JF2752: Why The Wrong CRE Insurance Could Lose You Deals ft. Danielle Lombardo

Do you find insurance and risk management hard to navigate? In this episode, Danielle Lombardo, Senior Vice President at Lockton, offers her expertise on selecting good insurance brokers and what common mistakes she sees investors make when choosing insurance plans.

Danielle Lombardo | Real Estate Background

  • Chair of Global Real Estate Practice within Lockton Companies, a global insurance broker and risk management consultant.
  • She’s an insurance broker and consultant for a variety of types of CRE firms. Within her specific team, they are focused on providing these services to real estate firms (owners, operators, developers, REITs, etc.) operating in all asset classes.
  • Based in: NYC, NY
  • Say hi to her at: dlombardo@lockton.com | LinkedIn
  • Best Ever Book: Twelve Hours’ Sleep by Twelve Weeks Old by Suzy Giodarno

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Ash Patel: Hello, Best Ever listeners. Welcome to The Best Real Estate Investing Advice Ever Show. I’m Ash Patel and I’m with today’s guest, Danielle Lombardo. Danielle is joining us from New York City. She is the chair of a global real estate practice within Lockton Companies, which is a global insurance broker and risk management company. Danielle is also a broker and consultant for all asset classes. Danielle, thank you for joining us, and how are you today?

Danielle Lombardo: I’m doing great. How are you?

Ash Patel: I’m doing very well. Before we get started, can you give the Best Ever listeners a little bit more about your background and what you’re focused on now?

Danielle Lombardo: Yes. I’ve been in the insurance brokerage business for the past 15 years. I started actually in Los Angeles, I did the opposite of what most people do, going from LA to New York. Clearly didn’t come here for the weather… But always been focused on real estate insurance and started in the multifamily space. One of my first clients grew from 100 units to 10,000 units in two years. During that process, I found out pretty quickly how hard it is to not only place insurance on behalf of real estate owners, but actually service it on a day-to-day basis. I spent an almost 15-year career building our expertise, not only on getting the best rates and coverage, which should be an afterthought with your broker, but really the day-to-day servicing and the psychology of risk management within an organization.

Ash Patel: Can we deep-dive into that? Because to me, it’s almost like title insurance; we don’t really know what we’re getting or why are we getting it. What are we supposed to look for? It’s one of those things that until there’s a disaster, it really is just not in the forefront of what you’re doing. So what are mistakes that a lot of multifamily or any commercial asset real estate operator makes? What mistakes do we make?

Danielle Lombardo: What mistakes? Wow, that’s a great question. First of all, I was talking with a client of mine earlier today. He’s one of the largest multifamily developers in the country. We were just chatting about how inefficient and opaque the insurance market is; no one really understands it. You have to go through a broker to get to the insurance carrier, insurance pricing has become very volatile the past couple of years; it’s causing deals to die, unfortunately. I’ve had multiple situations where people have come to me at the 11th hour trying to get cheaper insurance to make sure that they could actually close on a deal. So it’s become one of these service offerings that is becoming much less like a title, where it’s commoditized because it is what it is on the title insurance… And on the property and casualty insurance front, you can become a lot more strategic around how you’re placing the insurance, the deductibles that you take on, etc.

So if we want to talk about your last question of what do real estate owner-operators, where do they make mistakes – where I see the biggest disconnect is amongst acquisitions teams and the C-level of an insurance company, particularly in risk management, the CFOs etc. who are looking at the long-term coverage implications of insurance. When you’re on the acquisition side and you’re just trying to do deals, you’re trying to get the lowest possible coverage that will meet lender requirements, in general. I don’t want to paint such a broad brush, but I would say amongst all of my clients, that’s generally the perspective. Then, when you’re dealing with asset management, risk management, CFOs etc. they generally have the experience of dealing with the actual claims. So where you may be saving money upfront to get a deal done, from a long-term perspective when you’re looking at the financials of the deal, if you have to fund millions of dollars for a deductible that you didn’t anticipate or there’s a huge gap in coverage, that will absolutely affect investor returns as well. So you really have to take a look at insurance through both lenses – the upfront NOI perspective and focus, as well as more long-term IRR, how is this deal going to pan out if we don’t have the right insurance.

Ash Patel: I’m shocked. Do people really just find the absolute minimum coverage?

Danielle Lombardo: Oh, absolutely. Are you being sarcastic or you just — [laughs]

Ash Patel: No, I’m being serious. So I’m not in the multifamily space, I’m in the commercial space. But we usually get pretty decent insurance; we don’t want the minimum. I mean, we want to know that we’re covered. What horror stories have you encountered and what lessons learned can you help us with?

Danielle Lombardo: There are a lot, and that’s why I’m pausing right now, to see what would be most effective in terms of answering. I would say, at the end of the day a lot of your peers do focus on cost first, and coverage, as long as it meets lender requirements, can be an afterthought. I do see that perspective differing amongst different types of real estate firms. For example, real estate, private equity, and REITs might have more of a conservative standpoint, family offices, because it’s their own money. When I talk to more of my syndicator clients that are just trying to churn and burn deals, three to five-year holds, they’re just trying to make most of their money on the upfront acquisition fees; I think it’s a different perspective as well.

I’ve certainly seen situations where clients have had to do capital calls for insurance-related claims where the deductibles were a lot higher than they had expected. For example, when you’re dealing with catastrophe coverages, like windstorms or earthquakes, you’re going to see three, five, and sometimes higher percent deductibles of your total insurable value, which can be millions of dollars out of pocket after a significant windstorm, or earthquake etc. A lot of times you’re not putting aside that money for a rainy day, and you’re not really thinking through the deductibles on an upfront basis.

I would say the other mistake that I see across more middle-market to small operators is not purchasing general partnership liability insurance, which is essentially a blend of directors and officers and errors and omissions. When you’re dealing with claims of misrepresentation and other claims from investors when deals go South, for example, regardless of what your contracts look like or how good your relationships are, or you think they are, with your investors, they’re generally going to come to you to try to find some reason to recoup their money.

The other side of that too is if you’re the property manager, there are certainly errors and omissions-related claims as well. If you, for example, placed the wrong insurance or you don’t pick the right deductibles, then you have to come out of pocket and you didn’t appropriately advise your investors how you chose those limits or those professional services. There’s a lot there from a professional liability and a directors and officers liability standpoint. Everything else just really skirts the coverage gap conversation around why you’re choosing to purchase particular limits upfront, and what happens when there’s an actual claim.

Ash Patel: Can you dive into the general partner’s liability insurance? What exactly does that cover? Have you encountered a situation where an operator had a loss and they were sued, and this insurance provided some safety?

Danielle Lombardo: Yes, I have. These are typically what we would call catastrophic claims, meaning you’re not going to see claims for $50,000 or $100,000, and that’s why a lot of times the deductibles are much higher. These are claims from investors who say, “You misrepresented on this deal, and I invested as a result. Now I’ve lost money and I’m suing you for $5 million.” Those are the types of claims that we’ve seen. Depending on how the lawsuit is worded and a number of different factors, we certainly have seen significant claim payments on that type of coverage. From a professional liability perspective, if you’re doing property management, we do see, unfortunately, a lot of employee theft-related claims and things like that… Now it all falls within the realm of management liability, outside of what you’re buying on a property level.

