we still do hand-crank. Some markets we don’t have to do any hand-cranking. In New York City, which was our first market, we can do nothing and the thing will just probably go on forever, as long as we [unintelligible [00:09:03].18] the data. Every lease comp in New York City, we get an average of ten times, and we get a lot of those deals the day they take place, because there’s a competition for people to be the first one submitting and earn the most credits for submitting comps.

But we’ve consistently been launching new markets, so our database now spans from New York City to Honolulu, Hawaii, Anchorage, Alaska, Sioux Falls, South Dakota… We’re in every state, we’re in every town, so in some of those newer, smaller markets we still have to hand-crank, we still have to call up the local people in that market and get them engaged and get them sharing data. But there is a strong network effect, so over time you have to do less and less of that in a market. That’s why we have right now eight people at CompStak managing 20,000 members. If you look at that in contrast to a  company like CoStar, which has 1,800 researchers, effectively cold-callers, calling for information… So our corollary, our exchange team is the one to do that business development work and to build relationships, but they don’t have to call everybody, they just have to call some people and they just have to make sure those relationships are strong, and people wanna contribute… But our members are the ones that are contributing the data and doing that work.

Joe Fairless: Why would a successful broker who can afford to pay for a service like CoStar participate in your platform when they have to do some work, versus  – their time is valuable, so instead they choose to just pay for something like CoStar and not have to do any work for the data?

Michael Mandel: Sure, most of the brokers on CompStak do pay for CoStar and use CoStar, but you can’t get this data on CoStar. Part of my experience in starting CompStak is that I used to use CoStar every day when I was a broker, and I used it for listings, but we could never really rely on CoStar for lease comps, because the reality is that everybody wants to share their listings with CoStar, because you want your listings out there, but when that same researcher from CoStar would call you and ask you about the terms of the deal for that listing you just took off the market, you wouldn’t give that to them, because they’re not offering you anything in return for it. They’re not incentivizing anyone to share that information, so people just don’t share that with them.

So the end result of that – they just don’t have good quality lease comps data… I don’t know that it’s 100%, but it’s probably close to 100% of our members on the Exchange side who trade data also use CoStar, and they use CoStar for listings… And a high percentage of our Enterprise customers use CoStar for listings too, and I think CoStar absolutely is the place we wanna go for listings. They have amazing market coverage, particularly for for-lease listings, but for lease comps that wouldn’t be the case. And now for sales comps – we now capture sales comps data as well, but it’s a similar situation; CoStar is able to get the publicly-available information and the information people are allowed to share. You’re able to capture things like NOI and cap rate from our members, because they’re incentivized to share it. That’s really the differentiator. CoStar is very good for the things they are very good at, and we’re very good at the things we’re good at.

Joe Fairless: Mm-hm. That’s huge, having accurate NOI and cap rate… Is there a checks and balances for the accuracy of the NOI cap rate?

Michael Mandel: Sure. I think it’s a broader question, which is just sort of like “How do we maintain data quality across the board?” And that’s obviously tricky for any data company, certainly for a crowdsourced data company… But the way that we go about it – we actually used to have analysts review every comp that came into the  system, and they’d call up the brokers into the deal, or they would call up the person who submitted the comp and try to get more information… Obviously, that wasn’t scalable, so what we’ve done is we’ve built pretty sophisticated machine learning on top of the process, where — in fact, I wouldn’t really call them machine learning algorithms, but basically data science work that is used to look at the decisions our analysts were making in a manual fashion, and to automate those decisions. So we were able to pretty efficiently find outliers in the data and clean up the data and normalize a lot of these versions into master records, and then instead of having analysts look through every comp, we actually flagged certain comps for greater review by our analysts.

We also have a community regulation piece, so our members earn credits for updating incorrect data and lose credit if their data has been updated by someone else… And we have the fact that we get every comp multiple times, and every time we get it there’s another opportunity to validate the data.

But I would say the best testament to the quality of our data really is our customer base, because when you go and pitch a Tishman Speyer, you walk into their conference room and they expect you to show them all of their own deals; you’ve gotta have their deals, and those deals have to be accurate. If they’re not, they won’t sign a contract. So I think that that’s really a testament to the quality.

Joe Fairless: Very true. That’s a great point. In some databases I’ve seen some pretty whacky stuff on my company portfolio’s deals… I’m like “That’s not right, but I don’t care. I’m not gonna correct it”, because in some cases it’s beneficial that they have it so grossly inaccurate.

Michael Mandel: Well, you’re probably not eager to sign a contract with that company.

Joe Fairless: Yeah, exactly. Exactly. It’s quite the company that you have… I find this fascinating from an entrepreneurial standpoint, and also being in the industry. Your typical clients – you mentioned a couple times lease listings and lease comps…Are you referring to a certain asset class when you’re mentioning this?

Michael Mandel: For our lease comps we cover office, retail and industrial. And for sales comps we cover basically everything but single-family homes.

Joe Fairless: Okay.

Michael Mandel: And then we cover related property information for all of them.

Joe Fairless: Okay. When you take a look at some of the data that’s been accessible and been updated, do you all put together any reports on surprising things, or industry trends, or market trends based on the data, or do you always wanna keep that data behind closed doors for the members?

Michael Mandel: We certainly do, on occasion. We don’t do it very often, because when you’re a startup and you’re resource-constrained, you have to figure out how best to deploy your resources… And frankly, it takes a while to write reports and get them out there. We are now significantly building out our team, and we’re actually building out a new team here at CompStak that we call CompStak Intelligence. We’re gonna be putting out a lot of content – market reports, but also daily little tidbits on interesting things we’re finding in our data, and we’re gonna be publishing that over e-mail, and writing blog posts… So you’ve hit on something that is actually a real priority for us this year. I actually just interviewed candidates to join my team today, and I’m very excited about it, because we have such a unique dataset, and we think that we can create some really special thought leadership leveraging that data.

Joe Fairless: Based on your experience in the industry and as an entrepreneur, what’s your best advice ever for real estate investors?

Michael Mandel: Well, I guess I’ll be biased here and say my advice is that you should leverage data to do your job exceptionally, and then you should leverage creativity to really make a difference. I think that data has become table stakes in this industry. You’re not gonna win a deal, you’re not gonna make the best investment decision because you’ve got better than somebody else, or at least you shouldn’t; you should make sure you’ve got every piece of data you can available to you, so that that doesn’t become a variable for you. And then, the way you really differentiate yourself is through your creativity, going above and beyond that data to make your decisions and to focus on how you make your investments and what you do. But if you’re not doing the fundamentals of leveraging every piece of data that’s available, you’re really missing the boat.

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

Michael Mandel: Oh, boy… I hope so.

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

Break: [00:17:10].18] to [00:17:58].02]

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

Michael Mandel: Well, I’ve just read Shoe Dog, by Phil Knight. I don’t know if that’s the best ever, but it was a really good read. My latest book that I’ve just picked up is The Sales Acceleration Formula, by Mark Roberge. He was the head of sales for HubSpot, and I’m excited to read that one. I just saw him speak and he was great.

Joe Fairless: What’s the best ever transaction you’ve done, either through CompStak or as a broker or as an investor?

Michael Mandel: Good question. Well, the funny thing is the best transaction that came to mind is one that blew up on me. When I was a broker, that would have been the best ever… No, but I’m excited that —

Joe Fairless: What was it? Tell us the story of that.

Michael Mandel: Oh, man… I had a massive data center deal I was working on. It was an off-market deal, and it was a two-million-dollar commission on a data center deal in Manhattan… [laughs] And we lost the deal because another company got wind of the deal that we were doing and came in from under us; they had better credit than my tenants, and basically the landlord did the same exact deal with another company, that had better credit than my tenants.

Joe Fairless: Oh, man… You’re smiling about it now, but I bet you weren’t then.

Michael Mandel: Oh, I was not… It would have been a game-changing deal. But frankly, had that deal taken place, I don’t know that I would have started CompStak. I would have been sitting on a lot of money, and I maybe would have said “You know what, I’m gonna stick with this brokerage thing.” So maybe there is a silver lining in it.

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

Michael Mandel: I have two kids, so I don’t do a lot of kicking back. I’ve got a four-and-a-half-year-old and a one-and-a-half-year-old. But lately I just got Peloton Bike in my house, a spin bike, and it’s awesome.

Joe Fairless: I said giving back, not kicking back…

Michael Mandel: Oh, I thought you said kicking back… That’s funny. [laughs] As far as giving back, I spend a lot of time talking to other entrepreneurs, I try to help people getting their businesses off the ground, and particularly people in real estate tech. I try to be as helpful as I can to help them figure out how they can build their businesses, because I’m happy to support the ecosystem.

Joe Fairless: Real quick, do you like that bike?

Michael Mandel: I love the bike. It’s great. The bike is awesome.

Joe Fairless: Best ever way the listeners can learn more about your business?

Michael Mandel: Just go to our website, compstak.com, and check it out. They can also e-mail me; I’m michael@compstak.com. I’m happy to chat.

Joe Fairless: Michael, I enjoyed our conversation. I loved hearing about your entrepreneurial journey, how you were in the middle of a process that was unnecessary and you identified it as being unnecessary. And not only did you identify it, but then you did something about it and have been doing something about it for the last seven years with CompStak… So that is relevant for anyone, regardless of what we’re working on.

Then also having your one-two punch of you’ve got to have the data, but then how do you leverage it creatively? That’s so applicable to business and everything else. You’ve got to have the core assets or tools, but then what do you do with them? How do you leverage those tools? Well, we all have access to those tools, or we could have access to them if  we’re resourceful enough, but then what do we do with them? I love thinking about business that way.

Thank you so much for being on the show; I enjoyed learning about your company. I hope you have a best ever day and we’ll talk to you soon.

Michael Mandel: Sure thing. Thank you, I really appreciate it. It was a lot of fun.

JF1741: Investing In Distressed Debt #SkillSetSunday with Joshua Jaouli

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Joshua is joining Theo on the show today to talk with us about distressed debt. We’ll hear about his overall strategy, including how to find the distressed debt to invest in, how to evaluate them, and ultimately how to invest in the debt. A great episode for an intro into the distressed debt investing field, also a very informative episode with nuggets for even an experienced investor. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“Distressed debt is a space where not only do you need to have a lot of capital lined up ready to go, it’s something that takes a more sophisticated buyer” – Joshua Jaouli

 

Joshua Jaouli Real Estate Background:

 


If you’re a passive investor wanting to learn more about questions to ask sponsors in order to qualify the opportunities, sponsors, and the markets opportunities are in, visit BestEverPassiveInvestor.com.

We created this site just for passive investors to have a free resource providing the questions to ask and things to think through. BestEverPassiveInvestor.com


 

JF1707: Apartment Syndication Case Study #3 | Lessons Learned From Another Deal Sold

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Frank and Joe are having another case study conversation of a recent deal which they took full cycle. The property had its own unique set of challenges they had to overcome to make this deal work. From unexpected repairs to the outside and foundations, to replacing an entire new fence around the property. They also did a lot of things right with the deal, and we’ll hear about that too. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“Now we do our own property condition assessment” – Frank Roessler

 

Frank Roessler Real Estate Background:

 


How great would it be to buy a piece of institutional-quality, income-producing commercial buildings? Now you can… with BuildingBits. It’s NOT A REIT or a fund. BuildingBITS is a new platform for non-accredited investors, where virtually anyone, regardless of income, can select a building leased to a major corporation and earn money from it!

Start investing with as little as $500 at https://www.buybits.us/


TRANSCRIPTION

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

With us today we’ve got Frank Roessler. How are you doing, Frank?

Frank Roessler: Very good. How are you, Joe?

Joe Fairless: I am doing well, and welcome back to the show. Best Ever listeners, you recognize Frank because you’re a loyal listener. He is the co-founder of Ashcroft Capital. We formed Ashcroft Capital and we have exited some deals; the purpose of this conversation is to talk about the lessons learned from a deal that we exited, so it’s a case study conversation. It’s not to beat our chests about “Hey, look at us, this was a good deal”, it’s to discuss the stuff that we learned, and ultimately to help you out whenever you’re doing your own deals, so that you can learn from the things that we came across, the challenges that we came across when we were executing the business plan of a multimillion-dollar apartment community.

With that being said, we’ll go ahead and dive right into it. Today we’re gonna be talking about a property called Carrolton Oaks. Best Ever listeners, by the way – if you’re curious about Frank’s background, then just go to AshcroftCapital.com or listen to a previous case study conversation. So we’ll get right into it…

This deal that we sold fairly recently, Carrolton Oaks – how should we start our conversation, Frank? What’s the best way to kick this off?

Frank Roessler: I was gonna say maybe let’s just start off by talking about what drew us to this investment and why we liked it. The reason I would say that is because Carrolton Oaks really represents everything we look for in a value-add property. It’s really right down in the middle of the fairway for us. Ashcroft Capital – we’re value-add guys, we like to by properties with full meat left on the bone; something that a previous owner might have left on the table for us, where we can go drive net operating income to whatever business plan we create, and then hopefully return our investors a nice, strong multiple. That is indeed what happened on this property, and I think it’s because, like I said, it’s everything we look for.

Carrolton Oaks came across our desk — it was actually the third property that we did here at Ashcroft Capital, and it came across our desk because it was a marketed deal. This property was a nice-sized property, 320 units. With a property of that unit count you’re gonna get some good scale of economy; hopefully a lower price per door on expenses like payroll, turn costs, marketing, things like that. So good size.

Secondly, it was being sold by a non-institutional group. It was bought by the patriarch of a wealthy family, who passed away, and his daughter is the one who sold this to us. Joe, you might remember she did a buyer sales call from Cancun, while she was sipping a drink.

Joe Fairless: Yeah.

Frank Roessler: That’s unusual, but what we like about that is usually when you’re buying from a group that is not institutional, there might be some efficiencies or inefficiencies at the property which we can help tighten up, and hopefully reduce expenses, which will drive net operating income.

Another reason why we liked this deal was that they had not renovated any units. They had bought this deal several years back; as I said, the daughter inherited this property, and now she was just looking to exit. She was actually a full-time eye doctor, not a full-time property owner. So because they had not renovated any units, and other comps had in that area, we saw an opportunity to push rents, and improve the community, improve the quality of life at this asset, and get that multiple that we always seek out.

The market itself – we always do a lot of homework on the submarkets that we look at, and the market itself had a lot of projected rental growth underneath it. It’s Carrolton, Texas, which is just North of the city of Dallas. It’s kind of a submarket of Dallas-Fort Worth, in a good – not great, but a good school district; Carrolton-Farmers Branch Independent School District was there, so that was another box that was checked.

Another thing that was great about this property is it was infill. When we say infill, that means there’s not a lot of land to be developed around the asset, but it was infill based on single-family homes. So yes, there were a couple comps, but it’s not like apartment community row, where we’re one of a dozen apartment communities. It was us, a property next door, and then another comp a mile away. Everything else was single-family homes.

What we like about that – and this was similar in Woodglen Village actually, the first property we bought… It was that it creates a desirable place for families to live. Because if you can’t afford to go buy a $350,000 to $500,000 home, you can rent in a good school district, be around  a great residential suburb, have your children go to a good school. So it was very desirable for families, and we like to own communities where families want to live. They’re more long-term, stable residents, they tend to be consistent, pay their rent on time, and they also tend to really appreciate what we do for the properties. They are looking for their unit to be a little nicer; they like nicer appliances, and cabinetry. And because they’re families, they typically have higher household income to afford to pay a small premium for that.

Like I said at the beginning of this call, it was right down the middle of the fairway for everything we look for… And that might sound easy, but when you get into it, as you know, Joe, every property usually comes with some good and some bad. There’s usually never the perfect asset for value-add. I’m not saying this was perfect, but it certainly checked a lot of the boxes that we look for. So in terms of just a place to start, it was our value-add deal.

Joe Fairless: Yeah, yeah. Just curious, on the school district front – let’s say the school district (and it wasn’t great), instead of it being good, it was below average. Does this deal still pencil, if it’s a below average school district?

Frank Roessler: Well, that would be one chink in the armor of this deal. There’s always a price for every property, so to say it wouldn’t pencil – I don’t think. But what realistically would happen is our price might lower because we might say the submarket is not as desirable, families might not wanna live here, so we might not be able to get the premium we need to do these renovations. So then our business plan might change, our purchase price might change, and unless the price that the seller wanted changed, we just probably wouldn’t be able to get the deal.

As we always say, we underwrite somewhere between 75 and 100 properties we buy one, and usually, due to a few or many things that just don’t check our boxes, we’ll either not offer, we’ll offer the price that makes sense, and we just won’t get the property, because there are some other aggressive buyers that will drive the price higher.

So it would have penciled at a price, but probably it just wouldn’t have gone our way.

Joe Fairless: You mentioned there were some good things and some bad things. What were some challenging things that you think we should talk about?

Frank Roessler: I would say — as I mentioned, this was the third property we did, and I always like to talk about these… And this was a very successful investment, but I think part of the purpose of these calls, as you said, is to hopefully give a lesson or two that we had on these properties, and for your listeners to learn from this example, versus learning the hard way and doing it on their own.

One of the challenges we faced was definitely deferred maintenance. I will say though the third-party report came in very clean – it didn’t recommend new roofs, new paint, foundational issues… They really didn’t. Though that happened, we certainly experienced a lot of issues at this property. Now, none of them were extremely high, but we had foundational issues on three properties. When you get in there, there’s settling issues. Doors aren’t closing properly.

It turns our Carrolton — we did a tremendous amount of homework, but you can always do more… But it turns out Carrolton – the soil in that area is very soft, and continuing to settle. And this community, along with several houses in the area, has some settling and foundational issues, and we had to spend money on about five or six buildings, do tuckpointing and sure up the foundations, that we didn’t anticipate. That takes money away from other projects that you penciled for, of renovating the units, and repainting the property, things like that. So that was one issue we had.

Another was just drainage in general. We didn’t get to tour the property when there was heavy downfall, so it’s hard to know how drainage is going to work on the property without really seeing that. A couple months after we bought it there was just pools of water… And there’s a lot of acreage on this property too, and there was lots of areas where irrigation systems were either shut off, or not working properly, or the drainage systems of the building weren’t routing water properly. This led to other foundational issues… So we spent a lot of money turning back on those irrigation systems, rerouting drainage and getting the water away from the buildings when it would rain. That’s another project that I wish our engineers — or maybe we would have instructed our engineers to possibly pay more attention to.

And then others are just things that are really hard to identify. The entire perimeter fence was one thing that we should have paid more attention to; it started falling apart after we bought the deal, and we had to replace that whole fence. And when you have several hundred feet of a perimeter, that can get very costly, too.

You know, I don’t wanna beat this up too much. We did a lot more right than wrong on this deal. But if I could just impress upon the listeners one thing – don’t just settle for the third-party property condition assessment; a lot of times they’re not good enough, and they’re not doing the due diligence that you will need… So get your own engineers out to this property and spend a little bit more upfront. This was a 320-unit property; probably for another 100k in closing costs we could have had a few more professional engineers out there, someone looking at the foundations and the irrigation, and someone looking at the mechanics of the property. I’m not saying that didn’t take place from our third-party, but we didn’t do it internally, and we probably should have on this deal… And we started doing that subsequently.

Now, I think starting on maybe the deal right after this, we have the third-party which our lender requires us to do, but then we spend our own dollars and we get our own property condition assessment reports done. So we don’t just rely on those. And often our own is much higher and much more conservative, and it gives you not only projects that you need to get done if you were to buy this property day one, but also projects that are just kind of warning projects. Like “These roofs – I’m not saying you have to replace them, but as your engineer, you’re paying me to give you a number, and I think in five years you might have to replace all these roofs. Here’s a potential bid for it.”

We paid a lot of attention to those internal property condition assessment reports. We now make  sure either we’re covering the things that we think we have to do on top of it, or we’re preparing a sufficient contingency fund in order to cover any rainy day projects.

Joe Fairless: When the dust settled on this deal, what were the final investor returns? Do you have that in handy?

Frank Roessler: Yeah, I do. We did very well on this deal. We bought right, we negotiated right, and we closed at a 6.1% cap. We increased the value from the purchase price to sale price by 61%, in just over 18%, so that created an IRR of 42.2% on a project level. Pardon me, the valuation increase was actually the Alara. Carrolton Oaks – we increased the value by 32%, which created an IRR of the 42.2%. That created an equity multiple of 1.7 for our investors, and over 18 months it definitely made our investors very happy.

So this was a very successful deal. You don’t often see IRRs in 30’s, or high 20’s even, and we hit a 42 on this property. We had almost all of our investors 1031 their proceeds from this deal to another deal, so this was a very great deal for us.

Joe Fairless: So we talked about the school district – that would have changed things a little bit, but  it’s tough to identify really how much. What would be one thing about this property that if we took that one thing away, that type of return would not have been able to be achieved?

Frank Roessler: I would just say the comps, the submarket. So if this was a property where we theorized if we renovate, there will be a demand for a nicer unit, and if there’s the demand, then you can charge a higher premium – if you would have taken that away (and we certainly see submarkets like this), then you should think twice about it. You might not get that return on your investment for renovating these units. You wanna do a sufficient amount of market research to make sure you’re looking before you go leap and spend all those dollars… Because you would not wanna be in a project after closing, and then discovering “Oh my goodness, these residents don’t really care about nicer units, nicer cabinets, floors or light fixtures. They’re just looking for a place to live, and don’t care about the quality of it.” And there are plenty of places like that, that if you’re not careful, you might step into it.

Joe Fairless: I enjoyed our conversation, as always, Frank. Thanks for talking through the case study. Best Ever listeners, if you want to learn more about our company, just go to InvestWithAshcroft.com, and you can go learn more about what we’ve got going on… But you probably already know about us anyway, since you listen to this show.

Some things that Frank mentioned, that we learned through this process with Carrolton Oaks – the deferred maintenance, drainage, and perimeter fence… Basically, having a third-party do the due diligence like the lender requires – you’ve got to have that anyway, but in addition to that, have your own property condition assessment completed; that way, you’ve got two objective perspectives on the assessment of what needs to be done.

And ultimately, making sure that your fundamentals are in place for the opportunity. As Frank mentioned, if we weren’t able to achieve the rent premiums, then that’s a problem. So we were in the right market, and it was just a matter of tweaking some of the business plan… Which there will always be some tweaking of the business plan on an ongoing basis when you have 300 units, so you’ve probably got around 1,000 people living in a small footprint. Anytime you’re dealing with that many people, there’s always business plans and circumstances that are evolving, and it’s a fluid situation… So it’s just being able to make sure you’ve got your fundamentals right.

Frank, thanks again for being on the show. I hope you have a best ever day, good catching up with you, and we’ll talk to you again soon.

Frank Roessler: Likewise. Thank you, Joe.

JF1701: We Sold Another Deal! Lessons Learned From Taking Another Deal Full Cycle with Frank and Joe

Listen to the Episode Below (00:17:37)
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Frank has been on before, both to share his Best Ever Advice, and also to discuss another deal that Ashcroft (Joe and Frank’s apartment syndication company) took full cycle. We’ll hear why they bought the property at a time most investors were not optimistic about the market the property was in. They tell us about the business plan, and how it actually unfolded. This was only Ashcroft’s second property purchase, so a lot of learning opportunities along the way! Take their lessons learned with this deal, and apply them to your business, without having to suffer through the trials yourself. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“We could have done a better job with our lease audit, unit walks, and really getting to know the extent of the demographic around us” – Frank

 

Frank Roessler Real Estate Background:

 


How great would it be to buy a piece of institutional-quality, income-producing commercial buildings? Now you can… with BuildingBits. It’s NOT A REIT or a fund. BuildingBITS is a new platform for non-accredited investors, where virtually anyone, regardless of income, can select a building leased to a major corporation and earn money from it!

Start investing with as little as $500 at https://www.buybits.us/


TRANSCRIPTION

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

With us today, Frank Roessler. How are you doing, Frank?

Frank Roessler: Very good. How are you, Joe?

Joe Fairless: I am doing well, and welcome back to the show. Best Ever listeners, we’ve got a special segment for you – it is all about case studies, and most importantly, what we learned from those case studies. Today, Frank is gonna be leading the conversation about a deal that we took full cycle. Anytime you take a deal full cycle, you’re gonna learn some things along the way.

It was a successful deal for us and our investors, but we’re not really gonna be focused on that, as much as the lessons we learned, so that we can help you learn stuff as you go about doing your own deals. And by the way, if you wanna learn more about Frank – we won’t get into his background, because you’ve heard that on previous episodes. If you wanna learn more about Frank, just go to our website, ashcroftcapital.com, or investwithashcroft.com and you’ll learn more about Frank.

Frank, let’s go ahead and get right into it… What’s the deal and why did we like the deal?

Frank Roessler: Okay, so this property was called The Alara. It was located in Houston, and it was a smaller complex of 155 units. Why did we like the deal? We liked the deal, plain and simple, for two reasons. One – the basis. We were getting this deal at a tremendous cap rate, compared to where most multifamily was trading; most value-add 1980’s product in Houston at that time was trading for about a 6,5%, and we acquired the Alara for us at 7.7% cap rate. That’s a very, very strong basis to go into a property at. Right around 36k/door is what that translated to. Very low basis.

We liked that oil had crashed. We bought this deal in 2016, oil was down around $40 or so, and it used to be well above $110 a barrel… So as all of our fathers or uncles have told us, “Buy low, sell high”, and that is indeed what we did with the Alara.

I think what we did that was wise is we bought a deal that had a lot of value-add, had a great cap rate, and we also timed the cycle very well. We bought when there was not a lot of confidence in Houston; when there’s not a lot of confidence, there’s not a lot of buyers, so you can do well by holding on until confidence returns, buyers are in the market, and therefore cap rates go back down. So that was why we liked the deal – the economy and the timing of the cycle.

Joe Fairless: On the flipside of that, with most deals now I think it could be successfully argued that you’re not gonna get a great cap rate, and the timing of the market – not quite where you’ve just described… I don’t wanna get too off-track here, but how can you still be successful with really buying during the opposite of great cap rate and timing the market right?

Frank Roessler: It’s a great question, Joe. I wouldn’t advise anyone to make a business out of trying to time the markets right. No one has a crystal ball. Hedge funds usually don’t beat the S&P. There’s a lot of Ph.D. students that are focused on this that cannot do that… So I would not recommend that.

So short of that, well, just admit, “Hey, we don’t know what the future is gonna bring, so let’s make sure that we’re buying it at a good price right now, that we have a good business plan right now. If things don’t change too dramatically, let’s focus on the short-term return. What is our cash-on-cash most likely gonna be in years one and two and three?” and not “Where are we gonna sell this deal in five years from now?” So I would say focus on the fundamentals of investment; focus on the fundamentals of multifamily, and the actual demographics of this property, in that submarket, and what you can do based on your business plan. And if those returns are suitable for what you’re seeking, then move forward, and then try to buy that property at the lowest price possible. But for timing the market, focus on the fundamentals.

Joe Fairless: Yeah, I completely agree. Best Ever listeners, you can go to multifamilycorrection.com and you can read — I don’t wanna call it just  a blog post, because we spent a whole lot more time and research on it than just a blog post… It basically is a blog post, but it’s a very in-depth analysis of why I’m confident multifamily is gonna do well after the correction, or even during the correction… So multifamilycorrection.com – you can read that analysis.

So those were the reasons why we liked the deal… And then how did the business plan unfold?

Frank Roessler: The business plan unfolded not in the way that we thought it would, and I love the story of this deal  because there are a lot of learning lessons for listeners, and we had our learning lessons on this deal. This was the second property we had acquired. This property was actually bought at a price below six million dollars, so we bought it at a great basis. However, there were two things flying in the face of getting a good loan on this property. One is the submarket; as I’ve just mentioned, oil had crashed, and this was Houston… And when that happens – yeah, that’s great that there’s not a lot of buyers and you can get a property at a good price, but so too lenders are not going to be around, or as plentiful as they would have been in an area where there’s more confidence. So it’s gonna be more challenging for you to get a good loan on this property.

If you’re underwriting for a certain debt in a stable market and then you go look at a property in a very unstable economy, be prepared to have higher interest rates, lower loan-to-values. I don’t wanna say predatory lending, but you’re not gonna be with the who’s who of the debt market… So be very cautious.

Secondly, in any market, under ten million bucks, getting a loan, and really under 5-6 million on purchase price – there’s also not a lot of reputable lenders in that world either… So like I said, in a good market, if you need a loan for 4 million bucks or so, you’re not gonna attract the most reputable, stable lenders, who are gonna have the best spreads. You’re gonna attract lenders who are trying to grow their company, and they don’t want to make mistakes; they’re dealing with maybe smaller buyers, with not as good of a track record, and if they’re dealing with those buyers, in turn they’re gonna want to mitigate risk by charging higher interest rates to those buyers.

So we had two things going against us for debt. One was the economy itself was very unstable because of oil, and two, this was just a small property, so we weren’t gonna get the best lenders. That was a real challenge for us, and one that we didn’t anticipate things being such a challenge. I can talk for an hour about it, but we had lenders that gave us an offer, we accepted, we put a deposit down, and then the next week those lenders pulled out of the deal. It was very chaotic and very stressful.

At the end of the day, we did partner with a good group, but we got lucky to partner with that good group, because there were not a lot of other options out there. So we learned that lesson on debt.

I would say also — this was our second deal, and we knew the submarket was very challenging. We knew that there were properties around us that had renovated, and performed the way that we need this property to perform, but if I could speculate, I think we could have done a better job with our lease audit, our unit walks, and really getting to know the extent of the demographic around us. I think we walked into something saying, “Okay, we have a lot of non-paying residents”, but we weren’t aware of the extent of honestly the criminal element at this property, and then dealing with paying more for security to come to this property. We weren’t aware that the police did not like coming to this property, and when we had a problem they would not show up… And it gets worse. So I think we could have done better homework, making sure that we knew what we were getting into with the demographics.

And what I liked about it – we learned this lesson on a very small deal. We cannot be so naive and foolish and think “Okay, well, it’s heavylifting and we can do it”, but not to know really what that involves. And what it involved was us flying down to Houston very frequently and spending weeks on end with the property managers, making sure that they have the support that they need, that we’re running this property properly, that we’re getting good residents in there and not just recycling bad with bad… So it involved a lot more effort and time than what we thought we were going to give to this property. And it made us be more cautious on future deals.

Now we do all this research. We pull crime reports on every property, and we see all of the major crimes that have happened, any felonies that have happened; how often are the police being called to this property. We look at that and we pay attention to that… And we could have done a better job with that in the begging with this property.

What went on to make this project a success was 1) as I said, we did a fantastic job on the buy. In real estate sometimes you make all your money on the purchase; we did a good job there. But 2) the property would not have performed if we wouldn’t have broken our back to work with our property management company as diligent asset managers. Our investors trust us, and that matters a lot. My sister was invested in this, among many other investors, and we do what we say we’re gonna do. If that requires more time and effort for us, then so be it.

We were able to reposition this property. We took it all the way down to about 77% occupancy, and by the time we sold, about a year before then, we were back up to 93% occupancy. Our bad debt was sub 2% on this property, and collections were very strong, the expenses were stabilized and we wound up selling it to a group that was looking for a stable property. So in time, we got there… It just took more work than what we thought.

Joe Fairless: And you didn’t even mention the two hurricanes and one fire.

Frank Roessler: [laughs] That is correct, I didn’t even mention that.

Joe Fairless: Which probably aren’t necessarily lessons learned, but it just adds to it. We had two hurricanes come through; one was Hurricane Harvey, and I forget what the one before that was… And we had one fired that burned down one of our buildings. Fortunately, no one was injured on any of that, that I’m aware of… Right? We had no injuries…

Frank Roessler: No, no one was injured.

Joe Fairless: Yeah, no injuries there. But we had the property for — what was it, 2,5 years?

Frank Roessler: Yes.

Joe Fairless: Yeah, 2,5 years. So in 2,5 years we had two hurricanes, one fire, plus the lessons learned that Frank mentioned… And something that’s interesting to me is our largest investor invested in this deal, and it was the first time he had invested with us. He went into this deal, and then he saw how we approached things and how much attention we were putting towards it, and then ultimately seeing the results that we were getting, then he invested in another, and then another, and then he reached out to us and said, “Hey, I’d like to be the only limited partner with you all.” We have since partnered with him on three deals where he is the only LP.

As of yesterday, he just offered to be a reference to another group that is looking to invest with us and be the only LP on the deal. He’s bringing significant equity to our deals, and it all starts with 155 units, in a very challenging area, buying it during a very challenging time, and rolling up your sleeve and getting after it.

Thanks for sharing those lessons… Anything on the loan front, that as a listener, if they’re hearing “Okay, if I have a property under ten million, it’s gonna be tough to get some reputable lenders.” Any tip you’d have for them when they do find themselves buying a property under ten million, in order to get a reputable lender?

Frank Roessler: I would say underwrite accordingly. If you’re at under ten million, make sure you’re not buying at a 4,8% cap, and assuming that you’re gonna get some loan that’s at 3,8% interest. Assume that you are gonna get a loan that’s 300 basis points floating on top of the one-month Libor to come in at 70% of the purchase price, and then adjust your purchase price accordingly in order to get the returns that you’re seeking… So be cautious is what I’m saying.

I also don’t want our listeners to think that there are no lenders there. There certainly are, and it’s how many of us get our start – buying smaller deals and growing into larger deals. So it’s not to be avoided, it’s just meant to be used with caution.

Joe Fairless: Anything else we haven’t discussed that you think we should about Alara?

Frank Roessler: Just that we were able to sell this property at a 22 IRR. We increased the value from purchase price to sale price by 61%. We returned our investors over a 1.6 equity multiple in under three years, and it was a very satisfying project at the end of the day, because it showed us what type of owners we were; when the tough got going, we got going.

Joe Fairless: Oh, I love how you ended that. [laughter] And especially, it also showed us what type of deals we like to do more than others. This is a type of deal that we don’t like to do as much as other deals. We prefer larger deals, and we prefer submarkets that are stronger… And consequently, our investments after that have been in stronger submarkets, and this is the smallest deal we’ve ever done. Now it’s significantly smaller than all the deals we do.

Frank, thanks a lot for being on the show. Best Ever listeners, if you wanna learn more about us, then go to investwithashcroft.com, or ashcroftcapital.com, either one. Looking forward to more case study conversations.

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

Frank Roessler: Likewise. Thank you.

JF1700: NFL Tight End Double Dips In Real Estate Investing with Hakeem Valles

Listen to the Episode Below (00:23:39)
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Hakeem is a tight end for the New York Giants (as of the recording) and a real estate investor. He shares how he became interested in real estate investing, and we also hear some deal specifics. Hakeem explains how he put together his first sample deal package to show to potential investors, and how he presented it to them to secure verbal commitments. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“You can work your way into real estate deals by adding value to others” – Hakeem Valles

 

Hakeem Valles Real Estate Background:

 


How great would it be to buy a piece of institutional-quality, income-producing commercial buildings? Now you can… with BuildingBits. It’s NOT A REIT or a fund. BuildingBITS is a new platform for non-accredited investors, where virtually anyone, regardless of income, can select a building leased to a major corporation and earn money from it!

Start investing with as little as $500 at https://www.buybits.us/


TRANSCRIPTION

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

Hakeem Valles: I’m great, Joe. Thanks for having me.

Joe Fairless: Yeah, my pleasure. Nice to have you on the show. A little bit about Hakeem – he is a tight end in the NFL. He has played for three teams – the Cardinals, the Lions and the Giants most recently, and most relevant to us, he has been investing in real estate for seven years. He started by flipping ten houses in college. I imagine you were playing football and also flipping homes in college; you were  a very busy man in college. Based in New York City… And you can say hi to him – we have his link to his LinkedIn profile in the show notes.

With that being said, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Hakeem Valles: Absolutely. Thanks, Joe, for the beautiful introduction. Like you were saying, my name is Hakeem. I originally went to Monmouth University; it’s a small school in New Jersey, and it’s one of the few schools in the country that has a real estate program for an undergrad… My undergrad is Business, with a concentration in real estate.

While I was in college, I found a mentor who was essentially — the girl I was dating, her dad, at the time, had just started flipping houses… And he knew I was a real estate major and he kind of took me under his wing. And I just had to decide different places and facets in his business where I wanted to add value. So I was the guy swinging the sledgehammer, I was the guy driving for dollars, and I didn’t even realize what I was doing at the time. I was knocking on doors of pre-foreclosures and putting in offers. I was handwriting our direct mail campaigns. It was a lot of experience, and the wildest part about it is I didn’t even know about Bigger Pockets at the time; I was just experiencing and doing. It was wild, and it was kind of hard to do, playing division one college football; it’s not the easiest thing to do, but real estate is something that I’m passionate about and I love, so I made time and made it happen.

As I transitioned in my career, like you were saying, I went to the Arizona Cardinals as a rookie, and what I decided to do was to house-hack a fourplex using my FHA loan. I bought a 4-unit in Phoenix, lived in one unit, rented out the other three; it was awesome. It was completely the opposite of what my teammates were doing.

Joe Fairless: Oh, I guarantee you it was the opposite of what they were doing… [laughs]

Hakeem Valles: Yeah, and you’d be surprised of the neighborhood that the fourplex was in. One of my tenants was Section 8, and I didn’t mind it. It was the right move for me at the time… And it really protected me, because I have a brother as well who’s an NFL player, and I watched him while I was in college, when he got traded from the Oakland Raiders to the Buffalo Bills, he was still locked in on a lease and open for like another six months, paying 3k/month for rent. I’m like “Man, that’s $18,000 going in the air”, you know what I mean?

Joe Fairless: Yeah, yeah.

Hakeem Valles: So it essentially protected me… And when I knew I was inevitably gonna get cut from the Arizona Cardinals, when I got cut, I took that unit and now my property manager Airbnb’s it, and he does double of what it would do for renting it out. Then I slowly rinsed and repeated and did the same exact thing when I got to Detroit. Within a month I found a duplex, lived downstairs, and my fiancée, she handled the Airbnb upstairs, and it covered our mortgage.

We’ve just had a newborn, I’m the father of a five-month-old…

Joe Fairless: Congrats.

Hakeem Valles: Thank you, sir. After the baby came, we decided to stop airbnb-ing, and then moving forward, after I was released from the Lions, I have a property manager renting that property out now. Moving forward, I’ve just found mentors along the way. I’m currently working with a few partners out of Detroit and Miami, and we’re starting an opportunity zone fund. We’re headed over to Germany to start raising the capital for that at the end of February. We’re heading out to Germany to start this fund, so I’m really excited about capitalizing on the opportunity zones across the country.

But yeah, that’s essentially where I’m at. I’ve been investing for seven years and real estate is my passion, my lifeblood, what I eat, sleep. I talk to everybody about real estate. I love it.

Joe Fairless: So you talk to everybody about real estate… I imagine you were talking to everybody about real estate while you were playing for the Cardinals and the Lions and you were house-hacking. If that is the case, what were your teammates saying about what you were doing?

Hakeem Valles: Essentially, how I approached the process was — I’m sure you’re familiar with Michael Blank…

Joe Fairless: Sure.

Hakeem Valles: I took his guide on how to raise money… He teaches you how to create a sample deal package and present it to investors when you don’t have a property under contract. So after my rookie year (or second year) I built out the sample deal package – it was a 50-unit property in Phoenix – using his syndicated deal analyzer, which is amazing software; with that, I can analyze a deal in like ten minutes, but be the most professional-looking model that you’ve seen.

I essentially made this very nice sample deal package, I went to Staples, got it laminated… I had like 100 books. I started out actually doing it myself in my office, laminating and hole-punching, and I’m like “What the hell am I doing?” I went to Staples and just paid for it and got it all done… And literally, as the season ended – this was my second year – [unintelligible [00:07:00].09] I had the markets that I liked, I knew different players in those markets, and the former players that I’d played with; I set up an itinerary and I spent a month just traveling around the country, presenting the sample deal and getting commitments.

Over time – it took about a month, a month-and-a-half, and I had about 1,5 million in commitments, I would say… And from their perspective — I’d say they’re very receptive to the concept of real estate; you know, everybody loves real estate, and everybody knows somebody who invests in real estate… It’s just more about educating. Most NFL guys have different finance guys and different sharks throwing deals at them every single day, and not really knowing what’s good and what’s bad. I guess from my perspective, being a player, it helps with that certain level of trust, of being a player, going through the grind and all that…

Now, I didn’t saturate my market; I’m not “Real estate, real estate, real estate”. I was very organic about it. The guys who gravitated towards me, and that I like, trust and respect, and we all like, trust and respect each other, then we’d do dinner and it’d be almost like just an education session. I’m explaining how cap rates work, how markets work, the difference between commercial real estate versus single-family real estate, and then just giving them a walkthrough, play-by-play, of exactly how a value-add apartment syndication would work… Showing them the different structures, showing them my fee structure, how I don’t do an acquisition fee, because I’m not looking to make money upfront, and things like that. It was awesome.

And then essentially, whenever I’d get a deal, I’d hit them up. It works very smooth. I had one massive deal in St. Louis. 56 units. It was for 5.6 million, and I had negotiated with the seller to carry back a portion of the purchase price. Earnest money deposit is in, we’re in due diligence, and from the seller’s accountant I’ve gotten their actual numbers from their LLC’s bank account, their income statements… And from what they advertised from their proforma – it was an off-market deal – the NOI was off by about $200,000.

Joe Fairless: [laughs] That’s a lot on a 56-unit.

Hakeem Valles: Yeah, it was a lot, and I’m like “This can’t be real…” And they tried to renegotiate, drop the price, all this different stuff… And I’m like, “No.” The value of my network is too important to risk it on bending to make this deal work. I could have taken less and still made the deal work, but I didn’t know what the seller was lying about, so I essentially went back to each of those investors and — because after presenting the sample deal, I went back to all of them, sent them out the package with the syndicated deal analyzer, with the facts about the property and the market to all of them, and they were all in… And I had to go back and go “Look, this is why we’re not doing the deal – X, Y and Z.” The awesome part about it is that they respected me twofold, and now they’re just hungry and waiting to get on the next deal.

Joe Fairless: So you have your fourplex in Phoenix and you still have a fourplex in Detroit?

Hakeem Valles: It’s a duplex in Detroit, but yes, I still have it.

Joe Fairless: Duplex, sorry. Yeah, duplex in Detroit… And then once you got those two, then you were really hitting the pavement and preparing for some larger deals, and you rounded up verbal commitments of 1.5 million by educating players, and then you came across a 56-unit, the seller was not telling you the truth about what they were offering, and so you exited out of that deal… And now you’re focused with some business partners on the opportunity fund. Is that accurate, or were there any deals in-between that we missed?

Hakeem Valles: Yes.

Joe Fairless: Okay.

Hakeem Valles: Yeah, so with the business partner we’re doing the opportunity zones, and then with my NFL investors – I’m not gonna bring them in on the fund; with them I’m still working – like we talked about before the call – on a direct mail campaign and on a cold call campaign on a specific market that I’ve done research on across the country… And with those markets, I wanna stick to like the 5 to 50-unit range, with those markets and with those investors… Because these are deals that — I wouldn’t say I’m gonna take down myself, because I plan on partnering with different people and markets if the right opportunity comes about… But when I went out to raise all of that money in those different markets I liked, I also built up teams. I was meeting with property management companies, I was meeting with an attorney in each market, that’s familiar with that state; meeting with probably like 5-6 brokers per market… And then just local investors. Every time I was traveling to each market, I’d put out a message on [unintelligible [00:11:43].06] like “Hey, I’m in Vegas. If any investors wanna go golfing, please let me know.”

I met an awesome investor, and we’ve had an awesome relationship since. That’s where my life is kind of going and gravitating towards. With real estate, it’s one of those industries — with most industries there’s always a winner and a loser when it comes to competition; in real estate, I feel like competition just brings out the best in you, and everybody can win. The more people win, the better.

Joe Fairless: With the opportunity zone fund, I believe you said you were traveling to Germany… Why Germany, to raise money for an opportunity fund that’s gonna be in the U.S.?

Hakeem Valles: My partner – he’s also a real estate attorney from Michigan, and 30%-40% of his business is overseas, because he’s multilingual. He deals with a bunch of family offices in the Detroit market, from an attorney perspective… And it’s funny – one thing why I swear by Bigger Pockets is because I’ve met these people through Bigger Pockets… And they’re not even on Bigger Pockets, they’re a friend of a friend of a friend, just through networking on Bigger Pockets… But we went golfing with these people from Ireland, and they’re connected with a family office in Germany who my partner has done plenty of deals with in the past through these people from Ireland… And they deploy 350 million dollars of capital in the United States every year for single-family houses. And essentially, the pitch is having them allocate 150 million of their capital gains towards opportunity zones… Because it makes sense. The capital gains they’re seeing from that injection of all that capital – they’re getting taxed like crazy, and it’s a win/win.

Joe Fairless: What would be your role in that?

Hakeem Valles: My daily role right now – I’m literally finishing up the finishing touches, because we’re gonna send them a pre-pitch before we get out there. Then when we get out there, we’re gonna each take our own role on the pitch, section by section. Then as the fund rolls out, it’s gonna be more of a market perspective. My one partner has the North-East, my other partner has the South-East, and I have the South-West market.

My other role is — from the perspective of my partners and me, I’m the younger guy and I can move around a lot more… So I’m more of a networker and I make things happen. Because like I said, how I work is I like to add value to people’s lives, and one thing I try to tell a lot of young people is that you can network your way into real estate. The stigma around real estate is that you need to be 40 years old and rich in order to invest in real estate, or you need to be retired to invest in real estate. I’m trying to break this stigma; you can network your way into a real estate deal. You can add value and somehow work your way into a real estate deal; as long as you can just give up the concept of instant gratification and just hone delayed gratification. If you really wanna add value, it will work out in the end.

Joe Fairless: Yeah, I love that. Our society is conditioned to want instant gratification, and that’s why a lot of people don’t stick with one thing over a period of time and do it consistently, because they don’t see the immediate results… But I completely agree with you – you can network your way into real estate deals, and then once you network your way into a couple, then that builds momentum, and then you can not worry about the networking into a couple, because then you’re being presented opportunities and you go from there.

Hakeem Valles: Exactly.

Joe Fairless: The conversations you have with NFL investors or players who are wanting to invest in a deal that you put together – what are some questions that they have when you’re talking to them? Because you said the education piece is the important part of it, but then also they’re getting presented “deals” from all sorts of different angles, and for better or worse… So I’m sure they have their guard up as well, so you’ve gotta break through the guard that they rightfully have up, and then educate them on this… So what are some questions that are typically asked of you?

Hakeem Valles: I’d say one of the biggest questions is always “Who is your team and who else are you with?” That’s why [unintelligible [00:15:55].05] first building teams anyway. I instantly, no matter what, lose credibility — I gain credibility with NFL guys, but I also lose credibility, because I’m not a suit; I’m not some suit coming in, trying to present the deal… I’m on the field with you, and then in the locker room we’re talking about it.

Even in the industry as well, it’s the same exact thing, like “Oh, you’re just a football player.” I’m so passionate about real estate, and I hate that stigma. “You’re just a jock.” And that’s another thing – I’m starting a podcast that’s called “Not Just Jocks.” We’re trying to change the stigma of what jocks are, and highlighting what athletes do outside of their sport. Even for this pitch when we’re going to Germany, I don’t wanna be the dumb jock on the side of the room, so for the last 2,5 months I’ve been learning German; I watched Netflix movies in German, I watched TV shows in German, and [unintelligible [00:16:40].23] Why not, do you know what I’m saying? It’s the opportunity of a lifetime, and I take advantage of it in the lifetime of the opportunity.

But questions that they have – one is always the team, “Who are you dealing with?” Two is honestly the market. That’s why I was strategic with it; as I traveled market to market, in the markets that I liked, I like to talk to investors in that market… Because just to start with – a lot of NFL guys, like you said, [unintelligible [00:17:05].08] there’s so many deals that they see every day; they’re only gonna go with what they’re comfortable with. So I like to really frame it with the perspective of “We’re working on deals across the country, but to start with, I’d rather do a deal in a market that you already know, or are comfortable with.”

Perfect example, I have a couple teammates of mine — obviously, I’m not investing out there like Brandon Turner, but it really comes down to just educating… Like, I spend three hours breaking down deals to people, and it really comes down to… Also, they wanna do background checks on everything. We’ve gotta go through background service as an NFL player, and it’s annoying to some investors, even my partners, but it’s just a process that has to happen. And once it happens, and once everything is fluid, it’s a beautiful process.

Joe Fairless: The free background check service is a very necessary tool. I’m glad that that’s offered to you…

Hakeem Valles: Absolutely.

Joe Fairless: …with all the different opportunities that I imagine are sent your way and everyone’s way who’s in NFL. What’s your best real estate investing advice ever?

Hakeem Valles: Wow, my best investing advice is to just get going. Release those pre-conceived notions of whatever’s holding you back and just get going. The thing that held me back from getting my fourplex – I didn’t know if my dad was gonna be cool with it or not… And I remember telling him about it, and how excited he was when I told him; I was like “Wait, what…?” And then a month and a half later I was in a fourplex, because it was just like — that was what was holding me back. Just get going.

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

Hakeem Valles: Absolutely.

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

Break: [00:18:47].07] to [00:19:50].01]

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

Hakeem Valles: The Go-Giver.

Joe Fairless: Bob Burgh, great book.

Hakeem Valles: Amazing.

Joe Fairless: Best ever deal you’ve done?

Hakeem Valles: My fourplex with the FHA loan. I put down 13k, and it cash-flows about $800/month. I’ve never paid a dollar out of my pocket, because the tenants pay the mortgage.

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

Hakeem Valles: My duplex in Michigan. I was so eager to move in, I breezed through the inspection report and I had a cracked pipe going straight down the middle of the house.

Joe Fairless: How much did that cost you?

Hakeem Valles: Detroit is hard with handymen, so I had to deal with three different handymen and plumbers. It cost about 7k, and no kitchens on either floor for about a month, because they had to go straight through the wall. So that was a mistake.

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

Hakeem Valles: By giving my time. I like to take the time and just — you inspired me, actually. After booking the podcast to be on your show, that link of Appointlet.com. I was like “Whoa, that was really convenient.” And I literally went and signed up for Appointlet, and now it’s amazing; now people can kind of respect my time. I’m sorry, I went on a tangent, and didn’t realize what your question was and why I even brought up Appointlet.

Joe Fairless: That’s alright… Best ever way you like to give back.

Hakeem Valles: Oh yeah, talking to people about real estate. I have a lot of teammates, even just like college people, who just wanna know about real estate, and no one is giving it to them genuine. A lot of the stuff about real estate that you’re looking for out there, a lot of the best advice – sometimes you’re not even gonna find it on Google; you’ve gotta look in books. So I kind of just give my time to people, and I send them my appointment link. “If you guys wanna talk about real estate, Bam! Here’s 30 minutes. Whenever you wanna chat, we chat.” I have about three or four calls lined up for today.

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

Hakeem Valles: My website is currently under construction. I know you said you’re gonna include my LinkedIn link; besides that, just social media. My Twitter and Instagram is the same, @hakvalles80.

Joe Fairless: Anything you wanna say in German before we take off?

Hakeem Valles: Das Boot! [laughter]

Joe Fairless: Rosetta Stone is serving you well.

Hakeem Valles: Yeah, right?! Or Beerfest.

Joe Fairless: [laughs] I really enjoyed our conversation, and learning about how you’ve been focused on real estate since college, and managing to excel in both school and football stuff, as well as the real estate stuff simultaneously; what a person who’s good at prioritizing your time, but then also maintaining focus. Clearly, you had to maintain focus in each of those things, so it’s not just prioritizing, but it’s channeling the focus when you’re prioritizing that. Very impressive. It’s tough to go to college and graduate for some people, and then for other people it’s tough to go to college and play a sport… And then I don’t know too many people who go to college, graduate, play a sport, and also flip ten houses while in college. Very impressive, and clearly it’s flowed from college to today and what you’re doing…

So I really enjoyed hearing about your approach and what you’ve been up to. Thanks for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Hakeem Valles: Absolutely. Thanks again, Joe. I appreciate you having me.

JF1695: Can’t Find A Job? Start Your Own Business! With Sabine Franco

Listen to the Episode Below (00:19:37)
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Sabine was out of law school and struggling to find a decent job. Rather than settle for something less, she started her own firm. FRANCO LAW FIRM, P.C. is her firm and they focus on real estate law and business law. Needless to say, Joe and Sabine will be covering a lot of real estate investing law in today’s episode, but we also hear her personal story which we can all learn from. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“Start early, a lot of people spend a lot of time learning, but you learn more by doing” – Sabine Franco

 

Sabine Franco Real Estate Background:

  • CEO and Principal Attorney at FRANCO LAW FIRM, P.C.
  • Established in 2012, her practice strategically focuses on Real Estate Law and Business Law
  • Has 5 years experience working in the mortgage and real estate industries
  • Based in NYC
  • Say hi to her at http://www.franco-lawfirm.com/
  • Best Ever Book: The Four Agreements

 


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TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast, where we don’t get into the fluffy stuff. With us today, Sabine Franco. How are you doing, Sabine?