Ash Patel: Danielle, we’ve all heard the horror stories where somebody has a roof that blew off of, a fire, and the insurance company doesn’t want to pay. What tips can you give our audience on how to deal with situations like that?

Danielle Lombardo: I have this conversation all the time. The insurance companies want your money ASAP, but they generally will wait to pay claims or will take a while to pay claims. Especially if you’re dealing with catastrophic claims, because you have adjusters that are just overwhelmed. So I would say a couple of things… The way that your coverage policy forms are written upfront is very important. Most of my clients have what are called master insurance programs, that have a number of different insurance companies sharing in the risk. We have a locked-in-based form that we write on behalf of our clients, that tries to make it bulletproof at the point of the claim, so there are no questions and there’s not as much back and forth.

As strong as the coverage might be, you’re still going to have issues getting the right attention from a claims adjuster. So you need to have a broker that has an internal claims advocacy group, that’s sole purpose is to interact with and project manage with the adjusters, and have relationships with those adjusters. It’s actually a fairly small underwriting and claims community, if you can believe it, so having someone internally advocating for you on the front end and then project managing it forward is very, very important to get the claim towards resolution.

I do think that dealing with your larger insurance brokers, they’re going to have the leverage with the insurance carriers to get claims paid not only faster, but to maximize the claims payment. So I do think having a larger insurance broker is certainly key.

Break: [00:12:35][00:14:32]

Ash Patel: At what point do individuals qualify to get insured by these larger insurance brokers?

Danielle Lombardo: It depends on a couple of different factors. You need to have a minimum premium amount. I would say that minimum premium amount, at least for me personally and within our group where we can add the most value, is usually around $500,000 in premium. That can be a couple of thousand units, that can be even a thousand units if we’re dealing with Florida, because the premiums in Florida are that much higher, it can be 500 units in New York, because general liability insurance in New York is that much higher… So it depends on the geography and the asset class. But if I were to look at premium amount, it’s usually about that $500,000 mark.

The reason why, for us, there has to be sort of a minimum there is not only the service that we offer. We really act as an outsourced risk management department for our clients, so we’re heavily staffed more than a lot of brokers in that sense. But also, when you’re dealing with smaller portfolios, there tend to be one-off regional carriers that are more competitive than our carriers will be. Think farmers, and state farms… They’re obviously not regional carriers, but I’m talking carriers that are focused on smaller portfolios.

Ash Patel: Danielle, Neal Bawa, if you know of him, a multifamily legend, a Silicon Valley guy who just applies a lot of data to real estate investments – he did a webcast recently where he talked about how insurance companies are applying a different level of risk based on climate change data and past weather patterns. Are you seeing that as well?

Danielle Lombardo: We are. It’s a great question and it comes up at least once a week from clients and prospective clients. How are we addressing ESG, and specifically, from a climate change perspective, what is the insurance industry doing. At the end of the day, the reason why there’s so much volatility, at least on the property insurance side, is as you have seen over the past couple of years, there’s been an increase in frequency and severity in weather events. It’s very difficult to anticipate outside of any model out there of how things are going to pan out for insurers. So it’s very hard to underwrite when there’s so much unknown.

With that being said, there are catastrophe models that now have modules to address climate change. Think sea level rise, flood, wind, and other variables that they’re overlaying across their portfolio. We’re certainly seeing insurers focus on it more and we’re seeing clients focus on it more. I will say any catastrophe model that I’ve seen, whether it’s climate change-focused or not, it gives you thousands of years of data. But when you look at how it actually pans out in reality after a storm, it usually is a little bit far off. I think insurance carriers and clients are just reaching for any sort of data to help them make decisions, but at the end of the day, the reason why there’s so much volatility within the insurance market is that there’s so much unknown.

Ash Patel: They’re going to reach and try to stay ahead of the curve.

Danielle Lombardo: They’re going to try to, so what they do as they try to paint the accounts with a broad brush, and really, an insurance broker’s responsibility is to try to beat them at the pass, meaning underwrite internally, have the same types of systems and analytics that underwriters use, so that they can anticipate and be proactive about having conversations around their concerns… Whether it be weather related issues, catastrophe related issues, liability related issues… From a liability perspective, most underwriters are using what is called crime scores in order to evaluate their exposure in different neighborhoods from a multifamily perspective… And to be able to get ahead of that and have conversations with deal teams around what’s really going on within the neighborhood, and what cap-ex is being discussed on the front end, and really what the value-add strategy is at that location, and how they’re going to integrate security as well… So it’s really a lot about having the internal tools, whether it’s climate change or anything else, to be able to have those conversations with underwriters.

Ash Patel: Danielle, what is your best real estate investing advice ever?

Danielle Lombardo: My best real estate investing advice ever, from an insurance perspective, I will say you have to be able to marry both perspectives of upfront pricing and long-term coverage. I would say my advice, again, through the insurance lens, is around making sure that you’re looking long-term at really hedging against the volatility of the insurance market, taking on higher deductibles, putting in place and thinking through potential captive and risk finance opportunities so that you’re getting out of the dollar trading in the insurance market, and being more strategic around how you’re buying insurance.

You don’t want to be where I’ve seen most real estate companies have been over the past year or two, where you are beholden to the insurance market and you’re losing deals because of it. Everyone’s complaining about insurance, and it’s become a real issue when people just want to get deals done.

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

Danielle Lombardo: I’m ready.

Ash Patel: Let’s do it. What’s the Best Ever book you’ve recently read?

Danielle Lombardo: Twelve Hours’ Sleep by Twelve Weeks Old.

Ash Patel: What was your big takeaway?

Danielle Lombardo: Getting my two-and-a-half-year-old and my one-year-old to sleep through the night.

Ash Patel: Got it. Danielle, what’s the Best Ever way you like to give back?

Danielle Lombardo: I love to learn about organizations that are close to the people around me, and continually evolve how I’m giving back. My passion is for at-risk youth, so any organization that focuses on at-risk youth, specifically teenagers, is where my passion lies. But I really do love to spark conversation with people around me, especially my clients and colleagues, what means the most to them and support them as well.

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

Danielle Lombardo: I think email is probably best, dlombardo@lockton.com.

Ash Patel: Danielle, thank you for your time today and sharing some insights on the world of insurance that’s often mysterious to a lot of us. Thanks for your time today.

Danielle Lombardo: Thank you.

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

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JF2745: How to Analyze Political Climate Effects on CRE Markets ft. Sam Liebman

Sam Liebman, Founder of WealthWay Equity Group, has witnessed the drastic changes one election can have on an entire real estate market. In this episode, Sam shares his decades of experience navigating politically changing markets and his strategies for adapting to these shifts to keep business thriving.

Sam Liebman | Real Estate Background

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Slocomb Reed: Best Ever listeners, welcome to The Best Real Estate Investing Advice Ever Show. I’m Slocomb Reed and I’m with Sam Liebman. He’s joining us from New York City. He’s the founder of Wealthway Equity Group which focuses on syndications. He has a 30-year career in commercial real estate and his current GP portfolio is over 1800 units and 30 properties in New York and Texas. He’s also the author of a book that was just published in the last month, in January of 2022, titled Harvard Can’t Teach What You Learn From The Streets. Sam, can you start us off with a little bit more about your background and what you’re currently focused on?