Sabine Franco: Hi, Joe. I’m good, how are you?

Joe Fairless: I am doing well, and nice to have you on the show. A little bit about Sabine – she is the CEO and Principal Attorney at Franco Law Firm. Franco Law Firm was established in 2012; her practice strategically focuses on real estate law and business law. She’s got five years experience working in the mortgage and real estate industries. Based in New York City.

With that being said, Sabine, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Sabine Franco: Yes. Like you said, I had worked in the mortgage industry way back, and prior to 2008 I worked at mortgage companies, and was a loan processor, and then I worked for a mortgage bank, and after that, around the time of the crash in 2008 I went into law school. Then after law school I started my own practice, and naturally, part of that was real estate law. Now I’m currently helping individuals, businesses buy and sell and invest in real estate.

Joe Fairless: Got it. Once you graduated from law school, you immediately started your own practice?

Sabine Franco: I did, I did. I braved it.

Joe Fairless: Yeah, that’s a big deal… Why did you choose that direction, versus joining someone else’s?

Sabine Franco: I always tell people I was a little bit snotty about it, because of working in the mortgage industry in my early twenties; I made good money, and I was expecting that coming out of law school. So when I graduated in 2011, the market was kind of just starting to rebound itself, so it was fairly hard to get a good paying job… So because of that, I decided “You know what, I’m gonna go out on my own”, which in hindsight to me now, it was crazy… [laughs]

Joe Fairless: But it worked!

Sabine Franco: It worked, it worked.

Joe Fairless: But I imagine the first six months probably didn’t work out like you planned… So what were some challenges starting the law firm?

Sabine Franco: Getting business was a challenge in the beginning. I kind of just told everyone I knew that I had started out on my own, and I got referrals here and there, but it came slowly. I did work for other firms in sort of like a temp capacity; I covered cases for them, and stuff like that… Until the business kind of built itself up to where I didn’t need to do that anymore. But it took a while.

Joe Fairless: What type of work were you working on in those early days?

Sabine Franco: In those early days, other than real estate I did also business formations, and helped businesses with simple contracts back then. And when I was working with for other firms, I would cover a lot of landlord, tenant and foreclosure cases. It was good, because I learned a lot about tenancy and how the landlord/tenant courts work, and dealing with that in New York, so it kind of helped build some background for what I’m doing.

Joe Fairless: Now what are some typical cases that you would work on?

Sabine Franco: Now?

Joe Fairless: Yeah.

Sabine Franco: Now I don’t do too much of the going to court for tenancies, except for current clients, if they own buildings and multifamilies and stuff like that, they’ll ask me, so I’ll help them out sometimes… But mostly I do residential purchases and sales – single families, multifamilies; well, you call them multifamilies, but they’re multi-units here.

Joe Fairless: There’s a lot of red tape in New York… Especially New York City has its own set of red tape, doesn’t it?

Sabine Franco: Right. In New York it just takes so much longer with respect to searching the titles, the title reports take longer to come in, with respect to violations, and liens, and judgments… When those things come up on title, it takes a while to get it cleared. Dealing with the Building Department, and housing and buildings department… It takes a while. So if you have something that needs to be cleared off of the title, or inspected, you have to make an appointment and it usually takes them a couple of weeks, and then you can’t rely on the date they give you… So the whole side of things – it kind of makes it much more difficult.

And then when it comes to landlord/tenant laws in New York, it’s extremely tenant-friendly. It could take anywhere from six months to two years to get a tenant out in a New York residence.

Joe Fairless: I knew six months, I didn’t know up to two years… What’s a circumstance where it would take two years?

Sabine Franco: It basically would depend on the tenant’s living circumstance. If they are older, or if they are disabled, they’re gonna get more favorable treatment from the courts. If they have young children or small children, they’re gonna get more favorable treatment. They can keep going back to court and asking for more time. There’s no limit to how many times they can go back. Even if you set up a settlement with a tenant and they say they’re gonna move out on this time, they sign it, so basically it’s like a contract… [laughter]

Joe Fairless: It sounds like it’s like a contract, but it really isn’t a contract…

Sabine Franco: [laughs] Exactly. The way the courts treat it is it’s not so much like a contract, because when the time comes for them to be evicted, they can go back to court and just file what’s called an order to show cause, and get more time… And depending on if the judge feels their reasoning is sound, or worth it, they’ll give them more time. So it’s really open to a lot of discretion by the courts, so that’s what makes it so lengthy and difficult here.

Joe Fairless: Anything as an attorney you can do to try and shorten that timeframe, if you’re representing a landlord client?

Sabine Franco: Well, a lot of times what attorneys do is enter into — we call them stipulations, and they’re kind of those agreements… Because even though tenants can ask for more time to stay, it’s the quickest way, because if you have to go to trial with a tenant, then you have to wait for a trial calendar, and that could take even longer than just trying to put in an agreement… And depending on whether or not — if it’s rent-stabilized apartments, you can only get somebody out if they didn’t pay… So if you enter into agreement with them and they pay, then you can no longer evict them. But the best way to do that is to enter into an agreement and just stay closely on top of the deadlines, to see if you can get them out by acting immediately upon those dates.

Joe Fairless: Got it.

Sabine Franco: And those are pretty much what you–

Joe Fairless: You don’t have much. You can’t do a whole lot.

Sabine Franco: Yeah. It’s almost like “Who’s gonna get more tired?”

Joe Fairless: Right, yeah. How much would an attorney like you be compensated to stay on top of that process over the course of 12 months, for a landlord?

Sabine Franco: Attorneys charge by the hour, so anywhere from  — your average attorney is gonna be like $350, to your white shoe big law firm could be over $1,000/hour, depending on who the landlord is and how much money they wanna spend… So imagine that – filing petitions, filing documents to put into court, drafting documents, filing documents, appearing in court over and over again…

Joe Fairless: That’s the big one, right? Appearing in court…

Sabine Franco: Yeah… [laughter]

Joe Fairless: Because travel time and everything – that’s factored into the hourly rate, isn’t it?

Sabine Franco: Right. Sometimes a lot of attorneys won’t do flat fee if it’s gonna be that you have to continuously go to court, because of the fact that you don’t know how long it’s going to take. So on a case-by-case basis you may be able to get that, but generally you won’t.

Joe Fairless: Talk about whatever you can talk about obviously, but what’s a challenging case that you’ve participated in?

Sabine Franco: With regards to buying and selling, or…?

Joe Fairless: Yeah, yeah.

Sabine Franco: In New York and in the Brooklyn market it’s a very hot commodity right now; there’s a lot of competition, and a lot of times there’s investors that want to put in offers on multiple properties… So you can be in contract with an investor, on the seller’s end, you can expect for them to close, but then the times comes and they’re not ready to close, or they wanna back out of the deal, so it kind of makes a lot of mess for the seller.

I had a client who had a multifamily that she was selling, was in contract with an investor buyer… The property had some issues that she needed to get up to date, which she did. Finally, she got them up to date, and the investor is like “Well, I wanted the property vacant”, and the contract actually didn’t call for the property to be vacant, but the seller client wanting to accommodate, did try to get rid of all the tenants… Then come to find out the investor buyer now was not even ready to close, was not capable of closing. So after almost nine months of being in contract, which I know in other states it’s unheard of… [laughs] After nine months of being in contract, not having tenants to cover the cost of the building, now having to break the deal, basically, and the buyer wanting to back out and just walk away clean… So that ended up having to go into litigation, to sue over that buyer’s deposit. And I represented the seller.

Joe Fairless: Who won?

Sabine Franco: It’s still going. [laughs]

Joe Fairless: Oh, man… Everybody loses when that takes place… Except for the attorneys. They make out pretty well.

Sabine Franco: [laughs]

Joe Fairless: What’s some advice you give your clients to help mitigate the likelihood of litigation whenever you’re drafting up a contract, or even reviewing a contract if they’re purchasing something?

Sabine Franco: One of the things that I think is extremely important is even when you’re a savvy investor or buyer or whatever it is, it’s important to keep your attorney informed of all of the issues that may be going on. A lot of times parties will have conversations on their own, either buyers and sellers directly, or just outside of the knowledge of the attorneys, and then when they have these side agreements, there’s nothing we can do to protect you if we don’t know that it exists. Because you can’t cover everything under the sun in a contract. You can cover a lot, but you can’t cover every single scenario, so it’s good to keep their attorney informed, so that we can cover particular things.

I had a weird situation with a single-family property… The buyer was buying the property — so we got into contract, the seller’s lawyer calls (I’m representing the buyer) and says “Well, my client wants to take the shrubs out from the outside of the house. He’s not gonna leave a hole in the ground, he’s gonna replace it, but we wanna take it.” So I said, “Okay, let me speak to my client.” I’m thinking it’s not a big deal; it’s bushes, or trees, or whatever they want to take… So I call my client, I’m like “Yeah, the seller wants to take the bushes. He’s not gonna leave a hole in the ground, he’ll replace it.” My client is like, “Absolutely not! That’s the only reason why I bought the house. I went to school for botany…”

Joe Fairless: Oh, my…

Sabine Franco: Yeah. It turns out they were bonsai trees. It was just a ridiculous situation… But if I didn’t know that, I could have committed malpractice by just saying, “Yeah, sure. That shouldn’t be a problem.” [laughter] So it’s good to keep your attorney informed. I just think we have a certain level of confidentiality that we owe you as far as we’re legally bound to do, so… No reason to leave your attorney in the dark on things that you’re doing, so we can include it in the contract and cover it, and make sure that the thing that you’re concerned about is protected.

Joe Fairless: Based on your experience as someone who represents real estate investors, what’s your best real estate investing advice ever for them?

Sabine Franco: I would say start early. A lot of people, when they’re looking to get into investing, they spend a lot of time just collecting information and not starting. The quicker you start, the quicker you learn, because you learn a lot doing, versus just thinking about it… So I think the best advice would be to not wait too long, and just start as quickly as possible.

Joe Fairless: What type of investing do you do?

Sabine Franco: Personally, I have a couple of single-family and multifamily property. I’m looking to invest more. I kind of didn’t take my own advice, I didn’t invest as much as I–

Joe Fairless: It’s tough in New York City.

Sabine Franco: It’s tougher in New York City, but it’s still possible.

Joe Fairless: Yes, true. True.

Sabine Franco: Especially when you know your way around things. It’s harder to have properties where you have tenants, and things like that, but it is a flipping market here; you just can’t be afraid. That’s one of my biggest mistakes probably, because I was in and around the mortgage industry, and real estate, and financing since I was in my early twenties, and I didn’t start then… So that’s why I said to get in earlier than later is better.

Joe Fairless: Where do you live in New York City, what area?

Sabine Franco: I’m in Long Island in Nassau County.

Joe Fairless: Alright, you’re in Long Island. Where are your properties?

Sabine Franco: One in Nassau, and also in Brooklyn.

Joe Fairless: Oh, cool. Alright. So what type of deals — will you just give an example? Maybe the one in Brooklyn… What did you buy? Just to give some homework.

Sabine Franco: Okay, it’s a four-family property. It’s fully occupied with tenants. The purchase price was actually $900,000, which I know seems like a lot…

Joe Fairless: Not for Brooklyn. Where at in Brooklyn?

Sabine Franco: It’s Brownsville.

Joe Fairless: Brownsville, okay.

Sabine Franco: The properties there are a little over a million now, and that’s the beginning of that area being turned around… That area is on the come-up, and the areas surrounding are already in the multi-million.

Joe Fairless: Did you do anything to the property, or are you just leasing it out to tenants?

Sabine Franco: Right now just leasing it out to tenants, and kind of just letting it appreciate, but in the near future we’ll be renovating. The issue with that is because of the tenant laws here, it’s harder to get people out quickly. You kind of have to strategize and do it strategically.

Joe Fairless: Got it. What is an example of doing it strategically?

Sabine Franco: Well, kind of making sure that you have everything in order in terms of being able to cover all of the rents and everything, and while you’re in court with everyone, trying to get them removed… Because it’s gonna take a while. Because as soon as you put somebody in court, they’re gonna stop paying rent. So basically make sure that it’s one at a time, and make sure that you’re able to cover everything.

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

Sabine Franco: Yeah, okay.

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

Break: [00:16:18].22] to [00:17:14].15]

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

Sabine Franco: The Four Agreements.

Joe Fairless: If your business collapsed today, what would you do next?

Sabine Franco: I’d probably start a podcast. [laughs]

Joe Fairless: Why would you do that?

Sabine Franco: I like talking to people. I like talking about ideas, and learning about people, and helping people… Either that, or a YouTube show, or something like that.

Joe Fairless: What’s the worst deal that you’ve invested in?

Sabine Franco: The worst deal I’ve invested in… I don’t think I have one yet.

Joe Fairless: Well, if you’ve invested in multiple, then what’s the least profitable one? …I’ll phrase it that way.

Sabine Franco: The least profitable one… Probably the single-family that I live in.

Joe Fairless: [laughter] Ditto. Alright… Best ever way you like to give back to the community?

Sabine Franco: I like sharing my knowledge with people that I come into contact with. I’m happy to share anything that I know, to try to motivate people, to get them to just do the things that they desire. Opportunities are everywhere.

Joe Fairless: And how can the Best Ever listeners reach you?

Sabine Franco: My Instagram is @Sabine_Thepurposelawyer, and you can also reach me on my website, franco-lawfirm.com.

Joe Fairless: Well, Sabine, thank you so much for being on the show and talking about some intricacies with New York and New York City. Those things that you mentioned, like that six months to two years – is that New York City specific, or is that New York?

Sabine Franco: That’s New York City, so Upstate and Long Island – you’re looking at more around six months for Long Island; Upstate – it varies, depending where it it, but New York City is where it takes a really long time. That’s where you’re gonna see six months to two years on some — two years is on the extreme, but it happens.

Joe Fairless: Well, thanks for talking about that, as  well as your journey as a real estate investor and what you’re doing, and your business plan. I appreciate you being on the show. I hope you have a best ever day, and we’ll talk to you again soon.

Sabine Franco: Thank you. I appreciate you having me.

JF1672: The Next Great Investing Niche – Nudist Colonies? With Nico Blue

Listen to the Episode Below (00:19:25)
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Nico’s investing strategy is a little bit different than most strategies we usually talk about. He also lives a different lifestyle than probably most of us listening to this episode. Nico is a nudist who built a colony of nudists on vacant land that he bought. Hear how he did it, what kind of returns he got, and how he plans on doing it again in a new place soon. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“When investing into a community, you’re investing into the people as well” – Nico Blue

 

Nico Blue’s Real Estate Background:

  • Principal and Managing Broker of Blue Investing
  • Before starting the Blue Investing, Nico was a top producing apartment broker in Southern California at his brokerage
  • Has a personal career transaction volume greater than $2 Billion.
  • Based in Boulder Creek, CA
  • Say hi to him at: http://www.mattazark.com/
  • Best Ever Book: The Art of Loving by Erich Fromm

 


Sponsored by Stessa – Maximize tax deductions on your rental properties. Get your free tax guide from Stessa, the essential tool for rental property owners.


TRANSCRIPTION

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

Nico Blue: Hey, Joe. How’s it going, man?

Joe Fairless: It’s going well, and looking forward to our conversation. A little bit about Nico – he is the principal and managing broker of Blue Investing. Before starting Blue Investing, Nico was the top-producing apartment broker in Southern California, at his brokerage, and he has a personal career transaction volume greater than two billion (that’s with a B). Based in Boulder Creek, California.

With that being said, Nico, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Nico Blue: Yeah, for sure. I grew up in Southern California, I was a surfer. I grew up down in San Diego. My dad owned some surf shops; they were like surf/smoke shops. Growing up I was a surfer, helping my dad out in the shops, and then sort of after high school really went into business with him, trying to help get those surf shops up and running.

We had a surf shop right on Mission Beach called “Ridin’ Reef and Smokin’ Reefer.” It was great, we were killing it in the early ’90s. Once I came aboard, I was there to help him open up two more surf shops along Mission Beach. One of them was called was called “Surf’s Up *beep* Down”, the other one was called “Hit, Puff, Pass”, and they ended up sort of being kind of a staple in the Mission Beach community throughout the ’90s.

Joe Fairless: So that’s the ’90s, and just for my own clarification – did you all own those surf shops, or were you leasing them out?

Nico Blue: Yeah, exactly, so they were standalone buildings right along the beach. We did own those buildings, which really helped us keep our overhead down, not necessarily having to be a tenant and pay those monthly fees.

Joe Fairless: Oh, sure. So do you still own those surf shops?

Nico Blue: No, not anymore. Being [unintelligible [00:04:06].27] surfing community, one of the big things we like to do – my dad and I – we would go up to Northern California and surf the epic Mavericks Wave, if you heard of that…

Joe Fairless: No.

Nico Blue: There’s like a whole movie with Gerard Butler. It’s an epic surf location up in Northern California, in Half Moon Bay. Unfortunately, my dad drowned in a surfing accident. That was in ’95, ’96, and that sort of set me on a different path in life. At that point I sort of gave up surfing, tried to take a step back, look internally about what am I doing with my life… And I wanted to move up to Northern California, I wanted to be closer to his energy and kind of where he last was… So I sold off all the locations by ’96-’97, and then took all the life insurance that my dad had, and was able to start opening up Blue Investing up there, in Boulder Creek.

Joe Fairless: So what does Blue Investing do?

Nico Blue: The way we got started was — one of the first purchases I’ve found was this ranch up in Boulder Creek. It was a 25,000-acre ranch. After he passed away, I really started following the Buddhist ideology, started reading a lot more about spirituality, and becoming closer with Earth, and trying to live a more self-sustaining lifestyle. I eventually became a nudist. And I know that’s not the life that most people like to live, but me and a bunch of friends and my girlfriend moved up there, onto this ranch, and sort of started our own little community.

At the beginning we built anywhere between 20-30 little cottages on our ranch, and we started having people move into our community, which allowed us to start charging rent, and own these properties, and really started to build the blue investing.

Then I ended up growing those cottages into 200 different cottages across our ranch. That really allowed us to start bringing in a lot of money, allowing us to start investing into other properties outside of the ranch and into the actual Boulder Creek community.

Joe Fairless: So you bought a ranch that did not have cottages on it, and then you and some of your close friends and your girlfriend moved there and had a couple cottages built, and then you recruited others to come, and then you’re basically renting out dirt with a tent? Or how does that work?

Nico Blue: No, we ended up building this small community. We had about 20 or 30 little cottages built and operating on the ranch. Everything that we were doing up there was self-sustaining. We were growing our own fruits, vegetables, we had our chickens, goats, cows, and it really became sort of an attraction, this sort of Buddhist/nudist community. Popularity started to grow, which allowed for more people interested in moving into the community, to not only move in, but invest into us building — we ended up building over 200 different solid cottages on the ranch. At that point, I think we had between  800-900 people living on the ranch at one point.

Joe Fairless: It’s typically challenging to make land profitable, and with development, in my opinion, the risk is certainly greater than if you buy an existing structure… So what gave you the confidence that when you buy a piece of land, that you’d be able to make that profitable?

Nico Blue: Well, that wasn’t necessarily the idea going into it. The idea was we wanted to just build a place that we could enjoy for ourselves. I think all of us when we moved up there had the idea to live just a more simple, self-sustaining lifestyle. It ended up becoming more of a movement than anything… So as interest and people wanting to invest and wanting to come and live and be a part of the community – as that grew, that allowed us to grow, as well. We started really investing into more the supplies that we needed to build out a lot of these cottages.

Joe Fairless: What were some challenges that you came across — you’re essentially building a town on a ranch, so I’m sure there’s a lot of challenges you came across… What are a couple that you had to resolve?

Nico Blue: Well, the biggest challenge was the city of Boulder Creek, the town, did not like what we were doing. We met with a bunch of resistance from the other people living in the town; they didn’t like our lifestyle, they didn’t like what we were all about, what we were doing…

Joe Fairless: Specifically the nudist part?

Nico Blue: I think that had a lot to do with it. We’re very free-living people. We did grow marijuana up there from time to time, and I think between the nudity and the marijuana… I think some of the old people that lived up there, they lived up there for a long time, and just hadn’t come across people like us… And people get scared of what they don’t know.

Joe Fairless: It was illegal at the time in California to do that, right?

Nico Blue: Exactly, yes. We are running a legal operation up there. Everything about our business is 100% legal.

Joe Fairless: It was illegal before, but what you’re doing now is legal? Just so I’m making sure.

Nico Blue: Yes, 100% of what we do is legal. We didn’t start doing the marijuana growing until way later in the 2000’s, when it was legal to actually grow it up there for medicinal purposes.

Joe Fairless: Got it, okay. So how did you overcome that challenge of the town not having positive thoughts towards you all?

Nico Blue: That’s a great question. I think the sheer number of people that we had moving up there and being a part of the community, and us having the funds to start moving outside of the ranch – I was able to buy two different apartment complexes, both which had about 45-50 unit a piece. The community itself, before we had moved in, wasn’t the richest community, so… Being able to invest in these apartment complexes allowed us to not only get more people, more of the nudists into the community, but we were able to rent it to those people at a much lower rate, because of how much money we saved on being able to purchase these apartment complexes for 50 cents on the dollar. The community had not been doing well.

I ended up getting elected to City Council, along with a couple other members of our community..

Joe Fairless: Wow!

Nico Blue: So just being able to infiltrate the community, from a governmental level, allowed us to pass certain laws that allowed us to continue what we were doing up there.

Joe Fairless: Hm. Like what?

Nico Blue: Just like zoning restrictions, and how many different buildings we could build on a certain plot of land, different restrictions when it comes to nudity around schools, and making sure that everything that our people are doing, that are in our nudist colony – that they’re following the rules and they’re not doing anything illegal.

Joe Fairless: So I noticed that you’re talking about this in the past tense… Is this no longer a thing?

Nico Blue: Yeah, this is something I’m not really a part of as much anymore. I ended up selling off all my shares into this community, me personally. It’s still a part of the Blue Investing Group, but I personally don’t have much to do with it anymore. I’m really focused on trying to find another community in Northern California where we could start to invest into another ranch, or into another small town.

Joe Fairless: I’m just curious, why not continue to build that out, versus — you said it was a 25,000 acre ranch, right?

Nico Blue: Yes.

Joe Fairless: Why not continue to build that out, versus start something new from scratch.

Nico Blue: Yeah, I figured it was just time to move on. I feel that we’ve kind of really pushed the limits of how much we can really grow in that town. There’s only a certain amount of area and a certain amount of land that we can buy, and buildings we can build out there. We’ve really done a great job of building up that community, and I’m just looking forward to the next challenge of my life, and really wanna see… There are other communities that have been asking us to kind of look into bringing what we’ve done in Boulder Creek to other parts of the country, or other parts of the state.

Joe Fairless: You took the profits from that and now — is that currently cash-flowing, by the way? The original 25,000 acre ranch community.

Nico Blue: Yes.

Joe Fairless: You’re still an owner in that, you’re just not focused on it.

Nico Blue: Exactly. I’m still an owner, but I don’t really have anything to do with the day-to-day activity of keeping all the ranch up and running and going. At this point it’s pretty self-sustaining, so it allows me to really focus on the next endeavor.

Joe Fairless: So with this next endeavor, what are some things that you’re looking for in order to make it another financial success?

Nico Blue: Yeah, I think the main thing is we want to really move to an area where we can bring some of the community that’s already embedded from the nudist colony into the town that we’re moving to, as well as trying to get more outside investors… Because we still have a lot of people who wanna be a part of this; they wanna live a simpler lifestyle, they want to move to a place with like-minded people.

There are people who want to invest with us, but right now it’s just trying to find the right area where we can buy, and really buy a lot, and make sure that where we move that we don’t run into a lot of the same issues that we ran into in Boulder Creek. So it’s trying to find an area that has some cheap land, some infrastructure already in place, that we don’t need to start everything from scratch.

Joe Fairless: When you create a community out of basically raw land, what are some income sources that you generate as a result of that? Clearly, renting the cottages is one of them, but do you have any other income sources from the nudists who are basically your tenants?

Nico Blue: Yeah. On our ranch we had like a small little town center where we had our own cafe/restaurant, we had our own bar/nightclub, and the community is really tight. People spend a lot of time within the community, in that restaurant, in that bar… We had a place of worship as well, where we had donations.

We also had people who moved into the town that wanted to invest into Blue Investing as well. So we were getting investors, as well as we had some sustaining businesses up and running.

Joe Fairless: Anything else as it relates to this business that we haven’t discussed, that you think we should mention?

Nico Blue: I think a lot of it is — we really got into this because this is just the lifestyle that we love, and the lifestyle we wanna live. I think that a lot of times people get a little bit too caught up and just trying to “Hey, we just need to make money in any way possible”, but I think if you’re really trying to do something positive in this world and trying to live a nice, clean, self-sustaining lifestyle, you’re gonna find people that are gonna want to invest in you. As long as you’re authentic and you’re speaking the truth and you’re following up and living the lifestyle that you talk about, people are gonna see that. They’re gonna see the passion that you have, and they’re gonna want to invest in what it is you’re doing.

I’d never thought that it would ever grow into something like this, and it’s pretty crazy how bit it’s gotten.

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

Nico Blue: When you’re gonna invest into a community, really try to make sure that you’re investing just into that piece of property that you’re buying; if you can invest also into the people and into the community, it’s gonna not only help your own investment, but it’s gonna help the community as well. And the more support you have from the community, the more that community is gonna want to bring you in as a member of the community, and they’re gonna want to support you, and they’re not gonna try to stand in your way when you try to start new businesses and new ideas.

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

Nico Blue: Let’s go for it!

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

Break: [00:15:36].15] to [00:16:35].16]

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

Nico Blue: The best ever book I’ve recently read… I think I would probably have to go back to The Art of Loving, by Erich Fromm.

Joe Fairless: What’s a mistake you’ve made when putting this nudist colony together?

Nico Blue: We started to build before we got permits.

Joe Fairless: What happened?

Nico Blue: We had to shut down construction for a few weeks, until we got all that straightened out… But we ended up getting back on track

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

Nico Blue: I think the best ever deal had to be buying that 25,000 acre ranch up in Boulder Creek. Just being able to start that, and grow that as a passion project, and then watch it grow into something that is a huge investment opportunity for not only me, but other people. I think that ended up being out of this world.

Joe Fairless: And what is your real name?

Nico Blue: My real name is Matt Azark. Yeah, I’m a comedian up here in New York City. I’m happy to be back on the podcast, man.

Joe Fairless: April Fool’s, Best Ever listeners! We do an April Fool’s day episode every year… Except for last year; we missed it. We’re back, April Fool’s… There is no nudist colony. Well, there might be a nudist colony, but just not in Boulder Creek, California… That I’m aware of, at least.

Nico Blue: If not, there should be.

Joe Fairless: [laughs] Matt, how can the Best Ever listeners learn more about what you personally have got going on? …not fictitious, Nico Blue character.

Nico Blue: I’m a stand-up comedian here in New York. You can check out my website, www.MattAzark.com. Also, you can go to BombShelterComedy.club. That’s one of the shows that I run out here in New York City. We’re running shows at New York Comedy Club, West Side Comedy Club, and then we run a weekly show at a bar in Hell’s Kitchen called Gap West.

Joe Fairless: And you’ve got a podcast. What’s it called? What do you talk about?

Nico Blue: Yeah, I’ve also got my own podcast called Trophy Dad Podcast. It’s on iTunes, Spotify, TuneIn, Stitcher… Yeah, it’s a podcast by me, and I have other comedians, other dads… It’s sort of like a goof-off podcast; we drink beer and just talk about life.

Joe Fairless: Matt, there might be a couple things I have to edit out of this episode, but I would rather remove than have to add things. You really went above and beyond in this one. Thank you for being on the show, my friend, and thanks for another April Fool’s Day episode. Best Ever listeners, none of what we were talking about it’s true, just to reiterate, it is an April Fool’s Day episode… Besides that contact info.

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

Nico Blue: Yeah, see you later. Thank you again.

Best Ever Show #SituationSaturday flyer

JF1663: The Easiest Way To Handle Your Real Estate Taxes #SituationSaturday with Devin Redmond & Thomas Castelli

Listen to the Episode Below (00:26:33)
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Today we have two guests with us today to discuss real estate taxes. Stessa is our sponsor and also our guest today, along with Thomas Castelli, an investor, CPA, and tax strategist. So hit play to hear the easiest way to handle your taxes and hear about the new laws. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

  • Since the introduction of the Tax Cuts & Jobs Act in 2017 many real estate investors have wondered how these new rules and incentives will affect their taxes this year. Things were so confusing in fact that the IRS recently released clarification on the 20% pass-through deduction, and specifically singled-out real estate investments as needing more clarity.
  • Devin Redmond, Head of Customer Success at Stessa and Thomas Castelli, CPA & Tax Strategist at the Real Estate CPA teamed up to help provide clarification on taxes for real estate investors by creating a series of resources that investors can reference.

 

Best Ever Tweet:

“You really want to be taking a proactive approach throughout the year”

 

Devin Redmond & Thomas Castelli Real Estate Backgrounds:

  • Devin Redmond:
    • Head of customer success with Stessa
    • Former commercial real estate pro and investor
    • Say hi to him at https://www.stessa.com/
    • Based in San Francisco, CA
  • Thomas Castelli:
    • CPA & Tax Strategist at The Real Estate CPA
    • Real estate investor, invested passively before being active in an 82 unit apartment community
    • Say hi to him at www.therealestatecpa.com
    • Based in NYC

Sponsored by Stessa – Maximize tax deductions on your rental properties. Get your free tax guide from Stessa, the essential tool for rental property owners.


TRANSCRIPTION

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

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, and here is the situation – it’s tax time, and you’ve got to put together your tax returns, or your CPA has to put together your tax returns. Well, you’ve got to figure out what is it with these new tax cuts and Job Act law that you can do, or what is it about that that you can use to benefit you as a real estate investor. Let’s get some clarity on that.

This will be a one-stop-shop conversation for you, Best Ever listeners, as you navigate that… And even if you don’t do your own taxes, it’s important to be educated on this topic, so that you can look for your CPA or make sure your CPA is maximizing the deductions and the benefits that you have as a real estate investor. With us today we’ve got a dynamic duo – we’ve got Devin Redmond, head of customer success at Stessa, who is, as you probably know, Best Ever listeners, the sponsor of this podcast… And also Thomas Castelli, who’s a CPA and tax strategist at the Real Estate CPA. First off, welcome, Devin and Thomas. How are you two doing?

Devin Redmond: Great! Thanks for having us.

Thomas Castelli:  Great, same here.

Joe Fairless:  You all good, glad to hear that, and it’s my pleasure.  A little bit about Devin and Thomas – first, Devin Redmond, head of customer success at Stessa, former commercial real estate pro and investor; their company, Stessa.com – you can go check that out, and you know all about Stessa, because you’re a loyal Best Ever listener; based in San Francisco, California.

Then Thomas Castelli, CPA and tax strategist at the Real Estate CPA. He’s a real estate investor who passively invests, and then most recently is an active investor on an 82-unit apartment community, so learning from someone who is an expert in tax strategy and who also invests actively in deals, which is very helpful, because he’s gonna come at it from a different perspective than someone who’s just an academic person in this field. He’s based in New York City.

Before we get into it, can you both tell us a little bit more about your backgrounds and how you got into real estate investing?

Devin Redmond: Sure. This is Devin, I’ll get started. As Joe mentioned, I’m currently head of customer success at Stessa; we’re a free software platform for rental property investors, to track income and expenses and run key reports. I got started in real estate actually as a tenant rep broker in L.A, so on the commercial side; I spent my days driving around L.A. with clients, helping them find office space and negotiate deals. I then worked for a big owner-developer in the Bay Area; that was mostly office and R&D deals. I did acquisitions and asset management for them. This was kind of 2007 through the downturn, so it was a huge learning experience for me.

Very quickly I learned that the proforma goes out the window when cap rates are going up and the national economy is hurting… And I spent most days renegotiating leases with tenants, trying to cut operating expenses, and trying to run our portfolio as lean as possible.

Another thing I learned there was that institutional investors have a pretty sophisticated way of running the numbers, and we’ve built a lot of very complicated financial models, and that’s something I try to bring to my job at Stessa every day – we want to make it easy for rental property investors, but we also want people with larger portfolios to be able to run sophisticated types of reports that they need to understand what’s going on with their investments.

Joe Fairless:  Real quick question on that, in terms of the sophisticated way of running the numbers – what’s an example of that compared to what a beginning investor might use or do when they’re running the numbers?

Devin Redmond: One example – a beginning investor gets set up on QuickBucks, or a quick rental property manager, right? And that’s fine for running a general income statement; it shows you how much money you’re making at the end of the year. Our reporting with Stessa – you can run both an income statement and a net cashflow report, and the net cashflow report breaks down principal versus interest versus your escrow accounts, and it will even show you what your debt service coverage ratio is… So you can get a sense for how you’re doing compared to what your debt service is every month. That’s just one example.

Joe Fairless:  And do you all have ways to interpret a net cashflow statement for investors who come into your platform and are like, “Oh, well this looks like something I should do”, and then they see it and they’re like “Well, how do I actually read this and how do I interpret these numbers?”

Devin Redmond: We have a pretty good support center, with a lot of help articles that help you figure out what you’re looking at. One of the things I spend a lot of time thinking about is as newer investors come into our platform, how do I make it simple enough for them to get started, and then sort of guide them through and show them, “Okay, these are the reports you should be running, these are the numbers that really matter, and then this is how you can feed it back into your operations. This is how you can look across the months laid out, the income statement, and see where are utilities fluctuating too much, where are they maybe out of range.”

We’re actually trying to get much smarter about identifying those opportunities for people, and then sort of bubbling them up in the software so that you don’t have to go hunting in the statement to find them.

Joe Fairless:  And Thomas, would you mind telling us a little bit about your background?

Thomas Castelli:  Absolutely. I went to school for business and accounting, and during that time I started reading the Rich Dad, Poor Dad books. As I started to go down that rabbit hole, I just kept noticing that real estate was a common theme for building wealth… So I started going to a bunch of networking events; at this one event I met a group that was doing a seminar on real estate syndication. I went to that seminar, and really that point was pivotal because I fell in love with real estate syndication. I also met someone who would become my future mentor.

From there, I invested in a bunch of deals with him as a passive investor, and then that ultimately boiled up to participating in a syndication of an 82-unit property as a general partner, and then right around the time that deal was closed, I came across the Real Estate CPA and really found that it was a great blend of my passion for real estate investing and accounting background, so I joined the team as a tax strategist, and I now provide tax strategy and planning to investors of all sizes – people from one single-family rental, to portfolios of single-family rentals and multifamily investors, syndicators, among other groups. That’s where I am today.

Joe Fairless:  What was your role as a general partner on the 82-unit deal?

Thomas Castelli:  I worked mainly on the acquisition side of it. I ended up making a lot of phone calls to brokers and developing a relationship with a broker who eventually sent me a good deal out of a handful. From there, I ended up negotiating much of the agreement, and then I helped out with due diligence. From there, we had two asset managers who are the primary asset managers on it, but I’m still on the property management calls and keeping a pulse on the deal day to day… Well, not day to day, but week to week rather.

Joe Fairless:  I imagine you’re a good resource for the team from doing checks and balances on the books, as well

Thomas Castelli:  Yeah, I take a look at the books every once in a while, just to make sure that everything is flowing smoothly, but we actually have an accountant who works on that, so we’re pretty much covered on that end.

Joe Fairless:  So let’s transition into taxes, and the primary focus of our conversation today. I imagine this is going to be for Thomas – what are some key things that all real estate investors should be doing in preparation for taxes?

Thomas Castelli:  When it comes to taxes, the first thing is keeping good records. Stessa definitely helps you do that, but at the end of the day when you’re going to file taxes come year-end, if you don’t have your stuff organized it’s gonna be a nightmare pulling receipts out of shoeboxes and trying to get everything into your accounting system, and going back and retroactively trying to remember what transaction this was for, what expenses this was for… So really going into tax season with your books up to date and having everything organized is key. But also, at the same time, a lot of people come to think that taxes is just something you deal with once a year, around tax filing season in January or April… And the reality of the situation is when you file your taxes, at the end of the year you’re simply reporting your income and expenses, your results from the activities that you did in the year prior; once that year ends, your results are pretty much set in stone. There’s of course some flexibility and some things you can do during that time to reduce your tax liability after the year ends, but you really wanna be taking a proactive approach throughout the year, making sure that you’re implementing the right strategies and making sure that you’re taking the right actions that will give you those favorable results come year end, and ultimately reduce your tax liability.

Joe Fairless:  Is there anything you can do after the year is over to retroactively influence what you did during that calendar year?

Thomas Castelli:  There’s a few things. You can contribute to a retirement account, you can engage in cost  segregation studies… Those are pretty much some of the top things you can do during that time, simply because at the end of the day “you spend what you spend, you earn what you earn” type of thing, and you went about the way you did your business throughout the year in a certain way, and that’s already set in stone… But cost segregation studies, for real estate investors, is probably the biggest thing you can do after the year end to affect your tax liability.

Joe Fairless:  One other clarification question and then I’d like to ask about some tax strategies you see investors missing… But when you say “keeping good records, making sure your books are up to date”, will you be specific on what exactly good record keeping is?

Thomas Castelli:  Devin, do you wanna take that one?

Devin Redmond: Yeah, I can chime in. I met with a lot of investors, especially in the  early days building Stessa, and trying to figure out “What does your process look like?” across hundreds of investors, and I’ve found it really broke down into two buckets – there’s the people who are on top of things, keeping track of everything monthly, a lot of them using Google Sheets, a lot of them use Stessa now, and they’re kind of closing out the month and they always kind of know how they’re doing… And then once they close out December, they’re kind of ready for tax time. Then, as Thomas mentioned, there’s this other bucket of people who really kind of come up for air once a year, get everything ready, they’ve got a  bunch of back and forth going on with their CPA, they’re wrangling receipts, and that’s a tough spot to be in.

From our perspective, good record keeping is obviously knowing where each expense goes, into what category, and then staying on top of your tenants as well, and knowing who’s late, and making sure you’re collecting all your income.

Joe Fairless:  Yeah, and when we take a look at the tax strategies that we should be employing – I imagine this is gonna be for Thomas – what things do you see investors missing on a regular basis, that are low-hanging fruit, that they should not be missing?

Thomas Castelli:  Yeah, absolutely. So it’s not always a tax strategy necessarily if they’re missing — sometimes it’s just deductions; sometimes people think that simply by not taking the depreciation deduction, that they’ll avoid depreciation recapture tax upon sale. And for those who don’t know, depreciation recapture is a tax up to 25% on the portion of your gain that’s attributable to the amount of depreciation you took over the time you owned the property.

Sometimes they decide to omit or not take the depreciation in hopes to avoid that, but the reality is the IRS was going to assume that you took the depreciation and then recapture it anyway when you sell.

Joe Fairless:  But what if  you didn’t and their assumption is incorrect? Do you then get that money back?

Thomas Castelli:  No. You have to take it. Basically, take your depreciation deductions; don’t miss it.

Devin Redmond: But Thomas, if in the past you didn’t take the depreciation, you can file amended returns and recover that, right?

Thomas Castelli:  Correct. You can do that. You have to go back then and amend your returns. The bottom line is you just want to make sure you’re taking depreciation deductions each year, and just be proactive about doing it… Making sure you’re also maximizing depreciation through cost segregation, but… Yeah, just make sure you’re taking depreciation.

Another strategy we see people missing is not taking advantage of a home office. When you have a rental business, often you can take a home office deduction, which not only reduces your taxes, but it makes your home a place of business. And when your home is a place of business, your commute to other business locations such as the bank, such as your rental properties, meeting with a  broker, going to Lowe’s to pick up supplies for your rental business – these trips all become tax deductible.

The standard amount of deduction in 2019 is 58 cents per mile, so if you drive a lot for your business, especially when you work from home, in that type of situation, you definitely don’t want to miss out on that combo of having a home office and also taking those miles deductions.

Joe Fairless:  Okay. Fact or fiction – when you put a home office on your tax returns, it increases your likelihood of being audited.

Thomas Castelli:  That these days is more or less considered fiction. What happens is a lot of people who do have a home office often have Schedule C, which is for an active trade or business. Schedule C is actually the most audited part of Form 1040, which is your individual tax return, so I think there’s a lot of misconceptions that because you have the home office in and of itself is really the trigger for increased audits, but in reality it’s just the fact that most people who do have home offices have schedule C, which might not be the case for a lot of real estate investors, because rental real estate is filed on Schedule E of your tax return.

Joe Fairless:  Let’s talk about the 20% tax deduction. What is it, how does it work, and what do people need to know?

Thomas Castelli:  I can take that one. The 20% QBI deduction (Qualified Business Income deduction) is a deduction that allows you to take 20% of your business income, a deduction of 20% right off the top of your business income if you’re single and you’re making less than $157,500, or if you’re married it’s $315,00. Above those thresholds you still may receive a partial deduction; it’s usually going to be less than 20%, and the calculation to get there is super-complicated, we won’t go into that today.

One of the things for landlords that was up in the air was whether or not your rental business will actually qualify as a trader business for the purposes of this deduction. The IRS recently released a safe harbor that clarifies that and says “If you meet the safe harbor, you will qualify as a trader business for the purposes of this deduction.” Quickly going through what that is – to qualify, you need to meet the following criteria: the property has to be held through your personal name or through a disregarded entity or another passthrough entity such as a partnership.

Joe Fairless:  Like an LLC?

Thomas Castelli:  Like an LLC. A single-member LLC would count. Commercial and residential real estate may not be part of the same enterprise, so you have to keep separate businesses for your commercial activity and your residential activity. You also have to keep separate books and records for each enterprise. An enterprise can consist of multiple properties, as long as they’re all commercial or all residential.

You’re gonna also have to spend — well, not you specifically, but 250 hours of rental services must be performed in that enterprise for the year, and you also have to maintain records that include the hours of those services performed, a description of the services performed, the dates in which the services are performed and who performs them. Now, the good news is you as the owner don’t have to specifically do all the work; those hours will also count if your employees, agents or contractors do it. So all the hours worked by those folks will also count towards the 250, and the last thing to note there is that it must be rental services. That includes advertising for rent, negotiating leases, reviewing tenant applications, collection of rent, daily operation and maintenance of the property; things like financing and reviewing financial statements do not count toward those 250 hours.

Joe Fairless:  How is the IRS defining residential? Because I’m wondering if that includes multifamily, or if that’s just like one to four-units?

Thomas Castelli:  There’s often some confusion in that because brokers consider 5+ units to be commercial, and 1 to 4 to be residential… But for the IRS, the purpose of it is if it’s single-family or it’s multifamily, it’s residential.

Joe Fairless:  Okay. If anything, is there anything else that real estate investors should know when it comes to their taxes that we haven’t talked about? And I know that’s a broad question, so maybe some top of mind things…

Devin Redmond: I can weigh in on that… We see a lot of our investors doing 1031 exchanges, and we haven’t talked about that much… The sort of special treatment under the IRS is very powerful, and over time it’s one of the best ways to create wealth. It’s a long-term strategy, something you stick with through ups and downs and cycles and cap rates… And even with the new opportunity zone designations that are also open to deferred capital gains, my read on that is that 1031 is still the best strategy if you’re committed to real estate in the long run. Thomas, you may wanna weigh in on that as well.

Thomas Castelli:  Absolutely. 1031’s are a great strategy, and ultimately what it allows you to do is it allows you to continually defer the capital gains upon sale of a property, assuming you invest the entire sales proceeds into a new property. You can do this over and over and over again throughout your life, and in theory – albeit it is harder to do in practice – you can not pay any capital gains on the sale of any of your properties throughout your life, and then later when you pass away and you leave the properties to your heirs, they’ll receive it at what’s called a stepped up basis, which is the fair market value of the property at the date of your death, and it will eliminate all of the capital gains that you should have took throughout your lifetime when they receive it, so… Definitely a powerful strategy.

Also, something else to throw in there, something else that people sometimes overlook is the power of the combination of the real estate professional status and the cost segregation.

Joe Fairless:  Before we get into that, will you just elaborate a little bit on when you die, after 1031-ing your whole life, you said your heirs get the property at a stepped up basis, which effectively eliminates… Will you just repeat that and just elaborate on it?

Thomas Castelli:  Yes. What happens is when you do a 1031 exchange, your basis in that property decreases after each exchange, because [unintelligible [00:20:55].20] the dynamics of the way the exchange works, you’re gonna end up having very large capital gains at some point if you fail to do a 1031 exchange… But what happens is your heirs get it; their basis in their property goes from that very low basis that you had, to its fair market value.

Let’s just say for instance throughout your lifetime you did several 1031 exchanges, and the building you have now is worth, say, two million dollars. Your basis in that property might only be $200,000. So if you were to sell it —

Joe Fairless:  Because you started with a smaller property?

Thomas Castelli:  Yeah, because basically you started with that smaller property, and that basis just continued to roll over after multiple exchanges. So you might get to the end of the line, if you will, and say “I have a two million dollar property, but my basis is so low because of the original property I started with.” So you might have a huge capital gain of, say, in this instance, 1.8 million, and when your heirs receive it, your basis goes from that $200,000 mark to two million dollars. They receive it at two million dollars. So if they were to sell it, usually shortly after you pass away, they’re gonna pay little to no taxes.

Now, if they were to hold it, they’re gonna eventually have to pay capital gains on that fair market value when you die and the fair market value when they sell, but it’s gonna be significantly less than it would be if you were to fail to do a 1031 and have to recognize that gain throughout your lifetime.

Joe Fairless:  Why does the IRS do it that way?

Thomas Castelli:  That’s a good question. You know, there’s just a ton of tax advantages for real estate, because one of the things the IRS does is – the Treasury or Congress rather – they want to keep as much stuff in the private sector as possible, and by offering these advantages to real estate investors, real estate investors will build properties, and develop properties, and participate in real estate activities and provide housing to the population of America, without the government having to take that on as a public project, if you will.

Joe Fairless:  Sorry, I interrupted you just a little bit ago… What was the other thing you were gonna mention?

Thomas Castelli:  Yeah, so the real estate professional status – if you work full-time in real estate, you essentially elect to be treated as a real estate professional for tax purposes, which allows you to take the losses from your rental real estate against your ordinary or active income… So what you can do is you can buy a bunch of properties, you can have a cost segregation study performed, which is simply a breakdown of the components of your property into their individual class lives, which range anywhere from 5, 7, 15 to 27,5 years. And generally between 20% and 30% of the property can be broken down into that 5, 7, 15 year mark, which is not only depreciated over a shorter period of time, but can also be accelerated, increasing your depreciation deduction, and now with 100% bonus depreciation, that 5, 7 and 15 year property can actually be depreciated in full in that first year you purchase that property, which would give you a massive loss. That loss as a real estate professional can be used against your active income, whether it be from you or your spouse.

Joe Fairless:  You two put together a tax guide and a bunch of resources to help the Best Ever listeners… Where can the listeners find the tax guide and resources you two put together?

Devin Redmond: You can find that at www.stessa.com/taxes. All of our existing users have gotten a free copy of that. You do need to sign up for an account, but it’s pretty quick and easy. Then we’ll give you the PDF, and there’s also a separate document with the 11 top tax deductions for real estate investors.

Joe Fairless:  Excellent. Well, Devin and Thomas, thank you so much for being on the show. I learned a lot, especially the reinforcement of the 1031 and the stepped up basis – that’s really powerful stuff. I have spoken to some investors and they mention 1031-ing is like kicking  a can down the road; you’re eventually gonna have to pony up. But not so much. When you die, your heirs don’t have to, and that’s very powerful… As well as other things and things that you two talked about.

Thanks for being on the show. I hope you have a best ever weekend… And Thomas, how can the Best Ever listeners learn more about what you’ve got going on as well?

Devin Redmond: They can head on over to therealestatecpa.com. On there we have a blog, we also have a podcast, The Real Estate CPA Podcast – Joe was actually one of our first guests – which includes a lot of great tax strategies and other information regarding accounting and taxes.

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

Thomas Castelli:  Great, thank you!

Devin Redmond: Thanks for having me!

Guest Frank Roessler on the Best Show Ever flyer

JF1645: We Completed A Business Plan & Sold A Deal – Here Are The Details – with Frank and Joe

Frank Roessler, for Best Ever Listeners that don’t know, is the Founder of Ashcroft Capital, and managing partner along with Joe. Recently, they finished a business plan and sold a deal, now we get to hear their case study discussion. This will be a normal segment on the podcast, whenever Ashcroft sells a property, we’ll hear the details from Frank and Joe! If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Frank Roessler Real Estate Background:

  • Founder of Ashcroft Capital
  • Has overseen the acquisition of over $700,000,000 of institutional quality multifamily investments
  • Based in NYC
  • Say hi to him at ashcroftcapital.com

 

Best Ever Tweet:

 

 

Learn more about Frank:

JF810: When Mother Nature DESTROYS Your Property, What Do You Do? #SkillsetSunday

 


Sponsored by Stessa – Maximize tax deductions on your rental properties. Get your free tax guide from Stessa, the essential tool for rental property owners.


TRANSCRIPTION

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

We’ve  got a special segment for you today. It is a  case study conversation on a 200+ unit apartment community that my business partner and I, and our team, and our investors worked on and completed. Any time we close a deal, I’m going to attempt to have a conversation with Frank, and we’re going to have a case study conversation with you all, so that you can learn the lessons that we learned. Ultimately, this is about helping you out, and identifying things that we came across along the way, some challenges, and successes, and also things that didn’t go according to plan, how they were overcome, ultimately so that when you’re  doing deals you have a guide to help you when and if you come across similar situations.

First off, Frank, how are you doing?

Frank Roessler: I’m doing very well, thank you for asking. How are you?

Joe Fairless: I am doing very well, as well. I’ve interviewed you on this podcast, right?

Frank Roessler: Yeah, we definitely did that.

Joe Fairless: Alright, so I’ve already interviewed you. We’re not even going into your background, because we’re gonna be doing multiple case study episodes when we close deals, so we don’t wanna have to have you go through your background every time. Let’s get right into it.

The deal that we’re talking about today was formerly called Timberlodge, and you and I and our investors refer to it as Eleven600. Tell us about the business plan, tell us about the deal.

Frank Roessler: Yeah, sure. I was thinking a little bit before this call about things that went right; it resulted in a very good return for our investors, and there’s a number of things that went right. The business plan is definitely one of them. I thought I might start off kind of before the business plan, with just the submarket and the purchase. Is that alright to do that?

Joe Fairless: Yeah, please.

Frank Roessler: So starting from the beginning – we bought this deal, and we bought it right; we bought this deal off-market. I think that added a lot of value, because we avoided a bidding war. We got it at a price that we felt was very attractive at the time. One of the things that went in our direction was that the seller was a group that we had purchased from in the past, a group called Bridge IGP, Bridge Investment Group. We bought Woodglen  Village from them, and it always helps when you buy from a buyer, if you can, to close and close well; without retrading, without being a challenging buyer. While maybe retrading might get you a  lower price on that one deal, if you don’t need to retrade and you just close and you’ve maintained your reputation, it can lead to opportunities like this, where that same seller presents you with another deal, and that’s just what wound up happening here. So I always recommend, if you can, to have a very smooth due diligence and closing when you buy.

So we bought this deal off-market at a great price, avoided a bidding war; we bought from a group that we transacted with in the past.

Joe Fairless: Are we able to say how much we bought it for?

Frank Roessler: There’s a confidentiality agreement when you sell most deals, that prohibits you from doing that, so unfortunately we’ve not publically stated what price we bought it for or what price we sold it for, but we can definitely talk about the returns to investors.

Joe Fairless: Yup.

Frank Roessler: So anyway, we also didn’t just buy Timberlodge because the seller offered it to us. As you know, we did a very robust research project on all the submarkets in Dallas, and just looked at, okay, we know where the desirable markets are; we all know where Highland Park is, and Preston Hollow is, things like that, but what are the markets that are actually in growth mode? Just because it’s desirable doesn’t mean things are growing or are headed in the right direction.

We’ve found that the North Lake Highlands Area/Richardson was a challenging market for the previous ten years, but that it was really turning around. The community was investing significant dollars into that submarket. Other owners like us had bought apartment communities and were renovating, therefore improving the demographics… And the databases didn’t lie; they told us there was huge rent growth, a very strong vacancy, I should say… So that was one of the reasons that led us here. And then by great coincidence, this deal that came across our desk was being sold by a group we bought from before.

So I just wanna make that point, that yeah, we bought at a great price, but we also bought in a great submarket. We had a lot of wind behind our sails just going into this property.

Joe Fairless: A couple follow-up questions on that… When you say we bought off-market – we went through a broker, but it wasn’t publically marketed, correct?

Frank Roessler: Yeah, that’s a great question, Joe. And yes, that’s exactly what happened. Transwestern brought us this deal from Bridge, so it worked well that we had bought from them in the past; it helped to convince them that we’re gonna close and not screw them over (pardon my French). But then the broker did a great job of convincing the seller that, for whatever reason, this was a good offer, and that it made sense to just sell directly to us, rather than going through the hassle of going through a bidding war… So we owe a lot to the broker we used.

Joe Fairless: And just generally, when a broker does not have a listing fully marketed, but they’re representing their client, and it’s considered off-market, but there’s broker representation, how often is that broker sending it out to a whole bunch of other people, just not officially? …so it’s pretty close to being on market, since they’re already sending it out to a whole bunch of people.

Frank Roessler: It’s case-by-case, but everything you’ve just said could happen. It could be the case that a lot of brokers when they get a property and they don’t wanna market this thing for the next two months and do 50 property tours, so it would be great for them to just sell it to a buyer directly… And sometimes that’s the way things go – they kind of quietly e-mail the financials around to the most common buyers in a market, see if they can just get it done there, and if they can’t, meaning those prices don’t meet with what the seller wants, then they go through the process of fully marketing the deal, and launching it out.

I know on this property this happened very quickly. We were dealing with a broker, Taylor [unintelligible [00:08:52].01] who we’d dealt with many times in the past… And he’s always done a good job, from our perspective – we never know what’s going on fully behind the scenes – of really just sending us the first look at a deal… And it’s an exclusive (but short) look for us, to see if we like this price, if this price makes sense for us, and if so, okay, make an offer, start negotiating a purchase and sale contract. He doesn’t say “Hey, I’ve got this out to five other groups.” So that was the case with this one – it came to us, just us, we came to an agreement on price and we moved forward. So it worked well on this deal.

Joe Fairless: The initial price that Taylor presented – was that the transaction price?

Frank Roessler: No, it wasn’t. But it wasn’t far off, either. I think we were just a few hundred thousand dollars below the price that he brought it to us for.

Joe Fairless: So off-market and submarket strength going into the deal, so we were set up for success… And what was the business plan?

Frank Roessler: The business plan was ideal for us. We tried to look for low-risk deals with value-add. What we tried to do is find an apartment that is under market, its units are outdated, but it has almost all (if not all) units unrenovated, and we can see comps which were… But then we’re buying from a great seller, hopefully, that has taken great care of the property, so we’re buying a property with good bones, that we don’t need to invest funds for maintenance, like replacing roofs or repainting the property, things that don’t really drive net operating income, but that you have to do every five to ten years or so. And that was the case with this deal. That’s why we liked it so much. Bridge had taken excellent care of the property, it was very well maintained. They have a business plan where they try to be very, very troubled assets, stabilized, maintain, and then sell with full value-add. That is indeed what happened here. They bought this deal when it was at a point of very low occupancy, it had a tough demographic on it…

So they stabilized it, they did a good job of that, and they replaced the roofs, they renovated the clubhouse, did a really good job on that… So when we bought it, it was served to us on a platter, so to speak, of having no units having been renovated, yet the market as I said was in growth mode and several comps were fully renovated and they were achieving rents 20% to 30% higher than what this properly was achieving, as well. It’s everything that you look for in a value-add deal, and that’s what wound up happening – we wound up buying the property and just slowly implementing that business plan.

If you’ve listened to our calls, one of the things I always say is the huge risk in this investment game is the execution of the business plan. You can do  everything I’ve just said  – buy it at the right price, in a great submarket, with a great business plan, but if you can’t execute, you can really screw up an investment. So I’ll get into lessons learned, Joe, if that’s okay.

Joe Fairless: Sure.

Frank Roessler: One would be we took on a very complicated, heavy lifting value-add project in Timberlodge. We wanted to further improve the demographics, we wanted to rebrand this property, so get rid of all the brand recognition, start anew. We wanted to add revenue-generating projects like carports. Then we wanted to renovate every single unit, and we wanted them to look nice. We didn’t wanna tank occupancy, but we wanted to keep going on renovations whenever someone moved out. So we wanted high occupancy, we elected to put granite in a 1980’s asset, when no one else in the market was doing that, and we put in those carports.

So we didn’t have CityGate at the time that we acquired this company.

Joe Fairless: The property management partner?

Frank Roessler: Yes, thank you. So we were out interviewing groups. We knew we wanted to go with a small, yet sophisticated property management group, because we wanted our business to be important to them, but we interviewed four different groups — CityGate was actually managing one of the comps that we said “If we can do that on this property, we’re gonna do really well.” So that was in their favor, and ultimately we were impressed by their proposal; we happened to like that group a lot, and we said “Okay, let’s go.” But that’s probably a gamble. I wouldn’t recommend doing such a heavy value-add project with a property management company that you’re not too familiar with yet. And that’s what we did, and we wound up getting lucky here, because we did a good job of interviewing… But still, it was an unproven group to us, and this is a big, heavy renovation project, rebranding project, a repositioning. So if they would not have been able to execute as well as they did, we would have had to have replaced them… We could have been in a lot of trouble on this deal, and we were fortunate that they performed, and performed well.

I look back at that and I do think we did things right, but I do think we got fortunate… If someone else was looking at the property and they didn’t have a group set up yet, third-party, I’d recommend maybe going with a large, large property management group. While they might not care about your business so much, they’re probably not gonna do a very bad job…

Joe Fairless: Right.

Frank Roessler: Or, alternatively, maybe start with a property that doesn’t require so much attention, renovation, operationally, as well as cap-ex… An easier project, that hopefully a group can get in and do a good job on no matter what. Maybe one of those two directions.

Joe Fairless: Yeah, that’s very helpful. I remember — so you and I invested in this deal, obviously, like we do all of our deals… But then also, for this deal, we have one investor. He invested with us a couple times (more than a couple)  leading up to that, and then he said “Hey, I wanna be the only limited partner on a deal. Will you go find me something to partner with you guys on?” So we ran this scenario by him, and he was fine partnering up with this group, CityGate, who we now have our portfolio with… And they are a third-party management company. So there was just one person to have that conversation with, versus us mentioning it to a network of investors, which is different, because it’s just a different conversation, and you don’t have to have a lot of people being on board with it; you just have to have one person, who’s bringing the equity.

But I love that lesson, because even thinking about it from, “Okay, how do I pick  a property management company, regardless of if it’s heavy value-add or medium value-add?”, well, how about looking at the comps, and if they’re managed by a third-party, and as you said, if you’re thinking “If we can do that, then we’ll do really well with this property”, and simply interviewing the managers for those comps.

Frank Roessler: Yup, and that’s exactly how things worked out. We got recommendations in from Taylor, our broker, and some other guys, about what third-party to go with… And then when I was shopping the comps, I saw CityGates’ name on the door, and that’s actually how they came to us. They were just included in the process, and it worked out really well.

Joe Fairless: I think you said two lessons… Was that the first one?

Frank Roessler: That’s the first one. Now, the second one – putting in granite and spending almost 7k/unit on a 1980’s property… This is, again, case-by-case issue, and sometimes that makes sense. This happened to be the fifth project that we had done. We looked at these units and we said, “Let’s do granite, let’s do stainless steel, let’s make it look beautiful.” We replaced the vanities in the bathrooms, all the lights, floors – you name it. We made these units shine and sparkle, and I do love that we did that. It showed that we’re capable of doing something like that, and we got great rents. I think we would have gotten just a little lower rents by spending a lot less. I think we didn’t need to go to that level with this demographic, and we couldn’t have gotten away just resurfacing the  counters, even just maybe black appliances… The list from where the units were beforehand, completely unrenovated, with white appliances that were ten years old, carpets that had just been washed for five straight years, vintage lighting in there – from where it was to where we took it, I think we didn’t need to take it that far, and we could have gotten a higher ROI by maybe only spending $4,500/ unit. So I think that was the lessons learned of “Don’t under-renovate, but renovate to the appropriate level for the demographic.”

So now we found that if we do scale back and do the latter of what I said, which we’ve done on several properties in this submarket since – like Estencia and Belterra – you’re still gonna get a very, very strong rent bump, and therefore ROI, but you don’t necessarily need to do that big of a project and spend that much money… So I’d say that was also a lesson learned for us on this property, too.

Joe Fairless: For future properties and future acquisitions, what aspects of the subject property and the comps do you look at in order to determine “Okay, granite countertops, stainless steel” vs. “Resurfacing and black appliances”, or something in between?

Frank Roessler: Yeah, it depends on two things, which go hand in hand. One, what are the comps doing? Are you going to be the nicest property on the block? You probably don’t wanna be there… And then two, what is the income level of the demographic at that property and at the comps? Are you buying a property that has primarily workforce housing, that while they do want nicer units, maybe can’t necessarily afford a $200 premium, but could afford a $100 premium? I’m just picking those numbers our arbitrarily, but saying pay attention to the average household income of your residents, as well as the demographic around.

Or are you on a property that maybe because it’s built in the year 2000, it’s more of a core-plus asset, and it has a white collar demographic to it, with average  household incomes of 85k or greater? Typically, on deals like that and the comps around it you will see a higher quality of finish that often includes granite and stainless steel appliances, undermount sink etc.

In order to really determine if you can get that return on investment that I’ve just described, you really need to take a look at the market, take a look at the comps, and take a  look at the demographics of your property.

Joe Fairless: The business plan was five years, we sold it in less than half than that… What were the results of this project?

Frank Roessler: So we did an outstanding job on not only executing the business plan… We renovated approximately 60% of the asset, so we left a lot of meat left on the bone. We bought at the right time, we sold at the right time… We actually sold this property at 50% greater than what we bought it for, which is incredible to do. And on top of that, we sold in 18 months.

What happened with this asset… As you mentioned, it was a five-year hold, we sold in less than two years – we got an outstanding offer on the property… And like you said, we only had one equity partner; we have a fiduciary responsibility to bring any offers that come our way to our equity partner. That’s what we did. He certainly liked the price. The price more than doubled the equity invested into this property in less than two years. We actually pushed them a little bit more on price, we made them go non-refundable from day one, so that we didn’t waste anyone’s time here and have them retrade or back out of the deal later… And they agreed to the terms that we had them change, and it resulted in a fantastic investment in a very short period of time.

Joe Fairless: The 50% greater than what we bought it for – how much of that was cap rate compression versus NOI growth?

Frank Roessler: It’s definitely both. Our NOI increased 20% over 18 months, so that’s incredible right there, and that’s a direct result of our ability to execute on our business plan. But on that of that, there absolutely was cap rate compression, instead of expansion. We bought this deal at what I believe was around a 5.8 cap, and sold at a 5.2 cap. So if we would have done nothing, we would have made money. But if we would have done nothing, maybe it also wouldn’t have been an impressive return and we just wouldn’t have sold, we just would have held. It was the result of both – good timing and a good business plan.

Joe Fairless: Anything else you think we should talk about as it relates to this deal?

Frank Roessler: I took notes before this, and we went through everything that I wanted to discuss. We bought at the right time, but we did a lot of research as well in the submarket. We bought from a good group, that we’d transacted with before, and it was helpful, because we preserved our reputation by closing and closing at the right price. And then we had an appropriate business plan for the investment, and that’s what resulted in such a great return for us on this one.

Joe Fairless: And then the lessons learned – one, the lesson on picking the right team to do this type of project, and also perhaps not have this be a project that if you’re starting out, or if you’re doing large apartment communities, then this type of renovation overhaul probably isn’t the best first one for you to do, but certainly there’s a lot of value that you can add to it and it can be profitable.

And two is knowing how to renovate to the appropriate levels based on the demographic. And as you mentioned, the two things to look at is 1) what are the comps doing, and 2) what’s the income level of the demographic?

Frank, thanks so much for being on the show, great hanging out with you. I’m confident this is valuable, especially for multifamily investors who listen to this show, which probably makes up a vast majority of the audience. I hope you have a best ever day, and we’ll talk to you soon.

Frank Roessler: Thank you, Joe. I appreciate it.

Joe Fairless: And Best Ever listeners, you can go to AshscroftCapital.com and read Frank’s bio. I skipped over it, but you can check that out, and then see what we’ve got going on over there, too.

The Best Show Ever flyer with guest Grant Sabatier

JF1617: Millenial Real Estate Investor Reaches Financial Independence By The Age Of 30 with Grant Sabatier

From no job and submitting endless amounts of job applications to entrepreneur and financial independence, all in just 6 years time. Grant got his start by getting certified with Google Ad Words and hit the ground running, getting into real estate investing along the way. Hear how he was able to work his way up to a $500k income per year in a fairly short amount of time. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

 

Grant Sabatier Real Estate Background:

  • Creator of Millennial Money and host of multiple finance podcasts
  • Writes about personal finance, investing, entrepreneurship, and mindfulness and has been featured in over 200 media outlets
  • Based in New York City, NY
  • Say hi to him at https://millennialmoney.com/
  • Best Ever Book: Art of Living

 


Get more real estate investing tips every week by subscribing for our newsletter at BestEverNewsLetter.com


TRANSCRIPTION

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

Grant Sabatier: I’m good, Joe. How are you?

Joe Fairless: I am doing well, and nice to have you on the show. Grant is the creator of Millennial Money and host of a whole bunch of finance podcasts. He writes about personal finance, investing, entrepreneurship and mindfulness, and has been featured in over 200 media outlets. His website is millennialmoney.com. Based in New York City now… With that being said, Grant, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Grant Sabatier: Yeah, thanks for the introduction, Joe. My story starts back when I was 24. I was living at home with my parents after college. I’d bounced around a number of different jobs and ended up getting laid off twice, and finding myself back living in my parents’ home, and sleeping in the bed that I slept in as a seven-year-old kid. That’s where my financial independence journey started. It was at that point that I had to completely reinvent myself, and from that day in August 2010 it took me five years and three months to reach financial independence, at the age of 30. So there was a five-year period where literally 18 hours a day I was making money, launching side hustles, growing two different companies, and I really had a ton of fun doing it… And real estate actually factored pretty heavily into that entire process, and I’m excited to chat about it.

Joe Fairless: Well, I’m excited for you to chat about it, too. Just so we know how you define it, how much money were you making by the age of 30?

Grant Sabatier: By the age of 30 I was making a little over half a million dollars. After investing in taxes and all that good stuff, I was saving about 62% of my income.

Joe Fairless: Alright, got it. So you were making a little over $500,000, and you were saving – did I hear that correct, 62% of that?

Grant Sabatier: Yeah, that’s correct.

Joe Fairless: Well, you piqued my curiosity… Let’s go back to your seven-year-old bed – what did you do from there?

Grant Sabatier: So in August 2010 my parents had told me that I could crash there for about three months, and I was at month two, and I’d sent out over 200 resumes really into the abyss, and hadn’t gotten a single call back. It was at this time I was doing a search on my phone and I saw a little Google mobile ad, and I was like, “Huh, what’s this?” I’d never seen one before. So I started researching it and figured out that you could make between 10% and 20% of media spend to manage Google Ad campaigns. And what’s more exciting is that you could actually get certified through Google for free.

I had no digital ad experience whatsoever, didn’t know anything about Google campaigns, so I dove into their free YouTube videos, and the Google AdWords University, and I got certified. It took me about 30 days to do that, and I applied to a couple digital marketing jobs and ended up getting the first one that I applied to, and was off to the races, making $50,000. It was at that time where I was like, “Okay, I’m gonna treat money very differently. I’m gonna figure this out.” Money is really essentially just a human invention. How can I really put all of my attitudes, all of my thoughts about money, all of my emotions, how can I put them in a box and set them to the side, and look at money as a philosophical concept, as something we embed so much meaning into?

So I started looking at money from so many different angles, and really fell in love with not only how it can change your life, but how to make money in really counter-intuitive ways. And real estate factored in pretty heavily into this process…

I got kicked out of my parents’ house pretty quickly, got the job that gave me the boot, and I knew…

Joe Fairless: Did you try to convince them to stay?

Grant Sabatier: I was ready to leave, but it was the first time–

Joe Fairless: You weren’t being proactive about it though… They kind of came up to you…

Grant Sabatier: It was kind of just a confluence of a couple weeks where it was like “Alright, you’ve gotta get out of here.”

Joe Fairless: [laughs]

Grant Sabatier: I’d gotten my first paycheck and I was excited to start investing the money, and I was like “Hey, if I can just stay here for free…” But it was short-lived…

Joe Fairless: “Get outta here, kid…”, okay…

Grant Sabatier: Yeah, absolutely. So the best decision that I made was to move into the cheapest apartment that I could find. I’d moved to Chicago, that was where the job was, I got settled, and I found a $700/month apartment, when all my friends were living in $1,500-$2,500 a month apartments; I found literally the cheapest apartment that I could find. It had two bedrooms; I needed two bedrooms, because I wanted to have a little office…

Joe Fairless: Bad area?

Grant Sabatier: It wasn’t a bad area, it was a transitioning area; it was just a really crappy apartment. It was old… If it had been fixed up, it probably would have gone for double the price, but it was just something the landlord and the management company were just super-lazy… And actually, once I moved out a couple years later, they ended up redoing it and almost did double the rent. So I found kind of an undervalued place, and was able to bank pretty much every dollar that I would have spent on housing above that into investments.

Just renting that apartment for a little over two years, I’ve now calculated that investing the additional money – I invested an extra $800/month – it’s actually helped me earn almost $200,000 more, from my investments.

Joe Fairless: Wow. Did you have student loans, by the way?

Grant Sabatier: I had a little bit of student loans. What I had more of was credit card debt. I’d actually gotten an academic scholarship, so I was very fortunate. I’d taken out a few loans, but I paid them off over the course of actually college, because I didn’t wanna graduate with debt.

Joe Fairless: Good for you.

Grant Sabatier: But I did have about $20,000 in credit card debt.

Joe Fairless: Dang! Okay…

Grant Sabatier: I was certainly hedging there… But just the compounding impact of that one decision of renting the crappiest apartment I could, the one that my now-wife but then girlfriend – she literally wouldn’t come over to hang out… [laughs] I’m happy she stayed with me, but I focused on reducing that expense, and then two years in I ended up buying my first property in downtown Chicago, which was in a loft building, actually where they printed the Sears Catalog for almost 70 years. I found a really incredibly unique property; I took the route of how can I find a property that has immense historic value, and is also something — you can’t go and build it today. I had over 100 feet of windows, east-facing… Just an absolutely gorgeous apartment.

I was able to buy it — I looked specifically in the month of November and December, because Chicago, when it’s zero degrees, very few people are looking for properties, and I was able to find a guy who had been trying to sell it for a little while, and he was desperate and he needed to get it sold by the end of the year, so I was able to lock in about $60,000 worth of equity immediately, just on the purchase price. Then I bought a parking spot from him separately for cash, I paid $12,000 for a $40,000 parking spot, and that got me into investing in parking spots, which is something I never scaled, but actually ended up being quite profitable from a real estate investment standpoint.

Joe Fairless: What was the purchase price?

Grant Sabatier: Of the property in Chicago?

Joe Fairless: Yup.

Grant Sabatier: $272,000.

Joe Fairless: Okay, cool.

Grant Sabatier: This was a 2,000 square foot open loft, 11th floor, national historic landmark building. The only kicker was the assessments were incredibly high, just because the head of the board – he was really conservative, and they wanted to keep a million dollars in reserves at all time. So that was one of the kickers that ended up making it a little challenging to rent once I did leave the apartment.

Joe Fairless: Okay.

Grant Sabatier: So yeah, that was a really great investment from a real estate standpoint. There was also — I started Airbnb-ing it quite early. So one of the things I was actually able to do is I had a friend who lived a couple of blocks away, and I was able to rent out my loft for about $300/night, and for a period of about six months I was able to completely offset the cost of the mortgage on that property, and basically bank and invest the difference.

My girlfriend ended up moving in with me, and that was no longer possible, but I was able to bank that investment. Since then, I’ve invested in a couple of other properties also in historic buildings. That’s something I’m particularly passionate about. One of the things in Chicago, actually, during this time – they’d built about 5,000 rental units within a quarter of a mile of this property, and what was interesting is the property has actually more than doubled in value since I bought it in the year 2012. So it was an incredible investment. And then these historic properties are something – like I said, I’m incredibly passionate about that, because they’re not making any more of them… And they’re really like art pieces, in a way, and that’s something — I wanted to invest in the most beautiful homes that I could invest in, because a) they attract a more sophisticated renter, and b) you’re able to get a higher price point because it’s something that is very unique.

Joe Fairless: So within these five years you’ve been buying in historic buildings, renting them out via Airbnb, offsetting your mortgage, making some cash on the side… What else were you doing?

Grant Sabatier: Oh gosh, so many other things… So at this point I had two digital marketing agencies that I was growing.

Joe Fairless: So you left your 50k job.

Grant Sabatier: Yeah, I left the 50k job after a year. That year was an incredible learning experience for me. It was like getting a Ph.D. in digital marketing, because I was working for a 30-person agency, and I was like a sponge; I spent as much time as I could with the SEO guys, with the web developers, with the designers… But most importantly, I spent time with the sales guys, and one of the things I quickly learned was that our agency wouldn’t take clients who wouldn’t spend at least $10,000 a month in fees on campaign management, or pay less than $50,000 for a website… So I was able to form a good relationship with the sales guys and say “Hey, if someone calls us and they have a smaller budget, could I talk to them?” And it was completely fine with the CEO, so I was able to pick up some of my first clients. They’d called the agency, but they were too small for us to work with, and then through that process I became very good at selling.

By the end of that first year I was making over $300,000 just through my own side hustles, in addition to the full-time gig. So I made the leap and went full-time into entrepreneurship, with the specific goal of trying to make a million dollars as quickly as possible. That was the singular focus of my life… Fortunately, but kind of unfortunately too, because I did burn through the end of my twenties working literally the entire time. But I had a goal – I wanted to essentially buy my freedom as quickly as I could. I never wanted tens of millions of dollars, I simply wanted enough that it would give me the freedom to go and pursue other projects that I was passionate about, and just take off the stress of having to always grind.

I was on the road at one point 35 weeks a year, servicing clients and speaking at conferences. I knew that that wasn’t going to be sustainable long-term. I also didn’t want to work till I was 65. Both of my parents were in their early 60’s and they were still working, still  chucking away, and that was one of the things — I was so burnt out, even by the time I was 24. I was like, “Alright, I’ve gotta find the escape hatch here.” And I fell in love with money in the process, not from a greedy perspective; I fell in love with the potential that it has to transform people’s lives, and it’s never been easier in history to make more money, whether it’s through real estate, or side-hustling, or making money online, or selling your knowledge. It has literally never been easier in history, but a lot of people think they need degrees, or they have to spend just tons and tons of time learning. Not that it’s easy, but it’s easier, and that’s one of the things that really excited me most.

I went from selling $500 websites to $50,000 websites within a year. I was really hooked on “Hey, how do sell the same thing to two different people, but get one to pay literally a hundred times more?”

Joe Fairless: How do you do that?

Grant Sabatier: Great question. It really comes down to understanding the perception of the value of what you’re selling. I think a lot of people think about making money the wrong way. They’re like, “I’ve gotta be busy, I’ve gotta spend all this time, I’ve gotta even over-deliver”, and while delivering obviously value and over-delivering is one path to making money, I quickly learned that what was most important from the people who were buying from me was that they wanted to look good to their boss, or their boss’ boss, or their board. So I focused a lot of my energy on helping my clients communicate the value of what I was doing and what they were doing through working with me all the way up the food chain. So I actually ended up spending an inordinate amount of time crafting e-mails that my clients could send to their boss, could send to their board, could send to their CEO, being like “Here’s what we’re doing, here’s how it’s working out, here’s the data, here’s the new website.”

So when I sort of flipped it, and instead of trying to just sell my client and add value to my client, I made my clients look really good to their bosses, and that’s what I realized that I was actually selling… Because a website is a website. But if you can get the director of marketing at a big law firm – if you can make them look amazing to the CMO and to the partners, that’s a win/win across the board. They’re gonna give you more business, they’re gonna give you more referrals, so I focused on increasing the perceived value of what I was selling, in addition to — you can sell the same thing to two people, but the person who has more money and more at stake from that thing that you’re creating, they’re obviously more likely to pay you more money as well. So I was able to go in really as a solo practitioner first, and be able to under-price big agencies using the pitch “Hey, it’s me and my small team. We’re able to move faster, we’re gonna over-deliver, and we’re gonna make you look amazing to your boss.”

So that ended up being the secret sauce, and I figured out kind of the art and science of pricing… And then sometimes you’ve just gotta shoot for the fences, and that was one of the things I did a couple of times – the first six-figure engagement that I sold was literally a lead that had come through my website, and I just was like “I’ve got a lot going on right now… Hey, I’m gonna try to make $100,000 on this website”, and I did. That was something where if I’d undervalued and underestimated and just not tried, I never would have gotten there.

And then finally, the last thing is I spent a significant amount of time calculating my actual real hourly wage. This is one of the things a lot of the people don’t understand – even if you’re making $200,000 in your full-time job, but you have to travel all the time, you have to spend time decompressing from work, you actually are spending a lot more time on your job than you probably realize, and when you divide that number of actual hours that you’re spending into your salary or your paycheck… I did this with one of my friends who was making over $300,000 as a management consultant, and when we actually ran the numbers, he was making $37/hour, because he was on the road so often. He quit his job a couple weeks later and then moved into a less-paying job that took less time, so his actual real hourly wage almost doubled, and he was a lot happier.

A lot of people spend significant amounts of time trying to make money, when they could move to a job making less money, but they’d actually free up more time. And then the final thing is once I realized that a vast majority of companies are really just legal Ponzi schemes – they’re built so the person at the top makes the most money – that was a huge eye-opener for me, and that was something that I share with my audience, that I’ve talked a lot about… Because at the end of the day, the whole value of a company, of being a company owner, is that you can create efficiency and you can leverage other people’s time. So then you’re in the business of selling someone else’s time instead of selling your own, and that becomes really the multiplier effect, where I was then able to start selling websites, and I just became the broker and the connector of supply and demand; I actually wasn’t doing any of the work myself. So that’s where the value exchange can happen, because you no longer have to trade as much – if any – of your time for money.

Joe Fairless: Yeah, those are some profound insights – sell someone else’s time, not your own, and in order to  really let that resonate or have that sink in, then calculate how much you’re actually making on an hourly wage…

And then the other thing that you mentioned is make the clients look really good to their bosses. I always think “How does this apply towards what I’m doing?” and holy moly, it applies with my investors when we’re performing on a project – make sure that they’re aware of it. Now, I do monthly communications, but what you might have inspired me to do (I don’t know, I have to think through it a little bit more) is whenever we do a refinance or a sale of one of our properties (or a supplemental loan) I might do a special e-mail just recapping what all has transpired in more of a storytelling format, versus what I have done in the past, which was just “Hey, here’s what you’re receiving and here’s the status of the property”, just so that they can then forward that on to their significant other, who probably is their boss, in some ways… And their significant other can then look at that and be like “Hey, nice job. I’m proud of you for finding this investment”, and that makes them feel better, and then it just increases their likelihood of reinvesting.

Grant Sabatier: Absolutely. Life is storytelling. It really is. And the better you are at communicating the value, just like you said, of being an investor in one of your projects, the higher the retention, the better the person who invested with you looks… And this is one of the things – yes, more and more of our lives are being automated, but that actually increases the value of human connection. You have to think that the written word has only existed for a very small amount of the time that we’ve been humans. A vast majority of the time we were telling stories; it’s really wired into our DNA. So the better you are at telling stories and communicating that value, the more seamless that it is, the better people feel, the stronger the connection.

One of the things that I’ve done in a lot of my writing is the more open and vulnerable I am, the bigger the audience grows, the stronger the connection. When I make a mistake with money, I talk about it, I’m open about it. That’s one of the things probably a little more difficult to do when you have investors, but you could be like, “Hey, here’s the mistake that I’ve made, too”, because actually, people connect with those human mistakes, because it creates a level playing field. Everyone likes to see the human side, they don’t just wanna see all fluff, all plump, all positive storytelling as well. I think that was important too when I was selling – when I messed up, I owned it. When I made a mistake, I owned it. And sometimes even leading with that and then giving the good story became a pretty effective process.

Joe Fairless: And we’ll get into one of those mistakes, but first, what’s your best real estate investing advice ever?

Grant Sabatier: Oh gosh, try to live for free as long as you can, and there’s a number of ways to obviously live for free. You can stay with your parents, but no one wants to do that. The easier way is especially when you’re young live in your closet, live in the basement, live in a spare room, rent out the other rooms for as long as you can. Nothing is forever – that’s one of the big mistakes people think… It’s like, “Ugh, gosh, my living situation sucks. I don’t want this”, but be uncomfortable for a couple years so you can bank the difference, because every single dollar that you save today is worth significantly more than a dollar you’re gonna save in five years. So try to save and invest as much of that money as you can, whether it’s through living with someone else or through house-hacking, all the different forms of house-hacking that are out there… Or even house-sitting. Some of the best investors that I know – they’re flexible and they go from city to city and they house-sit, and they live for free.

The average American spends most of their money on housing. That’s the biggest expense. So if you can keep that as low as possible, or even make money from it and bank the difference, you’re gonna be better off than 99% of the people out there.

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

Grant Sabatier: Let’s do it, Joe.

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

Break: [00:22:29].11] to [00:23:19].12]

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

Grant Sabatier: The Art of Living by Thich Nhat Hanh.

Joe Fairless: Best ever real estate deal you’ve done, that we haven’t talked about?

Grant Sabatier: We’ve talked about all of them, so… I will say the first property. I think the first property you buy is the most important real estate investment that you’re gonna make in your career.

Joe Fairless: Top three (in order) sources of income for you right now?

Grant Sabatier: Right now blog affiliate income and sponsored content income is number one. Number two would be income from my book contract and my book deal, and number three would be rental income.

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

Grant Sabatier: That’s a good question… I actually recently sent a wire internationally to the wrong place.

Joe Fairless: Did you get it back?

Grant Sabatier: I did get it back, but it took quite a bit of time.

Joe Fairless: A couple sleepless nights?

Grant Sabatier: No, it didn’t lead to any sleepless nights, but it was just a careless mistake that ended up costing me a lot of money. I also realized recently that an affiliate link on my website had been wrong for over two months and I lost about $20,000 worth of income from it.

Joe Fairless: Why did the wire cost you a lot of money if you got the money back?

Grant Sabatier: I wouldn’t say it cost me money… It was just one of those situations where – it took about three months to get money back – for a period I thought that it was completely lost. It was about 40k, so it wasn’t an insignificant amount of money.

Joe Fairless: That wasn’t a sleepless night, when you thought you’d lost $40,000?

Grant Sabatier: No, actually, interestingly, the more money that I’ve made – and I don’t have tens of millions of dollars – the less it kind of means to me. It has diminishing returns, in a way. So something like that — well, it more upsets me than it does keep me up at night, because I’m the kind of guy… If I actually never got it back, I’d actually probably double down and try to make that $40,000 back faster, just because it would give me more motivation… But I’ve probably lost 150k-170k just in the past couple months on some of my investment declines, just because the market has been so crazy… But once again, you only lose the money when you withdraw, when you lock it in, but those types of shifts, and even — actually, the $25,000 affiliate link made me more upset than the wire.

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

Grant Sabatier: Oh, this is great… Giving back my time. Actually, most of the time that I do now is mission-driven work. Sometimes there’s not a high ROI from a monetary standpoint at all, but I find that giving your time is actually significantly more valuable than giving money, and that’s one of the things that I’ve learned, and I’m trying to give my time away as much as I can.

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

Grant Sabatier: Best two ways are millennialmoney.com, and then I have a book dropping, FinancialFreedomBook.com. My books is coming out in a bunch of different languages all over the world, February 5th. Check it out. It’s everything that I’ve learned about money over the past eight years, and how you can become financially independent as fast as possible. So check out millennialmoney.com, FinancialFreedomBook.com, and these are the best two places to find me.

Joe Fairless: Well, congrats on the upcoming book, and looking forward to checking that out. And thank you so much for being on the show, talking about how you’ve progressed from living with your parents after graduating college, getting laid off a couple times as a 24-year-old, to making over $500,000 in five years from that time, and how you were doing that  through your digital marketing companies, and how you did that through those companies, which was you made clients look really good to their bosses, powered through some limiting beliefs, and looked at your time relative to your hourly wage that you were spending, and then started selling other people’s time, not your own, and scaled the company accordingly, and what you’ve done to date since then. Really interesting.

Also, on the real estate front, buying in historic buildings, and buying things that can’t be built today. You mentioned earlier a bunch of floor-to-ceiling windows facing East. I assume that’s a big deal in Chicago, the facing East part… Is that the river, is that what it would face?

Grant Sabatier: Yeah, you’re facing the river, and just the sun in the morning. It could be five degrees outside, but it’d 70 in and warm, because you get that morning sun.

Joe Fairless: Oh, beautiful. Well, thanks again for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Grant Sabatier: Thanks, Joe. I really appreciate it.

Holly Williams on the Best Show Ever flyer

JF1600: Let’s Talk About How To Keep More Of Your Money with Holly Williams

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Holly and Joe are long time friends, going back to Joe’s advertising days when they were co-workers. She invested in one of his first deals and never looked back. She discovered a tremendous way to invest her money and not only keep more of it, but also create more of it for herself. Today she’s a full time investor and entrepreneur focused on helping others find these opportunities to keep and create more money. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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TRANSCRIPTION

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

Holly Williams: I’m doing great, Joe. How about yourself?

Joe Fairless: I am doing great as well, and…

Holly Williams: Happy new year!

Joe Fairless: Happy new year, yes. Episode 55 is when we did our interview the first time you were on the show. That is so long ago, that’s so many episodes ago, so here’s what we’re gonna do – usually, I do a Skillset Sunday or Situation Saturday with returning guests, but it’s been so long… I mean, you were the 55th interview guest on the show; we’re just gonna do a normal episode.

Best Ever listeners, if you recognize Holly, then props to you, because you have probably listened to every single episode since you listened to episode 55… And just as a refresher in case you haven’t checked out episode 55, which is titled “A creative alternative to just renting out your house”, we talked about a lease option that she did with a home that she owned… Holly is a passive investor with a passion for helping others passively invest and keep more of their money.

She’s the founder of MQ Ventures and a partner in over 100 million dollars in multifamily communities. She’s based in New York City. You can learn more about what she does and her company at KeepMore.com. With that being said, Holly, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Holly Williams: Sure, Joe. I have single-family home investing experience, as with episode 55; we had a four-family house in Brooklyn, we’ve done  a couple of single-family homes in other markets – Texas, whatever… So I think that’s how you and I met each other, was through mutual friends in Texas, and a board that we’re on together…

Joe Fairless: Texas Tech?

Holly Williams: …and all of that. So I’ve always known that real estate investing was a good thing. But I had this career in advertising that I liked; I’ve bumbled around from 1990, I came here to New York City and never left. I met my husband, and we have a daughter… And eventually sold my Manhattan apartment and moved to Brooklyn… So I’ve had real estate back and forth, but I had this career, and I did everything that you’re supposed to do.

We all have a map on how the world’s supposed to be, and my map was to go to school, do well, get a job, have a kid, get married, not necessarily in that order… And then I was also taught to buy real estate, but it’s a lot of work. It’s a lot of work to invest in real estate, it’s tough to get started if you have a full-time job… Something usually has to give, especially if you’ve got a job like I had, where I was traveling all over the place… And I was really happy and did okay; I did pretty well… And it was really you – I have to credit you, and I try to give it back and share what I know now – because you’ve really shared… I guess we’ve learned a lot together in some of it, but you gave me an opportunity to kind of help you get going. So I invested with you…

It’s so funny, because my investors today say “Holly, I’m just doing this because of you. I trust you. I don’t understand–” and I’m like “Listen, you’ve gotta understand this.” They’re like, “Well, I understand it, but I’m just not sure, I’m scared”, blah-blah-blah. And they understand it cognitively, but they almost think it’s too good to be true, because we’re programmed to think otherwise; we’re programmed to be given a set amount of choices for investments.

So when you came to me and said, “Holly, I’m gonna buy an apartment complex”, I was like, “Whatever, go for it.” So I invested in that with you and began to learn about this. Then you called me one day and said “I’m gonna buy another one. Can you help me raise some money?” and I thought it would be so easy. I thought that everybody would understand, because I know a lot of people with a lot of money from my career, and I thought, “Oh, I’ll make a few phone calls.” Oh, my goodness…! Because that’s when it really dawned on me that I wasn’t the only one that didn’t understand this; I wasn’t the only high-earning professional — I didn’t even know what an accredited investor was, and I was one… And there was just a lot that I did not know. So the more I began talking about what I was doing, the more people just didn’t get it; they thought it was too good to be true – that’s what I’ve heard so many times.

The reason it’s probably too good to be true is because in a way we’re by-passing Wall-Street. The framework that most of us – or at least I’ll talk about myself – were brought up in is to invest in mutual funds, let professionals handle it, and all of that. And basically, they’re taking cuts all the way down the line, and we are conditioned – at least I am conditioned – to believe that my 6%-7% is good. As a matter of fact, I’m ecstatic about a 6%-7%, or I used to be. Now I know that there are other ways that you can do things.

Now, that said, I’m still in other investments. You shouldn’t put all your eggs in one basket, but this has changed my life, and I was able to quit my job about three months ago, and I focus now on just providing access for people to some these — I know you, of course, and I’ve been totally immersed in this for about the last 3, 4, 5 years, and the more I do it… I know what a good deal looks like, I know how to evaluate it, I know what questions to ask, and I’ve learned all of this over the last little while just networking and talking to people that were smarter than me, including yourself, and it’s a great thing.

So that’s what Keep More is all about, because I was working like crazy… So all this stuff kind of happened at one time. You started doing this… Once you start making a little money — I’m 56 years old, so… Anybody that lives in New York City in much else than a third-floor walk-up with three roommates is an accredited investor. There’s a good chance that you are, right…? And we pay taxes like crazy, and [unintelligible [00:07:50].13] on our stocks, and stuff, and it says “Woo-hoo! You made $8,000. Woo-hoo, you made…”, but we’re paying capital gains taxes on all this.

I didn’t snap to this, and I’m a smart person. I’m not that smart, but I’m pretty smart. And when I got a 1099 that said “Congratulations, you’ve made $65,000 on these mutual funds, and because you’re in this tax hell that you live in, in New York City, you owe $30,000 in capital gains on this $65,000 gain”, and I’m like, “Wait– whoa… Hold the phone… I didn’t take $65,000 out. I don’t have $65,000. You’re saying I made $65,000, but I don’t have it!” And that is what happens in mutual funds. They’re buying and selling stocks and they’re making money all the way around. It says maybe I’ve got 0.75% expense ratio, and all that… Read the fine print.

People tell me that PPMs for passive real estate investing are scary, “It tells you all the horrible things that can go wrong…” Are you kidding me? Any mutual fund…? Forget it, you’ll never invest in another one. You can’t even find them. You have to ask for those… They give you the summaries online, and they’re about 150 pages, and if you ask them, then they send you this inch-thick thing, the terms and conditions of the mutual fund.

I’m not against them, I’m still in them, all that stuff, but I know now a lot more than I knew then, and I know now that I don’t understand; I thought I did, because I can tell you about Kenney Ratios, and stuff… I thought that I understood the stock market, but at the end of the day I really don’t. Apple went down today, right? I don’t understand all of what the trade agreements — what the impact is on Apple’s business. I don’t understand their margins, I don’t understand the worldwide share of cell phones. I’m not in that business, so I don’t know enough to invest in it.

In real estate, I know. I’ve been there, I know the pitfalls, I know what we’re doing to mitigate the risks… I don’t know that we’re gonna make five times the thing, I don’t know what the return is, but I can tell you that capital preservation — when you’re buying for cashflow… I can tell you what happened to rents in 2008, and in class B properties like we focus on they did not go down, and most of the time they went up.

Joe Fairless: That $65,000 gain on the mutual fund – I hadn’t heard about that… So you didn’t cash out that mutual fund, and that’s why you just had to pay $35,000 out of pocket?

Holly Williams: Yeah, because he was buying and selling. And they all do that, we just don’t know it. Look, I can’t tell you, Joe, the number of people I’ve told that story to, and they’ve come back and said “Listen, I’ve looked at my taxes last year, and you know what, I’ve paid capital gains taxes on 20k on a mutual fund that was outside of an IRA.” It’s crazy.

I don’t believe that these financial advisors come to work and say “I’m gonna screw over my clients.” I really don’t. I think that their blueprint is the same as ours. They don’t know that there are other opportunities.

A lot of my investors want to do what I’m doing and tell all their friends, right? And I was on a call recently, and this person was a real estate professional, they were a realtor, and they’d been a realtor for like 20 years in New Jersey. They had no idea that [unintelligible [00:11:30].19] Not a clue. Or the ins and outs, or how it worked, or anything. Not a clue. It’s amazing.

Joe Fairless: When you’re speaking to investors who aren’t familiar with it, what are some of the questions that you typically get?

Holly Williams: They believe it’s a REIT, first of all. “How is this different from a REIT?” They ask “How do you manage the apartments? You’re not in Dallas, you’re not in Tennessee  (or wherever the property is), so how do you manage that? Why doesn’t everybody do this?”

Joe Fairless: What’s your answer to that one?

Holly Williams: Oh, that’s the best. I told my CPA, I said “For the love of God, why didn’t you tell me about this?” My first accountant — I’ve switched accounts, but even my new accountant didn’t tell me, really. He said “Holly, they’re not available. They’re not something that is offered; you have to know someone. You have to have a relationship with the person that has one of these.” So only my friends and family and people I know can even participate. And then on top of that, you have to be an accredited investor, which is an entirely other conversation, which I could talk a long time on that, too.

The point is that this is private money, and this is what the uber-wealthy people are doing. And God love you, and God love all the people that are really doing this, because I feel it’s my duty to tell people that I love… Because I’ve watched my parents — you see the stock market right now; it’s crazy, right? So if you’re in the stock market, I don’t care how safe — as a matter of fact, I moved some of my daughter’s 529 money over a while ago, about a year ago, because I had a feeling this thing was gonna go… And I moved it to something “very safe.” It’s down. She still goes to college, so don’t worry — my point is that if you are relying on the stock market to live on when you’re retired… Remember, I’m 56, right? If you’re relying on that for income, it’s awesome if it’s up, but it’s not so awesome if it’s down… And you can’t live – or at least me; they tell you “Oh, you’re gonna not spend as much money in retirement”, and I don’t know about anybody else, but that’s not true for me. “You don’t need as much money…” – of course you do.

I watch my parents, [unintelligible [00:14:10].02] and I watched them die in 2010 and 2011, while the stock market was down, and I watched them have to withdraw from their portfolios, and they probably in 2008 had half a million dollars, and when they died it was pretty darn close to where — I was giving them a lot of money, too. And to see that, and to see how hard they worked all their lives, and to see because of the timing that’s what happened… And what is so amazing about this is that your principal can grow, but you get income from it.

So through the course of rolling over and avoiding taxes, I’ve been able to pretty much make enough money to more than pay my bills… So I’m focusing now on spreading the word and making a little income to replace that now. So that’s what I do, and it’s working out quite well. I’m having a great time with it.

I suspect just in the last 3-4 months of doing this full-time, and taking the advice of really smart people that I’ve surrounded myself with, that I’ve been able to really jump-start my business, and I feel like I’m doing some good in the world, actually. I really do.

Joe Fairless: Based on your experience in real estate, starting out as a passive investor and now being a general partner on deals, what is your best real estate investing advice ever?

Holly Williams: I think that eventually you just have to pull the trigger. You can analyze and analyze, but everything has risks, and I think you need to understand those risks, and then ask the question “What are you doing to mitigate the risks?” If you ask your financial advisor what they’re doing to mitigate the risks, they can’t answer that.

Eventually, it takes a leap of faith. Everyone is afraid… Not everyone, but at least me. And I think that you have to just trust that you know more than you think you know, and if you’re dealing with good people that have the same sort of life framework… There are bad deals that you can invest in in real estate syndication; there are people that are doing it different ways than I like to do it. So you’ve gotta get with like-minded people, that have the same goals, because that’s what it’s about. You can do fix and flips, you can buy stranded properties that need a doctor, that you go in and stabilize them, you can build ground-up construction, you can do a lot of different things. I don’t know enough about that to invest in it, and I’m not sure I would because it’s riskier than I like to do; I’m not comfortable with it, especially at the age that I’m at… And most of my investors are the same, because I talk to people like me.

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

Holly Williams: I’m ready.

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

Break: [00:17:07].15] to [00:18:15].04]

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

Holly Williams: Recently read… I would say “Never Split the Difference.” Everybody read it, but I did, too. It’s good.

Joe Fairless: What’s something that you’ve implemented in your business from that book?

Holly Williams: I think just to shut up. And I haven’t done that in this interview, but…

Joe Fairless: Well, I’m interviewing you, of course.

Holly Williams: [laughs]

Joe Fairless: I would hope you wouldn’t shut up. Good. Alright… What’s the best ever deal that you’ve done?

Holly Williams: Well, my Manhattan apartment was a good one, and that’s not a syndication… But I would say the best one I’ve done is the first one that you called me on and you were trying to raise money. I try to do what I say I’m gonna do. It’s important to me to do that. So I told you I was gonna raise some money, and I didn’t. It was harder than I thought. I was talking to a friend, “You sold your last company for 350 million dollars. What is wrong with you, why are you afraid to do this?” Now this person is on board, but he wasn’t four years ago, or whatever.

So I’ve put a lot of money into that first deal, and it was THE best thing I could have ever done with that money.

Joe Fairless: What’s a mistake you’ve made since you’ve gone full-time in this business?

Holly Williams: I think every mistake that I’ve made has been more of non-action rather than action. And I don’t even know if it’s a mistake… We do what we do when we’re ready to do it, and when we feel comfortable to do it. I tell investors all the time, “Don’t do this if you’re not feeling it. If you’re gonna stay up at night worrying about it, don’t do it.”

It’s more of a non-action, and I — again, and I don’t think I’m unique… You’re smarter than you think. At the end of the day, there are so many people smarter than me; and if you’re the smartest person in the room, you’re in the wrong room. But I really do kind of know what I’m talking about, and it’s more believing that and internalizing that, and I think that just getting myself in the right framework… Because we are given this blueprint for how life is, and you’re not supposed to leave a high-paying executive job, you’re not supposed to do that. That blueprint is outdated, because it really was okay for me to do that, but it’s amazing how I was afraid; even though cognitively I knew what the answers were, I was still afraid to do it.

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

Holly Williams: I think just sharing… There’s a lot of different ways, but I honestly believe that what I’m doing, providing access to these types of investments to people. I try to give back what I’ve been taught freely, so that’s really the way I give back. I’m beginning to get involved with some things, time-wise… I used to have more money than time, and now I’ve got a little more time, so check with me about a year from now and see what I’m doing time-wise… But I donate to a lot of things.

Joe Fairless: What’s the best way the Best Ever listeners can learn more about what you’ve got going on?

Holly Williams: KeepMore.com. That’s really my mantra of paying way too much tax, and… It’s not that people are being like “I don’t want them to know because I wanna hog it all myself”, but they don’t want you to know because they wanna hog it all themselves, right? [laughs] Because nobody would pay taxes.

Joe Fairless: Well, Holly, I loved the passion… You speak with conviction, because it’s a personal story. It’s one that you have experienced first-hand, you’ve seen the benefits of investing in the type of deals that we put together, and that mutual fund tax thing – that’s crazy, to be taxed on money that you don’t have in your bank, because it’s still in a mutual fund, but you’re still getting taxed on it… That’s insanity.

Holly Williams: I’m putting together a presentation and I have that 1099, and I have the tax return on how much capital gain taxes I pay. It’s really true.

Joe Fairless: Thanks for sharing your story. Great catching up with you again. I hope you have a best ever day, and we’ll talk to you soon.

Holly Williams: Thank you, Joe.

Flyer for Joe Fairless real estate show with guest Chao Cheng-Shorland

JF1589: Blockchain Real Estate Investor Helps Source Deals with Chao Cheng-Shorland

Listen to the Episode Below (20:46)
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Chao is with us today to talk about how investors can search properties, make offers, and purchase real estate directly on the blockchain. She created a company to help investors and agents do this after she saw the need for a product like this in the marketplace. Hear how her technology can help your investing and/or the businesses of your real estate investor clients. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Chao Cheng-Shorland Real Estate Background:

  • Co-founder and CEO of ShelterZoom Corp
  • They are the first real estate technology company to deliver a blockchain based real estate offer and acceptance platform to the mass market
  • Based in NYC
  • Say hi to her at https://www.shelterzoom.com/

 


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TRANSCRIPTION

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

Chao Cheng Shorland: Hi! Good, Joe.

Joe Fairless: I’m glad to hear that, and welcome to the show. A little bit about Chao – she is the co-founder and CEO of ShelterZoom Corp. They are the first real estate technology company to deliver a blockchain-based real estate offer and acceptance platform to the mass market. I’m not exactly sure what that means, but Chao is gonna tell us. She’s based in New York City. With that being said, Chao, do you wanna give the Best Ever listeners a little bit more about your background and what your company does?

Chao Cheng Shorland: Yeah, sure. Blockchain is really a very new technology, and it’s like a distributed ledger technology, so it’s very different from the traditional type of technology. As a startup company, we were very fortunate to deliver a blockchain-based platform, which is quite rare on the market at the moment. Our initial focus of the company was really to deliver a deal platform; it’s around real estate offer and acceptance, so for both property purchases and property rentals.

Now the company has grown a fair bit, and we’re really expanding our scope way beyond just offer and acceptance. Now we went really into the end deal space, so it’s really that one-stop marketplace, so people can come do their deals for real estate, and for even other industries as well… We’re expanding beyond, to include services from service providers like legal, mortgage, [unintelligible [00:03:47].07] home inspection, so all kinds of services you can acquire from our marketplace. That’s really probably the background of ShelterZoom.

Joe Fairless: I get blockchain as a technology, and I’ve interviewed people on the show, so I understand that… Help me understand your business model just a little bit more, and I think the best way to do that would be to talk about your ideal customer and how they use your platform. That would help in my mind clear things up a little bit.

Chao Cheng Shorland: Yeah, we  really target the real estate space – three groups of customers. The first group, brokers and agents, so anyone really who’s a professional real estate person. The way they can utilize our platform is they can install what we call the Offer Now and the Rent Now widget. It’s like a plugin for their website.

Then end consumers, the buyers or renters, when they see a property they really like, they can instantly make an offer through us to them. In a way, if they are the listing agent, they can immediately receive the offer, and it’s a qualified lead, and then they can negotiate through our app in the chat, and just track all [unintelligible [00:05:02].15] Then at the end they do the deal with that particular person.

But if they are not a listing agent, they can actually become the buyer agent, so when people submit offers through their own website; then they’re actually representing this person and become the buyer agent, so they can actually get more deals through that way.

Other benefits include they will reduce the paperwork dramatically. It really reduces admin costs, and it makes the deal extremely efficient, and they can pretty much have all the deals on one mobile phone, and they can make the deal on the go, negotiate on the go, and also go back to all the historical record and if they need something after a few months, they can very easily find the deal through the mobile phone and re-check what happened at the time. It’s almost like a virtual office for them, if they want to use it that way. So that’s the one group of audience.

The other group of users – consumers. Now the buyers and the renters or the sellers – they now have really much more control over the deal they have made or they received, because everything is going to be transparent. So they would know as a buyer where their offer is at, and whether the agent viewed that, because as soon as the agent views it, on our dashboard they will see the color actually changes, and the status changes, and they know exactly when the seller will be informed. Then they also can instantly chat with their agent through the chat feature we have.

As a blockchain technology, they also know the offer right in front of them is their own copy; it’s not a copy like a centralized, where people may have a chance to go in and manipulate something. So they can be very assured it’s extremely secure, it’s really tamper-proof. That’s really from the consumer side – it’s really the convenience they receive from our platform. They can make an instant offer, and very soon they can also acquire all the services they need through different service providers in our marketplace. That’s the second group.

The third group is really the service providers. They can come in and offer their service, and it’s almost like advertising their service, but instead of just a service that’s not really tangible, they can actually put a service as a real deal on our platform and say “Hey, I’m offering you 10% off. These are all my terms and conditions.” Then the consumers or even agent can come acquire those services.

So these are the three major groups, but they all really fall under several categories of organizations; even MLS – they can partner with us. Aggregators can partner with us, franchise or technology companies providing other types of products – they can utilize our platform as well.

Joe Fairless: I can see with the brokers and the consumers, how it would benefit both the consumer and the broker if — well, I’ll just call the consumer the buyer…

Chao Cheng Shorland: Yes.

Joe Fairless: So if the buyer is on the agent’s website, likes some properties that he/she sees, and the agent has your plugin installed on their website – if I heard you correctly, that means that the buyer can utilize that plugin to make an offer immediately, and there’s not nearly as much paperwork and communication and back and forth. Is that accurate?

Chao Cheng Shorland: Yes, very accurate. That’s right. And one of the concerns buyers or renters have is the security, because they don’t really want to put on the internet so much of their personal details… So that kind of explains why until now there was not much online purchase or rental in real estate, because it’s such a large transaction. But with blockchain, that kind of concern really immediately goes away, because really no one can see that when you have a private key. It’s almost like a safe – you can open it up, then see the data inside. The only people who have the key are the people in the deal, so the seller and the agent. Even us – we won’t be able to see anything inside. That really gives you the assurance that data is not going to be harvested. People can actually really feel secure to make an online offer.

Joe Fairless: Besides security, what’s been the objection that you’ve heard most frequently in terms of adoption for your services?