Sam Liebman: Yeah. First of all, thank you for having me, it’s a pleasure. I was a kid from Canarsie, Brooklyn; I came from a very poor family, dysfunctional family, and I just kept fighting, fighting, fighting. We call Canarsie the mafia minor leagues, because every [unintelligible [00:04:16].03] seems to be connected. But when you grow up on the streets, you learn certain street smarts, you learn to get your spidey sense tingling, you think out of the box; you have to, it’s survival. And I used those lessons from the street and I combined them with the traditional education to become street smart and know my stuff.

One of the things we did was mastered the fundamentals. Started off as an accountant, a CPA, had a firm for a while. Then when I was doing people’s tax returns, seeing what they made, I felt like everybody’s scorekeeper. They were making millions, I was keeping score. I said, “You know what? I want to be on the other side.”

Slocomb Reed: Every accountant I know tells the same story of how they got into real estate. You have a 30-year career in commercial real estate; how long have you been on the GP side of syndication deals?

Sam Liebman: Well, I started off as a GP. What happened was in 1992 — I had worked as a chief financial officer at Mountain Development Corp at 27, and I got what I call my Harvard education there, because the company started with myself, a secretary, and the owner, Bob Lee. Three years later, we had over 20 million square feet in five different states. So I really got tremendous exposure, which is really important in the learning process. Then through accounting, I had met one of the clients who called me in one day – this was in 1992 – and said, “We want to buy all the banks foreclosures.” That time, you could buy properties for three times rent roll; nobody wanted Manhattan real estate. I said, “Well, guys…”

Slocomb Reed: When was this?

Sam Liebman: This was 1992. Cap rates were going from 9.75% to I think 12%, interest rates were 10%, and I always tell people, the best time to buy real estate is when nobody wants it. The price you pay is a permanent cost; you can’t change that. But if interest rates are high, that’s a variable cost; you can always refinance, you could always pretty much go down, and that’s what we did. Those properties that I bought for $575,000 are now worth $15 million, for a lot of different reasons that we did, and that 9.75% initial interest rate is now 3%. Well, lower. So I said, “Guys, let’s do syndication.” “What’s that?” I said, “Well, instead of buying two buildings with your money, we could buy 10.”

That sounded appealing until they saw the documents. I managed to streamline the documents and we bought our first deal, 110-112 St. Mark’s place, I remember that. September 23, 1993, we closed; it was 22 two-bedroom apartments, 50-footer what we call, and two stores. $575,000. And I remember all we needed at that time was $290,000 in equity, including fix-up. At that time, under nine people, you didn’t need to do a full-blown PPM as long as it was under nine people. So if I got a guy who put in 50,000, now the average went down to 30,000. We had people put in in these buildings at the time $15,000, that and now $500,000 investors, and we bought 40 of those buildings for dirt cheap. We thought we’d fix them up, and we would have cash flow and appreciation. Did we ever think about these prices? No.

Slocomb Reed: So you’re talking about investments that happened 30 years ago, turning 15,000 into 500k. Now, how much of that appreciation do you attribute to the 30-year hold period and how much of it do you attribute to, say, other factors like you purchased a distressed asset and forced appreciation, or you bought in areas where there was – the buzzword now is gentrification of course… You bought in submarkets that have since shifted – how do you factor that appreciation over 30 years?

Sam Liebman: Okay, good question. For New York City, the main thing was the political climate that changed. In 1993, most of the buildings were rent-stabilized or rent-controlled buildings. We were only allowed to increase rents according to the rental guidelines each year, that ranged from 3% to 5%, depending if there was a one-year or two-year lease. Buildings were in horrible shape, because there was no incentive to fix up the building, because the rents were controlled. In 1994, they came out with vacancy decontrol, which was a game-changer.

Initially, what that let you do is if you could get an apartment vacant and the legal rent became $2,000 or more, the apartment became decontrolled. So if you had an apartment that was $1,200 a month and somehow you could get it to $2000, it became decontrolled. Now, what’s the importance of that? Well, they came up with this new technique, and it was basically if you put capital improvements in the apartment, you improve the apartment, you’re able to recoup one fourtieth of the cost, monthly. So if you put $40,000 in basically, you could raise the rent — and the tenant had to be out, the apartment had to be vacant. So for 1000, I put 40,000 in, make it really nice, get it over 2000… Ket’s say I only got 2500. That $1500 for the apartment, when you divide the extra income by the cap rate, it’s a lot more than the $40,000, of course. And by the way, in the city, because everything got better, that $2,500 apartment became worth 4000-5000. So the political climate was a major reason. Also, there were a lot of abuses in there; throwing tenants out. The game was to get an apartment vacant, by any means possible, [unintelligible [00:10:26].03]

This displaced a lot of buildings, but we became multimillionaires, and we did it the right way. There were tenant buyouts, again, using that cap rate formula to increase valuation. Over the years, the cap rates dropped, obviously. Now that was a change in the political climate. What I would tell your listeners now, if they’re looking for buildings, beware of the political climate where you’re investing. For instance, there’s a movement for national rent control, and it is horrible, because Minnesota, Minneapolis just passed, maybe two months ago, universal rent control, limiting new buildings to 3% increases. And they were all crying, “We need more affordable housing.” But what developer is going to sign a $30-$40 million construction loan when insurance is doubling, real estate’s doubling, and operating expenses and construction costs are doubling because of the pandemic, and then they’re going to cap you. So 10 projects immediately stopped, you could look it up.

Slocomb Reed: I want to hear a little bit more about your experience with the changing political climates and markets where you have been buying your properties. I know you have your current portfolio, some of it is in New York and some of it is in Texas… How much did the political climate of each of those states or each of those MSAs play into your decision to invest in those areas?

Sam Liebman: A big part. When we invested in Manhattan, we owned over 40 buildings or so at one time; it was a positive political climate. That has changed dramatically. I will not touch anything in New York City right now. I think I have a couple of buildings left.

Slocomb Reed: Sam, let’s go back to Manhattan. Can you give me a couple more inflection points? You talked about decontrolled vacant units in 1994. Can you give me examples of other political inflection points that drastically changed the commercial real estate landscape for New York City?

Sam Liebman: Sure, there’s a lot of them. Interest rates went down obviously over the last 30 years. The dollar became stronger; we’re talking about now. But over the 30 years, the dollar was weaker, so a lot of foreigners –and there was no virus… A lot of foreigners came into this country because they had cheap dollars. There was also a lot of political… Like the EB-5 program.

Slocomb Reed: What is the EB-5 program?

Sam Liebman: The EB-5 program, I think it was passed during the Obama administration. What that enabled was a foreign person, like Chinese or whatever, to come to the United States and invest, I think it was originally 500,000 and that became a million, and basically get citizenship. All the big companies now are getting all this EB-5 money that was funneled towards these big projects. So it was a way of getting tremendous amounts of foreign investment in this country. In fact, China was the biggest beneficiary. I remember probably about four years ago the quota was filled in January; that’s how popular it was. And there were other popular programs; there’s a lot of popular programs now, from the federal government.

Slocomb Reed: And you’re saying that the popularity of these programs for bringing non-US citizens to the United States is having a big impact on the real estate market in New York City.

Sam Liebman: Yeah, they were bringing in a tremendous amount of capital into the United States.

Slocomb Reed: So just to make sure, our Best Ever listeners and I are on the same page with you here… The influx of capital to the city increases property values, increases rent rates, correct?

Sam Liebman: Well, it increases demand. You bring in the money, you’ve got to do something with it.

Slocomb Reed: Yeah, of course. How long have you been investing in Texas? What about Texas attracted you to the markets where you’re invested there?

Sam Liebman: That’s a great question. I sort of saw what was going on in New York City, a little bit. About 2006 I think it was, somebody convinced me to go to Texas and take a look at what’s going on there. What I saw was tremendous potential. I saw infrastructure being built, schools being built, technology, and also there was a migration from California. I think it was close to, at that time, 200 people a day were moving into Austin. You had the West Campus part of Austin,  where the University of Texas is, and you had about a mile away downtown. And it was vibrant, it was entrepreneurial. And they had a master plan in Austin, it was called UNO – University Neighborhood Overlay. That plan really attracted me, because they were very pro real estate. They were rezoning areas, and they wanted capital to come in and build up the city. You had a young workforce, educated workforce. It had everything… Except water. But it had everything. They were building parks in Dallas, they were connecting uptown to downtown. So I saw all this going on, and I just said, “Wow, this is a great place.” And I just liked everything about it.

Slocomb Reed: So you said Austin had a master plan, UNO, and that plan excited you. On a smaller scale, Sam, in the city of Cincinnati, we’ve seen some tremendous revitalization of the urban core, and there were some major players, both governmental and private capital in making that happen. Since then, a lot of other neighborhoods and villages and jurisdictions in the MSA have come up with their own master plans for virtualization, publicized them, and many of them have not come to fruition at all.

When you see master plans like UNO in Austin, and you see potentially emerging markets that are demonstrating an intentionality about being pro real estate, how do you know that these are plans that will actually be acted upon and how do you know that they will actually result in pro commercial real estate growth?

Sam Liebman: That is a great question. The perfect example of that is Atlantic City.

Slocomb Reed: Atlantic City?

Sam Liebman: Right. Atlantic City, all the casinos, all the other things that are built there – Atlantic City failed because the jurisdiction there failed to develop the outer areas. The whole reason people came in was with that promise that they were going to build up the outer areas. It never happened, and that crushed Atlantic City. I’ll give you another area, Trenton, New Jersey. We bought a building there because we were promised — we’d met with the city council people and they were going to build the Mets… Or no, the Yankees had a minor league baseball team they put in; there was a hockey team put in, and they were going to do all these things. New jurisdiction came in, new political people – nothing happened. So you’re 100% right with that, that is a tremendous point. You don’t know, because one election can change everything.

Slocomb Reed: Is it really the elections that determine whether or not these sorts of master plans come to fruition?

Sam Liebman: Sure. Who’s controlling the money?

Break: [00:17:53][00:19:50]

Slocomb Reed: Let’s create a hypothetical situation. I’m tracking some emerging markets, let’s say, in the Southeast and in the Midwest. My investors and I are looking for cash flow, but we’re looking for long-term growth. I identify three markets, hypothetically, where I think strong growth is possible, and I am seeing a political climate that is favorable to the development of my asset class in these markets. If I see a brilliant opportunity, obviously, I’m going to pounce.

When I’m looking at not necessarily marginal deals, but when I’m looking at opportunities that would require that the market grow as is expected in the current political climate in order to reach my metrics, what should I look towards to ensure that the current commercial real estate favorable political climate will survive? Should I just be tracking elections? Is there something else? Is it possible, and how can I make myself certain that a market is going to remain with good conditions for developing commercial real estate?

Sam Liebman: Okay. Well, it’s a good question, and you have to decide if you’re going to be a pioneer or not. I don’t want to be a pioneer; I’m going to wait to see what’s being developed, how projects are getting approved or not approved. We do look at, in Austin for instance, how many student housing properties were put in for approvals. You can see, you can talk, but I’m going to wait until I see progress before I jump in, especially if you’re doing construction. You want to see unions, you want to see what the climate is there. Are they friendly towards developers? What are the views? We have an ever-changing political climate now, and depending on who gets in, it can change everything.

Just look at the president — not getting political, but from Trump’s policies to Biden’s policies, it’s a 360, 180-degree turn. So what I do is I follow — I don’t want to be a pioneer. I want to follow a pioneer and see how it is.

By the way, in Texas – that’s what happened in Texas and Dallas. There was a company called Power Properties, and on Gaston Avenue we bought over 20 properties. We watched our properties go in, renovate these classy properties, and we saw the rents they were getting. And they were the pioneers, we just followed them, and we were very, very successful. That’s a perfect example of what I’m talking about.

Slocomb Reed: Thinking about inflection points – you don’t want to be a pioneer, you want to follow the pioneers. I’d like to talk about this using Simon Sinek’s language around the bell curve of innovation. I don’t know if you’re familiar, let me give a quick summary for our Best Ever listeners. Everyone knows what a bell curve is shaped like. When you’re talking about innovation, you start the bottom left corner, and you look at the bell curve of the population. Let’s say it is the population for us; I’ll use two examples. One of them is the air pods from Apple that are in my ears right now. Someone has to innovate, and that’s where the bell curve starts. Apple announces that they’ve created this new headphone experience, this new phone call experience, whatever you want to call it. Apple is the innovator.

There is a group of people, a certain percentage, the moment Apple announces any new item, they immediately go wait in line in front of the store 24-48 hours, because they want to be the first to have it. Those people are called early adopters. The early adopters want to see an innovator or a pioneer come up with a great new thing, or create change in the marketplace, and then they want to pounce on it.

After you have the early adopters, you have the early majority. The early majority needs to know that not only has an innovation taking place, but some people have gotten positive results with that innovation. I would be early majority when it comes to these air pods. I don’t stand outside of a store and wait for anything in the cold for 24 hours. But as soon as I saw other people wearing them, I needed to know, because I hate holding a phone to my head. After then after early majority, you have late majority, and then you have what Simon Sinek calls the laggards.

I’m hearing you say, Sam, that you like to be either an early adopter or in the early majority when you see that a political climate is favorable in an emerging market for commercial real estate and development. Where would you put yourself, and how is it that you identify those moments at which you see that the innovators are innovating, or you see that there are early adopter developers coming in and that they’re seeing some success? How do you track that?

Sam Liebman: Okay. So it was an old saying in real estate, you’ve got to have a nose; a nose for deals. On my tax return, when it says occupation, you know what I put down? Opportunist. I’m an opportunist. I made it fortune buying other people’s mistakes. Now, you can be a frontiersman and go out in the wilderness if you choose. I choose to find other people’s mistakes, obvious value-add… My success and what I try to teach my students and followers is to master the fundamentals so you can see opportunities overlooked by others. That’s how I did it.

I don’t go with bell curves, I don’t go with this. Yes, I look at demographics, I look at all of that… But you have to get to a point, as you know, as a developer, where most of the stuff you do is on the back of an envelope, because you know so much that you get a few facts, and boom. That’s where you need to be. You need to be where a deal comes in, you can act fast, you know what to do, and that’s why I say I’m an opportunist. You haven’t yet, but if you asked me, “Well, do you want to go in the commercial sector, do you want to go in the residential sector?” It doesn’t matter, I want to go where the opportunity is.

Sometimes it’s development, sometimes it’s rehab, sometimes it’s in industrial, sometimes it’s what you explained to me, warehouse, which is very good. So that’s what I do. I get so many deals in that you have to weed through them and I have so much experience that I know pretty much right away which one I want to pursue and which ones go into the circular file.