Chao Cheng Shorland: I think people are not used to the concept that so many parties can come to negotiate through an online app, or a mobile app, or web browser. People still really incline towards the old way of practice, and want to be face to face, especially the older generation of brokers. They think face to face is more personal, which actually has been the practice for years… Which definitely has benefits. But what actually people sometimes fail to see is more and more people are now very comfortable with doing deals online, or through internet, or virtual rooms…

What we’re creating is really a virtual room, and especially the millennials are coming through and they will have more and more money; they will be the [unintelligible [00:10:17].12] buying properties or renting properties, and the older generation will be more like downgrading to the smaller-sized homes… And that’s really when the technology will really take off. They actually will require these kinds of applications to facilitate transactions. Millennials are much more comfortable with it, rather than going to someone’s office for a couple of hours, going through the paperwork. So that’s really not the practice anymore.

Joe Fairless: If I’m an agent right now – which I’m not, but if I was a real estate agent and I heard this interview, if I wanted to have your plugin on my website, so that people could simply go to my website with my listings and immediately make an offer on the deal, I would be able to use that plugin and make that happen. Is that correct?

Chao Cheng Shorland: Yes. It’s actually really simple – they can just go to our website, ShelterZoom.com, and sign up as an affiliate. As soon as they sign up, within 24 hours we will actually give them the widget and the links as well. So even before they install the widget on their website – they either can ask to install, or they can install themselves, because we provide the full instructions… They already can start using that link to make an offer, or share with their clients and ask them  to make an offer. So it’s almost instant – as soon as they sign up, they will receive the package and then they can start using that.

Joe Fairless: How do you make money?

Chao Cheng Shorland: At the moment we’re actually providing this service for free. The first year we’re really looking for adoption, and also while we’re still improving the technology and making it much more rich and robust. From the beginning of next year, which is towards the later part  of quarter one, we’re going to release the full stack to the marketplace. At that point in time we’ll start charging.

There will be multiple revenues we’re really looking to generate. One of them is what we call transaction – once people actually sign a deal, then they need to pay us a fee. We think it’s very fair; if the deal doesn’t happen, then they don’t really need to pay a fee, but if the deal actually happens, then we will charge a platform fee.

Then other ones, like the referral. If the service provider gets the service through our platform, our marketplace, then the service provider will pay us a small fee. These are just two examples, and they are kind of the revenue streams. One is the technology platform, because once we actually become the license provider, we will charge a license fee for companies that use our technology… So they can actually integrate and can use that as a kind of a gap filling, or whatever you want to call it, to really fill the capability gap in their own technology landscape.

Joe Fairless: What’s your best advice ever for real estate investors as it relates to your background and experience in the technology space?

Chao Cheng Shorland: That’s a great question. Myself, I’m actually from an enterprise architecture background, so I’m very much kind of a business outcome driven technologist. I actually worked in one of the largest property management funds in Australia before I came here. That was through my own consulting company. I actually advised them on how they do the technology for such a large fund… And through that engagement I came to realize a real tech, which is a prop tech, it actually gives you far more return than the real estate asset itself. At that point in time – I think it was back in 2015 or 2016… And what they actually looked at was – in Australia, every seven years the value of the asset doubles. Before real tech, the last seven years at that point in time was 1,200%. So it was far exceeding any other real estate investment. So that was really the day I came to the realization real tech is actually a very promising business.

I have seen an amazing amount of money coming into the real tech, from venture capital. You probably have heard of SoftBank Vision Fund, which is 100 billion, and they actually try to invest in all the high-growth startups, and companies like [unintelligible [00:14:46].15] really the valuations have gone up so much… This made a lot of those companies very positive cashflow and very good returns for their investors. So I think this sector is going to be really blooming in the next few years.

One of the research I actually did – I think it was called [unintelligible [00:15:11].06] and that really reached a very high level… 8.7 out of 10, if I remember correctly, this year. And then 96% of investors plan to make the same or more investment in prop tech over the next 12 months. So I do think the sector of real estate is actually going to be a shiny star the next few years.

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

Chao Cheng Shorland: Yeah, sure.

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

Break: [00:15:48].02] to [00:17:04].03]

Joe Fairless: What’s the best ever book you’ve recently read?

Chao Cheng Shorland: Actually, I’m more into the classical novel kind of thing. It’s not really investment-related.

Joe Fairless: That’s fine, yeah. What is it?

Chao Cheng Shorland: It’s actually a Persian book called [unintelligible [00:17:13].02] which is old poems. It’s a masterpiece. It’s similar to the Chinese Dream of the Red Chamber.

Joe Fairless: How do you spell that?

Chao Cheng Shorland: Oh gosh, I don’t know how to spell that actually. [unintelligible [00:17:26].22] I actually was not prepared, sorry.

Joe Fairless: Will you say the name of it again, please?

Chao Cheng Shorland: [unintelligible [00:17:33].23] Really very famous book.

Joe Fairless: Cool. What’s the most rewarding part of what you’re doing right now?

Chao Cheng Shorland: I actually think it’s extremely rewarding in my personal development, and also how I see the world, and being able to manage such a large team, and very talented individuals. We have just such an amazing, talented team… And really develop everyone’s career, and making sure everyone’s on track, and deliver the company’s vision. I think it has been really rewarding.

Joe Fairless: What’s been the least rewarding part of what you’re doing right now?

Chao Cheng Shorland: I really can’t think of anything that’s not rewarding. Even the stress I have, sometimes the frustration, disappointment – it’s all part of the learning experience and of the growth I need to go through to better myself and to better the technology we’re going to provide. So I really don’t think anything negatively; I’m a very positive person, I always see the glass half full.

Joe Fairless: Spoken like a true entrepreneur. What’s the best ever way you like to give back to the community?

Chao Cheng Shorland: Yeah, I’m actually really big into giving back. I do see so many homeless people from where I’m from in Melbourne, and whenever I travel around the world I see a lot of poverty. I really hope one day if ShelterZoom makes a big success, I’d love to give back a lot to the community. And another way of giving back is really continuously educating people about what’s really important, and develop my own team and make each of them a success.

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

Chao Cheng Shorland: They can go to ShelterZoom.com, that’s our website. Also, I’m in Forbes Tech Council, and I write the Technology for Real Estate. I have my own column in Forbes. The other way of getting in touch with us is through our social media. We have the ShelterZoom App, which is our Facebook account, and Twitter, Instagram and Telegram… So we do have quite  a few social media channels people can follow.

Joe Fairless: Chao, thank you so much for being on the show, for educating me and perhaps other Best Ever listeners on the benefits of having a blockchain platform during a deal. You talked about very specifically the brokers and agents, the benefit there with the plugin on the website, the consumer, more transparency throughout the deal, as well as the service providers can get more business as a result of being involved.

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

Chao Cheng Shorland: Thank you so much, Joe. Thank you so much for the opportunity.

Guest Jason Yarusi on the Best Show Ever flyer

JF1538: Return Massive Portions of Investor Equity After Just 13 Months #SkillSetSunday with Jason Yarusi

Listen to the Episode Below (26:20)
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Jason is back on the show to tell us about the execution of an apartment syndication deal in which he was able to return 75% of his investors’ capital in just 13 months. We have actually heard about this deal before, about 400 episodes ago when Jason purchased the property he came on and told us about how he was able to obtain the deal Now we’ll hear about his business plan execution on that same deal. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Best Ever Listeners:

Do you need debt, equity, or a loan guarantor for your deals?

Eastern Union Funding and Arbor Realty Trust are the companies to talk to, specifically Marc Belsky.

I have used him for both agency debt, help with the equity raise, and my consulting clients have successfully closed deals with Marc’s help. See how Marc can help you by calling him at 212-897-9875 or emailing him mbelsky@easterneq.com


TRANSCRIPTION

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

First off, I hope you’re having a best ever weekend. Because today is Sunday, we’re gonna do an episode called Skillset Sunday. The purpose of today’s episode is to help you acquire a skillset, so that you can then apply those skills towards your real estate ventures. We’re gonna be talking about a very specific skillset, and that is the skillset of performing on an apartment community, so that you can return 75% of the capital that was invested after 13 months. This isn’t hypothetical, this happened, and it happened with one of my friends, Jason Yarusi, who is back on the show to tell us how he did it. How are you doing, Jason?

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

Joe Fairless: My pleasure. You’re gonna add a lot of value to our community through this episode, so I’m grateful you’re on the show. A little bit about Jason, as a refresher – he’s the managing partner of Yarusi Holdings, which is  a full-service real estate and construction company. He has syndicated multiple deals, and in fact, episode 1,157, titled “Case study of a first-time apartment syndication, with Jason Yarusi” – I recommend going to check out that episode and also hear his best ever advice… We’re gonna be talking about a 94-unit. That case study of the first apartment syndication that we talked about on that episode – do you know if that was the 94-unit that we’re talking about today?

Jason Yarusi: It sure is.

Joe Fairless: Beautiful! Okay, so this is great. Part one of this conversation – go listen to episode 1,157, where Jason talks about how he acquired it and the numbers on the deal, and then we have the benefit of being 13 months later now approximately, and you’ve executed on that deal, and you returned approximately 75% of the investor equity after 13  months… So let’s get into some specifics about that deal. But before we do, how about you give the Best Ever listeners a refresher, just to remind them about your background, and then we’ll roll right into this 94-unit and we’ll focus on the execution during this conversation.

Jason Yarusi: Sure. Thanks, Joe. Yes, Yarusi Holdings – full-service real estate construction company; we mainly focus on flips here locally in New Jersey, and wanted for a long time to move into more apartment buildings, so I’ve spent a lot of time learning the process, following others like yourself and just learning the steps to take. The opportunities here in New Jersey were not really hitting on the metrics standpoint from what we were looking for, so we started looking out of state in a few markets, one being Kentucky. We really honed down on Louisville, Kentucky and really just specifically some of the submarkets there.

It took us a long time to find a couple opportunities and then we started offering. The deal that we closed on back in 2017 was a deal that we first offered on about eight or nine months prior to it going under contract, because — basically, our offer was about a million dollars off or apart from what the seller asking price was. It was an off-market opportunity; motivated sellers where the father, or the matriarch, was in his nineties, and the kids who were in their fifties or sixties just at that point were not really involved in the company. They came back and said, “No, thank you”, offered right at their asking price, and we went away. We kept it on our tracking list that this was something that we’ve made note to to go on — anything we offer, we keep a list of it, so we can check back and see what the status was.

So months later we saw this was still having no transaction history; we went back and offered just $50,000 higher than our first offer, and they countered back $600,000 less, and we were able to get it down to close just about a million dollars off their original asking price back in May of 2017.

Joe Fairless: Okay, so that sets the stage for you acquiring the property… A refresher on the business plan, please.

Jason Yarusi: Sure. Class C property, 1972-1975; six buildings built in the South-Central submarket. Basically, it’s an all owners-paid with two of the buildings where the tenants do pay some utilities. It has two boilers on the property; all the original windows. It also had basically high-flush toilets, and from that there was many different avenues from an income standpoint that we could capitalize on… One from just putting in a process for actually screening tenants, application fees, pet fees etc. Then we had rent bumps that were basically anywhere between $75 to $100 under market.

So our strategy from the front part was to have a traffic light rent raise strategy. Now, the tenants that are in the building, just because they’re paying under market doesn’t necessarily mean that they’re bad tenants; they were just being offered less rent, and if I was offered less rent to live in an apartment complex, I wouldn’t say no.

We basically filtered based on their collection history, just a level of green, yellow and red on the tenants standpoint, basically saying that if they’ve been great actors, they’ve been paying on time, really steady in their performance for the prior owners, that we were just gonna do a nominal rent bump.

Joe Fairless: What’s a nominal?

Jason Yarusi: $50 for after, and then $50 after six months. After that, we had yellow, where it was something that we were going to go in there and do $65 for the yellow, and red – basically there were a few bad actors who were continually on the list of having to be filed on, where we’d give them one opportunity where we have to file and they have to pay for filing fees for an eviction; if they came through and paid it, the second time there would be no remorse, we would take it to the action and we would be bringing them to market rate.

So we had that across the board, and we wanted to do this for a point that although we wanted to make sure that we were providing value before we were really taking rents up, so for this we were making sure that we were going forward and improving it. One of the first things we did was go out there and do all the landscaping, completely new signage across the board. Then we started getting into doing other things that can make the property better. We redid the parking lots, other things that ultimately in a value from a bottom line standpoint don’t add in there, but from a performance standpoint to the property it really just makes it perform better, because you’re not having a number of issues just with insurance, or other things.

We started doing concrete flatwork, repainting the parking lots, as I said, and then we did replace two of the boilers to start helping on the utility bill. Past that, we went in and replaced all the toilets, faucets and showerheads across the entire buildings to low-flush toilets and aerators. That has been a tremendous hit. It actually cut our water bill based on the last three months (we’ve just tracked it again) we’re down 32% on our water bill… Noting that this is an all owners-paid property, that goes right to our bottom line; it’s been a huge step for us. It also allowed us that we were able to go back and — it’s not really an area where you can bill back… So building back is in some areas, if it is an all owners-paid property, you will bill back tenants for part of the utility bill; it doesn’t happen on the 600 surrounding units around us, so it wasn’t something we were gonna put into play.

We also implemented, of course, application fees, which they weren’t doing, believe it or not… And simple things — we have an office, a full-time resident manager on site, an office leasing person. The prior office was having trouble with collections, but silly enough, they weren’t allowing the office manager to actually take checks. So the person who was the office manager had to refer them to take the check either to the mail, or go down four miles away and hand it to the office. So just a bunch of things that were very easily correctable for this site.

We installed move-in fees, instead of a deposit. We were finding that the tenant base is always worried about the deposit, the level of possible damage they can make, so we got away with the deposit, took that away and put in a set move-in fee, based on preparing the unit. It’s a one-time move-in fee that’s less than their deposit, and we also–

Joe Fairless: How much?

Jason Yarusi: It’s a $400 move-in fee, and then we do a surety bond on top of that, which would cover us for any damages, up to one month’s rent, that may incur for the life of their stay… And I believe this surety bond is $75; I have to double-check on that. But that still comes under where they would be paying if it was a deposit. The deposit would be in the $525-$550 range.

Joe Fairless: And that covers how much worth of damage?

Jason Yarusi: It covers one month’s rent, depending on where their one month is.

Joe Fairless: Okay.

Jason Yarusi: Past that, we started using some of the programs in the area to our advantage. It was having an occupancy issue with the prior ownership; we took it to 92% within the first couple weeks. We had a number of people skip just because they were not happy with rules, which is fine; it allowed us to quickly turn units. We basically turned about 40% of units until today, and for that no we were able to get those units rented up quickly. It’s a very workforce-driven area, and we’ve used some programs — we have dedicated up to 15% of the building for Section 8 and other programs [unintelligible [00:12:11].14] a veterans program, things that can really help the neighborhood as well.

Joe Fairless: What percent was Section 8 when you took it over?

Jason Yarusi: It was about 7% to 10%. There’s been some — let’s not  say difficulties with Section 8, but there’s been some change in the process they’ve done in Louisville where the inspections have changed their protocol and the payment structure has certain delays based on the government’s dynamic there. I know some other owners who have a very heavy Section 8 where payments are coming in three or four months behind. It’s been very difficult for them. We wanted to keep it at a low rate, no more than 15% of units, just so it’s a dynamic we can use there, but it wasn’t something that was going to cause issues for cashflow if we had to wait 3-4 months.

Joe Fairless: Okay. Just so I am recapping this properly, all the different ways that you ultimately added value, whether it’s from an income or expense standpoint… What I’ve got written down based on what you’ve said, in no particular order – app fees… And how much are the app fees?

Jason Yarusi: App fees is $35.

Joe Fairless: So one, the added application fees of $35. Two, move-in fees instead of a deposit, and the move-in fee is $400, plus on top of that they pay $75 for a surety bond… Did I hear that correctly?

Jason Yarusi: That I have to check, but I’m pretty sure that’s it.

Joe Fairless: Roughly… Okay, got it. No big deal. Okay, let’s see – so that was app fees (1), move-in fees (2), three, better collections; previously it was cumbersome to accept checks, or they did not at all, but now you just accept checks, so there’s better collections… Is that correct?

Jason Yarusi: That is. And that’s a fine line, we find, with this tenant base… Sometimes based on payment – if they get paid Friday, which is maybe the seventh, well that may incur a late fee, and lots of times people happily pay a late fee every month along with their check, just so they can have the availability to pay. So collections – we wanna make sure we’re collecting, but also we’re not always pushing to get rid of late fees, because that can be a great step to increase income as well, if you’re getting $3,000-$4,000 in late fees across a 100-unit building… Well, not $3,000-$4,000, but let’s say $500 in late fees a month, and that’s $6,000/year that’s basically going to your bottom line.

So we’ve improved collections, but we still have late fees and other fees that are coming across the board, just based on cycles for payment.

Joe Fairless: And then the huge thing – at least from what I’ve heard  – is getting that water bill down 32%. This is not an area, according to you, where you can bill back residents, so you found a different way or an additional way (if you could do both) to decrease that bill. How did you decrease the bill 32%?

Jason Yarusi: We changed all the toilets out, we made sure that we did a full unit inspection, and we’ve been continuing to do full unit inspections to check on any leaks, because there were a number of leaks going into the building just within some toilets or just leaking showerheads. We changed out also faucets and shower heads for aerator etc. just to really limit on the water use… So changing over to low-flush [unintelligible [00:15:27].01] just from the massive toilets that were installed, most of them from day one – it’s really reduced the water bill, and that’s been a huge hit.

Joe Fairless: Got it. And what was the investment to do that process?

Jason Yarusi: Honestly, oddly, if you think of the big run overrun, I think it was about $250/toilet across, somewhere in that range. We were able to buy them in bulk, so you do $250 times 94 and you’re talking about $20,000 or so.

Joe Fairless: Cool. And do you off the top of your head know how much value that decrease of 32% of the water bill added to your property, based on a certain cap rate that you use?

Jason Yarusi: We haven’t annualized it yet. I will say if we’re taking 30%, about $450,000.

Joe Fairless: [laughs] Would you do that deal all day long, again and again?

Jason Yarusi: All day long, all day long. We’re actually carrying it over to the next property that we’re rolling the investors into, so yes…

Joe Fairless: What cap rate did you assume there?

Jason Yarusi: Same thing. We actually were at a 7.5%, and I’m using this cap rate 1) based on the area, but 2) based on where the lender put us for the loan, and basically where they put us for the refi as well.

Joe Fairless: Okay. So that was the fourth thing. One, app fees, two, move-in fees, three, better collections by taking checks, four is doing a green program where you decreased the water bill by 32%, and the fourth thing… Holy cow! Did that have the biggest impact on your bottom line?

Jason Yarusi: That definitely had a huge impact. We’ve been able to get a good amount for rent increases as well, slowly pushing ourselves back up to market. We’ve also put in pet fees; we were the only complex, of 600 units in the area, that wasn’t allowing pets, and when we did our inspection, there was actually eight units with pets… So it was a simple thing to put in what was trending right with even the building across the street, $250 non-refundable pet fee, and $25/month for pets.

Of course, these little additions – they don’t seem a lot, but those are things that if you’re not going to be bullish trying to push on rents, where we do syndicate… So we have to be careful, we don’t wanna push on rents and have an occupancy problem. We wanna offer moderate rent increases, but then now perform better by offering these other opportunities where we can bring in other income and decrease expenses.

Joe Fairless: So five would be rent increases, six are pet fees… And then you mentioned you did other things, like concrete flatwork… What is that, for anyone who is not familiar with it?

Jason Yarusi: Sure. The first floor is a floating slab, and the second floor is a slab… So there were some cracks in the slab that were not structural, they just needed to be patched. There were also patches in the sidewalk that needed to be made, and on some of the steps going up some of the railings had some railing issues… Basically concrete where it needed  [unintelligible [00:18:21].06] These were things we would have done, but also basically the lender required a repair checklist that we had to make. So we had our game plan, and we also had 6 and 12-month repair items that were required by the lender. And we basically just went in there and knocked all the items out within five months. We were performing very well at five months, continuing to do our turns, continuing to do — basically, our units turns and our rent raise strategy, but we did have a one-year blackout period on the loan, so we had to wait till month 13, or at least right at that 12-month mark to really start going into the refi process to do the next step here of the business plan.

Joe Fairless: Yeah, and on that next step with the refi process – walk us through that, please.

Jason Yarusi: Sure. So we were performing very well, of course; we did push everything forward, as I said. By month five we had all the construction out of the way and now we could really focus, where — being that this was our first deal, we slammed everything at the same time. We were doing the rent raise strategy while we were doing all the corrections to the property, while we were trying to work on collections, and then do all the lender required repairs. So we put a lot on the plate, and it worked out great. We have a great management partner there, that had been in house construction, and had made the process — of course, with learning experience in there; not everything is always perfect… But it had a lot of the opportunities for us to really just capitalize very quickly.

So once we got to month five, we started to really just push on the rent raise strategy, and then once we got through the blackout period, which was year one, we wanted to go into a permanent loan. We had a Fannie 7-6 ARM product which allowed us to roll into cap-ex, and from there we transitioned to a Freddie 10-year loan product that was basically a fixed rate. For that now we went in and just at the same cap rate we appraised out for over a million dollars more in value, and for that when we did the refi we were able to pull out, with returns for year one, we’ve been able to pull out over 75% of equity and return it to our members, which has been great, and they’ve been very surprised, very happy. It’s been a huge win, and we actually have another opportunity that we have coming up, and they’re all eagerly waiting for that one as well.

Joe Fairless: It appraised for a million dollars more than you bought it for, so basically it appraised for the amount they originally wanted to sell it to you for.

Jason Yarusi: Pretty much, yeah. It’s funny, right?

Joe Fairless: But you had to bunch of stuff to get there, so you were right on the valuation, right?

Jason Yarusi: We were spot on on the valuation, and one of the tidbits for us buying in is that you may feel funny putting an offer so low, but sometimes it just becomes that there’s the expectation of the seller, and then there’s the actual realization of the seller; he can finally realize that the property is not worth their expectation, and for us, after months of negotiation at a lower price point, we ended up basically showing our underwriting to him and saying, “Guys, it’s not that we’re trying to beat you up here… This is just what we can offer based on just the way the property is performing, and this is where we are. We do bring investors to the deal, and this is where we have to be.” That got us across the finish line at that lower price point, to where we really implemented our plan… And with our improvements to where it is, it is now worth where their expectation happened to be (way off) over 24 months ago or so.

Joe Fairless: What’s one thing that went wrong with this property?

Jason Yarusi: We’ve had a couple [unintelligible [00:21:30].22] neighboring building. And the neighboring building is owned by the city; it had tenants, or let’s say not even tenants, but there were people in there that were — basically, there was a shooting there, and drug activity… And it’s not an area where there’s shootings; there’s maybe been two shootings in the last 15 years. So we have one building that’s right by  there that was scaring the tenants, and we had a couple tenants move, and wanted to move in other buildings, so we were worried it was gonna 1) create a really big safety issue for our tenants, and 2) that of course, we’re gonna start to [unintelligible [00:22:00].03] because tenants wanna move.

The city really was not very helpful at first, but then I was able to get in contact with the housing authority and go forward to actually get a detective from a local [unintelligible [00:22:12].26] and they were able to arrest a number of the bad actors over there and really clean up the neighborhood, which has been great. So they’re now performing some kind of rehab on that building where a number of the units were down, in some distress, and that building has come back online, which is gonna rather help the community a lot better than that.

Past that, being that it was an older building, we had an electrical issue, which at first they could have been something of a major issue. There was an electrical wire that somehow they got a [unintelligible [00:22:40].12] into the wire, and it was one of the buildings (23 units) shut down the power of that building for a portion of the day. Luckily, we have a great electrical company that works with the management company and was able to get on site right away, and by 7 PM that night all the power was back on. That could have been a much bigger thing, so they went through the whole building and checked everything, There were three other spots, they fixed them as well.

For us, we wanted tenants there to like where they live and feel safe, first and foremost, and with that, it’s also provided something on a positive note – we’re finding that we wanted to get our tenant base improved just to the point that we have a great tenant base… And past that, we’ve started to offer referrals for them, where they can bring in other tenants. So we’re now having about 30%-40% of our new tenants coming in are coming from referrals, where we offer the tenants who are bringing in the new tenant a $250 referral fee. And that’s good, because you figure if you have a good tenant, they’re bringing in another good person to them, and that’s been very helpful as we continue to make this a better community for people to live.

Joe Fairless: Was that a process that you implemented, or was that existing already, the referral fee?

Jason Yarusi: No, we implemented it. We implemented it and we wanted this to happen. As we were continuing to clean it up, we wanted to give basically guidance to the tenants that we want this to be a great place for them to live… And of course, tenants love when they have friends or cousins or whoever it is live there, so it’s been a win/win from both sides.

Joe Fairless: So to summarize the top three value-add components or tactics that you implemented, in order of the value they created, were what?

Jason Yarusi: So it would be the water savings, and then it would be the rent raise strategy, which at some point will take over the water savings process, but at this point we’re still continuing to have our moderate rent raise strategy. We’re now at about 98% occupancy, so we’ve started to be a little more bullish, but for that point, we’ve basically for year one into year two, we’re just doing the moderate rent raise strategy.

And then lastly was just putting in a proper management process; that adds in the little fees that come with the application fees, move-in fees. That would be third.

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

Jason Yarusi: Sure. You can check out our website, www.yarusiholdings.com. My e-mail is jason@yarusiholdings.com.

Joe Fairless: You’ve just educated us on how to manage a project effectively, so that it returns approximately 75% back to investors within 13 months… Thank you so much for doing so, and I’m sure the Best Ever listeners are thanking you, as well. I hope you have a best ever day, and we’ll talk to you soon.

Jason Yarusi: Thanks, Joe.

Jordan Goodman appearing as guest on the Best Show Ever

JF1524: Heroes Come First: How Our Heroes Can Save Money On Real Estate #SkillSetSunday with Jordan Goodman

Listen to the Episode Below (17:23)
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Jordan has a passion for helping people do better with their money. Today, he’s here to tell us about saving money on real estate, and a way to passively invest in real estate that anyone can do. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Jordan Goodman Real Estate Background:


Get more real estate investing tips every week by subscribing for our newsletter at BestEverNewsLetter.com


Best Ever Listeners:

Do you need debt, equity, or a loan guarantor for your deals?

Eastern Union Funding and Arbor Realty Trust are the companies to talk to, specifically Marc Belsky.

I have used him for both agency debt, help with the equity raise, and my consulting clients have successfully closed deals with Marc’s help. See how Marc can help you by calling him at 212-897-9875 or emailing him mbelsky@easterneq.com


TRANSCRIPTION

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

First off, I hope you’re having a best ever weekend. Because today is Sunday, we are doing a special segment called Skillset Sunday, where you’re gonna come away with a skill that you will either have honed even more, since you listen to this, or perhaps you will acquire, because you didn’t have the skill. We’re gonna be talking about a couple different things. One is if you’re a doctor, police officer, firefighter, our guest is gonna tell you how you can get great deals on real estate; the topic is “Heroes come first.” And we’re also gonna talk about how to verify mortgages, PMI and escrows, and who knows where the conversation will take us from there, but those are some specific skills that you’ll have at the end of our conversation.

With us today to talk through that, Jordan Goodman. How are you doing, Jordan?

Jordan Goodman: Great to be with you again, Joe.

Joe Fairless: Nice to have you back on the show. A little bit about Jordan – he’s been on the show two other times; one is episode 499, titled “This trick will pay down your mortgage in a few years”, and another is episode 858, “How to verify mortgage payments and score big refunds.” So we actually covered the mortgage thing on the last one, so we’ll focus on “Heroes come first.” If you’re curious about verifying mortgage payments etc. then feel free to listen to episode 858.

With that being said, Jordan, do you wanna give the Best Ever listeners a little bit of a refresher about your background and then we’ll dive into the “Heroes come first”?

Jordan Goodman: I’ve been a personal financial journalist for about 40 years. I was at Money Magazine for 18 years, NBC News for 9 years, Marketplace on Public Radio for 6 years… I’ve done 13 books on different aspects of personal finance, including a lot of real estate things. My website is MoneyAnswers.com, and I’ve got lots of resources there. I do the Money Answers radio show, I’ve got a Money Answers YouTube channel, so I’m there to help people with all their financial questions.

Joe Fairless: 40 years of being a personal financial journalist… What are some bad pieces of advice that you’ve seen out there?

Jordan Goodman: Well, usually it comes in the get-rich-quick category, I should say. Lately, it’s been cryptocurrencies. You invest in Bitcoin and you’re gonna be able to retire the next day, and other cryptocurrencies things like that. People wanna believe these things, but it’s usually not true. So I would say that’s the general category of bad advice I see all the time.

Joe Fairless: Get-rich-quick stuff… And in terms of good, solid advice that you’ve seen the more successful people implement in their business, what would you say falls into that category?

Jordan Goodman: Learn what you’re doing. Don’t just jump into something without understanding what it’s all about. A lot of people will go to a real estate seminar, Joe, and come out of it with 10 pounds of stuff, and they think they’re gonna be a real estate millionaire the next day. It doesn’t work that way. Real estate can be very profitable, but it takes some knowledge. It takes some network of people to make it happen. So don’t expect instant success, which is what everybody is looking for.

That’s why you’ve seen a lot of people over the years sell all kinds of enticing real estate programs, and most people don’t either implement them at all, or give up on it and never succeed.

Joe Fairless: What are your thoughts on trying to time market cycles as real estate investors? You’ve been a financial journalist for 40 years, so you’ve clearly been a part of some cycles..

Jordan Goodman: I’ve seen some big ups and some big downs; it’s about ten years ago that we had the beginning of the financial meltdown, where real estate led on the way down. Before the official meltdown of Lehman Brothers and AIG and Fannie Mae and Freddie Mac, real estate had already been contracting for about two years. So it’s not as though it happens one day. These are cycles that you can get a sense of on the way up and on the way down.

Frankly, right now – it depends on the city, but some things are definitely slowing down. Where I am in the New York area, sales are down about 20%-25% over a year ago, because the new tax law changed. It’s much more expensive on an after-tax cost basis to own real estate that it did before, and you don’t get the full value of those mortgage deductions, state local income taxes, property taxes, things like that. So it’s definitely affected the real estate market.

In some areas like Seattle and San Francisco it’s still super-hot, but I’m seeing signs of slowdowns already. In the mortgage market – fewer mortgage applications, nobody is refinancing their mortgages because rates have gone up, so I’m definitely seeing some signs of slowdown, but not the kind of surge we had before the crash we had ten years ago.

Joe Fairless: Have you interviewed a bunch of people over 40 years in the industry?

Jordan Goodman: Yeah, like hundreds, basically…

Joe Fairless: What’s an interview that stands out?

Jordan Goodman: Related to real estate specifically?

Joe Fairless: Yeah, related to real estate specifically.

Jordan Goodman: There’s a guy named Mitch Stephen I interviewed recently, who just like you came up not knowing real estate, learned about it, and has a huge portfolio of income-earning houses, and he shows people how to do it.

Joe Fairless: Oh yeah, “My Life in 1,000 Houses” author?

Jordan Goodman: That’s right.

Joe Fairless: Yeah. Great book, very entertaining book. That book has come up a couple times recently.

Jordan Goodman: I’ll give you another one – there’s a guy named Lance Edwards, who has something called Big Money in Small Apartments. His whole thing is to buy small apartment buildings – either four units, up to maybe 20, and do very well building a portfolio of income-producing properties.

People have specialties that have worked for them, that they teach to other people. Those are just two of many examples of people that do it right and are successful in real estate.

Joe Fairless: Alright. Let’s talk about Heroes Come First. What is Heroes Come First?

Jordan Goodman: Heroes Come First is a program where heroes get big discounts on buying and selling homes and mortgages. Heroes are defined, Joe, as doctors or anybody in the medical field, dentists, police, firemen, EMTs, military – either current military or veteran – clergy, educators, things like that.

Joe Fairless: Yeah, I like it.

Jordan Goodman: They’re helping professions. And it’s nice to say “Thank you for your service”, but this is actually giving them money, so it’s much better. The website they go to is HeroesComeFirst.com, and there are two things – when you buy a home or sell a home through a real estate agent associated with Heroes Come First, you get a rebate of one quarter of their real estate commission, which can be thousands of dollars, depending on the price of the home. So that saves you money right there.

And then, when you buy a home and get a mortgage, they give you discounts on mortgage rates and all the closing costs, points and fees involved; appraisals, escrow, legal fees, just a whole bunch of different things that they give you discounts. They just have to go through people that are associated with that program, realtors and escrow agents in the lending firms and so on. But there’s a real way of giving back to people who often don’t get much of a  financial reward for being heroes. So again, they can find out more about it at HeroesComeFirst.com. They’ve also got a phone number – 888-437-6114. That’s helped a lot of people who have a hard time — let’s just say the military alone; they have a hard time with what they earn, being able to afford a mortgage and buy a home. It helps a lot of those people get into homes that they wouldn’t be able to afford otherwise.

Joe Fairless: When you speak at a conference and there’s a Q&A session, what are some typical questions that are asked of you?

Jordan Goodman: About this particular subject, or other…?

Joe Fairless: Others, yeah…

Jordan Goodman: What I hear a lot today is “How do I earn a decent yield on my money?” People have money sitting in the bank in checking accounts, CDs, savings accounts, pretty much earning zero, or certainly less than 1%… So “Where can I earn a decent yield on my money today without having to take huge risks?”, that’s a question I get all the time, and I’ve got a good answer for it, if you’d like the answer…

Joe Fairless: What’s the answer?

Jordan Goodman: The answer is secured real estate funds, because those pay 8% yields over a one-year timeframe. You can get monthly checks if you like, or you can reinvest them and have it compound at 8%. There’s a website for that, too – securedrealestatefunds.com. They’ve got a phone number, too: 888-444-2102. Now, this is what are called crowdfunding funds. They get money from the investor, the minimum is $5,000 and a one-year hold, and then they pool the money and they lend short-term to commercial real estate projects all over the country, different kinds: medical buildings, apartment buildings, assisted living, student housing, all kinds of different projects. And the people who have been running this fund have been doing this for 30 years, and they’re very careful about who they lend to… So it’s a way of getting [unintelligible [00:11:48].27] the price of the shares doesn’t really fluctuate up or down. It stays pretty much at $10/share. So there’s a way without having to take any principal risk, to earn 8% on your money as long as you can put in $5,000 and hold it in there for a minimum of one year.

Joe Fairless: What do you personally invest in?

Jordan Goodman: I have that, I have a diversified portfolio of stocks, I do some really conservative things, like real estate investment trusts and master limited partnerships, and I do some aggressive things – I do some high-tech stocks, lately I’ve been doing some cannabis stocks, I dabble in options a little bit… So I kind of do some conservative stuff and some aggressive stuff.

Joe Fairless: What was the thing you said after REITs?

Jordan Goodman: Master limited partnerships, MLPs.

Joe Fairless: What’s a master limited partnership?

Jordan Goodman: A master limited partnership is a publicly-traded company that typically owns oil and gas pipelines that bring the oil and gas from the fields where it’s discovered to the refineries. They have a huge capital investment to put the pipelines in, but once they’re in, it’s like a toll road, and they’re collecting money as the oil and gas is being transported through their pipes. They have yields of 4%, 5%, 6%, and they don’t trade up and down that much… But it’s a nice way of getting a decent yield, which you can reinvest.

It trades more on the transmission cost of oil and gas than the price of oil and gas itself. I’ve got several of those that worked out quite well.

Joe Fairless: Why REITs?

Jordan Goodman: REITs are a way to buy institutional real estate. You can have different kinds, you can have them regionally, like just Washington DC area, or just retail, or just office buildings, or just apartment buildings; there’s different kinds. They are interest-rate sensitive vehicles, so when rates go up, they go down; when rates go down, they go up, in general, so you have to kind of realize that… But you can get some pretty decent yields on REITs, and the advantage of a REIT is that they are not taxed at the corporate level as long as they distribute 90% of their income to their shareholders, so you get a bit of a tax break; that’s why the yields can be higher, because they’re not paying corporate taxes… And the same is true of master limited partnerships as well, by the way – they’re not taxed at the corporate level. Only you as a shareholder pay tax on whatever dividends you receive from either a REIT or an MLP.

Joe Fairless: Have you looked into investing in private deals and have you invested in any private deals as a limited partner or a joint venture?

Jordan Goodman: I have not done that, actually. I know people who do it. I don’t have the bandwidth to do all the due diligence on it; in my case it isn’t necessary. The Secured Real Estate Fund kind of does it for me, and I’d rather have them do it and be more passive. And you can do really well being active the way you are, but it’s just not the way I’m put together. I’m doing radio shows, writing books and doing other things all the time… And REITs do something similar – you have a professional manager managing it for you.

Joe Fairless: What’s the latest book you wrote?

Jordan Goodman: The latest book I wrote is Master Your Debt, Slash Your Monthly Payments and Become Debt-Free. That’s the one, when we talked on the earlier episode about the mortgage optimization strategy to pay your mortgage off in 5-7 years instead of 30 years… And I’ve got all kinds of other things in there about improving your credit, and how to get the best mortgage, and credit score… It’s all about the whole world of credit and debt.

Joe Fairless: And that’s episode 499, and then also episode 858 – Jordan talks about verifying mortgage payments. Anything else that we haven’t talked about, that you think we should discuss as it relates to information that real estate investors would be interested in?

Jordan Goodman: I’ve created a special landing page for your folks, that might be helpful for them to take a look at, which is go.moneyanswers.com/bestrei. There’s some links there for them. At my website, at moneyanswers.com, I’ve got all kinds of resources and videos, I’ve got a YouTube channel, and links… I take questions from people… So I’d just love to be a resource to help all your folks. I’ve got quite a few e-mails from your last show to help them make sound decisions in real estate.

If you do it right, it can really work well. You just don’t wanna over-extend yourself, or get into something you’re not really familiar with. Understand it really well before you actually go into action.

Joe Fairless: Jordan, thanks so much for being on the show, talking about the different aspects of, well, bad advice you’ve heard, and good advice that you’ve heard, as well as the “Heroes Come First” program, and some miscellaneous other things that we discussed.

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

Jordan Goodman: Thank you so much, Joe. I really appreciate it.

The Best Show Ever flyer for how to do over $15M in wholesale

JF1485: How To Do Over $15 Million In Wholesales In Just One Year with Steven Libman & Adam Rae

Listen to the Episode Below (28:46)
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Steven and Adam teamed together to build a huge wholesaling business. They also transitioned over to commercial real estate to secure some passive income. If you want to know how to wholesale A LOT of deals and/or want to know more about commercial real estate investing, listen to what they have to say in this episode! If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

 

Steven Libman & Adam Rae Real Estate Backgrounds:

  • Two of Three of the Managing Partners of Integrity Capital Group
  • Steven Libman Real Estate Background:
  • Has spent over 10 years in real estate as a broker at first, then an investor
  • Managing Partner at one of the largest private investment companies in NJ, doing over $50M in transactions, and over 150 deals a year.
  • Based in NYC, NY
  • Say hi to him at https://www.integritycapitalgroup.com/
  • Best Ever Book: Never Split the Difference
  • Adam Rae Real Estate Background:
  • Has spent most of his career in real estate
  • In 2017 his company, Integrity Invest LLC had grown to be the largest Wholesale Acquisitions Real Estate Investment Firm in Southern Colorado, coordinating the sourcing and deployment of over $9,000,000 into the market over 12 months
  • Based in Colorado Springs, CO
  • Say hi to him at http://www.integrityhg.com/

Get more real estate investing tips every week by subscribing for our newsletter at BestEverNewsLetter.com


Best Ever Listeners:

Do you need debt, equity, or a loan guarantor for your deals?

Eastern Union Funding and Arbor Realty Trust are the companies to talk to, specifically Marc Belsky.

I have used him for both agency debt, help with the equity raise, and my consulting clients have successfully closed deals with Marc’s help. See how Marc can help you by calling him at 212-897-9875 or emailing him mbelsky@easterneq.com


TRANSCRIPTION

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

Steven Libman: Doing well.

Adam Rae: Thank you so much for having us.

Joe Fairless: Yeah, my pleasure. A little bit about these two – they are two of the three managing partners of Integrity Capital Group. Steven spent over 10 years in real estate as a broker at first, then an investor, and he’s been a managing partner at one of the largest private investment companies in New Jersey, doing over 50 million in transactions and over 150 deals a year. Based in New York City.

Adam has spent most of his career in real estate. In 2017 his company, Integrity Invest LLC, had grown to be the largest wholesale acquisitions real estate investment firm in Southern Colorado. He is based in Colorado Springs, Colorado.

We’re gonna be primarily talking to Steven, but you’ll hear Adam as well, because I know it’s tough to follow voices with three people on a podcast… With that being said, Steven, do you wanna tell us more about your company’s background and focus?

Steven Libman: Sure. Integrity Capital  Group was established just this year, actually, because we both (Adam and I) run very similar business. We have a wholesale/fix and flip business in New Jersey, and he does the same thing in Colorado. We actually met through a mastermind, and we’re both on track to do probably 15-20 million dollars in each state.

The name of our company is Integrity Holdings Group, the name of his is Integrity Invest, and the goal has always been to get from wholesaling into commercial real estate and multifamily. Just through meeting over the last year, and being of like mind – he is cut from the same cloth – we decided “Hey, why don’t we attack this together?” and in a very short order of time we’ve gotten thrust into a couple of pretty large multi-million-dollar commercial deals, and we just kind of hit the ground running.

So here we are, and our business model is to raise capital from private investors and deploy that into safe, securitized, and providing higher than expected returns on commercial real estate deals.

Joe Fairless: The primary reason why you two partnered up is so that you could go into commercial deals?

Steven Libman: Correct. Our businesses still operate kind of on their own now, and are — Integrity Capital Group was established specifically for commercial.

Joe Fairless: You both have, it sounds like, flourishing wholesale companies, 15-20 million in each state, if I heard you correctly… Why did you choose to partner with an individual who has similar experience, versus choosing to partner with someone who has commercial experience, since you wanted to get into commercial deals?

Steven Libman: Great question. That’s kind of one of the things that has always driven us, is to find like-minded people and find people of different skillsets. The experience level in commercial was both where we wanted to go, but it was more important to find people that were kind of similarly minded when it came to values and relationship, and where our family goals were, and things like that. So that was the most important piece of the puzzle for us when creating a team, and we all have different skillsets… So Adam’s genius zone is different than mine and different than mine, and different from Travis’, who’s not on the call today… But the three of us meshed really well, and that’s why we started the company. But to your point, the deals that we are involved in are co-sponsoring with guys that have a ton of experience. Collectively, they own about 2,000 units, and we’re building a self-storage facility down in Orlando with one of them, and acquiring 152 units in Arizona for another one… So we certainly get the value of partnering with people with that experience. For our core group and what our company was gonna be doing, we just decided that the three of us would make the best fit.

Joe Fairless: 15 million dollars on track this year – that’s great for anyone who’s listening, but especially it’s inspiring for people in that particular area. How much money do you make when you do 15 million dollars in wholesaling?

Steven Libman: So that’s just total transactional volume, and you skew statistics to make them sound really good, and that’s that one. But to put it in perspective, in 2016 we did 16 deals for $240,000 in revenue. This year we’ll do about 180 for 2,4 million dollars in revenue. So it’s been an extremely quick growth curve for us.

Adam, I forget what your numbers look like from two years ago till now…?

Adam Rae: Two years ago we did 21 deals for about $400,000 in revenue (just under, 380k). And this year we’re on track to do 88 deals with like 1.4-1.8, somewhere in there.

Joe Fairless: And just so I’m clear, revenue is the total amount of income, not necessarily the profit, correct?

Steven Libman: Correct. About a 35% profit margin.

Joe Fairless: Okay, so like for the 1.4 now we do 35% of that, and that’s about where you’re netting out from a profit standpoint.

Adam Rae: Yeah. My profit margin is about 33.76%, roughly…

Joe Fairless: About…? [laughter]

Adam Rae: Yeah, I’m a numbers guy.

Steven Libman: It depends if you’re in growth mode, too. So when we were doing extreme growth mode, that might have dipped down to 20%-25%, because we were pumping money into new markets, and new marketing channels, and things like that. So it fluctuates, but that’s the goal.

Joe Fairless: Interesting. I never heard that type of percentage expressed as a profit just for wholesalers; that’s great to know. When there’s a certain amount of revenue, then approximately — well, I don’t remember the percent that you gave, Adam, but approximately 35% of that is profit. That’s pretty cool.

Why go into commercial? Why not just continue to scale from 15 to 20 million to 100 million in wholesale?

Steven Libman: I think we’ll both have the same answer for this, and we’ve discussed it a lot, obviously, before we went into commercial. It’s because of passive income. Cashflow ebbs and flows significantly in a fix and flip business and in a wholesale business. And at the beginning of every month you hit the reset button… So you’re sending marketing pieces out, you’re spending more money on pay-per-click, you’re sending your acquisition people out on new appointments, and it’s just a heavy-lift at the beginning of every single month.

As entrepreneurs, I think we always wanted something that would create some passivity in our lives, and commercial offers that. We’re watching other guys that are building their businesses, and now that we have a business that’s kind of printing some cash that we can turn into passive income, that was always the goal for us.

Adam Rae: And then the second thing is Steven and I were headed down the path of partnering to build a monster single-family portfolio in different regional locations we were scouting, different cities around the country, trying to look at local partners, and I’ve got a small 23 rental portfolio in Colorado, so I have some experience with our passive income and growing that one house at the time, and we just looked at the amount of energy that it takes to source, find, fix and then deploying that capital, even in a small amount, into a  single-family house across the country… And then also looking at analyzing the numbers of a large, large commercial project.

To be honest, we’ve both done a lot of residential deals and we looked at our time commitments and said “My goodness, I can add three zeroes to this deal and it’s about the same amount of work as flipping three houses and buying two rentals”, but the payoff on the back-end has a couple extra zeroes on it, and then we can actually scale if we combine both of our ability to build businesses together. And we are talking every day anyway, so…

Joe Fairless: It sounds like two things. One is the endless heavy-lifting cycle that is wholesaling, because you’re constantly ramping up the machine, and then the time commitment in terms of opportunity cost too, and being able to scale.

When you two made that decision to go into commercial, what were some of your first steps?

Steven Libman: I would love to say that it was methodical, and I would love that we sat and wrote our plans of what we were going to do, but the truth of the matter is that we were at a mastermind together in Baltimore not more than 60 days ago, and a sponsor that I had been communicating with reached out and said “Hey, if you guys wanna get involved in this deal and you can raise six million bucks, then let’s talk about that.”

I went, I found Adam, I said “What do you think? Do you think we should paint ourselves in a corner and commit to doing this?”, and…

Adam Rae: Yes.

Steven Libman: He said “Yeah, I think we should.” [laughter] So we did, and just last week we closed on 14 acres of land with 1,193 approved self-storage units on it, just outside of Orlando.

Joe Fairless: Wow.

Steven Libman: And we just closed on the two million dollars of the land last week, and we’re in the process of closing out the second round for the 12 million dollars worth of construction cost for that. How did we get started? It was a violent shove into it, and our eternal need to say yes to things kind of got us in there, and then that just really opened the door for us to go side by side with a sponsor who has a lot of experience with 100 million dollars of assets under management, and to just learn and watch and figure it out… We’ve been raising money for a long time with our single-family fix and flip business, so we thought it was achievable, and it was, and now we get to take the ride.

Joe Fairless: What was something that surprised you as you got started having those conversations with investors?

Steven Libman: I think first it’s how many people are really interested in creating some passive income for themselves. When you’re paying double market returns to your investors, they get excited about that. So I would say that it was not easier than we thought, but initially the conversations were a little bit different, where “Hey, we’re gonna deploy your capital now for 3-5 years, versus 3-6 months” and people were excited about that. So the people that we’ve already had relationships with were saying “Yeah, that’s kind of what I was hoping you guys would do.” So it turns out it was the right move.

Joe Fairless: New development… I heard that right, correct?

Adam Rae: Correct. Ground-up.

Joe Fairless: Ground-up development. You definitely got into this with a violent shove, as you described, Steven. Did  you get any pushback on ground-up development?

Steven Libman: No. We actually have some experience in that. Travis, our third partner, is from the underground utility and site development world, so he has a lot of that background, so we’re confident that we can oversee that project with a solid fiduciary responsibility to our investors. Then also in New Jersey in 2018 we’ve taken down some, divided and either improved or approved over 100 lots for single-family development, so… It’s not that different, except storage doesn’t have any kitchens and baths. Well, maybe one or two baths, but it’s a little bit different of a process, so it goes much quicker than that larger single-family development stuff.

Joe Fairless: You’re working on another project, too. I think you said you’ve got that and something else, right?

Steven Libman: Yeah, so in just about 30 days we’re getting ready to close on 152 units in Yuma, Arizona. That’s a little bit different. It’s a cash-flowing asset already. We’ll make some changes to it cosmetically and operationally that will create some value… But yeah, we’re still in the middle of raising the final round for that as well. That’s a really exciting project as well.

Joe Fairless: And how much are you bringing into that deal?

Steven Libman: 2.6.

Joe Fairless: How long does it take you to raise 2.6 million?

Steven Libman: Hopefully less than 30 days.

Joe Fairless: It’s in process, it sounds like.

Steven Libman: Yeah, exactly. It’s in process, doing two projects side by side, with different risk tolerances. Ground-up means a different risk tolerance than the stabilized asset, so… Different investors, lots of conversations, but we’ll see. I wish we had a better dataset for that.

The goal moving forward is to continually meet with investors that like what our portfolio is turning out to be, and then as those deals pop up, we don’t have to play behind the 8-ball, because right now a little bit we are.

Joe Fairless: What have you noticed you’ve had to give more attention to as it relates to your wholesale business that you thought was on auto-pilot, but then not so much?

Steven Libman: For us, and I think for Adam too in the next couple of months, the goal is — for us, we’ve already identified and are starting the onboarding process for a COO, so that they can take the operations day-to-day off of our hands. But as much as we like to say everything’s on autopilot, you don’t need a COO if it’s on autopilot. Nothing’s really ever on autopilot. Marketing changes, your response rates change, your appointment quality changes, acquisitions people sometimes get sick or go on vacation so you’ve gotta step in and the business still has to run… But I think we’ve done a really good job, and I know that Adam has too in his wholesale business created a really good culture of accountability and team play where everybody knows that they are part of the [unintelligible [00:16:42].09] where we all hold each other up. If you have that type of accountability to everybody on the team, then everybody works really hard and that’s the culture that we’ve created, and that has been the biggest win for us in terms of making sure that things continue to run… Because if they don’t wanna run it for themselves, they wanna run it for their teammates, and nobody’s ever wanted to run it just for us; that’s been really helpful.

Adam Rae: One of the big surprising things on my end has been as I’ve started to shift my focus, I’ve realized I’m less important to my business than I actually thought.

Joe Fairless: That’s good.

Adam Rae: Not in the sense that I haven’t given a lot to it and made a lot of things work, but at the end of the day if I take an extra 24-48 hours to get back on a problem, by the time I get back to if I’ve noticed over the last couple of months somebody on my team has taken that opportunity to step up, usually, and has solved that problem prior to me being able to get to it. Actually, that’s been the most surprising thing, and exciting to see some of those team members step up into situations that you didn’t know that they could handle… But now my attention being pulled in another direction has given me the opportunity to see them do that, and my trust in that is growing, for sure.

Joe Fairless: What’s the short to medium-term vision in terms of asset class? Because you’ve got a couple different asset classes in commercial right now.

Steven Libman: We like multifamily and we like self-storage… The reason being is that during the last great recession, storage was the only asset class to continually gain throughout the recession, and multifamily because we like to have impact on people’s places that they live. People always need a place to live, and if we can impact that in a positive way, I would say that it’s arguably one of the other stable asset classes. If you buy those things right, and you manage them properly, then you can do a really good job and win. Not that we know how to run a self-storage facility, but CubeSmart is gonna sign on, and they are the ones that are gonna be running that facility for us. Then we have great asset managers and property managers to help us run those other multifamily assets.

Joe Fairless: What’s been a surprising challenge as it relates to getting into commercial and having those investor conversations that you didn’t think you’d come across, or maybe questions that they asked that you didn’t think you’d come across?

Steven Libman: First, I think it’s a slower process. I think that what makes the two deals that we’re in right now significantly more challenging is timeframes. People need time to discuss a property with you, they need to figure out where their investment moneys are coming from. If they’re rolling it over from a 401K or an IRA, that’s not a one-week process.

We have self-directed IRA companies that work with us often and they can do it in between two and three weeks, which is really fast… But I’d say that that’s been in my mind the biggest challenge – just making sure that you’re consistently having these conversations, because if it’s not this deal for an investor, it will be the next one… And making sure that you’re continually keeping them involved and updating them with where we’re at with the current project, and when they get excited for that, to make sure that they’re ready for the next one.

Joe Fairless: How do you grow your list of investors?

Steven Libman: I’m sure you can answer that better than we can at this point… [laughs]

Joe Fairless: Well, I’m not being interviewed though… [laughter]

Steven Libman: That’s been a strategy point for us over the last couple of weeks, figuring out exactly how to build those relationships… But I think like anything else in your business that you find has been really successful, it’s based on relationship, and making sure that you’re out there meeting people, getting connected, and just letting people know what you’re doing.

There’s a book called Getting the Money, and she talks about how she’s not Wonderwoman, but her and Wonderwoman have never been seen in the same room together,  and her point was don’t forget to tell people who you are and what you do… And I find that most of our investors work with us more for who we are than what we do. It’s great that we can provide good returns to them, and certainly, it’s better than what they have seen in the past… But it’s mostly about who we are and why we do what we do.

I think as you continue to build that base of good investors, they have friends, they have family, they have other people that they want to introduce you to, because you’ve done a good job for them, and they trust you, and you just continue to build that relationship.

Joe Fairless: And the self-storage investment near Orlando – if you can think about the one investor who invested the most amount, how did you meet him or her?

Steven Libman: By asking the question of the people that we know “Who else should we know that you think should be in this deal?”

Joe Fairless: Wow. And they introduced you to this person who wrote the biggest check.

Steven Libman: Yeah. It was one point of separation, and we said “Hey, this is what we’re doing.” They were involved in the deal themselves on a lighter scale, and we said “Who else do you know that we should be talking to?” and about an hour later we had the largest commitment that we had. So it’s our warm network.

Joe Fairless: Wow, that’s incredible.

Steven Libman: That’s the key – making sure that people know what you’re doing, and then asking those questions, “Who else should we be talking to about this?”

Adam Rae: But it’s also positioning yourself. We’ve done due diligence on this, we have a partner who his job is to blow up deals for us… Because we’ll get excited about something and we’ll send it across Travis’ desk, and he spends 36 hours in the numbers and says “Hey guys, here’s three yellow flags. We need to resolve these before we go any further.”

When we’re having conversations with people, we’ve found something that is intriguing, enticing and exciting, and we’re not even gonna take it out to somebody unless we feel like this is something we’re gonna put our own money into, that we’re excited about, and that truly has a great opportunity… So positioning ourselves as the prize, and just asking for who else possibly would be interested in something like this, and people are excited to share it.

So just capitalizing on that relationship and warm network, because you have built the trust and you have that relationship with someone and they’re excited to bring somebody else in that they know, because they trust you.

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

Steven Libman: For me it’s build the team. We started our business in 2011, the wholesaling side, and for five years I built a great job… But you heard the numbers – in 2016 they weren’t great, and now they are. The fear that I had and that was holding me back was I didn’t wanna be responsible for other people’s income. When mentors of mine told me that the value of our business is going to be predicated upon the talent of the people we bring in, it really changed my mindset to say “Wow, if I build a really good team, then I don’t really have anything to worry about.” That changed everything for us.

We started hiring people, and not all of them have worked out, but being able to confidently go in and say that building a rockstar team is gonna build a great company – that’s been the best advice I’ve gotten.

Joe Fairless: Adam, do you have any thoughts?

Adam Rae: Yeah, I would say for me it’s check your ego at the door, and just try and find somebody who’s doing what it is that you wanna do, and model. Just don’t try and recreate the wheel; it’s not complicated, but it’s not easy. So just keep your head down and try what someone else is doing, and stay long enough to really figure it out, and that takes checking your ego.

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

Steven Libman: Let’s do it.

Adam Rae: Let’s do it.

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

Break: [00:24:54].17] to [00:25:41].19]

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

Steven Libman: Never Split the Difference.

Joe Fairless: Best ever deal you’ve done?

Steven Libman: It’s gotta be so far this over a thousand-unit self-storage development deal.

Joe Fairless: What about a deal that has gone full cycle, best ever deal you’ve done?

Steven Libman: Probably the 24-lot subdivision, from entitlement to completion.

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

Steven Libman: So many. Probably making sure that we haven’t touched and felt every piece of it… That’s more in the single-family world, where we had less of a stringent timeframe with the due diligence, and we’ve uncovered some stuff in the deal that we should have known before the deal… Luckily, we still made money on it, but that’s a learning curve for sure.

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

Steven Libman: We work with Samaritan’s Purse, and we donate a portion of the proceeds from every property that we’re involved in to their Clean Water project, digging wells in third-world countries.

Joe Fairless: Best way the Best Ever listeners can get in touch with you two and learn more about what you’ve got going on?

Steven Libman: IntegrityCapitalGroup.com. My name is Steven, that’s Adam, and our e-mail addresses are just our first name, @IntegrityCapitalGroup.com.

Joe Fairless: Thank you so much for being on the show, talking about how you two have built  wholesaling businesses that are thriving, and now going into commercial deals – two primary reasons why… One is the heavy-lift at the beginning of every month; basically, just ramping up every month, because you’re starting fresh, and two is the opportunity cost, and I believe as Adam said, you could spend the same amount of time, but then you add three zeroes to the deal and it’s a significantly bigger payday for your time…

And the projects that you two talked about, and holy cow, that question that secured the largest investor in your recent deal… That question is “Who else should we know who should be in this deal?” and you’re asking that to a current investor. Now, you already have that rapport build up, and Adam, as you said, it’s not a magical question; when you ask that, people get into a trance and then say “Talk to my uncle Billy. He is a billionaire. He’ll give you money.” [laughter]

Adam Rae: Sometimes… [laughs]

Joe Fairless: Maybe, sometimes… I haven’t met uncle Billy yet, that is a  billionaire, but I’m sure he’s out there… But it is a question that once you have positioned yourself properly, then that question can help you get to another level. Thanks so much for being on the show. I hope you two have a best ever day, and we’ll talk to you soon.

Adam Rae: Thanks, Joe. You too.

Steven Libman: Thank you.

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JF1359: When No One Else Will Lend To You, This Guy Can Help with Michael Chelala

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Michael and his team deal with large development projects and large apartment community owners. Michael, through the company Equicap, specializes in getting creative and financing tough situations that most other lenders will not touch. They also lend in normal situations, and can help almost anyone looking for capital for real estate. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Michael Chelala Real Estate Background:

  • Entrepreneur who loves pursuing a great idea and turning it into a reality
  • Director of Originations for Equicap, a real estate investment banking firm
  • Able to effectively structure financing for complex real estate transactions
  • Based in New York, NY
  • Say hi to him at www.m-equicap.com OR michael@m-equicap.com
  • Best Ever Book: Like a Virgin by Richard Branson

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TRANSCRIPTION

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

Michael Chelala: I’m doing good, thanks for having me.

Joe Fairless: Yeah, nice to have you on the show. A little bit about Michael – he is the director of originations for Equicap, which is a real estate investment banking firm. He’s focused on effectively structuring financing for complex real estate transactions. Based in New York City, New York. You can say hi to him at his company’s website, which is in the show notes page.

With that being said, Michael, do you wanna tell us a little bit about your background and your current focus?

Michael Chelala: Absolutely. Like you mentioned, we are a finance firm focused around commercial real estate in New York City. We pride ourselves on our ability to structure debt and equity. We work for developers and owner operators around the country. My background is in finance. We’re a pretty small shop, about 5 or 6 guys here in the office on a daily basis, but we do about a billion dollars in transactions a year, so we’re very active. I think it equates to about 100 deals a year, and we go up and down the capital stack.

We arrange acquisition financing, construction financing, traditional refi’s, special situation deals… We touch all asset classes, from multifamily to industrial, to hospitality. We really like to touch it all; anything that as a commercial real estate component we talk about small businesses, SDA loans… We do it all, really. So yeah, we like the hairy stuff.

Joe Fairless: Give us an example of the hairy stuff. Give us a specific example if you could.

Michael Chelala: I’ll give you an example – last year we had a really interesting deal that came to us in Brooklyn. It was a distressed deal. The client was a couple weeks away from her building going to auction, and her lender was obviously foreclosing on her, and she was looking for an exit. Her building had tons of violation. In New York, the violations can get pretty heavy. You have to be on top of your building, and she wasn’t, so her building ended up going on the AEP list, which is a list of the worst violated buildings in New York City… So a lot of lenders wouldn’t wanna touch that deal.

Well, we did – we found a family office to come in, lend her the money, and pretty much get her out of the sticky situation that she was in, where she was in default. We bought her enough time to reposition the asset and stabilize the situation, and ultimately we got her out of that funky situation that she was in where she almost lost her building. She was able to buy time to clear up the violations, and then find conventional financing thereafter to take out that family office. This is an example of a hairy situation. We work on development deals where–

Joe Fairless: I’d love to talk about the development deals in a second, but I’d love to learn more about how that was specifically structured, just to learn more about, okay, if I have a building in Brooklyn, totally have been messing up, on the worst violation list, the AEP list… Is that it, AEP?

Michael Chelala: Yeah.

Joe Fairless: Okay, the AEP list… And then I come to you and you’re like “Hey, Joe, this is my specialty, you are in good hands. Let me try and take care of it” and then you come to me with the proposal – how is that exactly structured?

Michael Chelala: How is the loan agreement structured [unintelligible [00:04:34].02]

Joe Fairless: Both.

Michael Chelala: Obviously, the most important thing is getting to a place where the lender is capable of coming in, paying off the existing lender, and coming into a new sort of structured deal with the borrower. In this case, the loan was structured as a bridge loan, where the terminal loan was 12 months, and a couple extension options. So the borrower had 12 months time before the new loan would mature, she had a couple options to extend, and within those 12 months she was paying pretty high interest; the borrower is gonna be paying a pretty high interest compared to a conventional [unintelligible [00:05:15].05] but at least she was able to hold on to the asset and get it back to where it had to be.

So the trade-off with the bridge loan is that, hey, you’ve gotta pay up, but it buys you more time to get a distressed asset to where it’s gotta be.

Joe Fairless: And then her exit out in 12 months is she’s now done the stabilization — so the previous lender is paid off, done; now family office comes in…

Michael Chelala: Cleaned up the violations…

Joe Fairless: Cleaned up the violations, okay, and then stabilized it. From a stabilization standpoint, here what specifically are we doing to stabilize the property, other than cleaning up violations?

Michael Chelala: At the time where the property was really in distress, there were a good amount of vacancies. Some of the properties needed some cap ex work, some minor renovations to get them leased up. Once our lender came into the deal, she had that 12 months time to come in, make those minor renovations, get those units leased up, and that’s why she was able to upside the cashflow and get the building performing again.

Joe Fairless: And from a lender standpoint, is the reason why I would lend to an individual in that type of circumstance because if they don’t perform I get the building? And the reason why I say that is because if an owner has gotten to that point where they’ve got all these violations around the naughty list, it sounds like that would be tough to trust that they’ll follow through with this new loan.

Michael Chelala: For sure. I think that any bridge lender that tells you that they’re not worried about getting paid off is probably lying to you. They’re always worried about it, because they’re coming into hairier situations than a conventional bank would… But they definitely need to take into account what the property is worth as is, what they’re lending on, and just in case they run into that issue where they need to take back the keys to the property, they know that their basis is solid and that they would still be able to come out either making a little bit of money or breaking even. But I don’t think that any lenders that at least I deal with intentionally go into a loan to own situations, right?

There’s a lot of lenders out there that people need to look out for, and maybe some of your listeners that are sort of getting into the real estate game, that are looking for private money or “hard money” – you’ve gotta be careful, you’ve gotta make sure that your lenders are not out to just take the property right under your feet; they’re there to work with you… Dealing with those lenders, you’ve gotta be careful.

Joe Fairless: Any particular questions you could ask a lender to try and determine if they’re a loan-to-own type of lender?

Michael Chelala: Yeah, I think it’s important to know how many loans they have out at any given time, how many loans have been paid off, what their level of experience is… Anybody can have money and anybody can be playing in the real estate game, but really how many transactions have you been a part of and who can I call as a reference? Who are one of your borrowers that I can speak to and make sure that the process went smoothly?

And I think deal with debt and equity brokers like myself, that can speak to that, and… I’m accountable, right? A broker is accountable to which lender they pair you up with. Experience is definitely important, and just being able to speak to somebody that can guide you through the process.

Joe Fairless: Now, you were mentioning development deals before we went very deep on this Brooklyn deal. What about a development deal(s) that was challenging?

Michael Chelala: We’re dealing with a few challenging construction deals at the moment. For example, we have a developer that bought a lot that had environmental issues that we needed to clean up in order to acquire that land and then start building on it… But there’s all types of situations that developers can run into.

We also have seen a lot in this market, where people, first-time developers are getting into deals, they don’t budget properly, there’s cost over-runs, they end up falling short of their budget, and they need to upsize their construction loan again.

We worked on deals like that where we’ve taken out a construction loan, then we needed to bring in another construction lender to upsize the loan and give them more money to complete the project. So developers definitely need to be careful and make sure that they budget everything as detailed as they can, so as not to run into that problem.

Joe Fairless: What’s a scenario where I came to you and I said “Hey, I’ve got a really tough situation”, where you say “Joe, you’re screwed… Sorry, I can’t help you.” What would that be?

Michael Chelala: I think if you get to a point where you’re as complete value is falling short of what you owe on the property and what you need to complete the property. That’s when you’re really in trouble. You’ve gotta make sure that you buy things smart, you buy things at a good basis, that you’re not just building to build. You go into it, you’ve gotta run the numbers and make sure that you have room to play, and room for error, because any developer will tell you, it’s never 100% smooth; there’s always gonna be bumps in the road, there’s always gonna be contractors that need a little extra money to do whatever, there’s always cost overruns… You’ve gotta be careful.

Joe Fairless: What’s an approach you take to developing relationships with family offices?

Michael Chelala: I think with family offices you definitely wanna approach the ones that first of all have sort of an interest in real estate; not all family offices play in that game. And I think that you wanna bring good deals to family offices. Some of them play on the equity side, some of them play on the debt size, some of them play on both levels, but I think I’ve developers these relationships over the years by bringing good deals – deals that are strong on paper, that have strong sponsors. That’s primarily it. You wanna make sure that whatever you’re bringing to the table is gonna look good for them.

Joe Fairless: Thinking about that Brooklyn deal where the family office came in – I’m not asking you to name any names, but how did you initially meet a person at that family office?

Michael Chelala: I actually met that person at a networking event that one of my title relationships organized. You’ve gotta go out to these little events that people put together. It was sort of a private thing where a few guys got together and exchanged business cards, that was actually it.

What’s funny about that deal was nobody wanted to touch this deal. There was not a lender under the sun that wanted to touch it. And then the week before we got this thing closed we found this guy. So it was a really quick process.

Joe Fairless: How long have you been a director of originations?

Michael Chelala: Equicap has been around for 15 years. I’ve been here for about 3-4 years now.

Joe Fairless: Okay. With your approach in particular, for the 3-4 years you’ve been there, what’s something you’ve evolved?

Michael Chelala: I’ve definitely been paying more attention to me. In particular, I’ve developed sort of a marketing platform on Instagram, and some of these other media channels… But you’re starting to see more brokers and more developers and more owners put their product to show on these platforms, and I think it’s important to pay attention to that and be a part of it, because I think in the next couple of years it’s gonna grow even more. There’s a lot of people in the industry that aren’t really paying attention to it, but you’d be surprised how many new leads, new contacts, new developers I meet on a daily basis through social media.

Joe Fairless: So you’re a registered broker-dealer?

Michael Chelala: Yes.

Joe Fairless: For someone who’s not familiar with that term, first what is it, and then secondly, what’s the type of compensation that someone can expect to be charged if they work with a broker-dealer?

Michael Chelala: Sure. By the way, before I answer that question, about 90% of deals in New York City on the debt and equity side run through a brokerage, and that’s because brokers in this market are — it’s important to find a good broker, one, and two, you wanna have representation when you’re negotiating with your lenders to make sure that you get the best deal and you see all the options on the table out there, because it’s our job to know all the lenders and equity players out there.

Obviously, I’m biased, but I’m a big believer in people going out and using brokers, and I think the market speaks to that. But as far as what it takes to get into the brokerage world, you need to get license from a city – there’s a series of tests that you can take… And as far as the fees are concerned – different companies offer different sliding scales for their fees and stuff, but typically speaking, on a debt assignment you’re gonna get charged about 1% of the total debt. Then ob equity assignment, equity is usually between 2% and 3%.

You can play with those numbers – sometimes smaller deals or more difficult deals could be a little higher, bigger deals that are a lot easier to get done, cookie-cutter multifamily refinances, you can chop that point down to maybe 0.75%. So there’s some flexibility there.

Joe Fairless: Thank you, I appreciate that. What is your best real estate investing advice ever?

Michael Chelala: I would say to look for hairy situations, special situations. Don’t just go for the fancy-marketed real estate acquisitions. I think that if you wanna find a good deal, you’ve really gotta dig for it. You’ve gotta look for the guy that’s in trouble, or the lady that’s in trouble, that needs help. This way you can structure deals that make sense. You can maybe come into the deal in a unique way… So I think you’ve gotta look for special situations; you’ve gotta look for hairy deals. That’s the best way that you can sort of find the golden opportunities.

Joe Fairless: I’m gonna ask you a follow-up on that, because you’re brokering the money between the person doing the hairy deal, who is at risk, and the lender, who is at risk, but should have a property that they can own if the owner doesn’t adhere to whatever the loan covenants are. So you don’t have skin in the game necessarily; sure, a reputation, but skin in the game. So from looking at a hairy deal – I hear you, that’s where we can get a lot of value, but holy cow, that could be where I lose my shirt… So have you been an operator on these types of deals before?

Michael Chelala: What I’ve done in the past is if I really like a deal, I’ll roll my fee into the…

Joe Fairless: Oh, okay.

Michael Chelala: If it really makes sense, if it really pencils out and you know that the guy that’s running with the transaction knows what he’s doing, then it’s worth taking a shot at, right? Or maybe you split your fee, so you get paid half, and you roll half into the deal.

It becomes a small piece of the transaction, but 12-18 months down the line when there’s another play – whether it’s a sale or a refinance – you can see a little premium on your money. So the answer to that is yes.

Joe Fairless: Certainly more of an alignment of interest with them when you do that. Still, it’s investing money that is a commission, versus perhaps the owner-operator who didn’t earn money with the equity that they put into the deal; they might have had to dip in savings, or something… But still, more of alignment of interest. I didn’t know broker-dealers did that, so that’s pretty cool to know.

Michael Chelala: Yes, it’s definitely a creative way to get involved. And by the way, I wanna mention that these lenders, although they’re lending on a hairier transaction, let’s say, sometimes they like that, because they also recognize that there’s a unique opportunity to come into a special situation that the guy or girl that’s running the deal can create a lot of value and put the lender in a better position to be taken out down the road.

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

Michael Chelala: I’ll give it a shot, man.

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

Break: [00:17:34].29] to [00:18:11].13]

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

Michael Chelala: Best ever book I read… Oh, God… Like a Virgin, Richard Branson.

Joe Fairless: Alright. What is the best ever deal you’ve done that we haven’t talked about?

Michael Chelala: I did an SBA loan for a trendy cafe in New York City called Cafe Grumpy.

Joe Fairless: Why is it the best ever – just because it’s kind of a cool name?

Michael Chelala: If you look up their logo, they’ve got the coolest logo, man. A really cool coffee brand.

Joe Fairless: Alright, where is that located? I don’t know Cafe Grumpy.

Michael Chelala: They have a location in Grand Central, right in the middle of Manhattan, and they’ve got a bunch all over the city. The loan that I got them helped them open up a location downtown.

Joe Fairless: Alright. Yeah, they’ve got a new Miami location, too.

Michael Chelala: They’ve just opened up one in Miami… I think they’ve got a couple in Brooklyn.

Joe Fairless: Yeah, “Roasting in Brooklyn & Brewing Beyond.” Cool! What’s a mistake you’ve made on a transaction?

Michael Chelala: A mistake I’ve made? Hopefully none. I think the only mistakes I’ve made are really presenting things to lenders that hadn’t been fully vetted. What I mean by that is, for example, if a guy comes to me and says his net worth is 10 million dollars and it’s really $500, then that could pose a potential problem, and that’s happened in the past… So it’s definitely important to make sure that the people that you deal with, you vet them and you make sure that what they’re telling you is actually true.

Joe Fairless: That wild swing of net worth has happened before?

Michael Chelala: Maybe not $500, but give or take…

Joe Fairless: [laughs] Give or take $50.

Michael Chelala: Yeah… There’s definitely some cowboys out there, no doubt.

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

Michael Chelala: For me, I like giving back to orphanages. My grandfather was an orphan, so that’s really a soft spot to me, to give back to orphans.

Joe Fairless: And what’s the best ever way the Best Ever listeners can get in touch with you?

Michael Chelala: The best way to reach me is by e-mail, or on my Instagram, just DM me… That’s definitely the best way to reach me.

Joe Fairless: Cool. Do you wanna say your e-mail?

Michael Chelala: It’s michael@m-equicap.com. The Instagram is @thedeveloperclub. On @thedeveloperclub on Instagram you can reach out to me. Either through DM, e-mail me, call me… All my information is there.

Joe Fairless: I loved our case study conversation with the Brooklyn deal. The woman was in trouble, and then you got the family office involved… They bought out the existing lender and structured a new deal with her, as a bridge loan, 12 months, a couple extension options. She cleared up the violations, had some vacancies, cap ex, minor renovations, got it leased up within 12 months, and then exited out into a longer-term loan. It was a loan that no one else would touch. And you met the family office contact at a networking event that I think a title company contact put together…

So a lot of lessons to be learned there, and it’s just kind of a microcosm of the type of deals you do. Thank you so much for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Michael Chelala: Thanks very much.

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JF1348: Starting A REIT & Helping Others Invest In Manhattan with Jesse Stein and Janine Yorio

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Jesse and Janine started a REIT in NYC to help everyone be able to invest in real estate, even as little as $100. Unlike most opportunities for investors, Compound allows everyone to invest in Manhattan real estate, not just accredited investors. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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TRANSCRIPTION

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

With us today we’ve got Jessie Stein and Janine Yorio. How are you two doing?

Janine Yorio: We’re doing really well, Joe.

Jessie Stein: Hey Joe, how are you?

Joe Fairless: I’m doing well, and nice to have you two on the show. Well, their company has just launched a REIT focused solely on Manhattan residential properties. I think that’s pretty darn interesting enough for us to talk about, and we’ll spend the majority of our time doing some Q&A about that. They’re based in New York City, New York, and their website is CompoundNY.com. With that being said, do you two wanna give the Best Ever listeners a little bit more about your background and your current focus?

Jessie Stein: Sure. I’ll start; this is Jessie. I started my career as an equities trader in 2005, and I decided I wanted to get into real estate. Having made the transition from pushing a button and investing millions of dollars at a time to real estate, I started to realize how difficult it was to get a transaction process, and how difficult it was for the average person to invest in real estate.

Having grown up in New York and having worked in New York for a couple decades, I always had a vision of making investing in New York City something that is easy to do and that everyone could do. So what we’ve done at Compound is form New York residential so that everyone can invest in Manhattan residential real estate for as little as $100.

Janine Yorio: Joe, my background is similar, but not entirely the same. I come out of the real estate private equity investment world. I worked for a firm called North Star Capital for about eight years, where I managed a portfolio of about 200 million dollars in real estate investments, and I’ve also worked on different kinds of real estate investments at all points in the capital structure: commercial, hospitality and lots and lots of multifamily. Then I was the head of acquisitions for a hotel company that also did a lot of condominium development in New York, and Los Angeles as well.

So we built Compound specifically because we saw a [unintelligible [00:03:08].00] at the intersection of real estate investment and millennial investment trends, and we saw that fund flows into ETFs had increased dramatically over the last several years; in fact, they were up 24% last year alone… But there aren’t really great real estate-backed ETFs where a person who has a thesis can invest systematically. And given that we’re based in New York City and we’re both most familiar with the New York City residential market, we felt that was an optimal entry point into this sector, so we created a [unintelligible [00:03:37].09] investment vehicle specifically designed so that people can invest in Manhattan housing, which is historically one of the best-performing real estate asset classes and geographies, but also one of the most inaccessible. So unless you have several hundred thousand dollars or even a million dollars to buy an apartment, it’s very difficult to gain exposure to the Manhattan residential market, and that’s why we built Compound.

Joe Fairless: What do you do and what does Jessie do?

Janine Yorio: My title specifically is CEO, so I run the company and I’m primarily involved with setting the strategic direction for the company and leading our fundraising activities. At our core, we’re an asset management company, so we’re always capital-raising from consumers, institutions, and then at the operating company level we’re funded by venture capital firms. So a lot of my time is spent doing investor relations on all fronts.

Jessie Stein: I’m involved more in the real estate investments and operations aspects of the business, analyzing different neighborhoods that we’re looking to invest in, individual apartments, apartment buildings, and really designing an investment strategy.

Joe Fairless: Jessie, with identifying different neighborhoods, are we talking about all the burrows of New York City, or are we just talking about Manhattan?

Jessie Stein: We’re just limited to Manhattan.

Joe Fairless: Just limited to Manhattan. Here’s a dumb statement, and then please take me behind the woodshed for making this statement – it doesn’t matter where you pick in Manhattan, the price is gonna go up, so why do you bother putting a lot of research into which neighborhood to invest in?

Jessie Stein: I don’t think it’s necessarily wrong, in one respect, but our real thesis is about buying at value… So yes, there’s definitely correlations between different neighborhoods as far as which direction prices are moving, but we’re also focused on micro-level catalysts at the neighborhood level that might add value. If you go back 20 years ago, you probably would have been better off investing in the Lower East Side and Soho, as opposed to the Upper East Side or the Upper West Side. Now, prices have gone up in every neighborhood, but the returns have varied.

We start at a very natural level – we go down to the neighborhood level and then we go building by building and unit by unit to try and identify both trends and individual attributes that we think would be catalysts for greater appreciation.

Joe Fairless: Some of those micro-level catalysts would be what?

Jessie Stein: At the neighborhood level it could be a public-backed development project. We were just looking today at a neighborhood in the Lower East Side called Corlears Hook, which is a small neighborhood that’s not very well known, and the city is building a new ferry terminal there. So it’s a neighborhood that doesn’t have great public transportation right now, but the new ferry system will allow people in that neighborhood to get to Wall Street in under 10 minutes, mid-town in about 15 minutes, so it’s a real game-changer for the neighborhood.

At the building level it’s every attribute that any real estate investor would look at, and at the end of the day it’s gonna come down to supply and demand, it’s gonna come down to buying units and properties at below replacement cost and figuring out where the added value is going to be.

Joe Fairless: Are you all buying buildings, or individual units?

Jessie Stein: We’re buying both. In New York there’s a limited supply of single-family homes. There are townhomes, but those are typically five million dollar plus…. But the single-family home market in New York City is condominiums, so we’re focused on buying individual condominium units; we’ll also look at townhomes, we’ll look at small apartment buildings, new development… So really, anything that qualifies as residential is something that we’re interested in.

Then from an operational standpoint, our management team, our background is not just in general real estate, but also in operating individual apartments and apartment buildings in more creative type ways – for example co-living and short-term rentals… So we have some creative strategies in order to increase revenues in some cases, or operate units in non-traditional means.

Joe Fairless: And that was my follow-up question – so ways to add value, ways that you all add value… You mentioned co-living and short-term rentals; what are some other ways.

Janine Yorio: Number one, we look to create value when we buy, so we’re looking to find unique buying opportunities, either because they’re off-market, they have some complexity to them that an individual investor might not be able to underwrite or to endure; we are also going to tap our personal networks, which are quite deep, to find transactions that are not being widely marketed.

Then on the operations side we are looking to be very strategic about our use of leverage, which will impact our returns, and also to partner with strategic marketing agencies, for example Compass, who’s doing our marketing and leasing, to help us better rent out the units and to keep them occupied, which is a big driver of return as well.

Joe Fairless: Okay. Specifically within maybe the complex transaction – can you give us a complex transaction that you all did that others said “No, thank you” to?

Janine Yorio: First of all, we should clarify – we haven’t actually made investments yet; we are at the point where we are exploring investment opportunities and actively negotiating.

For example, there is an apartment unit in a relatively new condominium development that had historically been operated as a swing space in the building, and the building manager was using it as a fitness center. So there is a lease in place that terminates in the relatively near term, but that’s the kind of thing that an end user wouldn’t be able to deal with, because they might need a place to live. So since we are opportunistic and we can buy things that have some complexity to them, we’re able to price that and to handle the fact that it may not become available for 6-12 months.

Joe Fairless: Just to educate myself and the Best Ever listeners on the timeline for creating a REIT, and then when you buy the first property – can you just tell us all the things high-level that you’ve been through, and just like the high-level milestones that got you to this point?

Jessie Stein: Yes, sure. So we spent most of the last year going through a very extensive SEC qualification process. In order to offer REIT shares to the general public and to use general marketing and solicitation efforts, you do need to register with the SEC. We also were approved by FINRA for this same offering… So we’re just undergoing right now our capital raise, and this first round of capital is up to 50 million dollars.

The way that the offering works is that it’s an ongoing rolling offering. So as we raise capital, we can use that to begin to acquire assets. So we don’t have to raise 50 million and then go out to buy apartments; we can begin to acquire portfolio as we raise capital.

Joe Fairless: If you’re backed by venture capitalists, aren’t they the ones bringing the capital? Or are they backing just the infrastructure and your salaries?

Janine Yorio: They are backing the technology company and the operating company, but they’re not investors in the REIT.

Joe Fairless: Got it, got it. So they helped you get to this point for a piece of the action, and now the company needs to then go bring in investors for this particular business model?

Janine Yorio: Correct.

Jessie Stein: Right. Compound is the management company of each of the REITs, and the Manhattan REIT is really our first of what we believe are going to be many offerings, all based on the [unintelligible [00:11:15].06] investment strategy that’s specific to a major market in an asset class. So the Manhattan product might be followed by a Miami product, and a San Francisco product… The various options are endless at that point, but right now we’re focused on getting the Manhattan product off the ground.

Joe Fairless: Okay, cool. Congrats on getting it to this point, that’s incredible!

Jessie Stein: Thank you.

Joe Fairless: I’d love to touch on a little bit more the ways that you’ll be adding value, because it’s almost an oxymoron – New York City real estate value-add investors… [laughs] So you mentioned co-living, short-term rentals, off-market deals, deals that have complexity to them, and Janine mentioned that example. Can you give maybe a couple additional specific examples of how you add value?

Jessie Stein: I think we’re not really positioning the REIT or us as a management team as value-add.

Joe Fairless: Okay. I thought I heard that earlier, my bad.

Jessie Stein: No, we will try and add value whenever appropriate and for each unit individually, but what we’re really providing here is exposure to Manhattan real estate, which has been basically inaccessible for the majority of investors ever.

If you think about the returns, you’re starting with the base returns of the market – the beta – and then our management team will add some alpha component to that, whether it’s through a specific value-add strategy, or just through our ability to source investments… Whereas Janine noted earlier, some of the added value might be on the acquisition side, where we can acquire an asset by 5%, 10%, 15% below what we think the market value is, although there may need not be a specific strategy during our hold period to add value, we’ve in effect added value by buying well.

It’s really the exposure to Manhattan… The same way when you’re looking to buy an ETF – you’re making that investment to gain exposure to a specific investment strategy. That’s really what we’re selling. An added bonus for that is that our management team is capable of making intelligent investments and operating each of these properties the way that it needs to be managed, but it’s that beta level exposure that is the big play here.

Joe Fairless: At what amount of that 50 million will then be enough for you to then go buy your first deal?

Jessie Stein: We can start buying properties at a million dollars.

Joe Fairless: And with the approach that you all are taking, is it a certain period of time that you think each project will last? Or they just get grouped into the fund and the investor dollars make a certain amount?

Jessie Stein: Right. It’s structured as a perpetual vehicle, so unlike a private equity fund where we’re raising capital now and we’re gonna hold for five or seven years and then sell, we’re gonna give investors the ability to decide when they exit. Once we raise the 50 million dollars of this initial tranche, our intent is to list on the New York Stock Exchange, on NASDAQ, so that your investment in this REIT, the New York residential, will be liquid. And you can determine when you wanna make that exit. That may be on your personal circumstances, whether you need money or not, or if you think the market is overheated.

So we’re building a portfolio for the long-term. We’re buy and hold investors, we’re gonna continue to grow the portfolio, and really give the liquidity and the ability to sell (that decision-making) to the individual investor.

Joe Fairless: And Janine, why the decision to do a REIT versus just have one-off private offerings?

Jessie Stein: I think even though we have the specific investment strategy of Manhattan, and of course, that’s not really geographically diversified, it is important to diversify from the asset level, because you never know what’s gonna happen on a single building level, and there’s a lot of economies of scale that we can create and build in a portfolio of Manhattan residential properties, both on the investment side, on the operational side… And then of course, there are the tax benefits of operating as a REIT.

We’re small right now and we’re just beginning to raise capital, but we envision each of these REITs that we bring to market being billion dollar REITs that trade on the New York Stock Exchange one day.

Joe Fairless: The scalability certainly sounds like it’s there, and then some, with the REIT versus one-off private offerings, right?

Jessie Stein: Yeah, exactly.

Joe Fairless: As of today, what’s been your biggest challenge?

Jessie Stein: One of the challenges that we have in marketing this is people who are unfamiliar with the Manhattan market feel like it’s in this boom stage, and that it’s expensive and that we’re buying at the top. The reality is that the market has been very weak for the past three years, whereas prices have come down more so in this corrective cycle than even during the financial crisis.

So we didn’t necessarily try and time the market here when creating this product, but we got very lucky, because the market is weak; it’s a very strong buyer’s market, there’s a lot of opportunity out there for us… But there’s still this perception, because Manhattan is relatively expensive, that it’s this boom market that’s always flying to the sky and you’re always buying at the top of the cycle. It’s really just in educating the investors who aren’t that familiar with the Manhattan market what the current environment is.

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

Janine Yorio: Never sell. [laughter] No, buy and hold Manhattan for the long-term. That’s my personal experience… The apartment I bought when I was 24 – I spent $229,000, and I sold it a year later for $386,000. I just saw it hit the market again this year for 1.1 million dollars, so I wish I had never sold it.

I know that I happened to marry into a family that is from the New York City area, and all of the real estate investments they’ve made almost accidentally have gone on to become very, very valuable and huge stores of wealth, without actually doing anything to them. So that’s one piece of advice – if you can get a piece of Manhattan, hold it and don’t sell it.

Joe Fairless: Within your business model, do you sell properties? Or do you just hold them in perpetuity?

Jessie Stein: We don’t have to hold them, but building a large portfolio is right now the strategy. We’re certainly allowed to sell individual properties, but we don’t have a defined hold period for any investments that we make.

Joe Fairless: Would you 1031 if you do sell?

Jessie Stein: We can, sure.

Joe Fairless: Would that be the approach, that way you defer the taxes? Or is there a different approach, since it’s a REIT?

Jessie Stein: No, in a lot of cases we may decide to do a 1031, and one of the benefits of being a REIT is that we can acquire properties through an UPREIT contribution, which is an alternative to a 1031. There’s a lot of people in Manhattan that own investment properties, whether it’s an individual condominium unit or an apartment building, and what we do is we can offer them an alternative to a 1031 where they can contribute their asset in exchange for operating partnership units, which are basically shares, realize the same tax benefits as a 1031, diversify their holdings, and convert their interest into a property, into a liquid security.

Operating as a REIT we’re very tax-focused, so on an asset-by-asset level we have a lot of flexibility and we’ll do what’s best in order to either defer or eliminate taxes.

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

Jessie Stein: Let’s do it!

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

Break: [00:19:10].06] to [00:19:57].17]

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

Janine Yorio: Best ever book I’ve read?

Joe Fairless: Yup.

Jessie Stein: The Fountainhead.

Janine Yorio: Oh… If we’re going cheesy, Gone With the Wind.

Joe Fairless: [laughs] Best ever deal you’ve done?

Janine Yorio: I was involved in buying the Hard Rock Hotel and Casino in Las Vegas, and I lined up the financing for that, and that was pretty damn cool.

Joe Fairless: That’s a lot of fun.

Jessie Stein: I did a bulk condo deal in Miami just before the last cycle, which turned out to be a great deal.

Joe Fairless: Yeah, Hard Rock still wins on that. She beat you. [laughs] What’s a mistake you have made on a transaction?

Janine Yorio: Legal fees. I am so cautious about using lawyers, and waiting to bring them in until you really need them. Getting the business people to negotiate the deal as much as possible before you hand it off to lawyers, especially in New York City, where lawyers charge a small fortune. You can eat up a lot of your return on the deal before you even close with legal fees if you’re not really careful. That’s something I see young people make when they first start out. It’s a mistake you make one time, and you never make it again.

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

Janine Yorio: I like to mentor young people in my industry. I think there’s nothing more gratifying than seeing people’s professional careers grow and developing a really rich relationship with the people who have come under your wings.

Joe Fairless: And how can the Best Ever listeners get in touch or learn more about your company?

Janine Yorio: They should visit our website at CompoundNY.com, or follow us on Twitter at @GetCompound.

Joe Fairless: Awesome. Well, I just loved interviewing you two. You’re playing at a very high level, a level that a lot of people aspire to, and I’m grateful for our conversation… Learning how the process (or some of the process) for how to create a REIT, and some of the things you’ve been through – at least the timeframe; we didn’t really go through the process, but at least the timeframe… And then how you’re structuring your business model, how you are focusing on Manhattan real estate. Yes, there will be unique ways that you acquire, but really it’s the access to the real estate that your REIT is focused on.

Thank you for being on the show. I hope you two have a Best Ever day, and we’ll talk to you soon.

Janine Yorio: Thanks, Joe.

Jessie Stein: Thank you, Joe.

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JF1337: Talking Growth & Branding With Inman’s CPO & CMO – Matthew Shadbolt

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As the Chief Product & Marketing Officer at the popular real estate publication, Inman, Matthew knows a thing or two about how to brand properly. From drawing people in to keeping them engaged, we’ll hear amazing marketing tips from one of the best in the biz. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Matthew Shadbolt Real Estate Background:

  • Inman’s Chief Product & Marketing Officer
  • Oversees all growth, user experience, product, off-platform, brand development and marketing initiatives
  • long-time supporter of Inman’s journalism and events, Matthew works closely with the editorial team to shape and enhance the reader experience
  • Based in NYC, NY
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TRANSCRIPTION

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

Matthew Shadbolt: Hi, Joe. Great to be here with you.

Joe Fairless: I’m glad that you are excited to be here, and looking forward to diving in. Matthew is Inman’s chief product and marketing officer. He oversees all growth, user experience, product, off-platform, brand development and marketing initiatives for the company. He is a long-time supporter of Inman’s journalism and events, and he works closely with the editorial team to shape and enhance the reader experience.

Also, they just wrapped up a Capital Connect event, that we’re gonna be talking a little bit about. With that being said, Matt, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Matthew Shadbolt: Yeah, sure. I’ve been with Inman for about six months; I’ve been a long-time friend of the brand, but moved across into a more formalized role with Inman as the chief product and marketing officer about six months ago. Before that, I was at the New York Times around the real estate section. I was there for almost four years, which was a ton of fun. obviously, there’s a tremendous amount of change going on inside of that news organization and it was a fantastic opportunity to be a part of that, especially through the election cycle, as I’m sure you can imagine… Just sort of see that engine work from the inside was an incredible experience.

Then before that, I was almost ten years in the brokerage world, where I headed up digital for the Corcoran Group here in Manhattan.

Joe Fairless: Okay. Let’s talk about your experience at New York Times, and we’ll spend most of our time talking about your experience at Inman. With New York Times you wrote the real estate section for four years… How did you decide what to write about?

Matthew Shadbolt: I wasn’t on the editorial side. I served as like the general manager of the section; so I’ve worked really closely with the journalists, but I’m not a journalist. So I worked on the business side, on the growth side… So a lot of what we saw there was really this tremendous transformation of the newsroom, from not thinking so much about the production of a printed newspaper, to more about the use of data, the smart use of audience insights, and the general sort of muscle-building that the newsroom needed to go through in order to really sort of significantly modernize. And I saw that accelerate at a tremendous pace while I was there.

So I was a huge part of how the real estate desk within the newsroom started to really think about what was resonating with users, outside of just anecdotal stuff that they would hear on a Monday morning after people had read the paper on a Sunday. So a lot of use of data, a lot of modernizing of sort of process and practice, and then building tools and building services around that journalism to help people really understand and sort of bring to life the journalism’s stories.

Then ultimately rolling all of that up into the business and making sure that we can monetize that from the sales perspective, either through sponsorships, or native content, or any kind of other sort of articulation of how a brokerage may want to reach this particular audience.

Joe Fairless: What tended to resonate with the users?

Matthew Shadbolt: That’s a really good question.

Joe Fairless: I’m glad I asked.

Matthew Shadbolt: Yeah, it usually goes two ways. There’s like the recreational stuff – it’s sort of what we actually refer to as floor plan porn… So super high-end, really bonkers listings, amazing homes, celebrity homes… Things like that. Things that you would imagine on like an HDTV or something like the [unintelligible  [00:04:32].12] something like that. So like the really trophy, voyeuristic kind of homes. That stuff always did really well; it was great at getting scale of audience, but it wasn’t very good at retaining audience.

So the retention of the audience is the much more interesting thing from the business perspective, just getting people to come back over and over again, because they want to sort of consume the content, and the content is helpful for them.

If you heard of like service journalism – it became really powerful for us as a team, inside of the New York Times. So the more helpful we could be, the more we could dispel myths, provide guidance and insight, really sort of hold the user’s hand through “Here’s the nightmare of renting in Manhattan and Brooklyn, and here’s how you can navigate it [unintelligible [00:05:16].17]

The service journalism was really where we landed in terms of the stuff that perpetually brought people back to the website over and over again, and there’s  a very large set of initiatives at the New York Times around service… So a tremendously successful cooking product, where you can learn to cook or you can just search recipes, that kind of thing. A similar product for movie and TV recommendations… But informally, inside the New York Times, it’s called “The Guide to Adulting.” It was like, how to get a mortgage, how to think about buying your first house, how to think about wealth management – all of these kinds of things that grown-ups do, but nobody really teaches you at school.

So it became a lot of this sort of service-oriented journalism, and it became very popular, an incredibly powerful tactic for retaining subscribers and growing subscribers. So it was really powerful on the acquisition and retention front.

Joe Fairless: So you’ve got some candy that you offer them to come into the Times, and that’s the recreational stuff, and then you give them some vegetables once they’re there, and you feed their mind, not only their instant gratification sensors… How do you determine what ratio you should do candy to vegetables?

Matthew Shadbolt: That’s a good question, I should clarify this. Ultimately, people are at the New York Times to read the news, right? People are not specifically coming to seek out the recipes, or do the crossword, or whatever. The primary function of the New York Times is to report the news… But there’s other things that users do in their lives, that the New York Times provides – and historically provided – a lot of advice on. So it’s not all just sort of candy and vegetables. All this stuff that I’m talking about sort of wraps around this core experience of explaining [unintelligible [00:07:00].04]

But I think over time one of the things you realize is it’s not really like candy, it’s more like fast food. It sort of tastes really good, but then you’re hungry again 30 minutes later… This sort of quick hit of audience. You can get very seduces by that, I think, and a lot of news organizations really sort of grapple with this idea of immediate, short-term gratification around audience lift, versus longer-term retention and subscriber-driven behavior. That’s the more interesting thing for growth. So just like my mother told me, you’ve gotta eat a lot more vegetables than candy.

Joe Fairless: Yup, it makes sense. Now that you’ve taken your experience, not only at New York Times, but before at a brokerage and whatever else you were doing before that, and you’re at Inman as the chief product and marketing officer… What learnings are you applying to Inman that you’ve come across before?

Matthew Shadbolt: It’s a good, timely question for me as well. I think one of the things that I think Inman is uniquely positioned to do is to really act as a very helpful, essential service in realtors and brokerages’ lives. We’re a 25-year-old organization, and thousands of people come to our conferences every year, whether that’s in San Francisco or New York, and hundreds of thousands of people read our journalism every month, so I think there’s a tremendous sort of moment right now where technology is sort of colliding in terms of like the influx of capital into the real estate category, whether that’s through startups, or investment, or even different ways of handling the transaction… So we hear a lot about things like people buying homes with Bitcoin, or this sort of ongoing cryptocurrency conversation as it relates to real estate and investing. That’s like a fascinating thing for us.

But on the other side, you have this sort of legacy technology system that’s sort of struggling to consolidate and struggling to remain relevant. So all of this is sort of colliding with increased disintermediation of the actual agent themselves. The value of the realtor is still very much in question, especially with younger users, who are able to do a lot of what a realtor exclusively used to do. Younger users are more than happy to go do all this work on their own; they don’t really want to, but they do. And there’s this sort of amazing collision between the new way of thinking about transactions and then sort of the existing way of thinking about transactions, and I think that Inman as a news organization that also provides service journalism and guides and insights and events and all those kinds of things – we’re uniquely positioned to pool those conversations together and sort of be able to help chart a part for the particular individual that has questions.

This stuff comes with a tremendous amount of questions, so a lot of what we’re doing at Inman, especially with our conferences, for example – we’re actually doing less of this sort of focused on people talking from the stage, although that’s still obviously something that we do, but we’re inviting a lot of people to come up from the audience and do live problem-solving, as well. [unintelligible [00:10:08].09] inside of the New York event in January, and actually having experts on stage, and having people from the audience just come up and be able to ask them stuff and solicit a more organic conversation about “What do I do with social media?” or “What do I do with first-time buyers?” – all those kinds of things. That is where it can be incredibly valuable.

So a lot of what I’m talking about is really informed by the service journalism stuff that I worked on at the New York Times, but applying it to a very specific moment within the real estate industry is for me a very exciting thing to work on.

Joe Fairless: It makes a lot of sense… I could see easily how that would fit into a conference structure. How do you fit into the more organic conversation approach with writing stories and posting it online?

Matthew Shadbolt: Yeah, that’s a good one as well, because there’s like the daily beat, with covering the news, and that’s our core product (“This is what’s going on in the world…”), but then there’s also other things that we do. There’s other aspects in terms of like service journalism; it might be just “Here’s the guide to working with first-time buyers” or “Here’s the specific set of recommendations surfaced from our community about whether you should start forming a team or not”, or “Here’s the latest thinking around commercial real estate investing”, that kind of stuff.

So there’s the daily beat, but then there’s other sort of pillars of [unintelligible [00:11:32].08] we do, whether it’s service journalism, we do a tremendous amount of opinion work as well, or sort of just more experimental things like things with video, or things with visual forms of storytelling… There’s a very healthy mix between all of these things. The core daily beat is something that the editorial team is very focused on, and then the service journalism is something that we leverage specifically on the subscriber side, as well. We think that there’s a really strong correlation between not just understanding what’s going on in the world, but also having a strong sense of actionable, helpful advice available to you as a subscriber as well.

Joe Fairless: What are those categories? You said daily beat, experimental things, opinion…

Matthew Shadbolt: And service journalism.

Joe Fairless: And service journalism. Those are the main categories?

Matthew Shadbolt: Yeah, I would say so. There’s other things that we do, but those are the four broad most important ones, I would say.

Joe Fairless: And are they all 25%, or what’s the percent breakdown, would you say, that is maybe not where you’re at now, but what’s your ideal breakdown?

Matthew Shadbolt: It’s a good question, and obviously, it’s a really hard one, too. It varies day by day, depending on what’s going on in the world… But I’m sort of hesitant to give percentages, because it depends on the specific realtor. A specific realtor or a specific brokerage may be more interested in service journalism, and they may have a greater use for it than an understanding of sort of an opinion piece; that might be less important to them, less relevant to them.

So the degrees of helpfulness – we try to sort of take a broad approach and be as helpful as possible to as many people as possible, but it really does depend on who you are in terms of like your use of the product and where you fall in terms of like percentage breakdown of what you engage with.

Joe Fairless: Fair enough, fair enough. If you’re okay with this, I’d love to do kind of a pretend scenario… And the pretend scenario is you no longer work at Inman; you left on great terms, all good, so no burning bridges there, but instead you’ve moved to partner – for whatever reason – with a company that does not have the reach that Inman has, it doesn’t have anywhere close to the reach that New York Times has… It’s just a small brokerage, and for whatever reason, you’ve decided to join this small brokerage, and they said “Matthew, we’d like for you to be chief product and marketing officer and help us with our approach, and maximizing the exposure while maximizing the revenue along the way. How do we get started?” What do you do?

Matthew Shadbolt: Wow, that’s a very big question. When we think about that kind of problem, it’s like “Where is the unique value proposition? What is it specific to that particular brokerage that you can sort of really lean into?” I think when I was in the brokerage world, a lot of where we landed — there’s a lot of opportunity to be unique as a brokerage. There’s lots of customer surveys that sort of reinforce this idea that customers don’t really understand the differences between brokerages, whether they be big or small; there’s like a red one, a blue one, a yellow one… Things like that. And I think there’s enough surveys to really give weight to that kind of argument, and I think it really starts with the agent.

I’ve always been a firm believer that the core of any sort of brokerage brand really lives and breathes – or dies – with the agents. If the agents don’t buy into it, you don’t win, and I think a good example of agents buying into a brand at the moment is something like Compass. Those agents really believe it, and they really live it, especially online. So I think that that’s a good case study, for sure.

But I think finding the unique proposition is like a really interesting thing. When I was in the brokerage world, for example, this sort of unique idea that we worked with when I was at Corcoran was “What is around the four walls of the apartment building is just as much an important part of that transaction as what’s inside the four walls.” It’s a very, very simple idea. Going beyond the four walls of the apartment is the thing, right? And when you think about Zillow, Trulia, or even just like a regular brokerage website, there’s isn’t a whole lot that really answers the question “What does it feel like to live here?” And if you can answer that question, then you really have something powerful.

I still think that this is a massive space of opportunity, for brokerages in particular, and I think that there’s a wealth of stuff that you can do with that one idea… The idea of really helping people to understand “What does it really feel like to walk my dog on a Saturday morning and go and get my coffee? What’s my commute gonna feel like? How far away is the grocery store and what kind of things do they have there?” These are very simple, very regular questions that inform the home purchase, outside of the zeroes and ones, the prices and square footage, the room count, things like that.

But I think that there’s this sort of database-driven stuff that is informing search, but there’s a very high emotional quotient that goes with that stuff as well that is never really tapped into, and it’s something that realtors know very well. So this when I say — when I start with the realtors, digitizing what’s in their heads, in terms of like “Which bar is the best one to go to on a Friday night? How do I order off the menu at the local Italian place? How do I cut the line to get into that particular store?” – all those kinds of things, realtors know this, but none of it really translates to something like a brokerage website. So the idea of really investing in that kind of approach is really exciting for me, and the nice thing about it is the smaller the brokerage, the easier it is to do, because you have more available materials to work with. That’s really hard inside  a big brokerage. If you’re at an international brokerage, like a [unintelligible [00:17:26].06] or Sotheby’s or something like that – that kind of project is really challenging. But if you’re in a small brokerage, that would be something that would be of interest to me, I think.

Joe Fairless: How do you identify what that value proposition should be?

Matthew Shadbolt: For me, I always start by talking to customers – understanding where the pain points are, understanding really the questions that they have in their heads and trying to sort of synthesize that kind of stuff into (I’m speaking as like a product person here) a series of “How might we…” statements. So like “How might we take the pain out of a realtor not being able to call somebody back in time?” That’s like a good problem to solve. “How might we help people understand what it feels like to live there and what their weekends are gonna be like? How might we help people understand what travel and commuting is like if they live in this particular place?”

These kinds of things all come out of just simply talking to users, so the more transparency and visibility you have into being able to talk to users — this is one of the things that got me really excited about joining the Inman team, is because we have hundreds of opportunities throughout the year, but specifically the events in New York and San Francisco where we have 4,000-5,000 users all in the same place, and you can just soak it up for like a week, and you really hear “Well, I had problems with your website” or “I couldn’t read this”, or “Wouldn’t it be great if you guys did this?”

There’s tremendous opportunity to learn from the people that interact with your staff every day, and as a product person that runs a team here at Inman, to poke holes in all the assumptions of what we think is cool and to actually have users tell us what they need, not just what we think is cool – number one, it’s very humbling, but it also is incredibly useful to hear what’s not good. We kind of wanna hear all the stuff that’s broken. That’s the best path to actually just making a great product, I think.

Joe Fairless: For Inman, the focus is acting as a helpful service for realtors and brokers… What is your best advice ever for real estate agents and brokers?

Matthew Shadbolt: I get asked this one surprisingly frequently, and what I always say is just be really good at saying no to stuff. Your time is the most valuable commodity, and I know a lot of people sort of say that, but it’s really true. The customers is sort of paying for your time and attention. That’s really sort of what the commission consists of.

They’re paying for that service, which really means time and attention, and I think having a very acute understanding of the value of your time and how you translate that to the customer is really key. That does mean saying no to a lot of things; it does mean saying “You know what, I’m not gonna spend quite as much time on Facebook and Twitter as I used to, because I really need to just get back to that customer…”, things like that.