Slocomb Reed: Back of the napkin math is incredibly helpful for deal analysis. I know doing my own off-market lead generation here in Cincinnati, I know apartments. Sometimes I don’t need the back of the napkin to know whether or not a deal makes sense if it’s an apartment building in the size range that I’m already operating. But I’m also looking at office, retail, other commercial uses, and I still need more information and more analysis before I know that I can pull the trigger on something. So that makes a lot of sense.

Sam Liebman: I’m going to tell you something that might differ with you. I think office buildings or retail – there’s going to be Armageddon, and you’re going to be able to pick up those prices at tremendous discounts soon. You don’t need to live in a city to do business with the city anymore. You know what the occupancy rate in New York City is right now? 30%. Now, in my humble opinion, I don’t think it’s ever going to go over more than 65%. If I’m right, all these leases that are going to mature — we have a law firm, 30,000 square feet; you’re paying $80 a foot. You only need half the space now. “Hello, landlord, we’ve got to talk. I don’t want to pay anymore $80. I can get better space for $55 across the street.”

Now, if you look at the ramifications of that, where the owner now has to retrofit the old tenants from his 30,000 square feet to his 15,000 square feet. Maybe the bathrooms are on the wrong side, he’s got to redo that; it costs money. Then he’s got to retrofit the new space for the new tenant, 15,000 square feet. He’s got to pay retrofitting it, he’s got to give TI to the new tenant, probably four or five months free rent, he’s going to have to pay a broker, and he’s going to have downtime. Now that’s one tenant. And this is what’s happening in Manhattan. So I hear people say, “Well, they’re going to be vacant. Maybe they’ll repurpose the space, convert it to residential.” Yeah, maybe you can do that. But actually, when you convert it to residential, it’s not that easy. You’ve got to cut the building, so you lose a lot of space.

I’ve been through it. Remember, I bought the buildings for 575,000 that were 4 million in 1993. I’ll tell you another story. We bought a package of 15 buildings in Dallas, we paid I think was 12.2; five years before that package was $56 million. So this can happen.

I believe that the retail sector, because of technology –and we’re seeing it happen– and because of the office building issue, there’s going to be Armageddon, and banks are going to be inundated with foreclosures. I have a lot of relationships with banks, and they agree with me; they’re gearing up for it.

Slocomb Reed: So whether or not you pounce on a deal has much more to do with the micro economic factors impacting that particular property and its particular distress, more so than trying to predict the markets that are going to see growth?

Sam Liebman: Well, again, the price you pay is, to me, the most important thing. The price you pay is a permanent cost, so yeah. If you’re talking about where I see it going – I could be wrong; actually, I hope I’m wrong, but I don’t think so. One of my successes is being able to time markets. I timed the market in the ’90s, I timed the market in the 2000s… And right now, we’re sitting back, we have a tremendous amount of capital, and we’re just sitting back waiting for the right time to pounce in again. There’s a shortage of rental housing, for a lot of reasons… So I do think that the rental housing sector, which is my favorite sector, because you can get tremendous financing. Who’s going to finance an office building or a retail building? You think you can get attractive financing for that? Maybe if you have a small shopping center with Triple A tenant, you will. But for an office building – banks don’t want to go near that unless you put in a personal guarantee, 50% cash, interest reserves… Who wants to do that?

So I go where the financing is, and residential is the place to be. I think residential is going to keep going up, for a lot of reasons. But the housing market is too big, too strong, too high; people can’t afford houses. There’s also a change in culture with millennials. A lot of millennials would rather rent. There’s a movement now called build to rent; have you heard about that?

Slocomb Reed: Yes, I have. It’s much more popular in other parts of the country than where I am in Ohio, because it has a lot to do with market rents. My understanding is it’s much more popular on the coasts than it is in the middle of the country, because the rents that you can command are proportionally higher there, relative to construction costs.

Sam Liebman: Well, my point was though is the change in the younger generation and the older generation, that they don’t want to own, they’d rather rent. Everything has become disposable and portable now, so you’ve got to look at that. Restaurants are changing the way they construct their restaurants now, because millennials would rather take the food, bring it to their house. It’s like my wife and I. At night, she’s on her iPad, I’m on my iPad. It’s getting to be where there’s no reason to leave the house anymore, which is sad, but it’s the reality.

So all these changes in culture, all these changes – there’s a lot of them. People have asked me, “So where do you think real estate is going to be?” The answer I say is, “It’s Bob Dylan’s song. The answer, my friend, is blowing in the wind.”

If the wind blows this way and interest rates go up, there are other factors or variables, and I can tell you which way I think it’s going to go. If the wind blows right, and interest rates go down, or something happens where they change the laws, I can tell you that. But I can’t tell you which way the wind’s going to blow. And that’s the problem, there are so many more variables than there were years ago.

Slocomb Reed: Sam, are you ready for our Best Ever lightning round?

Sam Liebman: Oh, I never did one of those.

Slocomb Reed: What is the Best Ever book you’ve most recently read?

Sam Liebman: My book, Harvard Can’t Teach What You Learn From The Streets. No, there’s a very good book that I read years ago and I read it again about two months ago… It’s called the E-Myth and it’s by Michael Gerber. I don’t know him or anything, so this is an independent one… But the premise is, to be a successful business, you need three qualities. You have to be entrepreneurial, you have to have management skills, and technical skills. And if you lack in any of those, your business will fail. I’ve found that to be — it’s only like 110 pages, an easy read. I thought it was a great book, really…

Slocomb Reed: Totally, foundational. What is your Best Ever way to get back?

Sam Liebman: That’s what I’m doing now. I’ve given up trying to be the richest guy in the cemetery. Honest to God. I wrote this book, Harvard Can’t Teach What You Learn From The Streets in English, with real-life stories. You can learn to build lasting wealth through real estate by mastering the fundamentals; that is what people don’t understand. You must master the fundamentals to build upon. It’s like being a tennis player and you’ve got a forehand, and right away you want to learn the backhand. But if you don’t master that forehand, there’s going to be a part in your growth where you’re going to play someone that’s going to take advantage of what you didn’t perfect.

So I always mastered the fundamentals, and I’m giving back by doing podcasts that I hope people will learn from, I’m giving lectures, I’m mentoring young kids… I love it, because a lot of kids are lost now. When you mention real estate, it’s a big, hot subject now, and you see these kids… I’ve got a kid coming in Tuesday, he’s in graduate school, and he’s going to come in and start, and I want to keep getting more kids involved. I love it. I love doing it. That’s how I’m giving back.

Slocomb Reed: You’re leading right into our next question here… What is your Best Ever advice?

Sam Liebman: Master the fundamentals, be a gym rat, be passionate. Develop passion. That’s what I did. Real estate was the perfect industry for my personality. Bricks don’t talk back. I never wanted to get involved with raises and salaries of people, but I love increasing property value; it really turns me on. I’ve never been focused on how much money I was going to make, I always focused on, “If I do this right, there will be money.” Master the fundamentals, love what you’re doing, and don’t take shortcuts, especially in due diligence.

Slocomb Reed: Sam, how can our Best Ever listeners get in touch with you?

Sam Liebman: samliebman.com. I’d be happy; if you go in – just join, it’s free. We have articles, see all my buildings. With the building, I put a story of what we did to it pretty much, which I think people will find very interesting. My passion right now is to teach. I’m working on an online real estate academy called Street Success Real Estate Academy. I market myself as the kid from the streets who overcame a lot, became successful, and I’m the same guy I always was; straight-talking, no bull, and that’s it. I’m who I am and I did alright.