So you have to sort of give up a tremendous amount as a realtor. It’s a very challenging profession, I really believe that, but time is really the most valuable asset – not just for you as a realtor, but also for the customer as well. Their time is very valuable, as well. So just having a very clear understanding and awareness and sensitivity to that I think is key.

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

Matthew Shadbolt: Okay, what is this – like, saying the first thing that comes into my head here?

Joe Fairless: Sure thing. You betcha! [laughter] Does that work for you?

Matthew Shadbolt: I may filter at times… [laughter] But I’ll do my best.

Joe Fairless: We’re about to get a good glimpse inside your mind, which sounds like it’s gonna be very entertaining. First though, a quick word from our Best Ever partners.

Break: [00:21:09].18] to [00:21:54].02]

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

Matthew Shadbolt: Best ever book I read… Recently, I really enjoyed Ready Player One.

Joe Fairless: Ready Player One?

Matthew Shadbolt: Yes, it’s by a guy called Ernest Cline. It’s gonna be made into a Steven Spielberg movie later this year.

Joe Fairless: Oh, sweet. Okay. What’s a mistake you’ve made in business?

Matthew Shadbolt: Not realizing that I have two customers inside of a brokerage. There’s a real customer – the actual person selling their house – and then there’s the agent, and not realizing that everything that we built had to reconcile for both people.

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

Matthew Shadbolt: I really like to pay it forward at either the grocery store, or at the drive-through.

Joe Fairless: How do you do that?

Matthew Shadbolt: I pay for the person behind me.

Joe Fairless: Best ever way the Best Ever listeners can get in touch with you or learn more about what you’ve got going on?

Matthew Shadbolt: I’m an easy google. I’m @MatthewShadbolt on Twitter, or facebook.com/matthewshadbolt, or at matthew@inman.com.

Joe Fairless: Outstanding. Matthew, this was a much larger conversation than just brokerages and what you’re doing at Inman. You provided insight that can help any entrepreneur, real estate or otherwise, create a brand – or at least create the structure of a brand – with the value proposition… Because regardless of what industry we’re in, we need a unique value proposition, and you talked about an example of that – what is around the four walls is just as important as what’s outside of the four walls of the apartment, and tapping into the emotional quotient of the customer, and talking about what does it feel like to walk my dog and get coffee around this neighborhood… And really honing in on that as a focus. You can then use that for the content that you create, which you talked about with both recreational stuff and service journalism at the New York Times, as well as the four categories that you have at Inman: opinion, service journalism, experiential things like video and visual forms of storytelling, and the daily beat.

Thank you so much for talking to us about your approach, sharing your expertise, really grateful for that. I hope you have a best ever day, and we’ll talk to you soon.

Matthew Shadbolt: Thanks so much for having me, Joe. It was a pleasure.

The Best Show Ever flyer with Robert Dankner

JF1311: Being Able To Overcome 2008 & Thrive In A Market Reset with Robert Dankner

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In 2008, Robert had the unwavering belief that the market crash was temporary and that money could still be made. Had he been wrong, he would have been up the creek without a paddle. Luckily he was correct and the market was merely going through a reset. Robert and his partner were able to succeed in real estate at a time most people were losing all their real estate assets. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Robert Dankner Real Estate Background:

  • President of Prime Manhattan Residential, a real estate brokerage firm focusing on Manhattan’s luxury residential market.
  • More than 25 years of experience as a real estate investor in New York City
  • His team executed nearly $200 million in transactions on both the buy and sell side in 2017
  • Prime offers inventory of off-market opportunities, accounting for over $100 million in 2018 closings already
  • Based in New York City, New York
  • Say hi to him at https://manhattanresidentialnyc.com/
  • Best Ever Book: The Art of War

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TRANSCRIPTION

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

With us today, Robert Dankner. How are you doing, Robert?

Robert Dankner: I’m well, thank you.

Joe Fairless:  Well, nice to have you on the show, and I’m glad you’re well. A little bit about Robert – he’s the president of Prime Manhattan Residential, which is a real estate brokerage firm focusing on Manhattan’s luxury residential market. He’s got more than 25 years of experience as a real estate investor in New York City, and his team has executed nearly $200 million worth of transactions on both the buy and sell side in 2017. Based in New York City, New York.  With that being said, Robert, you want to give the Best Ever listeners a little bit more about your background and your current focus?

Robert Dankner: Sure. Just very quickly, I’m an ex-Wall Street trader. I spent many years trading interest rates, currencies and metals, about 10 years in Wall Street, and when I started making some money, I started investing in real estate. So fast-forward a bit, my business partner who’s currently one of my oldest friends, we were investing together for many years, and he decided to start a brokerage firm when I wasn’t active in the brokerage business, but I financed it. We continued to invest together, and I have sort of leveraged my Wall Street experience being a student of the markets and a trend follower, into understanding how to unlock value, create value, and buy and sell better than most.  And a result of that, we’ve built arguably one of the most powerful boutique brokerages in Manhattan in terms of what we do here. My small group is probably in the top 5 or 7 largest producing brokerage groups in Manhattan luxury market and residential, and we also have a concentration in the commercial market as well.

Joe Fairless:  Great stuff, lots of follow-up questions. Let’s start with being “a student of the market and a trend follower”, you’re able to unlock and create value.  Can you tell us how you do that?

Robert Dankner: Well, as an example, the trend is your friend.  A good example of this is we actually started Prime Manhattan Residential in 2007.  Obviously, in 2008 is when the markets collapsed – the real estate market, the equity market, etc. As a rule — you know, I grew up on Long Island, I was surrounded by a lot of very wealthy people, most of whom were in real estate, and frankly most of them not very smart, but they were all very, very patient. And one of the things that I understood in 2008, for example, was that what was happening was a once-a-generational event; it happens once every 15 or 20 years.  And if [inaudible [00:04:57] prevailed, there would be an opportunity for — I guess the best way to say it is a massive reset.  And if I was wrong, then I would have been on [inaudible [00:05:08] with everybody else.

But overtime, Manhattan real estate in particular, has been tried and tested and is true, and the trend is your friend, and this was a reset.  So as a way to compel both the users and investors to not disregard what was happening in the environment, but not to be afraid of it, it was an opportunity to grab and create more value than you’ll have an opportunity to do in most 10-15 year periods because of this massive reset. So that’s a good example of understanding the trend is more powerful than momentary events, and if you can recognize trends and understand that they’re sustained and sustainable, then you can operate and think carefully around short-term events that may cloud one’s thinking.

Joe Fairless:  Do you see any short-term events coming up in the near future based on your analysis?

Robert Dankner: Well, in any market, any asset class, whether it’s real estate or equity markets, things just can’t go straight up or straight down forever. I wouldn’t profess to be able to time markets – nobody can – but the equity markets are at a point where I’m sort of hoping that they’ll correct soon, because they’ve been moving in a parabolic state. But I think what’s going to happen is real estate, particularly Manhattan real estate, is going to be the beneficiary of what I think would be ultimately a slight reset of the markets. The reason for that is — again, it’s a different asset class, but it’s in the ground, you can touch it, you can feel it, you can use it, you can rent it. And again, with patience, a combination of whether you’re a user or you’re an investor, patience should pay, and I think values will continue to build on themselves and create more long-term value, and I think we’re at a particularly interesting point in time.

Joe Fairless:  So the thought process of “things can’t continue to go up and things can’t continue to go down, there’s ultimately going to be correction, and during that correction, just keep a long-term view” – anything specific within that that you look for…? I know you said you don’t time markets, but any fundamentals that when you start seeing some of those fundamentals change, it starts raising red flags in your mind?

Robert Dankner: Well, when the fundamentals change, you have to think a little bit more carefully. What I mean specifically is when things are going well, it’s very easy to make money, and when things are going as well as they are now, even in the real estate market, although prices have stabilized a little bit in the luxury market, north of 6-8 million dollars plus… But an area or category that has been moving well but is sort of not paid as much attention to because they buyer base is smaller is, for example, the Greenwich Village townhouse market.

The Greenwich Village townhouse market has been moving at a pace that’s probably 50% faster than the condo or co-op markets, specifically because there are less of them, you can’t make more of them, unlike a high-rise, and although it’s a different type of living, meaning it’s not living in a condo or co-op with a doorman, so a different type of vertical living, the money goes further, buys more in terms of square footage, and there’s a natural – for lack of a better term – arbitrage that will bring markets close to one another.

For example, if one wanted to buy a 5,000-square foot condominium in Greenwich Village today, if you can find one, you’re going to pay in the neighborhood of $4,000 or $4,500/square foot. In the townhouse market in Greenwich Village, you can buy the same amount of space for only $3,200/square foot, for example. It doesn’t have a doorman, it doesn’t have the services, but when you start to understand the huge disparities in terms of price per square foot in environments like we’re in now if you’re an investor, or even if you’re a user looking to build long-term value, you might want to pay more attention to sort of anomalies, things like these that will cushion you and create the opportunity for things to fall slower and rise faster when markets recover or start to move parabolically again.

Joe Fairless:  Interesting. Yeah, so taking a look at the rent per square foot on different asset types and seeing where the value could be, and then capitalizing on that value.

Robert Dankner: Yeah, it’s really not rent per square foot, but really selling price per square foot.

Joe Fairless:  Selling price — yeah, sorry.  My investment lingo isn’t there — selling price per square foot, okay.  Cool, good stuff. You mentioned that your business partner is one of your oldest friends, and you initially financed the real estate brokerage. Why did you do that, and how does that work? What type of structure did you set up?

Robert Dankner: Well, we’ve been friends. We always invested together, and he was actually in the apparel business, and he wanted to — again, we were real estate investors, and he wanted to get into the brokerage world, so we both put money together to help create a company that I didn’t really have particular designs on becoming active in it or not… But he’s a smart guy, smart as I am or smarter than I am, so I was sort of investing in him as much as I was in just creating an enterprise. And 10 years later, I started working everyday with him, but it was nothing more than we just got together at the right time and the right place, and both put in money to start an enterprise that he ran and I was going to be silent, but I’m no longer silent.

Joe Fairless:  When you left Wall Street as a trader, you said you initially started investing in real estate. What did you buy?

Robert Dankner: I’m not a developer, I’m not a builder, although I purchased single-family homes and apartments and fixed them up and sold them, that’s not what I do. I just started buying good quality cap rate place, meaning great locations or emerging locations, and a key rule for me is I don’t need to be first; I need to be right. So I’m looking at emerging neighborhoods where I saw smart money, developer money going in and building condominiums and hospitality etc., that was early stages, whether it was at Lower East Side or the East Village, for example, before it was cheap.

I started buying individual units and condos, those that existed, very small buildings, and just grew the rent roll, which improved the cap rate, and either I’m still holding them or sold them and redeployed my money as those markets started to mature, and I could grab higher capital appreciation base by redeploying that money back into areas that I felt were still emerging, as opposed to being more mature.

Joe Fairless:  You don’t need to be first, you just need to be right.  So you mentioned you look for developers who are building other condos and hospitalities. What are some other things you look for in order to be right about the market — well, the sub-market or the neighborhood?

Robert Dankner: In New York, for example, there are some extraordinary developers, whether it’s The Related Group, or HFZ, or Property Markets Group, or people that are  just very savvy, have access to a lot of money, have strong development track records… And although it’s not telltale, if you see more than one of them starting to infiltrate an area, that would raise my eyebrows, because right or wrong or otherwise, my first inclination is that I think they are smarter than I am, and if they’re moving into these areas, even if they’re not spot on right, at least they’re going to provide support from the standpoint of new residential options in the area, new hospitality options in the area, which brings new commerce. And once there is sort of a foothold there, meaning it’s starting to be developed, I think one can mitigate the risk by following in their footsteps so to speak.

Now, their perspective, they’re developers, so they’re in, they manufacture, build, sell it, and then they move on… But because the development cycle is so long and it’s not like picking a stock – they’re developing areas – I think logic should generally prevail that if there’s smart enough money or enough smart enough money moving into a new area, let them be first, let them sort of break the ice. It doesn’t mean it’s a telltale and an absolute that the area is going to mature into what they think it’s going to be or what I think it might become, but like I said, I think it mitigates the risk a lot, and that’s also a way of following trends. Let them sort of create trends, and then you hop on to it, ride it as long as you can, and as long as the trend is working in your favor, stay with it.

Joe Fairless:  Our audience are primarily real estate investors. As real estate investors, what should we know about investing in Manhattan, because you’ve successfully done that and are doing it?

Robert Dankner: Well, Manhattan is a market unlike any others, in that over the past 10 years the average annual appreciation rate, for condominiums for example, has been 12-13%, which is very high, and that’s really not sustainable. But the thing that’s interesting about Manhattan is if you want to be successful here, you pro-form yourself at a very low level; if you cut that in half or cut that in more than half, and make the assumption that over a 10-year period the average annual appreciation rate is going to be 3-4%, not 12-13% like it’s averaged over the last 10 years… But combined with that you have a very strong rental demand, so if you’re buying a property and renting it, you’re going to get 3-4% yearly rent increases, and after over a 10-year period, when you factor in your net [unintelligible [00:14:36].13] cashflow received, including your rent escalations, combined with 3% or 4% capital appreciation if you’re lucky enough to participate in a run like we’ve had over the last ten years, that’s great.  What happens is at the end of that period, when you sell your property, the combination of capital invested, based on your NOI and your capital appreciation, you can come out with 16-18% average annualized rate of return, which by any standards is very good in a market that’s very stable, and this is not an island, so there’s built-in support.  It’s not like — not that there’s anything wrong with being in Florida or Texas or wherever, but there’s only so much you can build on this island. So as a result of that, it’s sort of a built-in price supporting, built-in rental demand, so you sacrifice near-term capital appreciation for long-term average annualized rate of return combining capital appreciation with net operating income.

Joe Fairless:  I love the way you think about that. It’s gonna be really helpful for comparison purposes. How much do we need to invest in Manhattan?

Robert Dankner: Well, it’s a good question. The barrier to entry is pretty high, because this is an expensive market, but I would say that sort of the lower tier entry-level, if you will, as an investor, and if you’re buying single units, not houses, but they have to be condominiums, not co-ops, you have to be in the $1.2-1.5 million range as sort of a starting point. That’s not cash — that’s selling price. But the number of condos that are available in that range – one-bedroom condominiums – are few and far between, frankly. But that’s sort of the barrier to entry or the starting point, and then it’s onwards and upwards from there.

Joe Fairless:  So let’s see – $1.5 million… I just need 25% of that. That’s $375,000.

Robert Dankner: Correct.

Joe Fairless:  What variables or factors would you look at if you were an investor who does not live in Manhattan… Let’s say you live in California, and you’re deciding between some city in the South or the Mid-West, and you just heard this interview and now you’re considering Manhattan, and you’ve got about $500,000. How would you think about where to invest?

Robert Dankner: A very large portion of my business is dealing with investors at this level and above, and there’s no right or wrong answer. Everybody has their mission statement and what works for them. And if somebody is looking for near-term yield, meaning they’re looking to generate 7%-8% on their money, New York is not the place for that. But if one has a longer-term perspective, the capital appreciation pace from New York, in my opinion, will far outpace almost anywhere else in the country. As a matter of fact, there’s really only two or three markets in the world that work like Manhattan, which is Manhattan, London, and I guess you could say Hong Kong. But one has to be prepared to live with cap rates cash on cash that are not exciting – 3%-4% maximum – but the carrot is the hope (which is usually reality) that the capital appreciation rate, combined with your net operating income over time is going to create a rate of return that far outpaces what you can get in most other geographies.

Now, the icing on the cake is if one happens to be fortunate enough to be a participant in the market when it’s moving as briskly as it’s moved in the last 10 years, then it’s that much better. But I think as an investor, it’s prudent to take a very conservative approach.

One thing that’s going to remain constant, if in you’re in the right neighborhoods, is rental demands and rental income. A thing that’s less predictable is what the appreciation rate and the market is going to be. But unlike other areas of the country, Manhattan real estate is really looked at as an asset class that is a diversification outside of equities for example, and it’s a place where investors from all over the world park their money, whether it’s here or in London or in Hong Kong for example, for the reasons that I’m explaining to you – that there’s not wide open spaces, you can’t continually make a lot more of this stuff, for lack of a better term, because we’re on an island, and as a result of that, there’s built-in price support, which creates an appreciation rate that’s a bit different than most other geographies in the country.

Joe Fairless:  Are there opportunities for a value-add play similar to what I do in Texas, where I buy apartment buildings, renovate interiors, increase rent, and then I’ve got a higher value property?

Robert Dankner: Of course, but that’s really not for people that are passive investors. You really have to be here on the ground.  But in the investment side of our business, that’s probably the most active area in the $8-30 million market, whether they’re individual houses or small buildings that are bought, refurbished, renovated, increase the rent roll and sell them. But the nuances of renovating in Manhattan, or like in any other place in the country – it’s different everywhere you go, but rules and regulations and insurance requirements and how you work with contractors is a little bit more treacherous here.

So virtually every day we get calls from people that want to get into that type of investing, and the romance of it wears off very quickly when they realize what’s involved. But those who have the stamina to understand what’s involved in terms of being on the ground, the payoff is huge. But I think one has to have a very realistic expectation that it involves a lot of heavy-lifting, but the rewards are massive.

It’s not brain surgery. It’s just something that you really have to pay a lot of attention to, and as an investor, clearly you can pay somebody to do this for you, but that person that you’re paying to do this for you is going to be taking a large portion away from why you’re doing this. It might be defeating purpose, so… I think you understand what I’m saying. But to answer to your question, the answer is yes, you can do here what you do in Ohio, but it’s a little bit different.

Joe Fairless:  A lot different. [laughs] It’s a lot different.  The tenant-landlord laws aren’t as friendly either to investors in Manhattan.

Robert Dankner: No, New York and Manhattan particularly is very tenant-friendly, which has its positives and negatives. If you’re a landlord, obviously it’s entirely negative, and I will say that we have rent stabilization laws here that are very unique to New York, and we have tenants [inaudible [00:21:14] that are very unique to New York, and the vast majority of these protected tenants understand the laws as well as many attorneys do. So navigating around them, you have to be very savvy.

With that being said, I like things with hair on them, and the more complicated it is, that’s things that people overlook, and if you understand tenancy laws extremely well as I do, then it creates a different set of opportunities, because you can look at properties that a lot of people overlook because they see some obvious roadblocks. But if there are ways to mitigate your risk, then it creates much greater value-add opportunities.

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

Robert Dankner: My best real estate investing advice ever — well, there’s a lot, but I would say, don’t over-negotiate. Don’t try and buy it and get the last penny out of it, and don’t try and sell it and get the last penny out of it. Everybody has to walk away a little happy, but I see people lose things on both sides of the equation because they have to win. And you win even when you don’t win, so don’t over-negotiate.

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

Robert Dankner: I suppose.

Joe Fairless:  Alright, then I suppose we shall do it. First though, a quick word from our Best Ever partners..

 

Break: [00:22:24].19] to [00:22:53].10]

 

Joe Fairless:  Best ever book you’ve read?

Robert Dankner: The Art of War by Sun Tzu.

Joe Fairless:  Best ever deal you’ve done?

Robert Dankner: Purchasing a townhouse in West 10th Street in Manhattan.

Joe Fairless:  Why is that the best ever?

Robert Dankner: Because it was purchased, we bought it for $9.5 million, had to spend about $2.5 million to get the tenants out, then spent another $8.5 million dollars to renovate it, and I just put it under contract for over $37.5 million, over a 4-year period.

Joe Fairless:  2.5 to get them out — is that cash in pocket to be on their way?

Robert Dankner: Yeah, cash in pocket, yes.

Joe Fairless:  Got it. You gave them a living situation too, so they can transition into, I imagine…?

Robert Dankner: Correct.

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

Robert Dankner: I don’t know. I’ll have to come back to that one.

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

Robert Dankner: I give a lot of money away. Money is wonderful, but even when I was a kid, I wanted to grow up and have enough money so I could give it away and just support causes that are near and dear to me, near and dear to people that I like and support, and I’m very involved in philanthropy, and it’s my biggest joy.

Joe Fairless:  Maybe think about one of the last deals you’ve done and what’s something that if presented the same opportunity, you would have done it slightly different to optimize in the future.

Robert Dankner: Just going back to my advice, which is don’t over-negotiate… Again, there was a townhouse that I was representing, I represented the person that bought it, and I was representing them when they sold it… And I’m usually pretty forceful with people and the first offer that we got was an extraordinary offer, and I am a shepherd – I can’t push people to do things, but I can very persuasive when I want to be.  I wasn’t as persuasive as I should have been with my seller. I give advice like I’d want to get it, like I’d want to receive it, so I said, “I would do this. I would take this one,” but I wasn’t forceful enough, and we ended up selling it for about 6% less than our best offer, which was an extraordinary offer, like off the reservation. So my answer is not being forceful enough with my convictions, because I’m not pushy.  And you can never push, you can’t make somebody do something, but I think I could have been more persuasive with data.

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

Robert Dankner: They can email me at rdankner@primemanhattan.com, or they can call me at 646-485-5896, or they can visit our website at primemanhattanresidential.com.

Joe Fairless:  Robert, thank you for being on the show and sharing your advice from your ex-Wall Street trader days and how you’ve applied those lessons and that thought process to real estate, both building up the brokerage, as well as investing and what you invest in…  And also the comparison for investing in Manhattan versus anywhere else in the world, besides London, Hong Kong… But really comparing the Mid-West and the South to Manhattan, and what to think about when investing, and pros and cons. So thanks for being on the show.

Robert Dankner: My pleasure.

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

Robert Dankner: Thank you so much.

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JF1288: Making Money With Partnerships & Distressed Assets with Larry Friedman and Frank Sanchez

Listen to the Episode Below (26:01)
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Frank and Larry had a third business partner in the past, the three of them grew a firm from 0 to 500 agents in 10 years. Once that relationship began to sour, they went separate ways. Frank and Larry tell us what to look out for to avoid getting into a bad partnership. We’ll also hear about their latest business of acquiring distressed assets through their real estate fund. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Larry Friedman and Frank Sanchez Real Estate Backgrounds:

Co-Founders of SDF Capital, real estate investment firm focused on acquiring distressed real estate assets

-Larry is responsible for financially structuring property acquisitions, asset diligence and disposition strategies.

-Frank is responsible for all property acquisitions, dispositions and overall investment strategy.

-Say hi to them at http://www.sdfcapitalllc.com/

-Based in New York, NY

-Best Ever Book: Never Split the Difference


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TRANSCRIPTION

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

With us today, Larry Friedman and Frank Sanchez. How are you two doing?

Larry Friedman: Fantastic, Joe.

Frank Sanchez: Thanks for having us on the show.

Joe Fairless: Yeah, my pleasure. Nice to have you both on the show. A little bit about this dynamic duo there – the co-founders of SDF Capital, which is a real estate investment firm focused on acquiring distressed real estate, primarily single to three-unit, so one, two, and three-unit properties in the New York area.

Larry is responsible for financially structuring the property acquisition, doing the asset due diligence and disposition strategies, while Frank is responsible for acquiring the properties and the overall strategy. They’re based in New York, and with that being said, do you two wanna give the Best Ever listeners a little bit more about your background and your current focus?

Larry Friedman: Awesome. Thanks, Joe. Happy to be here. Basically, Frank and I have been in real estate for collectively around 15+ years. Our background with both of us is in residential real estate. We started a real estate firm – pretty much him and I and a few other agents – and we grew it from zero agents to over 500 agents over a 10-year span. At our peak we had 12 offices and over 500 agents. Ultimately, what happened was in our last acquisition we partnered in with someone that wasn’t a great partner, and ultimately it led to the demise of that real estate firm, or at least Frank’s and my interest in the firm.

Then from there, we always had [unintelligible [00:03:46].26] we had flipped one prior to that and we had loaned money to a couple of home flippers, so we decided “Hey, this seems like it could be interesting.” About three years ago, him and I decided to start doing this full-time, and here we are today.

Joe Fairless: So you’re fixing and flipping or wholesaling?

Larry Friedman: We do a combination of a couple of different exit strategies. We fix and flip, we wholesale, and we assign.

Joe Fairless: Got it. Clearly, we have to talk about the partnership that didn’t work out, because you two were up to 500 agents, you grew it from zero, and then you mentioned there was another partner that didn’t work out. What happened and what would you do differently?

Larry Friedman: We partnered with someone who on paper everything looked great; we had complementary skills. This person was bringing a lot of agents to the table – 200 to be exact – as well as more of a focus on sales, we had a focus on rentals. However, we quickly started to realize that from a trust, from a personality standpoint, from a way to treat people we just came from two completely different schools.

It ended in a litigation, and it ended in big fighting, and while we were fighting and litigating, agents want a stable place to work, and it became unstable. That led to the demise of what I think was a great firm.

And just to answer your question about what I’d do differently – it’s definitely know who you’re partnering with; the papers looked great, but I don’t think we did enough diligence, I don’t think we spent enough time; when you partner up, he becomes almost like a best friend, and it’s a very important decision. I think the person’s fiber is probably more important than what they bring to the table from a dollars and cents standpoint.

Joe Fairless: Besides the lawyers, who won the litigation?

Larry Friedman: It was one of those that the lawyers definitely won. Nobody won, essentially… The legal fees were astronomical. Frank and I ultimately decided that this isn’t really worth fighting anymore, and we saw greener pastures and just figured “You know what? This has run its course”, and the two of us decided at that point we’re just gonna see what we can do. We’re young guys, and let’s get into a different venture.

Joe Fairless: So now fix and flip, wholesale and assigning, right?

Larry Friedman: Correct.

Joe Fairless: Okay. What’s the last deal you two did? Describe it for us, please.

Larry Friedman: Frank, do you wanna go for that?

Frank Sanchez: Yeah, sure. The last one was actually one of our most exciting deals. It was a 3-bedroom 2-bath split-level in Brooklyn County. We actually put it under contract for 200k, and literally a week and a half later we put it out there, we marketed it, and we were able to double-close on it with the fund that we have. We made a 100k spread. So we bought it for 200k and just closed for 300k. That was a great momentum swing coming into the new year.

Joe Fairless: Well, it sure was. And you mentioned you were able to double-close with a fund that you have – what is this fund?

Frank Sanchez: Go ahead, Larry.

Larry Friedman: We established a fund basically to fix and flip and wholesale. So we have approximately 12 high net worth individuals that have invested money into the fund called SDF Capital Fund One, and we used the fund to purchase [unintelligible [00:06:54].00]

Joe Fairless: Okay, and how much did you raise?

Larry Friedman: We raised 725k. It was a relatively small raise, and in hindsight I didn’t realize that the whole process is the same if you’re raising 725 million. So it was quite a learning experience, and we definitely will have another much larger fund, but this is a good start.

Joe Fairless: You can’t just add to it? I’ve never done a fund, so I don’t know the details.

Larry Friedman: Joe, from my understanding, we have a finite timeframe, it’s a two-year hard close. So once the capital raise is over, that’s it. That’s the way this fund is structured; that’s the way ours specifically is. I’m not sure in general whether or not you can or cannot, but I know with ours we couldn’t. Because we have had others that have been interested in investing, we just had to turn them away.

Joe Fairless: You had two years to open up to investors and the close it out, or two years for the entire life of the fund to be closed out?

Larry Friedman: Two years for the entire life of the fund to be closed out, so from the day we started to — essentially saying “Hey, the fund is opening, and here is the date that the fund is starting”, it’s two years after that. And that started after we had done our capital raise.

Joe Fairless: All of your deals need to have closed out and gone full cycle within two years?

Larry Friedman: Correct. Most of our deals are relatively short-term in nature. We’re usually in and out anywhere between, as Frank said, a couple weeks, to six months.

Joe Fairless: Interesting, yeah. Congrats o getting this fund together. What were some things that you learned while putting together this fund?

Larry Friedman: Some of the things I think we’ve learned essentially were that when you put together you have to know who is your target audience. So as we were speaking to people, because we do a lot of debt raising as well, certain people that we spoke with, they were not comfortable with a two-year hold. So that was a question that people had. Other people really wanted more on the upside, so more of a profit split.

So I think the most important things we learned were you really have to know “Okay, this is the exact type of person that this makes sense for”, whether it be an IRA investor, whether it be a high net worth individual with extra money. So I think just that focus on who is that avatar, essentially? That’s number one, which I don’t think we had that going into it initially.

Then I’d say number two would be really streamline the structure, make it very simple to understand. I don’t wanna say ours is overly complicated, but it’s slightly complex, so I think going forward our next one would be much simpler.

Joe Fairless: How would you make it simple? What would the structure be?

Larry Friedman: Given what we’re doing, the way I would do it is I would do some type of preferred, which we have now; I would offer a preferred, and then I would do an accrued return. Very simply a preferred, then an accrued return over the same two-year period. It’s just much easier from an accounting standpoint as well.

Joe Fairless: Accrued return over a two-year period as opposed to what?

Larry Friedman: So we have a profit split, and then we have expenses as well in the fund. So we have a preferred, but then there’s expenses, and then there’s an after the fact profit split, which gets a little murky, because you have to figure out what is the profit.

Joe Fairless: Oh, I bet.

Larry Friedman: So that’s kind of something that some investors want more clarity on, so again, in the future I would just make it much simpler.

Joe Fairless: Yeah, so basically, it’s like a debt deal for them, because they know that they’re getting, assuming that it goes according to plan.

Larry Friedman: Exactly. And I think that for the type of investors that are attracted to what we’re doing, I think that would be a better structure.

Joe Fairless: How much does it cost to put together a fund?

Larry Friedman: I’ve heard different numbers. We’ve spent between the filings – because we’re in about four different states – as well as the legal work, we’ve spent around $18,000 to $20,000.

Joe Fairless: That’s pretty good. I was expecting another zero on that.

Larry Friedman: Yeah, I’ve heard the same… I’ve heard all different numbers. We tried to stay simple, and we were only in four states. I think every time we do the blue sky and register in a different state it just adds to the cost.

Joe Fairless: Are all of your investors in those four states, as well?

Larry Friedman: Yes, that’s where they live. My understanding from the securities rules are if you have an investor that lives in that specific state, you must register to do business and file in that state.

Joe Fairless: Okay. Would you recommend some of the Best Ever listeners create a fund, who are doing fix and flip projects on a one-off basis?

Larry Friedman: No. [laughter] I think if you’re doing one-off fix and flips, I would just do that and make it very simple. The reason why Frank and I decided to go this route is we do a pretty decent volume, and we do use hard money, but we also like to use more flexible money, and a lot of our investors, when they were investing with us and we would cash them out of deals, they would say “Well, I don’t wanna be cashed out of this deal. I want my money to still work.” So that’s kind of the reason why we decided to go with this structure. But again, one or two deals a year, or three deals a year, I wouldn’t bother. It’s too much work and there’s also a lot of regulations etc.

Joe Fairless: That’s interesting. So really if we’re a fix and flipper and we’re cashing people out at a volume in which they want to get put back into deals, and we’re constantly having to put people back in and cash people out, put people in… Then when it becomes that point of a headache, then you need to look at doing a fund. Is that right?

Larry Friedman: I would think so. Or if you are tired of using hard money, although we love using hard money, but it comes with mortgage recording tax, and they’re bringing in an appraiser, and it takes a little bit longer to get a deal done… So we just like that speed.

Joe Fairless: With your deals, you said that you two are doing high volume… How are you able to get so many leads?

Frank Sanchez: That’s a good question, Joe. So basically the way we get leads is we have a very big marketing budget. We’re spending $32,000 every single month, including targeted marketing. We’re doing yellow letters, we’re doing SEO, we’re doing pay-per-click, we’re doing a little bit of radio and TV, and it’s very targeted. It’s for people that have low LTVs, homes built in a certain year – usually in the 1950’s, probates situations, homes that are not financeable, people that have tax liens etc. They’re calling us directly.

Our deals are basically off-market deals, directly with the sellers. We’re visiting their homes, we’re sitting down with them and seeing if we can create a win/win situation with them where we’re helping them.

Joe Fairless: Let’s go through a scenario. Your budget just got sliced in half – which is still more than most people are spending every month… Where do you put that money?

Frank Sanchez: Honestly, I would say back in marketing.

Joe Fairless: But where specifically in marketing?

Frank Sanchez: Sure. I’d say we’re getting the most use right now from direct mail. About 60% of our buyers are coming from direct mail.

Joe Fairless: How do you approach direct mail? Is it just a postcard, or is there a system that you have in place?

Frank Sanchez: Yeah, we have yellow letters. We use a mail house, and they basically send them out for us.

Joe Fairless: Okay.

Frank Sanchez: We just give them a bunch of zip codes and our budget, and it automatically gets sent out. We do two mail drops a month. Usually, we do one right in the first week of the month, and then we hit them again the third week, and we repeat to the same sellers; they get a letter every three months.

Joe Fairless: Okay.

Frank Sanchez: So we’re consistently sending that letter out.

Joe Fairless: Every three months… So if I’m receiving your letters, then I get a letter from you the first week of the month and the third week of the first month, and then I get a letter from you every three months thereafter?

Larry Friedman: Well, let me clarify that. So you would get a letter the first week of the month, then a letter three months from that day.

Joe Fairless: Okay, got it. You just split up the first batch, got it.

Frank Sanchez: Yeah, we split up the batches, correct.

Joe Fairless: Okay. And what do you say in your letter?

Larry Friedman: We basically say that we are interested in buying houses in your neighborhood. “If you’re looking for an all-cash offer, with no repairs necessary, sell as is, close quickly, give us  a call”, essentially. It’s a very simple letter.

Joe Fairless: Have you made any changes to it over time?

Larry Friedman: No, the letter pretty much has been consistent. One of the things that we’re contemplating doing is sending a postcard to some of the top zip codes in between that three-month period that Frank discussed, which we know some other people are having a lot of success… Just another touch.

Joe Fairless: Okay. Because right now that letter is in an envelope, so they have to open up the envelope?

Larry Friedman: Correct. And as Frank said, it is our bread and butter, but it’s probably the highest cost of acquisition, it’s direct mail. But it is predictable; obviously, our response rate keeps declining as we spend more money, but I’d say it is (like Frank said) the number one core strategy in a market. At least in our markets.

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

Frank Sanchez: I would say being on the acquisition side it’s really buying the property at the correct numbers. We are in a risk business; buying it correctly – we really want it to allow us to have the most exit strategies and to maximize our profit. I think knowing the numbers is crucial, you’ve gotta know the numbers for that market. And you also have to take into effect all the factors to the property, and it’s location.

We’ve made countless mistakes that we can share with the best listeners ever on our first few deals, just having errors with our after repair value numbers. We typically try to buy between 65-75 cents of the after repair value minus repair costs.

Joe Fairless: Will you tell us a story of one of the lessons learned on when it didn’t go the way you wanted?

Frank Sanchez: Yeah, for sure. It was about our third home we purchased. I went on the appointment, and it was a 3-bedroom 2-bath–

Joe Fairless: So it was your fault. [laughter]

Frank Sanchez: Yeah, absolutely my fault.

Larry Friedman: [unintelligible [00:16:42].04]

Frank Sanchez: So I was running my comps, and I have experience running comps… All the 3-2’s are going for this price, all the [unintelligible [00:16:52].14] everything’s in line within one mile of the subject property. That’s basically how we run the comps, going back six months. So I show up at the house, look over the repairs, speak to the owner, see if we can make a win/win situation… I give him my offer and all of a sudden he shakes my hand. In the back of my mind I said “Something was just too easy with that.”

After we bought it, we realized we only had one exit strategy – basically, to rehab it. What I missed is the house was across the street from a church, which I didn’t factor into the value. And it also had what we call a funk factor. Basically, yes, I was comping it as 3-bedroom 2-bath, however this house – the configuration was very funky. To get to the master bedroom, which was like an extension, you had to go through the dining room where people were eating. And then it was connected to a bathroom that Jack and Jill-ed with the kitchen, and when you go up the stairs, if you’re a big dude it kind of gets real tight at the end; you’ve gotta squeeze up onto the second floor. The shower – you couldn’t put your full body in the shower, because it was ricocheting off the wall, the water…

It was just nuts, and we did a full-blown rehab, which this market did not commend the finishes that me and Larry did. But another lesson to the best listeners ever is don’t over rehab. We put in the marble, we put in the new hardwood floors, high hats, the whole  bang. Picture moldings… And we had it listed at a price the market wasn’t gonna pay, and again, the lesson there was just I should have taken probably a 20% discount off my original after-repair value, after I went into the house and saw it had a funky layout, and saw it had a Jack and Jill bathroom going into the kitchen and all that.

So when you’re looking at the house, you take a discount for that… And you can’t change the location, so if it’s across the street from a gas station or a church (in this case) or an elementary school, that’s gonna be some sort of a value detraction that you have to play in your numbers. So really just knowing your numbers is super important.

Joe Fairless: How do you come up with 20% off for those things?

Frank Sanchez: It’s a number that we feel comfortable with after we see the house. If there are some funk factors in there, we’ll kind of compare to other homes that have a similar layout, or a similar location, and that’s the kind of number we see that are selling, the kind of discounts that are coming off for having those factors into the property.

Joe Fairless: Thanks for telling that story, that’s pretty cool. The last question on that, with the property – was it on the market for a while, so could that have been an indication that there was something up too, or were you one of the first people to come across it?

Frank Sanchez: No, it wasn’t on the market at all. We bought it directly from a seller that was moving into a retirement home.

Joe Fairless: Okay, got it.

Frank Sanchez: It was just a number I gave him, and that’s why he was really happy with it. I should have known.

Joe Fairless: With the church and the elementary school example, I could easily see the seller saying that that’s an advantage and an amenity, and they shouldn’t receive a discount… What would your response be?

Frank Sanchez: I’ve heard the same also, Joe. School can get extremely busy with parking and noise at 9 o’clock and 3 o’clock again, which can be a disturbance, especially if it’s a high school. I know when I was in high school I was hanging out doing god knows what, so that could be another disturbance. It really depends. I mean, personally, from my experience, when we have something on the market, most of the feedback we get is that they’d rather be on a nice, quiet, suburban street, without these types of places close by.

Joe Fairless: Makes sense. Are you two ready for the Best Ever Lightning Round?

Larry Friedman: Yeah.

Frank Sanchez: Yeah.

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

Break: [00:20:47].13] to [00:21:18].06]

Joe Fairless: Best ever book you’ve read?

Larry Friedman: The best ever book – actually, I’ve just finished reading it – is called Never Split the Difference, by Chris Voss. He’s a former FBI negotiator. Great book, a lot of nice nuggets of information about negotiation, which I think is critical in every aspect of life.

Joe Fairless: I’ve heard a lot of people mention this book many times recently, so it’s definitely – I think I’ve already bought it – on my list of books to read.

Larry Friedman: Yeah, you’ll enjoy it. I actually listened to it in the car, as audiobook. That’s my new thing.

Joe Fairless: Best ever deal you’ve done that we haven’t talked about, that wasn’t your first and wasn’t your last? Something in between, a best ever deal.

Larry Friedman: Another best ever deal that’s actually similar to the deal that Frank discussed (a double close), we bought a home for I believe it was $100,000. This home was a complete disaster. We put it on the market for 204k to be exact, and we were able to close it at that number with multiple offers. It was on a lake; that helped it. Literally, a lake view. That was an awesome, easy deal to get done.

Joe Fairless: And you didn’t do anything to it?

Larry Friedman: Did nothing to it.

Joe Fairless: Did nothing to it. How did you find that deal?

Larry Friedman: Same, it was through direct mail. I think that one actually was a tax delinquent– he was on a tax delinquent list [unintelligible [00:22:30].04]

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

Larry Friedman: Frank and I, we run something called Deal House. It’s a monthly meetup, and it’s something that we put together for other investors and those in the real estate space. Essentially, we talk like kind of what we’re doing today, about some of the things we’ve done well, some things we haven’t done well, others come and share their advice, and we network together. That’s something we do once a month, and it’s actually an in-person meetup. It’s called Deal House. That’s something we really like to do.

Joe Fairless: Where is that hosted?

Larry Friedman: We hosted in New Rochelle in the Radisson, and it’s the third Thursday of every month, 7 PM.

Joe Fairless: Cool. Well, Best Ever listeners, if you’re in upstate – I call that upstate… Should I not call that upstate, New Rochelle? [laughter]

Larry Friedman: Well, we wouldn’t consider that upstate. [unintelligible [00:23:18].11]

Frank Sanchez: It’s like 40 minutes from the city.

Larry Friedman: Yeah. [laughs]

Joe Fairless: For all of the Best Ever listeners who want to travel 40 minutes from the city, or are near New Rochelle, then definitely check that out. It sounds like a really cool meetup.

Frank Sanchez: Awesome, we’d love to see you there.

Joe Fairless: How can the Best Ever listeners get in touch with you? …which is a perfect segue into this.

Larry Friedman: Awesome. The Best Ever listeners can get in touch with us one of a few ways – they can find us on SDFCapitalLLC.com, or they can find us on DealHouseNY.com. We’re doing the site as we speak. We have some videos as well on YouTube, under Deal House, and like I said, the in-person meetup at Deal House as well.

Joe Fairless: Very cool. And the Deal House website is DealHouseNYC or NY?

Larry Friedman: Just NY. We’re in the process of putting up a new site.

Joe Fairless: Sweet. Well, thank you you two for being on the show and talking about your fund and what you did prior to this, lessons learned with partnerships, and then the fund as far as when it makes sense to put a fund together and when it might not make as much sense to put the fund together. And then lastly, just talking about how you’re getting your marketing leads and the most effective ways that you’re doing that with direct mail, how you’re approaching the direct mail… You might include some postcards in the future to reach people more frequently.

Then how you found some of your most profitable deals, and lessons learned on a not so profitable one. How much money did you lose on that not so profitable one, the funk factor one?

Larry Friedman: We couldn’t sell it and we had to put a rental in there, and we’re actually negative about $150/month.

Joe Fairless: Oh, alright. What do you think it’s worth now, compared to the all-in price that you have in it?

Larry Friedman: I’d say probably our loss, if we had to take that loss today, would probably be about $20,000. If it was a year and a half ago or two years from this happening, it probably would have been about 30k.

Joe Fairless: Good. Well, keep on holding, maybe it will continue to appreciate. But more importantly – I don’t wanna end on that note, by the way… More importantly, I really enjoyed learning about how you MADE money, and the lessons learned along the way. I was just curious about that one thing.

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

Frank Sanchez: Thanks, Joe. I appreciate it.

Larry Friedman: Awesome. Thanks, Joe.

Steve Rosenberg and Joe Fairless

JF1276: Giving Away Half Of Your Real Estate Investing Profits with Steve Rosenberg

Listen to the Episode Below (24:49)
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Steve is the CEO of a company that has a $26 billion loan portfolio. He attributes the company’s success to their philosophy and practice of giving away at least 50% of to people that need it. Curious how giving away so much makes a company rapidly grow? Tune in to hear how that has happened for Mr. Rosenberg. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Steve Rosenberg Real Estate Background:

CEO and Founder of Greystone, a real estate lending, investment, and advisory company

-Responsible for the coordination and management of corporate matters

-Founded Greystone in 1988 as an independent investment banking firm & developed it into a mature investment firm

-Greystone closed on $550 Million Freddie Mac Loan to Refinance Moinian’s Sky, the largest residential tower in U.S.

-Say hi to him at https://www.greyco.com/company/

-Based in New York, New York

-Best Ever Book: Peace Like a River

 


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TRANSCRIPTION

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

With us today, Steve Rosenberg. How are you doing, Steve?

Steve Rosenberg: Great, Joe. Thanks for having me on.

Joe Fairless: My pleasure, nice to have you on. A little bit about Steve – he is the CEO and founder of Greystone, which is a real estate lending, investment and advisory company. They’ve just closed on a 550 million dollar Freddie Mac loan to refinance the largest residential tower in the United States. Needless to say, they’ve got some track record and experience that comes with them.

Steve founded Greystone in 1988, as an independent investment banking firm, and developed into a mature investment firm. With that being said, Steve, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Steve Rosenberg: Sure, thanks a lot, Joe. I was the head of housing finance at Dean Witter Reynolds before I started Greystone, and frankly, Dean Witter was a large company, and there’s a certain culture at large companies that is you just have to be a certain kind of person to do well there, and you have to know how to play the politics and you have to fit into that culture, and I really didn’t. So as I saw the writing on the wall and I saw that there really wasn’t much of a future there for me, I decided to start Greystone.

I just started in the back of my friend’s music store, trying to call potential clients and see if they would use me to refinance loans. Somehow, through those conversations and some of the work I had done at Dean Witter before, I started building up a small clientele. Over the years – now it’s been 30 years – what’s really been interesting is that Greystone has been built into a fairly large institutional player. We’ve got in excess of 7,000 employees. What’s really interesting though is that we’ve never raised any capital ever in our history. Even though we’re a principal lender and our loan portfolio is about 26 billion dollars at this point, we’ve never gone outside and raised equity. It’s always been whatever profits we made, or meager profits certainly at the beginning that we made – we invested those back in the company, and what’s maybe the most amazing fact of all, Joe, is that throughout our history we believe in enhancing the lives of others, and at least 50% of our profits have always gone to charitable causes.

Every year, no matter how well or not well we did, at least 50% of the profit that we made went to help other people’s lives and just enhancing other people’s lives. So in spite of the fact that I myself am pretty much an introvert, and we’ve never raised any equity, in every year we’ve given away at least half of our profits… Notwithstanding all of that, somehow there’s a certain magic to helping other people, and notwithstanding all of that, again, the company just keeps growing.

Joe Fairless: I was gonna ask you to clarify it if was 15% or 50%, and then you said half, so obviously I know the answer… 50% – that is incredible. In 1998 you were giving away half of your profits to charity?

Steve Rosenberg: In 1988.

Joe Fairless: Yeah, I did it again… [laughs] 1988.

Steve Rosenberg: Yes, when we were making almost nothing, at least half went out. These days we’re giving more than half. The mission of the company is to do what we do well, and that’s doing business, but that’s just the mechanism for generating profits that we can give away to help other people live a better life. So I would say that we’re not great, loud institutional givers; there are great – whether or not it’s the Red Cross or whether or not it’s The American Cancer Society or other great, great not-for-profits… That’s not the target of our giving.

What we do is we have a network literally around the world where families that flow on hard times, whether or not it’s a child that gets sick that needs an operation, or whether or not it’s a new kind of cancer therapy that has come out but hasn’t yet been approved by the insurance companies… We’ll just step up, write the check, and just help the situation. So we really target families and individuals that were it not for us being able to do what we do, they just wouldn’t be able to get help anywhere.

It’s incredibly fulfilling and empowering, but the bottom line is the mission of the company is not to enrich me or the other senior managers. The mission of the company is really to help other people.

Joe Fairless: How do you choose where you give? You said you have a network – can you elaborate on that?

Steve Rosenberg: Sure. We have a network of people literally around the world, whether or not it’s in Europe, in the Middle East, even in Asia, even Australia, where somehow, whether or not it’s a rabbi or a priest or a nun — we had heard that in Cameroon, for example, there was unfortunately a high percentage of AIDS in the population, and yet children walking the streets that, because both parents had passed away, and there was a sense in the community that because both their parents died of AIDS, that somehow they were contagious… And so even their relatives didn’t take them in.

There was a nun that opened up a home for them… It wasn’t an orphanage where they were gonna be adopted, but it was just a home. So we had heard about this and we had heard about what she was doing, and she was taking care of 45 kids at the time. We looked into it, we gave them the money to built the capacity to take 250 kids. That was in Cameroon. We helped kids that needed operations that we heard about in Australia…

It’s kind of interesting, once you put yourself out there and people know that you wanna help, things come to you. I think that’s kind of the karma or a certain energy, but when you wanna help people, the cases come in. We’ve never had a problem having to advertise that we wanna help people. People find out and cases come in.

Joe Fairless: I’m gonna ask you to speculate, and as a person who’s been in the real estate lending business for 30+ years you might not like it, but I’m still gonna ask you to do it, and just play along with me for a second… Your company has a loan portfolio of 26+ billion dollars, right?

Steve Rosenberg: Right.

Joe Fairless: What would you guess your loan portfolio would be today if instead of giving 50% over the last 50%+ over the last 30 years, you gave 10%?

Steve Rosenberg: What’s interesting, Joe, is that I attribute the success of the firm to our giving. If you ask me, I think there’s a great chance that had we not given all of this money away, we might not even be in business. The fact that we weathered the Great Recession in 2007-2009, when banks were left and right pulling credit lines from us… It was just a very, very difficult time, and we don’t have any large institution behind us. There’s no insurance company, pension fund or any institutional investors, it’s just us. The fact that we were able to survive that time and just keep growing, notwithstanding the fact that we’re giving so much money away… I actually attribute our success and our growth to our giving. So I wouldn’t be surprised if we weren’t even in business if we hadn’t done it.

Joe Fairless: And digging a little bit deeper in that, because I assumed you were gonna go with that approach, and I love it, and I’d just love to learn more about why you say that, and maybe speak to the analytical Best Ever listener who’s listening to you like “Yeah, yeah, but why are you saying that? How was there a cause and effect? How did the numbers shake out?”

Steve Rosenberg: I would say this – if I tried to establish a cause and effect, which I’m always reticent to do, I don’t think that I can logically prove it. But if we just look back on history and we say we started with nothing, we’ve given most of it away, and I can assure you that I am not an extrovert – it’s hard for me to ask anyone to do anything – there is no logical explanation to how the company has grown the way it has. There just isn’t.

By the same token, what I can tell you is that so much of business is — sure, you wanna be smart and you wanna make the right decisions, but so much of it is being at the right place, at the right time, having someone like you that didn’t have to like you, having the market go in your favor when it didn’t have to… There’s just so much that has to go right for businesses to prosper. It’s just my sense that things fall into place even when you would expect that they wouldn’t, when they certainly don’t have to; it’s my personal feeling that I attribute that to our philanthropy and the fact that we really just love other people and feel like we’re in business to help people. I understand that there may not be a business case for that, except that there’s a book that recently came out; Adam Grant is a professor at the University of Pennsylvania-Wharton, and Adam came out with a book called Givers and Takers. He makes the business case for extending yourself for others just creates a positive business environment and actually creates successful business.

I would just recommend that that Best Ever listener that’s out there right now that’s scratching his head, rolling his/her eyes and saying “Hey, this is just a bunch of malarkey”, pick up the book. What I can tell you is that my career and my history with the firm is evident that the book is right.

Joe Fairless: What’s been a tough decision that you’ve had to make with this company over the last 30 years?

Steve Rosenberg: The hardest decisions that I have to make are ones that affect people’s lives. Sometimes people come to Greystone and we expect great things from them and sometimes it just doesn’t work out. To have to have that conversation with someone where we know that they’ll be better off at a different place, because either they don’t fit the culture here, or for whatever reason the skillset that is required to do this job is not the skillset that they have, but the skillset that they do have could be very well utilized at a different company – having that conversation I find is the hardest conversation to have… Because again, I feel like I’m here and our company is here to enhance the lives of employees and other people in the outside world, and whenever you have to have a conversation where you’re telling somebody it’s just not working out, that’s a tough conversation to have. We try never to surprise anybody with that, but those are the hardest parts of my job.

Joe Fairless: And what’s your approach in that conversation?

Steve Rosenberg: Well, I think you always wanna be kind, because what you’re really doing is sure, the conversation that you’re having is for the company’s best interest, but it’s also the individual’s best interest, and people do well at jobs that they love. I think you rarely find a situation where someone does extremely well at something that they don’t love, or that they don’t do well at something that they’re absolutely in love with. So I think the idea is to be as kind and gentle — and not only that, as helpful as possible in finding their next job. But I think that trying to help them do that, trying to be kind and supportive to them, and also giving people constant feedback… Because no one should ever be surprised when someone tells them that it’s time to find another position. And if they are surprised, it only means that the management of the firm hasn’t been giving them the feedback that every employee deserves. Every employee coming in to work every day needs to know whether or not they’re a rockstar or whether or not they’re failing at their job. If they don’t know that, then shame on the management, because that’s’ what they owe every employee.

Joe Fairless: I’m gonna switch gears a little bit because I mentioned it in the intro, and that is you all closed on a 550 million dollars Freddie Mac loan to refinance the largest residential tower in the US, which is in Manhattan… Tell us about that.

Steve Rosenberg: This is a project that was done by the Moinian Group, which is one of the best-known development companies in New York. They create very high-end properties. This was on 42nd Street on the West side of Manhattan. This was a tower, it was very creative financing, that 550 million, as you mentioned… And it’s one of the largest  transactions ever done by Freddie Mac, and it’s one of the things that Greystone does – the loans that we do are generally guaranteed by either HUD, which is a US government agency (the Department of Housing and Urban Development) or Fannie Mae, which is another kind of government-related entity, or Freddie Mac.

This loan was guaranteed by Freddie Mac, and again, I’m very proud of the financing and I think the owners Moinian Group was very happy with it, and we were very happy with it, and so was Freddie Mac.

Joe Fairless: This is gonna be a tough question to answer, but as objectively as you can be, why do you think they selected your group versus three or four other groups that I’m sure they were looking at?

Steve Rosenberg: I think that when you think about Greystone and the fact that we started with nothing, and give most of our profits away and still have grown… I would say that the one thing that we do that others don’t is besides the fact — everyone works hard; I think we work harder. I think there’s very little business that we get because we just say “Give us a shot.” We always are bringing something to the table that the competition doesn’t. We use our capital in our balance sheet I would say more aggressively and more creatively than any other lender in our space.

Sometimes we’re doing a loan for a client and the loan falls several million short. We’ll use our own capital to fill in that gap, because we don’t want the client to be disappointed and we wanna have a successful financing. Lots of times we’re financing an acquisition for a client, and one of the client’s investors falls out at the 11th hour; we use our own capital to fill in the cap and fund that amount of that lost investor, and we’ll give the client six months to find another investor, or a year to find another investor.

So we are constantly doing the double and triple backflip to accommodate clients, and I think that’s the reason that people will come to us. We’re not just creative and we don’t just work hard, we put our money where our mouth is and we’re constantly doing things that the competition literally — if they had to do it, they would just get nauseous. But we do that constantly, and we always feel that we’ve gotta prove ourselves every day, and we do. We’re constantly doing things that others won’t even consider doing. In fact, we’ve created a special group inside Greystone called Special Situations, because borrowers and clients – all sort of things happen in the eleventh hour where we’ve gotta come up with a bunch of cash to help a client out… And we do. It was happening so consistently and so often that we just created a special group called Special Situations; it’s got its own group leader, and when those situations come up, we know we’ve gotta respond within 28-48 hours or within a very short period of time, so we’re prepared to do it.

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

Steve Rosenberg: You know, it’s interesting… I’ve always said that when we invest in real estate as well – we own a portfolio of almost 8,000 apartment units and we manage those, and we have a portfolio of skilled nursing facilities and we also manage those… I don’t wanna have to be too smart to this investment. I need to see a clear road to success before we take the risk. So I would say as an investor I am relatively risk-averse. I have the patience to weigh into situations that are complex and try to figure them out, but I don’t wanna have to be a genius and guess at where markets are going to go before I get into a transaction. So I’d like to be able to be conservative and not genius-like at all, and still see the profitability in a transaction. I don’t wanna have to be that smart.

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

Steve Rosenberg: Okay.

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

Break: [00:20:03].28] to [00:20:55].16]

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

Steve Rosenberg: A book that I recommend to everyone is a book called Peace Like a River. What I love about that book (it is a novel) is the author uses commonly used words, but he puts them together in very uncommon ways. I am such a fan of how human beings  communicate with each other. I feel like lots of times I’m talking to someone and as I’m listening to them I can just tell that there’s something in their brain that they wanna say to me, and they’re not looking to see whether or not I’m really understanding what they’re saying. So I think communication is a very unique skill, I don’t think too many people have it, and I think the author in this book, Peace Like a River, just communicates in such a unique and effective way using small words.

Joe Fairless: Best ever deal you’ve done?

Steve Rosenberg: I think the best deal I’ve ever done is hiring the senior management that supports me and supports the firm. I think it’s all about the people, and I think the best deal I’ve ever done is hiring people that are not just hard workers and creative, but have huge hearts and are just generally kind and generous and good people. That’s clearly the best deal I’ve ever done.

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

Steve Rosenberg: The greatest mistake I’ve made on a transaction was thinking that I could protect myself with documents. I saw that a client wasn’t behaving in an upright or forthright way, and I felt like my lawyers were good enough and I was good enough to structure the transaction so that I couldn’t get her. I’ve never failed to be disappointed whenever I thought too much of my ability to structure the right transaction.

If a client doesn’t have integrity and they are not people that you would want to do business with, it’s best not to do business with them. That’s been my mistake. I’ve always thought too much about our ability to structure around a lack of integrity.

Joe Fairless: How can the Best Ever listeners get in touch with you or learn more about your company?

Steve Rosenberg: The best way is probably our website, which is GreyCo.com. I’m Steve Rosenberg, I’m extremely accessible, and I’m happy to help or talk to anyone. It doesn’t have to result in business for Greystone. Again, I’m here to help people live better lives, and if I can be helpful to anyone that’s listening, or to you, Joe, I’m happy to do that.

Joe Fairless: A very refreshing conversation… I thoroughly enjoyed our time together, Steve. Thank you for talking about your business approach throughout the last 30+ years. At least 50% of the profits have gone to charitable causes, and while you certainly weren’t doing that with the intention of getting a dollar amount in your portfolio, which is now 26 billion, we kind of reverse-engineered that in a hypothetical scenario and perhaps you wouldn’t even be in business if you didn’t take that approach. You might be not giving yourself enough credit, but I know where you’re coming from.

You talked about the book that Adam Grant wrote, Givers and Takers – we’ll check that out… And you’ve talked about the bunch of intangibles in business that have to go right for a business to prosper. Basically, you’re building up your karma bank by taking this approach.

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

Steve Rosenberg: Thank you, Joe.

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JF1213: Using IRA’s & 401k’s To Invest In Real Estate with Expert Bernard Reisz

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Bernard is here today to tell us how we can use our, or other people’s, retirement accounts to fund real estate transactions. Not only does that help us get deals done, but also helps people earn better returns with their retirement money. We’ll learn about the tax advantages, as well as what is not allowed by tax law. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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Bernard Reisz Background:

CPA and Principal of ReSure Financial and combines tax, financial, and investment expertise

– Advises on the use of self-directed IRAs and Solo 401(k)s for real estate investing and lending

– Specialized in real estate debt and equity investing using retirement funds, and personally invests in that way

– Based in New York City, New York

– Say hi to him at: https://www.401kcheckbook.com/

– Best Ever Book: Phishing for Phools

 


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TRANSCRIPTION

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

Bernard Reisz: Doing great! Great to be with you, Joe, and with all the Best Ever listeners.

Joe Fairless: Yeah, we don’t wanna forget about them too, you’re right! Welcome, Best Ever listeners, and welcome, Bernard! Welcome, everyone!

First, Bernard, we’ve got to tell the Best Ever listeners a little bit more about your background, because it’s definitely relevant for our topic at hand. Your background – Bernard is a CPA and Principal of ReSure Financial and combines tax, financial and investment expertise; basically, he’s an expert on self-directed IRAs and the compliance and usage of those self-directed IRAs and Solo 401(k)s for real estate investing and lending. He’s based in New York City, New York. His website, which is in the show notes, is 401kcheckbook.com.

We’re gonna talk about self-directed IRAs and compliance responsibilities, so if you have a self-directed IRA or are curious about self-directed IRAs and you know a little bit about it, well perhaps we’re gonna educate you (and me) on some compliance factors that we need to be aware of. With that being said, Bernard, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Bernard Reisz: Absolutely. My background is CPA; I’ve been involved in consulting, I’ve worked with some of the country’s largest corporations, Fortune 500 companies, and with individual investors. With that experience I’ve learned a lot about investing, tax and finance, and have seen that investors and individuals can really benefit by being put in the driver’s seat, by taking control of their own finances, rather than being sold to. There’s a lot that people don’t see, and through self-directed accounts and real estate they can dictate their own futures.

Joe Fairless: Amen! So with self-directed IRAs, real quick – let’s not assume everyone knows what it is, so can you quickly define it? I think 95% of the people listening do, but can you quickly just give us an overview of that and Solo 401(k)s?

Bernard Reisz: Absolutely. These retirement accounts, contrary to what Wall Street leads us to believe, can be invested in nearly any asset. So the tax code doesn’t define what you can and can’t invest in your retirement accounts. The tax code outlines the few things that you can’t, and those are collectibles and life insurance for IRAs. Other than that, for your 401(k) defined benefit IRA, if you can imagine it, you can invest in it.

Practically, the most popular investment for self-directed retirement accounts are real estate and some other angle in real estate, be that tax liens or private lending. There are so many ways to get into real estate and to leverage real estate in retirement accounts; there’s a way for everybody to get involved.

Joe Fairless: How are the profits taxed when you make money on a deal after you invest with a self-directed IRA?

Bernard Reisz: Okay, so there are a couple of stages to analyzing that. Some of that relates to all IRAs and some of that is unique to self-directed IRAs or IRA LLC’s and Solo 401(k)s. In general, with IRA taxation and 401(k) taxation there are two routes – there’s what we call traditional contributions and then there are Roth contributions. With traditional contributions you’ve got a tax deduction for all the money that flows into your account. Everything grows tax-deferred, but at some point, usually around age 70, those funds have to start being distributed from the account, and then it’s taxed as ordinary income. So you get the power of 50, 40, 30, 20 years of tax deferral and upfront tax deduction, but there is ultimately taxation.

The other approach is the Roth approach. With the Roth approach there’s no current tax deduction for putting the funds in, but subsequently all gains come out completely tax-free. So you’ve got great deals, you’ve got things that have the potential for high appreciation, you want a Roth, because everything will be completely tax-free.

Joe Fairless: Yeah, so the other scenario would be if you think you’re gonna be making more money at age 70 than today, you’d wanna do Roth, correct?

Bernard Reisz: Absolutely. Because if you’re in a higher income tax bracket, then you wanna get all the Roth funds out completely tax-free. That’s exactly it.

Joe Fairless: What are some common questions that you get from your clients who ask about self-directed IRAs and doing a Solo 401(k)?

Bernard Reisz: One of the most common issues that comes up relates to self-dealing. So while it’s really exciting to be able to invest tax-free in real estate, there are certain limitations. One of the things that we like to make clear at the outset is that you can buy real estate with your retirement plan, but you can’t buy real estate from yourself or from your spouse or from a child or a parent. So the IRS has set this up to try to keep your present self from benefitting, and restricting the benefit to your future self.

So you can buy real estate, but you’ve gotta be aware of those restrictions, and that, I think, is a very common issue that comes up the first few minutes of every conversation.

Joe Fairless: What’s a use case where someone would be doing it incorrectly?

Bernard Reisz: Somebody may have a property that they see is profitable and there’s appreciation, and they get excited about moving that into a retirement plan and having that tax-free. That’s one of the things that gets people excited, which unfortunately cannot be done; you’ve got to buy the property with your retirement account in the first place.

Joe Fairless: Okay. If the property is owned by your retirement account, then that is either tax-deferred, or it’s taxed immediately and then not taxed on the exit, depending on either traditional or Roth.

Bernard Reisz: That’s exactly it.

Joe Fairless: Okay. What’s another question that you get?

Bernard Reisz: There’s another common question that relates to people that want to invest in the type of real estate that involves more than long-term buy and hold and flips; they wanna invest in hotel kind of properties, and that brings up an issue related to something called UBIT – Unrelated Business Income Tax. This I’d say relates to the tax question that we spoke about a few moments ago.

Retirement accounts are tax-free, but occasionally you could inadvertently engage in a transaction that can result in tax within the IRA, and that kind of tax is something called UBIT, and Congress enacted that to keep tax-free accounts from having an unfair competitive advantage over other active businesses.

Joe Fairless: I’m having trouble following you on this one. Will you give an example?

Bernard Reisz: Absolutely. When you get engaged in something that’s active business and it’s ongoing and continuous, Congress enacted a tax on tax-free accounts, and that would apply potentially on flipping real estate. So if you engage in lots of flips inside a retirement account, that potentially results in taxable income to the retirement account.

Another example would be the hotel scenario we’ve described, where you’re going beyond providing the traditional landlording services and providing room services and things of that nature, and the IRS says that’s not an investment business, that’s an active business.

Joe Fairless: Oh, okay. Do you have to be passive?

Bernard Reisz: You certainly do not have to be passive; on the contrary, there are great deals that are available even after the tax, and I think this is a great segue into some of the great benefits of self-directed retirement accounts. Why would you use your retirement account for real estate? The benefit is many-fold, depending on each investor’s stage in their real estate investing career.

For some that are experienced and they’ve got their team in place, they’ve got their strategy, they’re gonna do better in real estate, their returns are great and they identify great deals – they should be deploying all their capital in real estate; as much as they can get into it, that’s what they should do because they’ll do better there than anywhere else.

So even after these taxes, they’ll still do better in their IRA, putting their IRA into real estate, than having it in the traditional space.

Joe Fairless: And I just wanna close the loop in my mind on the unrelated business income tax – you mentioned flips and the hotel scenario… Let’s just go with the flip scenario. If you have an LLC that has, say, 100k and you flip a house and then you take the profits and you keep it in that same LLC that’s through your self-directed IRA and you just keep flipping houses… Say you do one a month – then that would be a red flag?

Bernard Reisz: It’s not a red flag. Actually, it’s perfectly legal, but there would be an income tax to pay, and it wouldn’t be an income tax of the individual that has the IRA, but the IRA would get its own EIN, and it would file its own income tax return to pay taxes on that income.

Joe Fairless: Okay, because it’s more of a business versus an investment.

Bernard Reisz: Exactly.

Joe Fairless: It seems like that would be a grey area, for if it’s a business-oriented investment.

Bernard Reisz: Very grey area, very murky. There’s really nothing in the tax law that outlines what the guidelines are for when something crosses a threshold to an act of business. There was a tax case that went to tax court in which there were nine flips done in the retirement account in a year, and there was no assessment of UDFI; there was no assessments of such tax. That doesn’t establish a precedent, but that just shows us that it’s really grey, and you could potentially go up to quite a few flips without incurring the tax.

Joe Fairless: Okay, now going back to the benefits… The first one you mentioned is if you’re good at real estate, you might as well put more money into real estate to make you more money, and that will likely outweigh the taxes you’ll pay. What are other benefits?

Bernard Reisz: That’s for the experienced investor. For many people that are just getting started, real estate provides an opportunity that’s not available in traditional markets. Traditional markets are fairly efficient – there’s something called efficient market hypothesis; you’re not gonna build incredible wealth in the stock market, and you’re gonna have to deal with the volatility.

Real estate can be an inefficient market; there are opportunities there that can be life-changing for people that get into the game with the proper team. The question is “How do you get in? Where is your capital?” Real estate requires some sort of capital, and IRA LLCs and Solo 401(k)s provide that entry point.

There are people who have capital tied up in retirement accounts that aren’t doing much – they can use that capital to make their initial foray into real estate; they can leverage the IRAs of other folks (of friends and family) that are not disqualified persons to get funding for deals. Beyond that, they could become private lenders. If you’d like to get into real estate and you know somebody that’s successful and is active in real estate and you wanna get his guidance, you can say “I’ve got an IRA. We’ll lend this money on your deals” and this way you can get your feet wet and learn about real estate and get into the game, which is really the only investment opportunity that can be really that life-changing.

Joe Fairless: You just can’t lend to your family?

Bernard Reisz: That is again tax code! So you can’t lend to what the tax code calls “disqualified persons”, and there are lots of family members that are disqualified, and there are lots of family members that are not disqualified. The list of disqualified family members would be a spouse, children and the spouses of children, and parents. Spouses of parents are not disqualified, meaning somebody that’s not a biological parent and married one of your biological parents. Siblings are not disqualified, friends are not disqualified, boyfriends and girlfriends and domestic partners are not disqualified, nephews and nieces, in-laws… So the list of people that are related that are not disqualified persons is pretty broad.

Joe Fairless: Is checkbook IRA another way of saying self-directed IRA?

Bernard Reisz: Definitely not. Checkbook IRA is an exciting way to take self-directed IRAs to the next level, to make them really flexible and really cost-efficient. When we talk about a regular self-directed IRA, we’re talking about an IRA that sits at a custodian; the custodian controls the funds. Every single transaction, every single document has to be processed by the IRA custodian. That can take time, that incurs fees.

Each time you’ve got a deal that you’re pursuing and you need to get that deal before somebody else does, which happens in real estate all the time, particularly looking at REOs, share of sales, you’ve gotta be nimble and move quickly. Having it at a custodian can be an obstacle.

The checkbook IRA is a very creative workaround that puts you in total control of the funds. To get a checkbook IRA involves setting up an entity that’s held by the custodian, so we usually use an LLC. All the funds move into that LLC; that LLC has a bank account over which the IRA owner has signature control, so it can be run like a regular business. Is that clear?

Joe Fairless: That is clear. What type of liability do you open yourself up to as the owner of the Checkbook IRA versus having a third-party handle all of the stuff for you?

Bernard Reisz: The potential of engaging in a prohibited transaction increases. You’ve got total control, and when you have those funds you wanna make sure you don’t accidentally use the money in that bank account to buy groceries, you don’t wanna use that for any personal funds… It’s gotta be clear that those are IRA funds to be used for investment purposes only. Don’t accidentally or inadvertently use them for yourself.

Joe Fairless: How come retirement accounts are called tax-free when in fact you get taxed, either on the entrance or on the exit?

Bernard Reisz: There is a tax deferral. Roth IRAs we’d say are tax-free on the earnings… When we say tax deferral, among us, financial professionals, we immediately know what that means. To most of the people out there that are not CPAs, the term deferral would throw them off, but it’s a way of saying that there are incredible tax benefits to using these accounts.

Joe Fairless: So it’s not accurate, because it’s not actually tax-free.

Bernard Reisz: Yeah, a traditional IRA is gonna be taxed on the way out; it’s tax deferral. Roth IRAs are tax-free on all the profits and gains, but the money that goes into it is not tax-free.

Joe Fairless: Right. In some form or fashion you’re getting taxed, in any of these accounts.

Bernard Reisz: Yes, absolutely.

Joe Fairless: Okay. Because I always say as a multifamily syndicator our investments are tax-deferred, and then if I hear not an investor but a tax person say their investments are tax-free, I just was always wondering that question. So they’re all tax-deferred.

Bernard Reisz: They’re all tax-advantaged. That’s the term I try to use, tax-advantaged.

Joe Fairless: Yeah, because the terminology might be a little bit different, depending on which one. What is your best real estate investing advice ever for investors, as it relates to your background and your expertise?

Bernard Reisz: I’d say real estate is something you’ve gotta get into; you’ve gotta get an angle, you’ve got to associate yourself with real estate pros in your neighborhood, and you’ve gotta take that leap, and you’ve gotta access the capital that you have available to you, and there is an abundance of capital that’s locked up in retirement accounts. Over 25 trillion dollars is sitting there in retirement accounts. That’s greater than the US national debt, which may change before we got off this phone call… But there’s just so much power locked up in there, and you should use that to get into the market.

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

Bernard Reisz: Let’s go for it!

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

Break: [00:19:21].13] to [00:20:19].21]

Joe Fairless: Best ever book you’ve read?

Bernard Reisz: Phishing for Phools. That’s by George Akerlof, Nobel prize winner. He goes out and explains how there are so many places in the financial markets that we are being taken advantage of, and you’ve got to be aware and cognizant of that and look out for yourself.

Joe Fairless: Best ever resource other than that book that we can be educated on self-directed IRAs, Solo 401(k)s, checkbook IRAs, things like that?

Bernard Reisz: That’s a good one. I’d say we try to put up on our website a wealth of information, and we’re always refreshing it; we put links to the tax code, we go down deep into details, and we’re always refreshing that information with new angles and new ways to go about it.

Joe Fairless: And there’s a link to that in the show notes page. I didn’t expect to give you a layup, but hey, I’m on your side and you do have a bunch of good stuff, so we’ll go with that. What is a mistake you’ve seen one of your clients make as it relates to your area of expertise?

Bernard Reisz: I’ll give you more than one answer if I may, because I really want the Best Ever listeners to be aware of this. When you’ve got an IRA LLC, you may go to Home Depot, you’ll maybe go to a store and they’ll offer you a credit card. Don’t take it. That can be a prohibited transaction, because you’re taking and personally guaranteeing the liabilities of your IRA.

Joe Fairless: That’s a good one. You said you have another?

Bernard Reisz: The other would be when opening your IRA LLC account, I discourage funding the account with personal funds; that could potentially be interpreted as a prohibited transaction. Often times you go to a bank and you open the account for your IRA LLC or Solo 401(k) and the banker says, “Okay, you’ve gotta put some money into the account.” So you’ve gotta tell them, “We’re gonna move the money from my custodian. It’s coming over. I don’t wanna put personal funds in here.” We, as part of our services, we deal with the bankers and we iron that out.

Joe Fairless: That’s great. Those gotta be two common mistakes that come up, because those are kind of spur of the moment types of decisions people need to make, versus a decision where they’re in front of their computer, e-mailing or can call; these are in-the-moment type of things.

Bernard Reisz: Yeah, that’s it… And we’ve gotta be there for our clients to make sure these don’t happen and pre-empt that before they occur.

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

Bernard Reisz: Best way to get in touch with me is direct e-mail, Bernard@ReSureFinancial.com. We’d love to hear from all the Best Ever listeners and help everybody out in the system and get in control.

Joe Fairless: Thank you for being on the show. I’ve done many interviews about this subject, and you’ve taught me some things that I haven’t learned in other conversations, so I’m grateful for that and I know the Best Ever listeners are as well.

Some things we can’t do, the last two things you’ve mentioned, that is don’t take a credit card out at Home Depot or wherever, because you’ll be personally guaranteeing against that, and it might be considered a prohibitive transaction. Then also when you open an account with your LLC at a bank, don’t personally fund it – again, a prohibited transaction, or it might be considered that. And then some limitations and some benefits as well, which we’ve talked about.

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

Bernard Reisz: Joe, thank you for having me, and thank you to all the Best Ever listeners for listening, and I look forward to being in touch.

Carl Banks and Joe Fairless

JF1206: He Doubled His Business In 18 Months After Losing $30 Million In Contracts with Carl Banks

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After a very successful career in football, Carl continued his success trend in business, launching G-III Sports. With his new business, he made outerwear for the NFL. Until one day when reebok bought the licensing rights to make the outerwear. Rather than giving up, cutting costs, and downsizing, Carl and his team hustled working with smaller shops and in return only lost about 10% of his business. Carl knew that Reebok could not make the outerwear as good as they could, and in 18 months G-III Sports was awarded the licensing for outerwear again, which now doubled his business vs. what it was before. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Carl Banks Background:

-2x Super Bowl Champion/NY Giants Legend, NFL’s 80’s All-Decade Team, and Michigan State University Hall of Famer

-President of G-III Sports, the largest licensed sports apparel company in the world that produces for the NFL, NBA, MLB, NHL, etc.

-Founded G-III over two decades ago and responsible for bringing back the iconic Starter satin jacket.

-Travels with NY Giants as an on-air broadcast analyst and serves as a mentor to the team

-The Carl Banks Foundation raises money for a variety of causes, most notably autism research

-Based in New York City, NY

 


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TRANSCRIPTION

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

With us today, Carl Banks. How are you doing, Carl?

Carl Banks: I’m doing well, thanks for having me.

Joe Fairless: Well, my pleasure and nice to have you on the show. A little bit about Carl – he is a two-time Super Bowl Champion with the NY Giants, he is a New York Giants legend, he was on the NFL’s 1980’s All-Decade Team, and he is a Spartan from Michigan State University. He is a Michigan State University Hall of Famer. You’re from Flint, Michigan, right?

Carl Banks: Correct, yes.

Joe Fairless: I was born in Flint, Michigan.

Carl Banks: Really?

Joe Fairless: In fact, in about a month I’m gonna be in Flint, visiting my grandmother who is 102 years old.

Carl Banks: Oh, that’s awesome.

Joe Fairless: She’s still living in the same house that she’s lived in for 60 or 70 years.

Carl Banks: Boy, I know there’s some stories she can tell.

Joe Fairless: Oh, boy. Yes, yes, yes. So Carl – not only from the football background, we’ll put that aside for a second… Holy cow, Carl has been busy post-football career; he founded G-III Sports, and G-III Sports is one of the largest license sports apparel companies in the world that produces for the NFL, NBA, MLB, NHL. They’re the number one outerwear sports licensing company, and we’re gonna talk about that, as well as some other entrepreneurial endeavors. He also still travels with the New York Giants as an on-air broadcast analyst, and serves as a mentor for the team… So here’s my first question for you, my friend. Well, first off, welcome to this show!

Carl Banks: Thank you for having me.

Joe Fairless: You were a grave-digger in high school… How did you get into that?

Carl Banks: Well, there’s a few cemeteries in Flint, Michigan. Gracelawn Cemetery was the one that shows me, I guess, there was a really great — I call him a community leader. His name  was Peter [unintelligible [00:04:20].13] and he tried to make sure that all the young athletes around town just kind of stayed out of trouble; he would offer summer jobs. He was at one of my games, and it was probably my junior year, going into the summer – it was the summer league basketball – and he said he had a job for me.

I came, and he gave me a shovel, pointed me in the direction to go, but… There were a lot of us out there, but it was so interesting because the whole grave-digging thing, with the people that you work with… I think there was kind of a method to his madness, because he had us working with people that were just out of incarceration, so people that were trying to get their lives back together…

So you’re sitting there and you’re digging graves, and you’re having these long conversations with people that are giving you really great life advice… Because people are saying “You don’t wanna do these types of things, you don’t wanna be with these types of people. This is what got me in trouble”, and some of these young men — my father was a corrections officer, so he knew some of them. So it was really interesting, but it was a great character-building experience, so much so that I continued to do it throughout college. It was great.

Then Peter was just awesome, because he would come, he would drive through, pick me up, take me to lunch, and we’d have these life conversations, and how to deal with people and building people skills… It was just awesome, that whole experience, and I always joke — when people ask me about it, I say “People are dying to get in there.”

Joe Fairless: [laughs] Well, with some of the conversations you had with the people who are just getting out of jail or prison, do you remember any particular piece of advice that really resonated with you?

Carl Banks: Flint was a really small community, but I’d say the one thing that I never forgot – I don’t know if it was Peter that told me, or one of the ex-convicts… He said, “Your eyes remember what your ears forget”, meaning always stay alert, always be observant of people and your surroundings.

Joe Fairless: How have you applied that to your life?

Carl Banks: It’s so interesting, because in business, just like in sports, what I call phatic communication or non-verbal communication – you can read a lot from a person just by observing them, and sometimes you’ve gotta be less of a talker in business and more of a listener and more of an observer. And in sports, because I played on some very good teams, I was able to – when I knew I could impose my will on someone – watch their behavior; I could tell when someone gave up, I could tell their level of determination. The harder you played, the more tips they would give you.

If a guy had to block you, you could tell the ball was coming to my side of the field, because the guy would be a little more nervous than he would if he didn’t have to block me. Sometimes you find that in business people are over-talkers sometimes, or if you ask a question and you watch behavior, you can learn a lot about people, so that’s why I observe and I listen.

Joe Fairless: I love that, that’s incredibly helpful for us as entrepreneurs. You mentioned that – and this will be the last grave-digging question I have for you, but it’s really fascinating… You mentioned you continued it when you were at Michigan State – did you just find a new cemetery to go dig in, or did you go back to Flint and dig at the same place?

Carl Banks: I stayed at Gracelawn Cemetery.

Joe Fairless: Okay.

Carl Banks: And I did everything, too. It was grave-digging, landscaping, I ended up working backhoes and tractors… It was everything, but you had to find lost grave locations, you relocated people to their family plots… It was all kinds of stuff, and one of the weirdest things was when you had to relocate someone that’s been buried for a very, very long time; the family or the kids bought a plot and they want everybody together, and you’ve gotta go dig someone up… And once you dig it, you can only go so far, then you have to go by hand and scoop out turf, and there’s water and all kinds — it’s just like the creepiest thing…

Joe Fairless: Yes, it is…

Carl Banks: But it was fun… [laughter] Believe it or not, it was fun.

Joe Fairless: Were there any self-talks later in life, whether in the NFL or post-NFL, doing the successful endeavors that you’re doing, where you think “You know what, I hand-dug out an existing grave, I can do XYZ.”

Carl Banks: Probably more often than you can imagine. Because I think it also taught hard work. I’m not afraid to get my hands dirty and dig in, literally. Pun intended. But there are times where you’ve got a decision to make, or you’re training — when I was in sports, yeah, I would say I’m doing pretty good for myself. I’ve been around death, I can do just about anything.

Joe Fairless: Let’s talk about a tough decision, as an entrepreneur, that you’ve had to make. Can you tell us what that was and just the thought process that you had with it?

Carl Banks: I would say in the late ’90s the licensing landscape changed, and Reebok became a major licensee for all categories in the NFL. They just pretty much bought the entire business. So I was a niche business at that time, I was strictly outerwear, and I was informed by the NFL that all of my major retail rights were taken away and gonna be granted to Reebok.

Now, I knew Reebok did not have the outerwear core competencies that we had, and yet I lost the business to them because they were the highest bidder, and obviously outerwear for someone who’s making jersey shirts and hats [unintelligible [00:10:36].03] but it’s a very important category at retail. So I spent probably two or three meetings, myself and Morris Goldfarb, the CEO of G-III – we went to Boston, we sat with their executives, Paul Fireman, and we said “Okay, so if you guys are gonna do outerwear, we do it better, why don’t you sub-license us to do it?” He said “No.” So ultimately, their goal was to put us out of business. So my decision that I had to make at that moment was “Was I going to allow this company who is much bigger than me in the sports area to put us out of business, or to strategically adjust?” Because I sat with Morris Goldfarb and he said “Look, I may have to shut the division down, because I don’t know where we’re gonna get this business from.”

I would say the number one thing that kicked in for me, and I basically said to myself while I was in the meeting with him, I said to myself “What would Belichick and Parcells do?” Because they’re the masters at knowing what you are this year, and I’d written both of them letters thanking them for being kind of a blueprint for how I approach business from year to year, from week to week.

So what I did was a little bit of deductive reasoning. I knew that Reebok did not make outerwear and they didn’t do it proficiently, so even if they did, it would be one or two pieces. So what I said I would do is adjust the business. And I just looked at the CEO and said “We’ll be okay”, because I knew if they didn’t service the customer, it was gonna be a problem with the leagues, because the customer is gonna say they’re not getting outerwear and G-III Sports was getting me everything I wanted. And if you’re talking about a 20 or 30 million dollar business at the time, that’s a lot. And you’re taking product out of the market. So they bought the rights, they warehoused them, so I said to my CEO, “We’re gonna be okay.” But in the interim, I still had to find business, right?

Joe Fairless: Yeah.

Carl Banks: So what I ended up doing, where they took the major retailers away from my portfolio, there were a ton of independent guys, local market guys, team pro shops, right? So my ability to go out and go find the local market guys to buy my outerwear was the greatest thing I could have ever done, because I expanded my business in preparation for the rights to come back, because all of these mom-and-pops got the product, and they were the only ones to have outerwear for a couple of years.

Now, the big retailers were complaining to the NFL, like “I can’t even get outerwear when all of these other mom-and-pops have outerwear.” I’m saying, “Go talk to Reebok, we have nothing to do with it.” So eventually, I think about 18 months into the deal, we probably lost I would say 10% of our business. So we had to hustle, right? But we found a different way, and that was kind of — if I had to look at the lessons I learned from Parcells and Belichick, those are the things. Each week, each year it’s “What are we? What do we have available to us? Now let’s find a way to be successful with what we have”, because the old way doesn’t work given the tools we have available to us. So I immediately went into that, and that’s something that businesspeople didn’t experience. It takes a series of meetings, and the first thing you think to do is cut-cut-cut, slash-slash-slash, and I’m thinking “No, let’s grow; here’s an opportunity”, because these were guys that weren’t getting my product that wanted it, now I can give it to them exclusively, and make the other guys want the product as a result of that.

My business was down, like I said, about 5%, maybe 10%, which wasn’t bad, given I just watched 30 million dollars worth of business go to someone else and I had to refigure it out, but I was able to cultivate a new customer base, and Reebok and the leagues, all of them (the NBA and the NFL) were hearing it from the major retailers – “You can’t do this. You can’t keep this–” and Reebok could not make the products at the level we could, and they were offering one jacket that wasn’t very good. And I got into the business being a niche player in outerwear, because I was able to make jackets at a level where they’re presenting ten T-shirt, I would go to JC Penney’s and present 20 jackets as if they were T-shirts; I was able to give each customer their own jacket, and that’s how I got in the business with NFL… But I basically went back to my roots.

When the big players started to call the NFL and say to them “You can’t not keep this product out of the market”, Reebok had to either make the product or surrender the rights, and we ended up getting the rights back in 18 months.

Joe Fairless: Wow.

Carl Banks: What ended up happening, I grew a business and then I got the 30 million dollars in business back, so it doubled my business just like that in 18 months.

Joe Fairless: Knowing that you went through that process and the results from the process, would you ever trick yourself into thinking that something like that is about to happen again?

Carl Banks: It is.

Joe Fairless: Okay, will you elaborate?

Carl Banks: It’s a thing called Amazon. Amazon is great, but they are squeezing brick and mortar… So yeah, it’s happening. We’re making some adjustments, and the experience is very important if you wanna be relevant beyond online purchasing; you’ve gotta create an experience, you’ve gotta create stories that work, that can’t be articulated by looking at a computer screen. We’ve been able to do that, and we do business with Amazon, we do business with Fanatics; both are good partners, but their stated goal is to take over the world, and as long as we’re part of that, that’s fine, but we have other partners that we wanna keep in our mix as well that are brick and mortar, and the only way you’re gonna do that is people go to brick and mortar for the experience; if you’re buying a coat, if you’re buying your favorite team hat, jersey or shoes, it wasn’t grab and go… That’s what online is right now. There is no experiential component.

I’ve just read about the artificial intelligence of the Echo and Alexa, where they’re gonna be  beaming and looking at your body and seeing what you wear, and how to do that, but that’s just not the same. If you continue to create the experience and if the retailer can adapt to the changing taste of the consumer, I think we’ll be fine. But there are certain things that you can’t do online that you can do in person, and also a lot of these guys have to buy brands in order to stay relevant, because they don’t wanna make product; they wanna sell product, so they have to buy other brands to sell the product, and sometimes it’s just like they bought whole foods, because they know that people like to feel their vegetables; they like to look at the fish before they buy it. They can’t buy that online. So it’s got a proof that everything can’t be sold online; you’ve gotta have some level of experience.

Joe Fairless: On the entrepreneurial note, and really just the hustle and the foresight note, I was reading a story about you and it mentioned that you convinced a radio station to allow you to host a post-game show while you were playing for the Giants. So you would shower after the game and then go talk about the game immediately after, on your show, and most of your teammates, I imagine, were not doing that.

Carl Banks: None.

Joe Fairless: Okay, none. [laughs]

Carl Banks: There was no one doing that at the time. There was no one in the league doing what I was doing at the time, and it became kind of the format for what we see in post-game shows now – player-hosted shows, player reports… That was all a result of what I did, and I had great help, because again, when you talk about being proactive and opportunistic and kind of having that grind — I got Coca-Cola to be a sponsor of it, but how it happened… I was speaking — I’m trying to think where it was; it was in South Jersey like Exit 9, and I was speaking at a kid’s banquet, and the father came up to me, his name was Wayne Vogel, and he was from Coca-Cola.

So we struck up a conversation, I said “I’ve got this idea, I wanna do a post-game show… Would Coca-Cola be interested?” Long story short, he took me to meet Jim Patton, his boss, and Patton had this idea, too; they had to try to sell a two-liter bottle of Diet Coke, and it was the first time they were launching that, so I was a big guy, it worked for them, because I became kind of their poster guy for this two-liter bottle of Coke, and which kicked off an entire campaign around the entire country with the NFL, and then Pepsi signed Shaq as a result of that.

Joe Fairless: Shaq should thank you, by the way.

Carl Banks: Yeah, so I got Coca-Cola to say, “Okay, we will be your sponsor.” So I walked into the radio station – and by the way, this is the same way I operate now with my radio show here in New York on WFAN CBS Radio… I had a Coca-Cola in hand, it became the Coca-Cola Carl Banks Report, and the Coca-Cola Carl Banks Post-Game Show. So I was like in radio while I was working. No players were doing any radio shows during the seasons, and they certainly weren’t doing postgame shows. That’s kind of what laid the groundwork for me to be a broadcaster, but I loved the philosophy of having a sponsor in hand and basically bartering your air time… But it’s great, especially if you’re good – and I think I’m pretty good at what I do, but here I have a postgame show, I do a Monday and a Friday show here on WFAN, and my main sponsor is KIA, and KIA wasn’t in sports.

I’m not gonna say I’m solely responsible for putting KIA in sports, but I was at [unintelligible [00:21:18].29] and I needed to rent a car, and they gave me what I thought was a Toyota Land Cruiser and I find out it’s a KIA, right? I’m like “This is great!” and I was ranting and raving, so I got back to the radio station and I said “Can someone call someone at KIA?” and I recorded this testimonial, they sent it to them, and we’ve had a relationship for like seven years now.

Joe Fairless: Wow.

Carl Banks: But then, KIA is now in NBA, they’re in NFL, they’re a big part of sports now. LeBron James is a big spokesperson for them, but the experience and being proactive in things that you like is really cool. I know I didn’t answer the question, but I just wanted to share the experience.

Joe Fairless: No, you did! And I love that, because I have a follow-up question on that. You mentioned it was called a Coca-Cola Carl Banks Report…

Carl Banks: Yeah.

Joe Fairless: No one else was doing it…

Carl Banks: Correct.

Joe Fairless: I’m gonna make some assumptions now. I am assuming that your teammates were like “Dude, you’re doing what after the games?” and when you made a  mistake in the game, would the coaches and/or players be like “Well, Carl, if you weren’t doing all this extra stuff, then you would have more time to focus on the game and what we should do.”

Carl Banks: We had a little bit of that. I got my chops busted a  little bit, but that’s even more pressure to be good. And again, I was on some really good teams, so there was always this element of accountability; we always had to be accountable to each other, so effort was important. And if I made a few bad plays in the game, I had to fess up to it. That was the way our team was built and the way each component that Bill Parcells built our defense and Belichick ran it… But if something happened, we pretty much happened whose fault it was, because that’s just the way we were set up. We were pieces that worked together, so if a pass play happened or  if a run play happened, you couldn’t come off to the sidelines and tell your teammates, “Well, I did my job, but something freakish happened” – no, we knew, everybody knew.

So if I screwed up, I had to fess up right there, which made it I guess even more authentic for me in a postgame show, because I had to go on air — I didn’t have a 24-hour rule; I had to go on and fess up right on air… “Hey, look, they scored a touchdown because they ran on the outside by me and I didn’t do my job.” I think that’s what makes me such an honest broadcaster to this day, is that I can actually look at something and say whose fault it was without making it personal, because I had to do it myself.

Joe Fairless: You are more so proactive and opportunistic than most people. You’re digging graves, doing a job in high school that most people wouldn’t wanna do for their whole life, let alone in high school. You made the NFL, excelled, while in NFL you took on another job that evolved into other stuff and now post-NFL you’re doing really well with your company… What would your advice be to people who don’t naturally have your level of proactiveness in their nature?

Carl Banks: I would just say be curious. Developing people skills, believe it or not, it started for me while working in the cemetery, because I was around different types of people and I had to ask questions, I was asked questions, and I had to learn certain things. So I would say everyone who is not proactive or they don’t think opportunistically, I’d say be curious, always be intellectually curious; you wanna learn something about something or about somebody, and that one question will lead to the next answer, to the next question, and then that’s growth, and then you wanna know something else about something, because that’s how it really starts.

You’ve gotta develop some level of communication skills; you don’t have to be a great orator, you just have to be curious. You’ve gotta be curious and you wanna have interest in people, and I’m probably, when I’m not around people, the most introverted person ever. I enjoy doing nothing better than anybody, but when it’s time to have that conversation or to follow up on something that I was reading, I’m all in. I wanna learn as much as possible.

Joe Fairless: Based on your experience as an entrepreneur, what is your best advice ever for other entrepreneurs?

Carl Banks: As painful as it can be, do not be afraid to fail, because entrepreneurism is about exploring every idea you have. That’s what an entrepreneur is – it’s about blazing a trail, it’s about breaking new ground, it’s about having a better idea. That’s what an entrepreneur is. He finds either a better way to do it or he has a better idea or he has a unique idea. Sometimes you find out that your idea is not unique, and you either abandon that idea and go to the next one, or you find a better way to make your idea even more innovative, but it can be painful. Even when you’re successful, your one or two ideas for expansion could fall flat on its face, and that’s painful, but you’ve gotta be able to say “I’m not afraid, because I’ve got many more ideas to come, so I’m just gonna keep coming at you.”

Joe Fairless: Well, let’s stick with the painful theme. What is a painful flop business-wise that you’ve been responsible for accomplishing?

Carl Banks: [laughs] Well, this was just recently. I had an idea that I was trying to work a licensing deal with Classic Media, and they have just the greatest library of cartoons, Rocky and Bullwinkle to Richie Rich… They have this incredible catalog, and I thought I would be able to take those images and really create some fun stuff on apparel, because we’ve seen it, junk food has done it with vintage, from Coca-Cola to 7Up, whatever it is, right? And I thought the time was right in the market.

I invested a lot, hired a lot of people, we created some incredible product, and nobody wanted it, nobody understood it, no one wanted it, and it’s unfortunate, because I still have some great designs that eventually — and I’ve been ahead, that’s how I also look at it too, sometimes I’m ahead of the curve in some of my ideas… But that was a very expensive failure, very, very expensive, because you get licensing rights and they gave me everything, I gave them a great presentation, I built a great product, I even had product in the warehouse, and just no one wanted it, and that was interesting, because I thought the timing was perfect for it.

It happens, but I still have great product and I know at some point if I have to revisit it with Classic Media, I’ll be okay. I think they’ll be ready for it.

Joe Fairless: If presented a similar type of opportunity, or if you have a similar type of idea, how would you approach it differently, knowing what you know now?

Carl Banks: I don’t think I would approach it any differently.

Joe Fairless: There’s no way to test that before sinking in a bunch of money?

Carl Banks: Sure, you have to spend money to build it, right? But you do your market research, you see what’s trending, you see where fashion is leading, and you say “Okay, this fits”, and it didn’t. But that’s okay, because it’s about instinct. Entrepreneurs have to have instinct. You can’t be numb. If you feel it and it feels good and you feel great about the research that you’ve done, you feel great about the integrity of what you’re building, you go for it.

I had the same instincts on the Starter brand, that’s extremely successful for me right now. I wore it when I played, I was a spokesperson for it, I was building a jacket program, and I wanted to get the starter label on it because we were recreating the scene from Coming To America with Eddie Murphy and Arsenio Hall; Eddie had the Mets on and Arsenio had the Jets on, and they had all the buttons and everything on it, and I said “I wanna do this, but I want it authenticated”, and I was able to reach out to the folks at Iconix, the IP holder, and asked for permission to do it. I said “You know what, I think it’s time to bring this entire movement back.”

So we worked together with Iconix, I got the license for the brand, and it has been on fire. Instincts felt good, I built it the right way, I made sure that the integrity of the product was as authentic as it used to be, and I knew there was a generation of millennials and even people that are of my age group or a little younger that had an emotional connection with the brand. This was a brand that resonated even before Nike started to enter into sport. So there’s heritage, these are the guys that created what we know as sports fashion, as sideline apparel. These are the guys that were innovators, they created that, so I brought it back and it is on fire right now. I’m very excited and I’m very glad I trusted that instinct as well.

Joe Fairless: Oh yeah. You’ve got the pullover Starter jackets…

Carl Banks: That’s the breakaway, yes sir.

Joe Fairless: Yeah… I do have a place in my heart for that, and I think I will be getting one after our conversation.

Carl Banks: Yeah, you should break your old one out, but yeah, Starter.com… We do a great job. But the number one thing I wanted to do when I got permission to do it from the NFL, and then I went to Iconix and they granted me the rights to the license, the first thing I wanted to do was find out where the product was made, so I looked in the old jackets to see what country of origin they were made in, and then we tracked down and I have three people on my staff that actually worked for Starter during that period.

They knew some people, and we tracked down the original factory, and we’re still working with that factory to make sure that we have some level of authenticity to it.

Joe Fairless: That’s incredible.

Carl Banks: And how about this? This is something for entrepreneurs to know about, too – I also went to the vintage dealers, because those guys are so true to the essence of the product, because they sell it… I became really good friends with — there’s a guy here in New York, he has a vintage store called Mr. Throwback, and he specializes in Starter jackets. So I went to him to make sure I had all the details right, and if there was a detail off, he talked to me about it and we got it right. So also bring an outside, expert point of view into what your thought — you’re not surrendering your thought process, you’re just perfecting it.

Joe Fairless: The final question — actually, I have two questions… This is the penultimate question – how do you identify the people to be on your team as advisors? Because I’m sure through your connections throughout the years you’ve got a rather large rolodex, so really the challenge is identify who you should really closely associate yourself to?

Carl Banks: Well, you find out what people’s core competencies are. It could be people that you admire for what they accomplish. You start to pick their brain, you have conversations. Again, like I said, eyes remember what your ears forget. So if you’re very observing and you see how people do things, you learn about them and you say “Well, maybe that can apply to what I do.”

The same principle applies when I hire someone. I still to this day — I didn’t think I was that tough, but my current men’s activewear designer, I almost sent to home in tears, because I kept making her do projects and I kept challenging her because I lost a very good designer, and I was really in a good space in terms of how my product looked and where it sold at retail, and I kind of had carved out a position, and I didn’t wanna lose ground to my competition, and I was fond of the designer I lost.

So the next person in – she’s not a kid, she’s a young lady… But her mother was in and she was like, “Mommy, would you tell him how hard I took it?” I’m like, “I didn’t think I was that tough, but I just wanted to know that you were good enough and that we were gonna have great product.” I could not say more great things about her to this day, because she is just incredible. She actually took our activewear to a whole other level.

Joe Fairless: Wow. As a business owner and entrepreneur it’s incredible what you’ve accomplished, and I’ll give my summary here in a second. But before I do, what if anything would you like to mention that we haven’t talked about?

Carl Banks: Well, I would say you’ve gotta have a work/life balance. I think people that are so driven – and I’ve been there before – they don’t have a life. I think health is important, I think you have to do something you like outside of the things you wanna create, like work… Because entrepreneurs often multitask from different ideas, but I think a healthy mind and body is important as well, and I think you need to have balance in that, and if you’re an entrepreneur with a family, you definitely need work/life balance there, because the sober reality is your failure sometimes can bleed into your personal life, and you don’t want that.

You wanna have a balance where people are rooting for you, you wanna create cheerleaders. If you fail, you don’t wanna come home and be looked at as a failure; you want everybody bought in. You wanna have a life where everybody’s proud of every effort that you have, so that they’re your cheerleaders and they’re like “Okay, what do we wanna do next? If this one didn’t work, we’re gonna do the next thing.”

Joe Fairless: With your company, how can the Best Ever listeners check out the products that you licensed? Where can we go to look at that?

Carl Banks: Well, we have a website, giii.com, but starter.com is another place. Fanatics – if you’re just going to Fanatics.com and you type in any of our brands, meaning Starter G-III For Her, G-III By Carl Banks, you’ll see all of our products. I do Hands High for Jimmy Fallon, I’m partners with Alyssa Milano who is the number one fashion, maybe sports apparel brand, Touch By Alyssa Milano… So she has literally changed the game.

We met probably ten years ago at a trade show and she said she wanted to do women’s apparel that didn’t look like men’s product, that was (as she said) “shrink it and pink it.” So she had an idea – talk about an entrepreneur – she said “This is what I want it to look like. Give me a designer, give me staff”, and away she went. Now I think she is the leader in high-end fashion for women’s sports apparel.

Joe Fairless: Wow. I will include those links in the show notes page. Carl, lastly, as someone who — I believe your company works with investors, right? I see an Investor Relations–

Carl Banks: Yeah, our corporate company, G-III Apparel is a publicly-traded company, that’s correct.

Joe Fairless: Got it. And I guess my last question is what was the decision-making process to make it a public company versus keeping it private?

Carl Banks: Well, I was not part of that process. Morris Goldfarb and his father and his brother are the ones who took the company public. I joined the company probably two years into that process. They had just gone public. So what I brought was a whole different mindset, because they weren’t even in the licensing business at that time. They had just become outerwear company of the year for some retailer on a Bomber jacket, and I joined the company with the sports licenses, which became a model for how the company would operate, because the margins were so much better… Now you’re dealing in brands instead of commodities.

So now, if you look at the G-III portfolio, outside of my sports business, you’ll see names like Calvin Klein, Karl Lagerfeld, Andrew Marc, Kenneth Cole, Cole Haan, Levi’s, G.H. Bass are all brands that we corporately license or own outright. We own DKNY (Donna Karan) now, we own G.H. Bass, we own Karl Lagerfeld… So we have brands now so that we can remain important at the retail level, and just not a commodity black or brown dress, or suit, or jacket.

Joe Fairless: Carl, thank you for being on the show and sharing life lessons along the way…

Carl Banks: I appreciate it, man.

Joe Fairless: This is incredible, very insightful, and I’m very grateful that we were able to catch up and learn more about your approach, from the very beginning — or from the beginning of when we started our conversation, where you talked about lessons learned from your summer job, digging graves, to just your overall approach where you can [unintelligible [00:39:06].29] a lot from people by observing them; sometimes you wanna be less of a talker and more of an observer, and how you’ve applied that towards business. Sometimes people talk too much, they’re overtalkers, and perhaps there is something that is lurking just beneath the surface there, whether they’re insecure or hiding something or whatever.

Then life challenges or business challenges – you had Reebok come in and took away basically a 30 million dollar account. You had to hustle, you went after the private companies and lost only 5%-10%, but then you got it back 18 months later, plus you’ve got all these private companies, so you grew tremendously through that experience… And the whole thought process, what would Belichick or Parcells do… It’s funny, I had a challenge in my business when I was starting out and I thought “What would a billionaire do?” So it’s still having the thought process of someone else at a higher level at the time of where you’re at would be doing…

And then being proactive and opportunistic… Holy cow, playing a football game and then doing the radio show when no one else is doing it, then bringing on sponsors… And if we don’t have that level of ambition and proactiveness that you naturally have, then your advice is to be curious, ask questions and learn. From learning, you will grow, and then that leads to more questions, and naturally, there’s more growth.

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

Carl Banks: Alright, man.

Jay Williams and Joe Fairless

JF1169: #2 Overall 2002 NBA Draft Pick & Entrepreneur Jay Williams: How To Reinvent Yourself When In Life Altering Situations

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As the #2 overall draft pick in 2002, Jay had his future all planned out. Until one day when he hit a utility pole at 65 MPH on his motorcycle – his life was forever changed. Rather than let his situation get the best of him, he turned it around, writing about what he went through and helping others in their tough situations. Today he’ll discuss how to come back from tough times, as well as giving us business and investing tips. Jay isn’t where he is today because of his athleticism, he truly made himself into a phenomenal business man, someone we can all learn from. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Jay Williams Background:

-Multi-talented ESPN college basketball analyst, motivational speaker, and Former NBA star

-Considered one of most prolific college basketball players in history, and the second pick in the 2002 NBA draft

-While a motorcycle accident pivoted his promising NBA career, he saw the adversity as a blessing that taught him    how to thrive/inspire others

-Now applies his positivity and signature personality to broadcasting, business, and beyond.

-Best selling Author of “Life Is Not An Accident”, a Memoir of Reinvention

-Say hi to him at http://www.jaywilliams.com/  

-Based in New York City, New York


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TRANSCRIPTION

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

With us today, Jay Williams. How are you doing, Jay?

Jay Williams: I’m doing good, my man. Thank you for having me.

Joe Fairless: My pleasure, and I am grateful that we’re gonna spend some time with you. Best Ever listeners, you know Jay, and if you need a refresher, let me just give you a quick one. He is a former NBA player. He was drafted number two overall by the Chicago Bulls, got into a motorcycle accident and he pivoted his career from NBA to now an entrepreneur and multi-talented businessman, one of which occupations is being an ESPN College Basketball analyst, he’s also a motivational speaker, and many other things. He’s also the best-selling author of the book “Life Is Not An Accident: A Memoir Of Reinvention.”

Jay, let’s start off with that. What does that title mean to you?

Jay Williams: First off, who would have thought it took me three years to write close to 290 pages…

Joe Fairless: Books aren’t easy.

Jay Williams: Yeah, they’re definitely not. They’re more stressful than anything. The most humbling part about it is writing draft after draft and then being vulnerable enough to share that insight about what you’re going through in the darkest moments of your life with your inner circle, and having guys like Coach K., after you put a year-and-a-half into it, read it and then call you and with that Coach K.-like voice say “Yeah, I think this is pretty shitty. You could do a better job”, and you being honest with yourself and saying “Wow. Okay, back to the drawing board.”

But I guess the overall premise of it is that I found myself in a very bad place for a very long time because of decisions that I’ve made in my past… And it’s all about owning your experiences and using that as something empowering, where I think a lot of people run away from bad things that have happened in their life instead of documenting it, recognizing it, thinking through it and then using whatever experience they’ve been through as something as a positive driver in their life to push them to be more, in whatever capacity they decide to pursue.

So recognizing that all these incidents have led up to this point, that have allowed me to be the person I am currently today, and that person is exponentially different and stronger than the person that it happened to when he was 21 years old.

Joe Fairless: And you’re 36 now. I’m curious on the feedback that Coach K. gave – and we’re talking about head coach for Duke, your former coach – you on the book… What was the difference from that version that he read to the end version?

Jay Williams: You know, sometimes when you’re writing, there’s a tendency for you to be so worrisome about the way you’re perceived by everyone, not just yourself; if you have the moxie or the confidence to be vulnerable about your experiences, how vulnerable are you going to be about the experiences you’ve had with the people that you are closest to? And then are you doing a disservice to truly telling your story if you’re not going to be candid and honest about your relationship, about where that was in comparison to where it is now.