Slocomb Reed: Awesome. Well, Best Ever listeners, thank you for tuning in. If you’ve gotten value from this episode, please subscribe to the show, leave us a five-star review, and please share this episode with your friends so that we can add value to them, too. Thank you and have a Best Ever day.

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JF2679: 5 Tips for Transitioning from LP to GP with Matt Picheny

Over the past 16 years, Matt Picheny has learned a lot about active and passive investing. In this episode, Matt shares how he scaled as an investor, starting with his first deal as a limited partner and what lessons he’s learned along the way.

Matt Picheny | Real Estate Background

  • Founder of Picheny, which syndicates multifamily investments.
  • Portfolio: Over 8,000 units total: 2,337 as a GP, approx. 6,000 as an LP.
  • 16 years of real estate experience
  • Based in: Brooklyn, NY
  • Say hi to him at: https://picheny.com | www.linkedin.com/in/picheny

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Joe Fairless: Best Ever listeners, how are you doing? Welcome to The Best Real Estate Investing Advice Ever Show. I’m Joe Fairless. This is the world’s longest-running daily real estate investing podcast where we only talk about the best advice ever, we don’t get into any fluffy stuff. With us today, Matt Picheny. How are you doing, Matt?

Matt Picheny: I’m great, Joe.

Joe Fairless: Well, I’m glad to hear that. I’m looking forward to our conversation. Matt is the founder of Picheny, which syndicates multifamily investments. He’s got a portfolio of over 8000 units, about 2400 or so as a general partner, and about 6000 as a limited partner. He’s got 16 years of real estate experience, he’s based in Brooklyn, his website is picheny.com… And, just published a book, congrats on that. I know that it can be a labor of love; or just labor. [laughter] Either way, the way the book is published, it’s called Backstage Guide to Real Estate. With that being said, Matt, do you want to give the Best Ever listeners a little bit more about your background and your current focus?

Matt Picheny: Sure. For me, it all started back in 2001. I was in digital marketing and I had my own boutique agency in New York City, doing website projects, website development, that sort of thing. The dot-com bubble burst, a lot of my clients were either going out of business or just scaling back any digital marketing budgets that they had, and my business was basically imploding. And it just so happened that at that time, my landlord came to me and said, “You’ve got 90 days to get out.” That really threw me for a loop, to say the least. I needed to figure out what I was going to do and trying to find an apartment…

Joe Fairless: Your company landlord, or where you were–

Matt Picheny: No, sorry. The landlord of my home where I was living, my residence.

Joe Fairless: Why? Were you not paying rent?

Matt Picheny: No, I was paying rent. So this property was owned by a relative of mine, and he let me move in there. I used to be an actor, and he let me move in there when I was an actor. The year that I moved in there, I made just a little under $8,000 for the entire year. So out of the kindness of his heart, he was letting me stay there, but I was paying the maintenance fee. And I don’t know exactly his whole financial situation, but he needed to sell the place. The whole financial markets were in turmoil, so I’m sure he had some sort of situation where he needed to get rid of the place. It was a co-op in New York. So I needed to find a new place to live and I needed to do that with — and I’m sure you’re aware of this, Joe, having your own business, especially the first few years of your business, you don’t have really wonderful books, you don’t have a huge balance sheet, and it’s hard to substantiate that income, and especially when your business is imploding because everyone’s going out of business, all your clients.

So for me, I was like, “How am I going to find a new place to live?” I might as well have been climbing Mount Everest; it seemed an impossible task. What ended up happening was a client of mine in Showtime, the cable television channel, hired me to come in-house. They asked me to come in-house, so I did. I was getting a steady paycheck and was looking to rent an apartment. I wanted to live on the Upper West Side of Manhattan, which is where I had lived when I first moved to the city and was my favorite part of New York City, it still is to this day… Well, except for Brooklyn where I live now, but Manhattan is my favorite part. I was looking, and the prices were just unbelievable. I couldn’t afford really anything; maybe I could squeak out something to rent. But what I found was up in Washington Heights, which as you know, Joe, because I know you live in the city, all the way on the tip of Manhattan way, way, way North, I was able to find a place. My sister was living there at the time, and actually, she found a place on Bulletin Board that I could buy. So I bought an apartment. And within two years, I sold that apartment, and I quadrupled the equity that I had put down for the down payment.

Break: [00:04:19][00:05:57]

Joe Fairless: What did you buy it for and what do you sell it for?

Matt Picheny: I bought it for 150k and I sold it for around 250k. I put $30,000 down and I walked away with 130k in my pocket; it was like 160,000. So it was 30k down and 130k profit afterwards, which was amazing. I said, “Wow, I’ve got to do this again.” This is amazing. So I used that money, the profits from that to buy a new place, this time in the Upper West Side, so I was able to live where I wanted to, and I started wanting to invest in real estate. I was trying to figure my way around. And back then, I don’t even think podcasts existed at all, or…

Joe Fairless: What year was this when you bought the place on Upper West Side?

Matt Picheny: This was 2005. So I don’t think podcasts existed, or at least that I was unaware of them. I remember buying an iPhone, but that was much later; that was a few years later. iPods existed, but I don’t think podcasts were really a thing at that time.

So anyway, I bought that place, and then about a year later, I found a property in Northwest Connecticut that I wanted to buy. It was a piece of land, and I thought “Oh, this will be a great investment. I’ll buy this land, and then sell the land in the future. Or I could build a house there and have a little place to get away from Manhattan, a little country home.” So a few years later, I went ahead and built that house. What ended up happening was I met my wife just as I was finishing up building the house. I met the woman who would, in the future, become my wife. She had her parent’s house on the other side of Connecticut which we could go to from time to time, but there was this incredible demand to rent my property, this house that I built.

So I was renting it as a vacation home, and never ever ended up really spending a lot of time there. But through that process, I learned a lot about renting homes and I learned a lot about things like depreciation, accounting, that kind of boring stuff, looking at leases, and all those types of things. That’s what really set me on the path to where I am today.

Fast-forward a few years, we ended up selling the place on the Upper West Side and moving to Brooklyn. Then about a year after we moved to Brooklyn, out of the blue, my wife got an unbelievable job opportunity, but it was in Miami, Florida. So we moved to Miami. I quit my job, I was working in advertising. Actually, Joe, you and I both worked at the same agency, but at different times. So I quit that job, and I moved to Miami with my wife. And I was trying to figure out what did I want to do. I was looking at some agencies down there, but the agency world is much smaller down there, much smaller teams; it didn’t really make sense.

I was kind of burned out. I had been working in the advertising world for about 18 years at this point, working at a bunch of different agencies, and working my way up the corporate ladder, and it was fun, but I was kind of burned out. I loved the real estate that I had been doing on the side as a little hobby, and it was a passion of mine. So with that move, I decided to go ahead and see if I could make real estate a full-time job. That was a little over six and a half years ago, and that’s when I found out about real estate syndication, where investors could pool their capital together, their balance sheets together, their experience together, and take down these otherwise unobtainable assets. That’s when I started down that path, and started off as a limited partner. I always wanted to be a general partner. It took me a few years to get my first deal as a general partner, but it’s been a very fantastic and fruitful ride. That’s what that book that you mentioned earlier is about, it’s about that journey.

Joe Fairless: The first deal that you invested as an LP, how did you come across the general partner, and what made you feel confident in the general partner that you invested?