I think there was a big push from him for me to find out more about myself. He’s always a person that drives people for self-exploratory journeys, so for me the more honest I was with myself and the less I was the BS Jay and what I want the perception of people to think of who Jay was, he once again pushed me in the direction of being truthful. And when you tell the truth, it helps other people confront their truth with your truth, and then it’s your job to find common ground.

Joe Fairless: Can you think of a specific story or example that wasn’t in there pre-review, but it was in there post-review?

Jay Williams: Yeah, various sensitive subjects, in particular with Coach K., and then I’ll give you one from my father, because [unintelligible [00:05:09].23] I obviously have a dad, and my dad has raised me since I’ve been a little boy and has done a hell of a job, all the sacrifices he’s given me, but then Coach K. in my [unintelligible [00:05:19].08] years as well kind of stepped in as a coach, in that capacity.

The one with him was recognizing that at the time he was very traditional, and he liked for guys to stay in school for three to four years, and he wanted people to graduate, and it was difficult for him to adjust to the new culture, where kids wanted to be one and done, kids wanted to get in and out. And having to address the fact that after my sophomore year we won, and he allowed me to make the decision myself, but in retrospect if you think about it, he should have told me to go, and how to confront that with him… Even though I did graduate in three years, once again, owning my journey – it happened for a reason; look where I am now. But the advice I would have given some other kid is that you only get a certain amount on time to capitalize on that skillset that you have. In particular, we’ve seen all these injuries with Gordon Hayward, and you saw one last night in the football game.

That was something I had to address, and how you’re gonna handle that with your coach [unintelligible [00:06:17].06] all means John wouldn’t like. So one of those moments when you’re honest with yourself.

And then with my dad, about going through what he went through back when he was younger; there was history of domestic violence in my house, and how that ultimately affected me and affected my relationship with him, and how I’ve had to work through that, in particular with forgiving myself with my own accident; I had to learn how to forgive others and not hold slight or animosity if I was going to learn how to forgive myself.

So I think there were some really cool life lessons that he forced me to address. And it’s one thing when these things happen to you, it’s another one when you’re writing it down and you’re forced to thoroughly think through it and you can’t dismiss it, and you wanna suppress it and act like it didn’t happen.

Joe Fairless: And when you say your own accident, you’re referring to the motorcycle accident where you hurt yourself, and basically the NBA career was no more after that, right?

Jay Williams: Yeah. When you hit a utility pole going around 65-70 mph, it inevitably changes the path of what you thought your original path was.

So taking all that and then once again owning it and then helping other people empower themselves with owning their journey is something that I’m very passionate about.

Joe Fairless: With that circumstance and other circumstances, you’ve come up with this approach of “you document it, you recognize it, you think through it and you use it as a positive driver.” What are some positive things that have come out of that experience? Because I imagine – but correct me if I’m wrong – that has been one of the most life-altering experiences that you’ve come across, but I don’t know, so I’m just guessing.

Jay Williams: I’m knocking on wood that it is. There have been a lot of positives. One is that it really pushed me as far as how I look at life. There’s a tendency from the people that I know that the smaller things, the minutiae really affects them, and I think I’m able to sift through the minutiae and recognize the bigger picture, and also recognize that when certain things don’t happen the way that I really work hard for them to happen, to understand that “Okay, this is all part of the plan.” Now, it may not be the plan that I’ve been trying to orchestrate, but ultimately that’s my own plan… And not to get into the whole spiritual stuff, but you have to believe that there’s a purpose behind everything, and that ultimately my purpose is one that’s going to continue as long as I push and drive myself to be fulfilled. So that’s one positive.

Another positive is recognizing the importance of my relationships. I just lost one of my best friends, and I haven’t really been punched in the stomach like this for a very long time, since I was 21. There was also a tendency for me to get lost in my work. When you go through something like that at the age of 21, the same kind of passion I had towards basketball I had to translate into work, and that has ultimately lead me to be in a really good place work-wise; I don’t know if it allowed me to spend as much time on my own personal growth and the growth of my friendships, and the candidness and the honesty with some of my friends and with some people I care about in particular. Writing my book was the first step towards that, but I lost one of my really good friends, Peter Stein, a couple of days ago — two days ago, actually… And going to the viewing, you just — those are the things that just remind you how important each and every moment is that you spend with the people that you love.

Once again, I was able to sift through the minutiae work-wise, but then I was able to sift through a lot of minutiae personally as well, friendship-wise and family-wise.

These are things, like Icarus, as you fly higher, sometimes you get up and you see the sun, you get knocked down, and it makes you appreciate the entirety of the journey.

Joe Fairless: From a business standpoint – and we’ve talked about this prior, and my thoughts first and foremost are with your friend’s family and you and everyone that was affected, and whatever we can do as a community, please let us know… From a business standpoint, what are your focuses? You’ve got ESPN, and then what other areas of focus take up your time during the day?

Jay Williams: One of the things that happened for me — it’s funny seeing how other people have been able to really build upon it, in particular Gary B., who’s a good friend of mine, and also another guy named Scooter Brown, who I’ve known since I’ve been 13 years old, who represents for Justin Bieber and Kanye and has done tremendous within the entertainment realm… Is that you start seeing the play of content, content, content. And one of the things that I’ve been able to do, and I got lucky enough to do that, is that I invested in the company in New York City called The Leverage Agency back around 2006-2007, with a guy that I’ve known for a very long time, Ben Sterner.

Joe Fairless: I know Ben, I used to work with Ben.

Jay Williams: Small world, right?

Joe Fairless: Yeah.

Jay Williams: Ben’s incredible. I kind of call him — he’s like Russell Crowe in A Beautiful Mind, for his ability to put together things, and he’s constantly coming up with ideas. It was a way for me to be connected to more brands. I had this network of people that I had met throughout my tenure at Duke, and having other assistant coaches become head coaches, and Tom [unintelligible [00:11:34].00] goes to Harvard, Chris [unintelligible [00:11:36].14] goes to Northwestern, Mike [unintelligible [00:11:37].07] was originally at Stanford before he went to UCF… You’re tapping into this network along with other friends and you start to recognize, “Okay, I have this great network, how can I leverage it, but how can I be truly authentic to who I am?” So working with Ben, being a partner with Leverage, procuring sponsorships for major events, and now I’m on the verge — I consult with players [unintelligible [00:11:59].06] and helping them build out content because I recognize – and I started to a while ago – okay, the traditional model in which brands have worked with agencies is becoming more antiquated by the second.

You’re seeing a lot of brands that are internally trying to create their own content, their own collateral, and how are they building out their brand voice, and who are some of their distribution partners in which they are trying to go to market with? So recognizing that and helping other athletes come up with original content on their own, me coming up with original content, bringing the branding advertiser in as a partner, working with a multitude of different distribution companies… That’s The Players’ Tribune, that’s working with Twitter and Facebook and coming up with original series is something that I’m really passionate about now, in conjunction with still working with Leverage and still investing in smaller things on the side.

Joe Fairless: When you decide to invest your time – because I imagine that’s the most precious resource that you consider you have, versus money… But the time – what do you look for before you dedicate your time towards something?

Jay Williams: I look for thoroughness, and I’m a little bit old-school as well – I also really pay attention to the due diligence of the party that I’m potentially going to work with. Detail is everything for me, so if you’re paying attention to what my story is and who I am, are you trying to make a ball fit into a round square, or are you trying to make it fit into a square peg?

And then also the candidness; I like authenticity, I like things that really blossom naturally. That’s my MO. I’m more of an emotional guy. I’m not saying I’m not gonna do my own research and do my own due diligence and be thorough, because I am… But I like seeing that creative passion from the person that I’m working with. Are they truly invested? Because one of the things I recognize, being from New Jersey, New York, is that I meet con artists all the time. I meet people who are really good at talking and people that can put themselves in scenarios that you would never expect, and I think now recognizing that I’ve been faced with a lot of these people… Okay, how thorough are you? Are you going to follow up? Are you going to be on the conference call when you say you’re gonna be on the conference call?
Everybody has a quick-fix ideology these days, and that stuff is becoming easier for me to sift through. The more I can do that and the more I can see the authenticity of the person I’m working with, that’s the first step to allow me to say “Okay, this person has my attention, they have my time.

Joe Fairless: Is there any questions that you ask, or is it more you thin-slice based on your interactions with the people and then you go from there?

Jay Williams: I do the latter, but I have a team that literally puts you through a pitbull session. What I mean by that is the team I have and the team I put on board are people that I’ve trusted for a very long time and that are also very thorough and detailed. So when I start putting you through the blitz territory, all the different questionings, and that’s from my financial advisor, that’s from my calendar, that’s from my business manager, and that’s from one of my other partners in my other business… I really put your through it, and if you don’t answer the questions within the timeframe they ask you, I start wondering “Okay, what are your true intentions? Are you just looking for a quick answer, a quick hit, or are you actually really involved in this for the long run?”

Joe Fairless: With your business now and your focus, how do you see it evolving in the next couple years, if at all?

Jay Williams: Well, on a multitude of levels… So the TV side first off, it’s going to be fascinating to watch as subscriptions continue to go down. With the likes of Apple and live streaming, it’s inevitable before you feel like an Amazon, a Netflix or an Apple will own live sports content. Or if you’ll have leagues — the money is great right now, but if you have leagues that eventually go to a subscription model where they make you pay… They’re already essentially doing that, but just owning all the rights outright. And also for, in particular teams, instead of allowing these third-tier production companies to come in and film all this great content, own it yourself. If you’re the 76ers and you hear [unintelligible [00:16:06].24] talk about the process, why not figure out some kind of [unintelligible [00:16:11].00] since he’s already an employee, and keep that all in-house?

So inevitably seeing it go into that direction, and working with different brands to — obviously, I think those rates are going to increase drastically. On the production side, seeing more now about real original content, recognizing a year and a half ago – and I was on [unintelligible [00:16:32].03] talking about this – for all the craziness that comes along with LaVar Ball, it’s brilliant to have a deal with Facebook and to create your own brand.

I posted something today on my Instagram about – I do these talks to these kids all the time, and I say “Are you preparing your plan?” A lot of people talk about wanting to be a millionaire, wanting to be a billionaire… But are you really starting to thoroughly think through the process of how you’re going to get there, and do you recognize that right now you are your own brand?

LaVar Ball was able to recognize that for Lonzo, and he’s done the same with LaMelo, and he’s the same one with everybody that’s in his camp. There’s strength that comes along and leverage that comes along with that. So for athletes, I really like what TPT is doing, I like what Bleacher Report is doing – obviously, they’re killing the game digitally… And even kind of the cross-pollination of their content, like them owning House of Highlights — and people are not even recognizing that Bleacher Report owns House of Highlights, but how you end up going to House of Highlights for all your highlights, and what are some of the advertisers they’re working with…

So the linear equation is losing a ton of support, and it’s all becoming how you’re really amplifying your voice digitally, and how do you have access. I think people, and especially athletes in particular, are finding out the power of their own voice. So helping other athletes, in conjunction with myself, and doing co-production deals to bring that to light.

Joe Fairless: When you’re involved with the industry that you’re in, and you are an expert, you’re consulting, you’re helping come up with different deals and brokering the deals with talent and brands, you have reinvented yourself, and that’s part of your title in your book… What are the keys to effectively reinventing yourself when you’re either forced to change your career or choose to change your career?

Jay Williams: You know, I spoke a year ago at Delta, and I spoke in front of about 250 of their employees on one of their retreats, and it’s really something that I think is applicable to everybody, because I’ve seen it. One of the reasons I wrote Life Is Not An Accident is because I recognize that yes, I had a motorcycle accident, but the word accident can equate to everybody pretty much in their life. Now, hopefully your accident may not be as extreme as my motorcycle accident, but at the same time for you, if you dislocate your knee or you tear your ACL, that could be the worst thing that ever happens to you in your life. [unintelligible [00:18:53].10] but for you, you might look at that as something that’s traumatic overall, and overall changes the path of your life.

So the first thing I say to people is that it’s the same kind of business analogy that I gave before, that is applicable to everyone. You are your own business, and even for me, when I talk to my employees, I say that “I want you to think about yourself as your own business, because the more you think about yourself as your own business, the better overall that my business will do, because you’ll take more ownership on what you have.”

When I have friends that do this and I watch it from afar – do you come in, do you punch your clock at eight o’clock, and then when it’s time to punch out at five, are you the first one to punch out and you get done your bare minimum? Or are you trying to push yourself to get more, to elevate yourself and elevate the business?” So the first question I say to people is “Who’s on your board?” I have a board with a multitude of things I’m involved in. Every board meeting I go to, I see different CEOs who are literally sweating their tails off. They’re nervous as hell each and every time, because it’s their job to answer to this board on a quarterly basis about where the company was, where the company currently is, and if we’re on schedule to get the company for what our Q1 or Q2 goal is.

So if you’re your own brand and you’re your own CEO, first off, who’s on your board? Even for these employees at Delta – okay, great, if you’re in the marketing department, who’s on your board? And are you really sitting down with your board each quarter, and are you candidly assessing where you are, where you want to go and how you’re going to get there with your own board? And then are you gonna be vulnerable enough to actually hear feedback from people that you really look up to or people that you hold high, and these people with high standards that that board is in the vertical of business, and really be open enough to hear and bring in what they tell you? And then can you reinvent yourself?

This reinvention thing isn’t something that happens one time in your life, it’s constant. It’s almost like an app. It’s one of the things I laugh at with my phone; my damn iPhone is constantly updating. I send Eddie Q. a note, I’m like “Eddie, seriously, is it the iOS 8, is it the 9? The new phone that’s coming up, you’re asking me to update my software, and all of a sudden my old phone isn’t working again… Oh, very smart, you get me to get the new phone…”, and that’s how we should be individually.

If you have your board and you put people that truly you look up to and you know that they’re gonna hold your feet to the fire with this, are you constantly updating yourself? Are you taking on information to make you better?

I think that’s the major part to reinventing, because it needs to happen because we’re constantly updating within society.

Joe Fairless: Who’s on your board?

Jay Williams: I’ve been lucky, I have a multitude of boards. I have a business board, I have a guy that I’ve known for a while (since I’ve been 13 years old) and it’s been great to watch his story. I call him Scooter now, but his name is Scott. What he has been able to do with some of the people that he’s been able to represent, and what he’s been able to build – I bounce ideas off him all the time. He’s one of these guys, he’s very upfront, he’s very honest and he holds my feet to the fire.

Another guy is a guy named John Wren, who was the CEO of Omnicom for a very long time. Obviously, when you work with over 5,000 brands, he recognizes where brands were, where they are currently and how the landscape ultimately is changing.

Another guy is Matt Blank, who is the CEO of Showtime. I’ve known Matt for a while, and watching what they’re trying to do at Showtime, and competes with HBO and Cinemax, and where they are right now and how their game is ultimately changing with live streaming…

And a guy named Mark Clouse who was the CMO over at Mondelēz for a while, but now is the CEO over at Pinnacle Foods is a very dear friend. And then a guy named Carl Liebert, who ran 24 Hour Fitness for a while, did that and then decided that was not for him, and took another route and now is the CEO of USA Bank.

The beautiful part about all these guys is that I wanted to be successful business-wise, but one of the things I was very scared at is the more success I found on the basketball court, the more I started to lose myself personally. For me, I was like “Yeah, I want to have [unintelligible [00:23:07].23]” if that makes sense. I don’t want these guys just to be successful in one vertical, I want these guys to be good individuals.

When I look at Carl Liebert, or when I look at Mark Clouse, or when I look at Scott, these are all guys who are great family men. And I know this sounds silly to say, but once again, being authentic to myself and my brand, they’re all loyal to their wives.

I watch Mark Clouse, and every Saturday he’s at his sons, Spencer and Logan – he’s at their football game. Spencer goes to TUFTS and Logan plays at a high school in New Jersey, and he splits his time with his wife.

Carl has three sons, and one of his sons went into the army. I watch that, and that’s inspiring to me, because I recognize “Oh, you can have both.” It doesn’t need to be “I can have this, and then this suffers.” There’s actually a way to delegate your time and to be successful and be a successful father and a successful husband, and run a successful business. Those are the stories that I find extremely inspiring to me now.

Joe Fairless: How do you know that the value exchange is good enough for them when they’re on your board? Here’s the background for why I ask the question… As real estate investors and entrepreneurs — we’re all entrepreneurs at heart, right? So real estate investors – we’re entrepreneurs, and that’s why I wanna talk to you about this; we want to surround ourselves with people who have been there, done that. So John, Matt, Mark, Carl – those are all examples of guys who have been there, done that, or are currently doing it. And the challenge that we come across as real estate investors in particular is that when we find people who have been there, done that and perhaps are currently doing it, it’s a disproportionate value exchange, because we need information, but they don’t need a whole lot from us, so how do you balance the value exchange there, if you do at all?

Jay Williams: Well, I would ask that individual “How do you measure your hustle?” I think I’ve been really blessed, because one of the things that I can’t stop doing — when I was playing basketball I was always on the court, working out. And when I started to get involved in business, I found that same burning desire. My thing was that yes, the value prop to me was nowhere close to the value prop that it was for the names that I’ve just mentioned, but my thing is I think I was vulnerable enough with them to recognize that I didn’t know that.

Once again, I think the more transparent you can be with people… When I’m vulnerable — and obviously, I’ve had a different background. Being on TV gives me leverage due to my platform, so it opens the door for me to have these types of conversations with these individuals in conjunction with the people that I already know. But one of the things I would tell somebody who maybe didn’t have that platform is that “Are you doing the small things to make sure that you’re noticeable?”

One of things that happened to me – I did an internship, and it was a really cool experience for me because I wanted to recognize how hard somebody would work. Now, without saying — I had multiple people come up with this internship, and I put it out there, and a lot of people that came to me and wrote long-winded paragraphs via e-mail… About 98%-99%, that was to the extent they went.

Joe Fairless: Yeah, that’s how it is.

Jay Williams: Okay, so you know… A lot of people who they say they wanna achieve success, they say they wanna do all these great things, but they once again do the bare minimum and then they get angry if you don’t respond. So me, I don’t respond to anybody, because I wanna see “Okay, who’s gonna constantly sent me a note? Who’s constantly gonna find different ways to make themselves stand out?” So when you’re trying to form that relationship and you’re trying to form that connectivity, what things are you doing that are different to really attract that person’s attention? Are you waiting for them one day after school, or you know their location where they’re gonna come out of?

I know some of these things may sound crazy, but at the same time, I want somebody who’s a little bit crazy; I want somebody who’s willing to push themselves to go to a different level, that all of a sudden person a regular person wouldn’t do that, because I know that at the end of the day that person is going to do whatever the hell they need to do in order to get it done. Now, as long as it’s an incredible way, I’m never going to turn down the spirit of the hustle, and I don’t think a lot of people have that.

With this internship, this one person won in particular, and then all of a sudden it’s like, they’ve got the internship and they’re waiting for me to give them instructions, and I didn’t give them instructions. I wanna see what you bring to the table, what’s your value prop to me? I know what I can do to help you. An internship doesn’t mean that now all of a sudden I’m gonna just give it to you. I wanna see how long this goes, I wanna see what kind of things you’re gonna do for my business, and the more you do for me, if you get me, and if you hustle with me, I’m going to go over and beyond to make sure that you are successful at the end of the day.

But if you come into this opportunity and you worked your tail off to get my attention, and then just because you got it you think I’m going to give it to you, that’s not the real world. I’ve got doors open, and that’s not how the people — I worked hard to get their attention [unintelligible [00:28:22].12] their door open. So once again, it comes down to the measure of the hustle for me.

Joe Fairless: That’s beautiful. I love that. Based on your experience, what is your best advice ever for entrepreneurs and real estate investors?

Jay Williams: Well, on top of the hustle, I think that inevitably if you open the door of somebody, either you’re gonna be a person that does the work or you’re not. And I think that will be displayed within what you bring to the table once that door is open. I really think this is becoming a major issue within our world right now – people have lost the ability to do what you and I are doing right now. They’ve lost the ability to look somebody in the eye and not BS them, but actually be upfront and be honest with them.

For example, I get turned down all the time. Today [unintelligible [00:29:10].16] I took a stab at trying to reinvent the news; I really did, because I think the linear approach to how we see news is antiquated. I did not want to see news an hour after it breaks, and I’m tired of news being skewed. So I’m trying to pitch — I’m not gonna say who the company was, but pitch them on “Hey, this is a new format of how we see news. It’s gonna be 24/7, it’s gonna be functioning ADHD.”

Hearing the guy come to me, the head of biz dev for news, sitting down and talking to us about what their initial goals are, he pretty much said “Hey, what you guys are doing – that’s not in our wheelhouse.” But being able to listen to that and then say “Okay, great. Have you thought about this? Have you thought about that? Frankly, I don’t want my brand to be where I think your brand is going. I want my brand to be here.”

So then again, being authentic and being honest… And then I think we both left the meeting saying “I have a lot of respect for them, because we disagreed on where I think their brand voice should be, but that’s the direction they’re moving and we’re upfront and we’re honest about it, and he knows where my line in the sand is drawn”, and that was good. Because I don’t wanna be BS-ed. I don’t want somebody to talk me into doing something that I know they can’t do.

I think the ability to convey a message and the ability to be very candid and upfront about what your value prop is, and the things that you can’t do… Once again, what makes a great CEO? There are a lot of things I can’t do, but I’m going to surround myself with the best people to do them at the best of their degree in order to achieve the business.

Joe Fairless: Some pretty powerful business lessons, and I’m very grateful for that. We’re gonna do a lightning round, so are you ready for the Best Ever Lightning Round?

Jay Williams: Let’s do it, man. I like that name, Best Ever Lightning Round.

Joe Fairless: [laughs] Well, I guess I like to set the bar high, because it’s the best ever… We’ve got some questions from listeners who have asked these questions and we hand-picked a couple of the questions. So here we go, this is from Charles in your neck of the woods, New York City – “Did writing your book help you through your tough times?”

Jay Williams: I think about writing another book. I think everybody, honestly, has a book in them, and one of the things that I would tell or really kind of implore everybody to do is to write down your experiences that you had in life, and really take those things and read it and see the evolution of how you think, and are you challenging yourself to think differently?

I know for me, being 36 years old, writing my book and continuing to write op-ed pieces or different things on where we’re in sports allows you to formulate opinions. I start becoming more of a voracious reader, and I think hearing other people’s stories and really equating those stories to my life just allows me to pick up on more and more knowledge… So that’s where I will leave that.

Joe Fairless: Best ever investment you’ve made that you haven’t talked about already on our call?

Jay Williams: A little small investment in Uber.

Joe Fairless: What’s a mistake you’ve made when investing?

Jay Williams: I think it’s the mistake I made – without going into the particular… I had one business I had a chance to invest in and I did, and let’s just say that I got really excited because I got excited about the person and the investment and the entity that the person was working with I thought was talented, but it didn’t really pan out, and I quickly recognized that “Oh, okay, there’s multiple levels to an investment.” Just because you have a great CEO, you have to really work with that CEO to make sure that they hire the right people underneath them.
I think that even though his ideas were tremendous, his execution and the people that he hired underneath them weren’t the right people to really lead the charge.

Joe Fairless: How would you qualify that if presented a similar opportunity in the future?

Jay Williams: I’d get myself a more firm stance on that board, and I’d start to really evaluating what that vetting process is, and I’m a lot more strict now at 36 than I was when I was 25, 26, looking to make one of my first seed investments.

Joe Fairless: This is from Aaron in St. Louis – he asks “For anyone who wants to play in the NBA, what is the single piece of advice you can offer him?”

Jay Williams: Make sure that your mom and dad are above six feet tall… [laughter] I’m kidding. Playing in the NBA represents less than 0.001% of the world, so a very arduous task. I will just say, as you continue to get better at whatever your skillset is, one of the best pieces of advice I ever got was from a guy named Steve Nash – I don’t know if you’re familiar with Steve, but Steve used to always say “Get in where you fit in.” And I remember Ben Wallace, who was a guy that played for the Detroit Pistons – everybody now wants a shot that they can score, and Ben was like “I screen, I rebound.” I remember him in USA basketball, looking at him and he’d say, I’m like “Ben, when I give you the ball there, you’ve gotta shoot”, he’s like “I screen, and I rebound.” [laughter] I’m like, “Wow, this guy knows what he does, and he does it pretty damn well.” That screening and rebounding got Ben Wallace 65 million dollars.

Not everybody can be LeBron James or Paul George or Kyrie Irving, but if you have a special skillset that you can do extremely well, do it. Get in where you fit in.

Joe Fairless: Isn’t that analogous for business, too?

Jay Williams: Exactly. Get in where you fit in.

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

Jay Williams: They can’t.

Joe Fairless: Just play this interview on repeat, and that’s all we’ll give them, right?

Jay Williams: You know, one of things that I — I started a company a couple years ago called Clandestine Ventures… It was even funny when my PR person was like “Hey, do you wanna do this interview?” and I paid attention to some of the things he’d done before… I was like “Yeah, you know…” “But why do you seem hesitant?” I said “Because I don’t like talking about some of the stuff or some of the moves I make.” But as I get older, I do think I’m starting to be in a place where as long as I share the knowledge of people that I feel are truly passionate about it — for me, it has to start with the passion. And I think I see a lot of the people that get involved in the business for the lifestyle that it comes along… And don’t get me wrong, I’m very lucky, again, but I just love to work, man, and I have a hard time being around people that just get into — it’s like playing basketball… Like, “Oh, I wanna fly in jets”, and “I wanna go here” or “I wanna do that, and playing basketball helps me do that.” I’m like, “Hm, that’s unfortunate.”

If you’re passionate and you’re truly hungry to learn, and this is something that you wake up in the morning and you can’t wait to go do, then I’ll work with you.

Joe Fairless: And what’s the best way to either get in touch with you, your team… Or where should they go?

Jay Williams: Through you, listening to more of these podcasts. I’m very active on social, and… Look, I’m in this position now where I think in the next year or two I’ll be taking on a lot more employees for a new personal direction I plan on going, so for me, I like people that pepper me with questions; I like people, once again, that are consistent. It goes back to what I’ve said before, I think that’s my mantra for life… I work extremely hard, and it’s funny that a lot of people are like “Oh, you’re a college basketball analyst.” I’m like “That’s great that you see me that way, but I do a lot more than that.”

If somebody reaches out to me and they’re truly passionate about it and they continue to show that effort, then eventually I’ll open my door, but I like seeing that effort made before.

Joe Fairless: I love that approach. As I mentioned, I’m very grateful for our conversation. One of the things that rings true is what you’ve just said, that certainly surfaced often during our conversation, is the hustle, and how a lot of people don’t necessarily have it consistently. There’s a vast majority of people if given an opportunity at one moment in time, they will show hustle, but then it fades away, and that really separates the good from the great, and the great from the outstanding – it’s the consistent hustle.
You gave some great tips and insight on how to break free from the pack, whether it is working with you, but even more high-level just in business, how we separate ourselves from the competition, and that is having the consistent hustle and the follow-through.

I see it often at events where if I speak and I have a bunch of people line up afterwards, I’d say 9 out of 10 people want to speak to me and do some sort of business transaction afterwards, and 1 out of 10 people actually follow through with that. And it’s just simply because it’s convenient for them at the time to talk about it, and they have these ideas, but then they don’t have the follow through, and that is what separates the good from the great, and the great from the outstanding… So thank you for that.

Also, your approach to owning your journey and your experiences. When things happen that on the surface aren’t as positive, then first document it, second, recognize it, three, think through it, and four, use it as a positive driver to push and do more.

Again, I really appreciate our conversation. I hope you have a best ever day, and we’ll talk to you soon.

Jay Williams: Thanks for your time, man. I really appreciate it.

Best Real Estate Investing Advice Ever Show Podcast

JF1150: She Left Wall Street Jobs Behind To Be A Realtor with Julia Hoagland

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Julia has a background in engineering and finance, so why in the world leave the Wall Street firms to be a real estate agent? I’ll let her answer that in the show, she’ll also tells us how she leverages her engineering background to impress her clients and earn their business. As the #21 agent in NYC according to WSJ Real Trends, it seems Julia made the right decision with her career change. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Julia Hoagland Background:

  • Licensed Associate Real Estate Broker at Compass, a residential real estate brokerage firm
  • Ranked #21 of NYC agents by WSJ Real Trends 2016
  • Formerly the Vice President and Director of Marketing at two leading Wall Street firms
  • Active member of the Who’s Who in Luxury Real Estate international affiliation
  • Based in New York City, New York
  • Say hi to her at jhoagland@compass.com
  • Best Ever Book: Traction

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TRANSCRIPTION

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

We’ve spoken to Barbara Corcoran from Shark Tank, Robert Kiyosaki, author of Rich Dad, Poor Dad, and a whole bunch of others. With us today, Julia Hoagland. How are you doing, Julia?

Julia Hoagland: I’m doing fantastic. How are you, Joe?

Joe Fairless: I am doing fantastic as well, nice to have you on the show. A little bit about Julia, she is a licensed associate real estate broker at Compass. She was ranked #21 of New York City agents by Wall Street Journal Real Trends 2016, formerly the VP and director of marketing at two leading Wall Street firms, and she’s an active member of the Who’s Who in Luxury Real Estate. She’s based in New York City, New York, so she is performing at a high level in a very competitive market. With that being said, Julia, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Julia Hoagland: I am happy to. My background is very analytically-focused. I’m an engineer by training, and I did that for three years before going to Business School for finance. After eight years of that I gave it all up for a career in real estate and started this business about 12 years ago.

Joe Fairless: Okay, so why?

Julia Hoagland: Good question. [laughs]

Joe Fairless: Because with your background in engineering, and then you went into finance, you were working at Wall Street firms, you have to be making more money than what you made your first year as a real estate agent, or at least thought you would make in your first year, so why leave that?

Julia Hoagland: I really always felt slightly like a fish out of water in the corporate American structure is the best encapsulated version. I was never fully passionate about what I was doing, and I got laid off if truth be told, and I took a year to travel for our honeymoon with my husband. When I came back, I just thought  “You know what? I can always go back to Wall Street. Let me see what I can do on my own.” At the end of the day I just switched assets and added emotion, because I’m still marketing, underwriting and selling financial assets, they just happen to be in the form of real estate.

So it’s not really that different, but now I work for myself and in theory my time is my own, but in reality my time is not my own at all… But I love it.

Joe Fairless: A year to travel for your honeymoon certainly is the longest honeymoon trip I’ve ever heard of. I’m about to go on a ten-day honeymoon and I thought that was kind of long to leave, but holy cow, now I’m really jealous.

So your engineering background – how has applying that led you to rise to the top as an agent or broker?

Julia Hoagland: Engineers are all about problem-solving, that’s what the core of engineering is, and there are a lot of problems to solve in real estate deals. What we do here in New York — I’ve never done what I do outside of New York, but we have a very liquid and very geographically condensed market; it’s not that big of an area. It is tall, there’s a lot of verticals but not a lot of horizontals. So you can assess valuation pretty accurately by doing statistical analysis on the multitude of statistics that we have here.

It’s really a perfect marriage of the science that I was trained on and the art which makes it much more interesting than what I was doing in the past, to me.

Joe Fairless: Can you give a specific example…? Okay, so I’m your client. What about you with your approach do I recognize “She might have an engineering background”?

Julia Hoagland: What is important to clients is always maximizing value. To a buyer that means buying a property for the lowest price, and to a seller it means getting the highest price from a qualified buyer. What we are able to do by the analysis that I just described is assess using real data – the true value of something is what someone else is willing to pay for it, so it’s important to know what the true value of assets that are like the asset that you’re considering have been in order to assess [unintelligible [00:05:06].08] But data is by its nature historical, and you are trying to predict the present by using the past, so the art of the science (if you will) comes into play when you adjust that statistical analysis on that historical data by current market trends is now the interest rate, the consumer sentiment and all kinds of qualitative factors.

Joe Fairless: With the different qualitative factors that you just mentioned, and then I’m sure you’ve got some qualitative go-to points that you always look at, how do you determine what’s most important and how to prioritize?

Julia Hoagland: It really depends on the asset. If you have (I’ll call it) a cookie cutter two-bedroom apartment in a building with 500 units in it and there have been ten other two-bedroom sales in the last three months, several of them in the same line, then it’s pretty clear that the most important comps you wanna look at are those in building comparables… Because when you’re in the same building, you neutralize for location and amenities and monthly charge levels services etc.

If you have a very unique asset, for instance let’s say a penthouse, one-bedroom apartment that’s 2,000 square feet and has a terrace, you may not be able to find any comps in the building that are like that, and there might not be any in the immediate area.

I’ve actually searched for an apartment exactly like the one I’ve just described all over Manhattan, for the most expensive one-bedroom apartment to sell in the last six months to one year, and analyzed all of the data that is similar about those apartments while trying to adjust for what’s different in terms of neighborhood, and type of building, month lease etc.

Joe Fairless: And with your clients, what type of presentation or how do you communicate this information to them?

Julia Hoagland: I prepare a spreadsheet with my team; we pull data off of our listing system, which is just basic data – the address, the unit number, the costs monthly, square footage etc. and we then augment that with condition and a lot of factors… Like, if we’re analyzing townhouses, do the townhouses have suites and how wide are they, and are their gardens South-facing or North-facing, and are they deep? Do they have high ceilings? Are there interior [unintelligible [00:07:33].21] that kind of thing. I put it on a spreadsheet and calculate averages based on the entire data set and then similar condition data points, and then maybe side street data points, and put together about six or seven paragraphs of analysis, including on the actual data, and put it into an e-mail and send it to my clients with the attachment along with the statement of account from the New York City taxing authorities and also the Property Shark information.

That gives them something to chew on, and then we get on the phone and discuss the findings and decide on a negotiation strategy.

Joe Fairless: As far as your clients go, what would you say is the typical profile, demographically, of a client of yours?

Julia Hoagland: I speak finance, so I tend to connect — it’s all about connection in our world, and in any world of sales, I think, and we all tend to connect with people whose language we speak most, and since I have an analytical background and I approach the business that way, I tend to connect with people who also are in some sort of an analytical field or have analytical training, which includes finance, consulting, accounting… So I would say a large majority of my client base is from or connected to those worlds, but we have very good business referral partners in California, as an example, that are entertainment industry advisors.

We’re also extremely discreet, and discreet by nature and by practice, and I do think they go hand in hand; it’s hard to be one without the other. So I connect on that level with them. We’re able to work with very high-profile names that you’ve heard of without letting anyone know, and they appreciate that.

Joe Fairless: How do you get introduced to the high-profile names?

Julia Hoagland: It’s all about networking. I’m a big networker, I am a member in several organizations, I ascribe to the abundance mentality, so really trying to figure out how I can help people, and I learned that when people help me, I’m very focused on helping them; what goes around, comes around, and it all kind of made sense to me. So it’s networking, organizations that I’m in… I tend to connect with people who ultimately introduce me to these clients or their business advisors.

Joe Fairless: And what organizations are you involved in?

Julia Hoagland: I’m in the Women Presidents’ Organization, I’m in 100 Women in Finance, I was a member of BNI for 12 years (I’ve just resigned this year) I’m a member of The Cultivist, which is a really interesting organization focused on the arts — it’s not really a networking organization per se, but there’s always networking to be done when you’re at events with people who are interested in the same things you’re interested in. I think there are a few others, I don’t have them at the tip of my tongue.

Joe Fairless: Yeah, but those are the ones that are top of mind. The NI – what does that acronym stand for?

Julia Hoagland: BNI is Business Networking International. It’s quite popular in New York. I think there’s 70,000 chapters around the world. It’s all about networking; the sole purpose of the organization is to help business owners build business. I helped form a group when I started in the business, and I could tell you one of the big contributors to my growth in the beginning, and just a really good way to not only build business, but… You stand up every week and you talk about what you do, so it makes you really good at marketing, and trying to figure out a million different ways to talk about things that you do in ways that will sell them. And you also develop this really strong network; I have very good friends – some of my best New York friends are in the chapter… And a strong network of wealth advisors, and [unintelligible [00:11:25].06] attorneys, mortgage brokers, graphic artists – all kinds of people who are in these chapters that you get to know really well because you meet every week.

Joe Fairless: It sounds like a great organization, why did you resign this year?

Julia Hoagland: I wanted to make room for the next guard, and I also felt like I was at a position and a place in my career and development that I wanted to focus on other things, like The Cultivist and the Women Presidents’ Organization. My team, which is comprised of six salespeople, myself and two admins, they are now – some of them are in BNI already, but it’s really about what they’re doing now. So it was just time to kind of make room.

Joe Fairless: Got it. Based on your experience, what is your best advice ever for anyone who wants to invest in New York City?

Julia Hoagland: Partner with someone who really knows about how to assess the value of properties; I’m talking about a brokerage, which is what I do, but there are a lot of different ways to approach what I do, so it’s not only important to partner with someone who’s confident – that’s kind of the baseline to me – but also someone who you can really relate to, because then they get to know what it is that you’re looking for from a deeper level and they can better advise you.

Joe Fairless: You told me before we started recording about 10% of your clients are investors, right?

Julia Hoagland: Yeah, about 10%.

Joe Fairless: Okay, so what are they looking for?

Julia Hoagland: Interestingly enough, when I first start working with investors, they’re often looking for highest yield, which makes perfect sense… But in New York City (and other cities like it) people trade yield for upside appreciation potential and liquidity, so that’s one of the first questions I always ask investors – if yield is your number one goal, then I might suggest [unintelligible [00:13:18].00] to a broker in an area like Kansas, or somewhere in Middle America where prices are much lower, rents are also lower, but the yields on those properties is higher. The thing that you’re trading is upside appreciation potential; there is a good likelihood that New York City – this is me as someone who’s selling properties in New York City talking, so take it with the grain of salt that you need to, but I’m very bullish on the long-term valuation potential of the city, because of a lot of reasons.

That potential doesn’t exist somewhere that’s more [unintelligible [00:13:51].03] and less internationally-known. And the liquidity in New York City is pretty amazing. With the exception of the six months after the financial crisis, you can sell just about anything at any time if you get the pricing, marketing and exposure right here.

If you’re in a place like – I’m picking on Kansas and I don’t mean to, but somewhere that’s just not a major metropolitan city, you’re likely not gonna face equal liquidity situations, so you might have to drop your price pretty dramatically if you have to sell at any specific point in time.

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

Julia Hoagland: Yes.

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

Break: [00:14:34].05] to [00:15:33].15]

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

Julia Hoagland: Recently, Traction by Gino Wickman.

Joe Fairless: Best ever transaction you’ve done, either business-wise or real estate?

Julia Hoagland: My own home, purchasing our apartment that I live in now and I absolutely adore, that I found and I wanted to buy on the day that I found it, and my husband being the shopper that he is needed to spend another few weeks looking around at properties, so I sent him on this way… And then he came back. [laughter] Thank goodness.

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

Julia Hoagland: Not listening and not giving the other side a chance to give me information by picking up the phone and calling them.

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

Julia Hoagland: I love talking with people and finding out what it is their interests are, and taking something that I’m really familiar with or can easily get familiar with and either contributing to the cause or introducing them to someone I know who’s affiliated with the cause… Basically, making connections.

Joe Fairless: And how can the Best Ever listeners either get in touch with you or learn more about your company?

Julia Hoagland: You can e-mail me, you can call me on my cell phone, or you can go to my website. I’m very happy to connect with everyone at any time.

Joe Fairless: And what’s the best e-mail?

Julia Hoagland: jhoagland@compass.com

Joe Fairless: Easy enough. Well, Julia, thank you for being on the show; thank you for talking about the analytical approach that you take based on your engineering background and the data points you look at, as well as how you get clients through the networking approach that you take, the abundance mentality and those specific organizations that you’re in and the benefits that you’re getting from a couple of them.
Thanks for being on the show. I hope you have a best ever day, and we’ll talk to you soon!

Julia Hoagland: Thank you.

best ever real estate pro advice

JF963: Why You Should Raise BILLIONS in Capital with a 506(c) Offering versus a 506(b)

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Raising capital for cash flowing projects it’s exciting, but only one of these offerings will allow you to talk about it. Publicly soliciting potential transactions can boost your ability to close for obvious reasons, you get the word out! Follow Mark as he walks us through some case studies and shares why he would prefer to let everyone in on the deal!

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Mark Mascia Real Estate Background:

– Founder and CEO of Mascia Development
– Mascia Development LLC, is a long term value investment real estate investment company
– Over 12 years experience in real estate
– Presently an adjunct professor at New York University‛s Schack Institute of Real Estate
– Based in New York City, New York
– Say hi to him at http://masciadev.com/

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raising money with a 506(c)

 

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 fluff.

I hope you’re having a wonderful — no, best ever weekend, and because today is Saturday, we’ve got a special segment for you that we do sometimes, called Situation Saturday. You’re gonna love this is you’re a money raising machine or want to be a money raising machine, because we are with an investor who has developed over one billion dollars – yes, with a b – of property, and he has over 12 years of experience in real estate. We’re gonna talk about why he chose (or is choosing) to do a 506(c) offering, versus a 506(b) offering on his current deal. How are you doing, Mark Mascia?

Mark Mascia: Good, Joe. Good to hear from you.

Joe Fairless: Nice to have you on the show again. If you recognize Mark’s name, that’s because you’re a loyal Best Ever listener. He’s given his best ever advice once before, and he’s been on the show a couple times. You can just search his name at BestEverShow.com and hear his best ever advice.

A little bit more about Mark – he is presently an adjunct professor at NYU Institute of Real Estate — how do you pronounce, NYU’s Shnack…?

Mark Mascia: Shack, unfortunately… [laughter] It’s the most unfortunate naming of a real estate program.

Joe Fairless: No kidding, the irony… NYU’s Shack Institute of Real Estate – he’s an adjunct professor there. He’s also the founder and CEO of Mascia development, and he is based in New York City, New York, where his company is. With that being said, Mark, before we dive into the 506(c) stuff, do you wanna briefly give the Best Ever listeners a refresher on your background and your focus now?

Mark Mascia: I started my own company about ten years ago, Mascia Development, as you mentioned. Before that, I had worked for large companies, small companies, doing development of all kinds throughout the New York City and DC area; some, like you mentioned, as big as half a billion dollars. That’s pretty easy when you’ve won a project that is that large to get to a billion dollars in development.

So I started my own company ten years ago, and we’ve since always focused on retail and medical office. We focus on properties all over the country, and we’re really a long-term value player, so we buy undervalued assets for the long haul. Cash flow is focus, so we’re not buying vacant buildings and fixing them up; we’re doing development, and it’s all in a cash-flow driven strategy.

We work with some of the largest family offices in the country for the majority of our capital, but we also allow and enjoy having individuals invested alongside those large capital sources. Our sort of egalitarian model is everyone invests at the same terms; there’s no special treatment, even if you have a billion dollars, like some of the families we work with do. So that’s just kind of how we operate, and have owned – I think we’re up to 86 assets right now.

Joe Fairless: What’s your total portfolio value?

Mark Mascia: It’s like 515 or somewhere million dollars… It’s hard for me to keep track because I don’t really look at it every day.

Joe Fairless: Yeah, just ballpark. You don’t track that like the stock ticker.

Mark Mascia: Yeah, right. [laughs]

Joe Fairless: Okay, got it. And Mascia – I apologize for mispronouncing it. Before we started interviewing, I triple checked how to pronounce it and I wrote it phonetically in my notes, but I didn’t write it correctly phonetically in my notes, so I apologize. He’s a friend of mine, I shouldn’t be butchering his last name.

Alright, Mark, thanks for the context. The reason why we’re here is why you are choosing to do your current deal under a 506(c), which you can publically advertise, versus 506(b). We’ve spoken to securities attorneys (a couple of them) on this show, and they’ve walked through the pros and cons of 506(b) versus 506(c), but they’re not doing the deals, so this is gonna be interesting because you’re actually doing the deals. Walk us through your thought process.

Mark Mascia: First and foremost I’m not an attorney, so none of this is legal advice, but it’s just our own experience what I’m sharing… So I like give attorney advice, but I’m not an attorney.

Our current deal is a retails strips center in Spartanburg, South Carolina. It’s a pretty growing, booming market, largest growth center of basically the South. They’ve gotten over a billion dollars of investment in the last couple years, so it’s an interesting market that we track for a really long time. We found this property there that has some vacancy, it has really low rents, it has some great tenants, long leases, so a pretty straightforward retail deal to what we do. Cash flowing day one, around 7% levered, and it goes up to 9% over time. Nothing to blow the doors off, but just sort of a very steady, down in the middle, strong deal that has great [unintelligible [00:06:50].02] cash flow.

We have good reserves, long-term debt – all the kind of stability things you want, and that exactly follows our model. What I just told you – I couldn’t have told you any of that if I was doing 506(b), the old way of raising capital.

Case in point, the first and foremost reason that we like it is because we can talk about what we’re doing actively, and not have to keep everything a secret or know you personally before we talk about it. It just makes logical sense, in my opinion, from a business perspective, to be able to talk about things you’re excited about, and things you’re excited about are usually the newest deal, or the newest thing you’re doing in your business, and before September 2013 you couldn’t do that legally. It’s kind of crazy to me, but that’s the way that we used to do it, and it was the only choice before that date.

So first and foremost, the ability to communicate openly about what you’re doing is exciting and it is the only way to do that – under a 506(c) deal. So that’s kind of the deal in a nutshell.

What we specifically do every time – I mentioned our capital sources are predominantly family office in the beginning, but now have made a huge focus on not just diversifying the investments we make across different locations and different properties, but also our investor capital base. What we saw in the beginning was we have these few families that have deep pockets, but if any of them decided not to do any deal we found, for any particular reason, and some were as funny as “Oh, I’m going skiing for a month, so I’m not gonna do any deals, regardless of how good they are” (that literally happened), to any other reason… They just don’t like Spartanburg – let’s say they grew up there and they hate it and they’re never going back, so they don’t wanna invest there. That didn’t happen, but things like that happened in the past, and we just don’t wanna have any sort of single source of capital, just like we don’t wanna have any single tenant or any single property that can sort of wipe out our whole business.

With that being said, every deal we do, we have the ability to raise all of the funds from these large, big-pocketed family offices, but we specifically choose not to… 1) so that we can keep relationships with our friends and family and other investors who have been with us for a long time, but 2) to meet new investors. I think it’s really important – when you think about this, it’s very easy to go and say, “Oh, Sally invests half a million dollars with us every time. She’ll write another half a million dollar check every time”, so it’s easier just to go to her and get that half a million dollars.

What I would suggest – personally, it’s worked for us and I’d suggest to form your own perspective – is consider what happens if Sally one day stops writing that $500.000 check. It’s gonna be a lot harder to find a bunch of $10.000 people if you don’t know any of them, versus if you’ve already had many 10k, 25k or other hundred-thousand-dollar investors that you can replace Sally with.

With that all being said, every deal we do, we do a portion of it crowd funded, which really is nothing more than just advertising online through one of these third-party platforms for new investors. So it’s a straight general solicitation out there, advertising on the website, and they advertise on other platforms, but they’re aggregating individuals who are interested in investing in real estate, and putting our deal in front of those eyeballs. So every deal we do, we reserve at least a few hundred thousand dollars for that specific purpose.

In this deal we’re doing that as well. We’re on CrowdStreet, but we’ve been on just about every platform out there in the past, so we don’t have any one that we love or don’t love more than the others. They’re all good for their different reasons. In this case we went with CrowdStreet, so our deal is up there and we’ve gotten some investors directly from them. These are people that I would otherwise have never met in my life, that are interested in investing with us, and some of them have already invested with us.

So it’s a great opportunity to grow your network of individuals that either might be interested or are definitely interested in investing. Again, something you couldn’t have done prior to 506(c), or that I couldn’t do now even, if I chose a 506(b) type of raising capital.

Joe Fairless: You couldn’t do a 506(b) with CrowdStreet, even if you have a relationship with CrowdStreet and CrowdStreet has a relationship with their investors?

Mark Mascia: Yeah, there are some platforms that do 506(b) and crowd fund it and they sort of backdoor a few of these “relationship” angles. What you’re alluding to, which I agree with, is you have to have a pre-existing relationship before you can market something to someone. You and I know each other, Joe; I can tell you anything privately I want about any of our deals, regardless of how we’re raising money, because we have a pre-existing relationship. But to any of your Best Ever listeners – I’m sure many of them I’ve never met – I can’t tell them anything about the deal until we have a relationship. But it’s kind of catch-22, because how do you establish a relationship with someone so you can tell them about what you’re doing? They’re not just gonna invest blindly and send you money before you can tell them about the opportunity.

So there are some loopholes to this, and I’m not a super-expert in what those loopholes are. We’ve tried to stay pretty clear of those and just say, if we’re generally soliciting – which online advertising, in my opinion, clearly is generally soliciting – then you wanna use 506(c) to stay out of the gray area. But again, there may be other ways around that if you talk to your attorney; it’s just not my expertise.

So crowdfunding – the primary source of “advertising” for this deal in terms of new investors. We are also in this particular investment trying out for the very first time Facebook advertisement, because we’ve heard in the past a lot of great reviews from friends about how they’re acquired investors that way, because you can be super targeted. We know very clearly that 90% of our investors are 40 years and older, live all over the country, but mainly in population centers of 100.000 people or more… Things like that. It’s pretty easy to target those types of people on Facebook, because they’ve already given all of that information out there.

Joe Fairless: Is it primarily males, too?

Mark Mascia: Yeah, unfortunately it is. One of our largest investors is a woman, and I’m really excited about that because I really love to see a more diverse investor base that’s not all male. But yeah, it’s probably 95% male in terms of number. Just because one of our investors happens to invest a lot of money, it skews a little bit when you consider percentages of dollars, but…

Joe Fairless: Any other things you target for?

Mark Mascia: Like I said, this is the first one we’ve done. I’m not a super-expert, but those are the main things that we’re looking for. Well, I guess education I didn’t mention, as well. So generally they’re all college educated. To the extent that you can target more professionals – doctors, lawyers, executives or small business owners, those tend to be good users. But that covers a large population, it’s not exactly a narrow niche of people; that’s a lot of people, so…

Joe Fairless: Okay.

Mark Mascia: So Facebook advertising – we’ve just started that and we’ve seen a ton of traffic. We haven’t actually converted anyone yet on that, just to be perfectly open and transparent, so I don’t know if that’s something we’ll do again or not – stay tuned on that side – but it’s certainly something we’re doing now and something we couldn’t have done under a 506(b) deal.

We’re also trying old school newspaper advertising, because our investor base tends to be a little bit older. In some cases we have investors 70, 80, 90 years old, and newspaper still happens to be a very relevant source for those people.

And because we’re local – we’re not local in terms of our operations are in New York, as you mentioned at the outset, but our property is located in South Carolina, so what we’ve chosen to do is try to get investors that live in that general area, so we will make an extra target, either on Facebook and also in this newspaper advertising, that focuses on North Carolina, Greenville, South Carolina – markets that are very close to these areas. Charlotte’s an hour away, Greenville is about 45 minutes away, Charleston… Those types of things, because people tend to like investing locally; even though long-term I think that’s a bad strategy, it’s a great gateway if they can drive by the property and see it.

So newspaper advertising is something else we’re doing and something else we couldn’t do under a 506(b).

Joe Fairless: And you did – I believe, if my memory serves me correctly – newspaper advertising in Omaha for a deal, didn’t you?

Mark Mascia: That’s right, and we actually did get investors directly from that, so that’s why we’re doing this again.

Joe Fairless: Okay. Do you happen to know any type of return, or how do you look at that? One dollar spent in a newspaper ad, and you get an investor… How do you measure the return on your investment there?

Mark Mascia: It’s a great question… I don’t have a mathematical model that works yet, because honestly some of these people start out and invest 5k, 10k, 15k, 25k – some smaller check size because they’re testing the waters with us and seeing how we operate. That may be all they ever invest, because they don’t like us. Or, generally what happens is they try us out for that amount, and the next time they write 100k check, or half a million dollar check.

It’s kind of difficult, because they lifetime value of that customer to us could be extremely high if they invest a lot of dollars or refer a bunch of friends, or things like that. But if they only invest one time, 5k, or they don’t invest at all, it’s very difficult to see the clear — I mean, it’s not like purchasing a product… They bought my book or something, and then I’d be like “Okay, that’s a clear conversion of one to one.” In this case, first of all it’s a high dollar value that they’re dealing with. If they write a check for 100k, that’s obviously worth a lot to us, versus somebody who would buy a $20 item on eBay, or something.

I think typically we’re trying to stay in that 2%-3% of capital raise to cost to convert. That’s about what happened: we spent about $3,000 in newspaper advertising and converted somewhere in the $150,000 range from that, so I think that math works our roughly. But it’s not an exact science; that’s what we hope for. Sometimes it will be 20% cost to convert, but over the long haul that will decrease itself drastically.

Joe Fairless: Okay.

Mark Mascia: We also did a webinar, which is something else… I’m sure you’ve seen the “be everywhere” strategy, that kind of like blanket/carpet marketing, whatever you wanna call it… We’re definitely trying to follow that strategy. I mention