Matt Picheny: I met this gentleman at the first seminar that I went to. I went to a live seminar about syndication. This one was more like a 30,000 foot, it wasn’t really the details of what the syndication you could do…

Joe Fairless: Which one? What’s the name of it?

Matt Picheny: It was the Secrets of Successful Syndication, The Real Estate Guys.

Joe Fairless: The Real Estate Guys. Yup.

Matt Picheny: Yeah, they’re awesome. I love those guys. So I went there, I learned about syndication in general, and I met a gentleman there. He’s awesome, and he’s become one of my closest friends; but I became friendly with him. He had syndicated the deal before, he had done one deal before. And what ended up happening, he was part of another group and I joined this other group…

Joe Fairless: What’s the group you joined?

Matt Picheny: Brad Sumrok’s group.

Joe Fairless: Okay, got it.

Matt Picheny: So I joined that group, and this gentleman was doing a deal, and he asked me if I’d be interested and I was overjoyed, very excited to do it, so I joined that deal as a limited partner. And the deal didn’t really do great. But look, the bottom line is, I didn’t lose money on the deal, and I learned a ton from being a limited partner in it. I spoke with the general partners about it, I learned so much from that deal, it was fantastic. It didn’t go as planned but… I mentioned this in the book, the most important thing, I talk about this specific deal, and the biggest lesson for me from that deal is the deal matters and the market matters, but the most important thing is the sponsor. And I had faith in the sponsor. This guy – he’s an airplane pilot, and I was sure this guy would be able to land the plane, that it wasn’t going to crash and burn. And honestly, it probably should have, had it been anybody else. But this guy just stuck with it through thick and thin and got that plane to a safe landing. Maybe the flight was delayed quite a bit, but it landed safely.

Joe Fairless: What specifically happened with the deal that it didn’t perform?

Matt Picheny: There were a number of different things, Joe, but we had a much higher than expected vacancy… I think in hindsight, the general partners realized that they were renovating the units, they were doing interior renovations maybe to a finish level that was above what the market really wanted or demanded… I think there were a number of miscalculations, little ones, throughout the whole thing, that just when added together in totality just made the deal problematic.

Joe Fairless: Got it. Well, I have been there on my first deal as a general partner and continue to learn as well, so understood. You said you learned a ton from that first deal. What are some other lessons that you learned from that deal, besides the sponsors being the most important?

Matt Picheny: Right. So there was that – really being able to understand the market and the trends that are going on in the market, making sure that we’re not over-renovating. That was a big mistake that they made, there was a miscalculation. They were putting in granite countertops, which was complete overkill for that particular market. Some markets is great for that, but it wasn’t great for that one.

I think that also, property management was a big, big problem. They had a big problem with property management, they ended up switching managers. The property manager can really make or break the deal and you have to very, very carefully vet. Look, I have a deal that I did and we had a problem with property management, and we had to switch it over. Once we got a good property manager in there, it was like night and day. But those people who are in there day-to-day dealing with tenants, the toilets, and the termites – they need to be top-notch, or your deals going to fail no matter what. Those are some of the important things that I learned to look at.

The other thing was I started to dig into the financials of the deal and going through that General Ledger, that P&L, and understanding what all those different things are, what they mean, how they affect the business. So part of it was when I invested that money in that deal, which for me — look, I put $50,000 into that deal, and for me, that was a very large chunk of change to put into an investment. I mean, besides buying a home that I controlled, putting it into something that someone else controlled just as one investment – that was a large thing for me. I spoke with them about it and said, “Listen, I do want to sponsor these deals,” which they knew, and I said, “I want to be able to talk with you and learn from this experience.” I made sure that I wasn’t obnoxious about it, that I wasn’t calling them every day or every week. But every few months or so I would set up a call and just learn from that experience, talk with them and find out what was going on, what were the challenges. It made that a great learning experience for me.

Joe Fairless: You mentioned that you had to fire a property management company as a general partner. I’d like to get to that in a moment. But before we do, how many limited partner deals did you do until you did your first general partner deal?

Matt Picheny: Five limited partner deals.

Joe Fairless: Why five? Why not one, or why not 15?

Matt Picheny: Joe, I probably would have been okay with maybe even zero, in my mind, at that time. But I wanted to invest as a limited partner to gain some experience and see what other investors are doing. Joe, I’ve invested in one of your deals, so I know how you communicate with your investors. That’s something important for me to learn and see how other people are doing things. I think you can learn a lot just through that process. But for me, I was looking for my first deal while I was doing these limited partner investments. For me, the experience I got from the limited partnership was great; it was nothing compared to what I learned, actually, while I was doing the deals. But it takes a while as a new person in this business to sort of break in and break into a market. I looked in a couple of different markets before I ended up in the market where I found my first deal, and it took me a while to develop a rapport with the brokers.

The first deal that I bought –besides the duplex I had in Brooklyn and some other single family, smaller single-family things that I had done– was a $10 million 132-unit development. And for a broker to have the faith that I can actually come up with the equity and the debt and close that deal – it takes a while to build that rapport and get the trust of a broker who’s presenting your offers to the seller and say, “Yeah, I actually think Matt’s going to be able to close on this deal.”

Joe Fairless: Did you say $10 million deal and it was 132 units?

Matt Picheny: Yeah. It was the $9.9 million purchase price.

Joe Fairless: Did you say it was in Brooklyn?

Matt Picheny: No, sorry if I was confusing — no, the duplex is what I own in Brooklyn. The property that I’m talking about was in Lawrence, Kansas, which is outside of Kansas City. It was 132-units, 9.9 million.

Joe Fairless: KU, Rock Chalk, Jayhawk.

Matt Picheny: That’s right, Rock Chalk, Jayhawk. I went to one of those games, it was amazing to watch them play basketball. It was incredible.

Joe Fairless: That’s on my bucket list, to go see the Jayhawks play.

Matt Picheny: Joe, you can’t buy tickets. Give me a call if you want to go. I have connections. They don’t sell them.

Joe Fairless: I’m going to be wearing red and black whenever Texas Tech comes in to play them, and I’ll be a fan of one for Texas Tech there… But I would love to experience that. Okay, so that was 75,000 a unit, I heard Brooklyn, I heard that amount, and I was wanting to…

Matt Picheny: I was a little confused. Sorry.

Joe Fairless: Okay. So the property management company on one of your deals didn’t work out. How do you know when you should fire the property management company and bring another one on, versus trying to work through whatever the issues are?

Matt Picheny: It’s a really hard thing to figure out. The transition is always going to be rough. It sounds like you have had the experience so you know as well – as a limited partner, I’ve seen it a number of times and it’s a difficult thing. This was a couple of deals in for me, so it wasn’t on my first deal. I was trying to avoid it. What happens is the first three to four months that you’re in a deal, it’s really hard to know how things are going. There’s a lot of transition that’s happening with the books and with the billing. You don’t even get the first month’s bills really until the second or third month. It just takes a few months to really get things going and see how things are going, really get that baseline, see where occupancy is, see how expenses are going, income, all of that kind of stuff; collections…

With this property manager, about three to four months in, I was starting to get a little nervous about them. I had a conversation with them, we had multiple conversations over time. Eventually, I think we were about eight to nine months in on the deal when we actually had the transition. Obviously, prior to the transition, I was talking with people, interviewing people, finding a new property management company, and then there’s also a whole thing that you have to do with your lender, to get approval from the lender… So I wanted to wait sort of until the last minute to tell the existing property manager, because obviously if you tell them, it’s quite likely that they would take their foot off the gas at that point in time. So I wanted to have all my ducks lined up in a row. When I called to tell them, they were like, “Yeah, we kind of knew this was going to happen.” So we did the transition, and it’s not easy…

Joe Fairless: Just going back to my question though. Respectfully, sorry, but my question was, how do you know when you should change. What happens where it’s like, “Alright, enough’s enough. XYZ is happening. I have to make the change.”

Matt Picheny: Sure. Well, our occupancy was tanking in this particular instance; occupancy was going low, make-readies were not getting done in time, there were problems with bills not being paid on time or even at all… So it wasn’t just one little thing, there were a number of different things that were all happening at once.

Break: [00:19:23][00:22:19]

Joe Fairless: Knowing what you know now about having worked with that property management company, what are some questions you would ask a future property management company that you perhaps didn’t ask that one, before engaging with them?

Matt Picheny: The most important thing for me is getting referrals from other operators that I know are working with them. So the first question would be “Who else in this market are you working with? What other ownership groups?” Then I ask to try to understand what does their back-office look like? What is their process for accounts payable? How do they deal with occupancy? What are their marketing plans? One of the big things is retention. So how do we retain the residents that we have? Because the largest cost really is turnover. A lot of times we’re doing a value-add so if someone moves out, it’s not so bad because we can then renovate the units. But we don’t want our occupancy to go down the toilet while that’s happening, so it’s really a question of how are you communicating with the residents? What are you doing? What is your plan? How do you go about that retention? That’s super important.

Then also I like to understand what sort of bench they have. A lot of times you may have a maintenance person or a manager who, for whatever reason, decides not to stay at the property, at the company, whatever, if something happens; that can be a really tumultuous time for a property. I want to make sure that the company that I’m working with has some sort of support on the back end, some sort of bench; maybe they have floaters. A lot of times a company might have maintenance people that float from property to property, just people that they can bring on so that a property doesn’t suffer if there is a personnel change.

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

Matt Picheny: I think leverage is the most underutilized thing by a lot of beginning investors. I have a friend named Aaron who likes to just pay everything off. But if you refinance properly, you can use that equity and grow your wealth exponentially. So that would probably be my best advice, is to really look at the current assets that you hold… Because a lot of people talk about cash-on-cash or return on investment, but what is your return on equity? And looking at that, recapturing that stored equity can be phenomenal for you.

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

Matt Picheny:  I’m ready.

Joe Fairless: Alright. What deal have you lost the most amount of money on?

Matt Picheny: A flip that I did.

Joe Fairless: How much did you lose?

Matt Picheny: I lost $10,000, which was huge for me back then.

Joe Fairless: And if you had to do it over again, what would you do?

Matt Picheny: I wouldn’t have bought that property.

Joe Fairless: Well, I know —

Matt Picheny: [inaudible [25:00] We had to buy it without an inspection. So what happened was, once we got in there, it was a lot worse than we had anticipated.

Joe Fairless: Got it. So you wouldn’t buy a property without having an inspection.

Matt Picheny: At this point, yeah.

Joe Fairless: Fair enough. That’s a good approach.

Matt Picheny: I mean, unless it was like a ridiculous bargain basement kind of situation… But yeah, I wouldn’t. There are too many unknowns.

Joe Fairless: Agree. There are always exceptions to generalities. But generally speaking, that’s a good approach. What deal have you made the most amount of money on?

Matt Picheny: The townhome in Brooklyn. We were able to sell air rights to this property and basically take all of our equity out, so we don’t really have any equity in it, number one. Number two, it’s gone up in value dramatically.

Joe Fairless: Where’d you get the idea for air rights and, and high level, how do you go about selling them?

Matt Picheny: Well, I wrote a whole chapter about that in my book. I had heard about it, and when we bought this property, we knew there was additional development rights. Essentially what happens is, depending on the size of the property, you can build a building of a certain square footage. If you haven’t used all of that square footage, you can sell that square footage to the adjacent property. That’s essentially what it is. It does not mean that they can build on top of your property or cantilever their building over yours. But it gives them additional square footage if they have availability on their lot to actually build if they meet the setback and height requirements.

Joe Fairless: Best Ever way you like to give back to the community.

Matt Picheny: I like to support charities that deal specifically with either the arts –I have a whole background in the arts and that’s a whole other story– but also homelessness. When I was in Boston, I was an ambassador for a company called Caritas, a nonprofit that provided permanent housing for people. I’m looking for something like that in New York, if I can find something. I just moved back a few months ago.

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

Matt Picheny: They can go to picheny.com. There you can get the book, you can sign up for my free newsletter, which has lots of great information, and you can just learn more about me. Check out the blog.

Joe Fairless: picheny.com is also listed in the show notes. Matt, thank you for being on the show, talking about your experience leading up to this point, lessons learned, and also sharing a little bit about the book that was just published, Backstage Guide to Real Estate. Congrats again on that book, and grateful for the conversation. Hope you have the Best Ever day. Talk to you again soon.

Matt Picheny: Thanks, Joe.

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JF2666: Investing in Office Space During the Work From Home Era with Andrea Himmel

Andrea Himmel’s mother went from nothing to a multibillion dollar portfolio of office buildings and warehouses in New York City. Inspired by her mother, Andrea joined the family firm and now acts as Chief Investment Officer, hunting down great opportunities in Manhattan and the boroughs. In this episode, Andrea breaks down why she’s investing in office spaces during the work from home era, and how she’s able to close on these high-profit deals.  

Andrea B. Himmel  | Real Estate Background 

  • Career: Principal and Chief Investment Officer at Himmel + Meringoff Properties
  • Founded in 1978, they own a multibillion dollar portfolio of office buildings in Manhattan and last mile warehouses in the boroughs of NYC. They do not syndicate equity. They own their entire portfolio with their own equity.
  • Portfolio: Multi billion dollar portfolio of ~20 properties in NYC. Over the past 40 years, they have bought and sold over 5MM SF.
  • Based in: NYC, NY.
  • Say hi to her at: http://linkedin.com/in/ah-ny
  • Best Ever Book: A New Earth: Awakening to Your Life’s Purpose by Eckhart Tolle

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Ash Patel: Hello Best Ever listeners. Welcome to The Best Real Estate Investing Advice Ever Show. I’m Ash Patel and I’m with today’s guest, Andrea Himmel. Andrea is joining us from New York City. She is the principal and chief investment officer at Himmel and Meringoff Properties, which was founded in 1978. It owns a multibillion-dollar portfolio of office buildings in Manhattan and last-mile warehouses in the boroughs of New York. Andrea has 14 years of real estate experience. Andrea, thank you so much for joining us in how are you today?

Andrea Himmel: I’m great. Thank you for having me. I’m honored to be here with you.

Ash Patel: The pleasure is ours. Andrea, before we get started, can you tell the Best Ever listeners a little bit more about your background and what you’re focused on now?

Andrea Himmel: Sure. I studied real estate undergrad at Wharton and knew I wanted to work in it, because my mother was actually in the industry. She had co-founded the firm I currently work at in 1978, and was really a pioneer in becoming a first-generation owner of a significant portfolio, coming from really not much. So I was very inspired by my mother. During college, I had multiple internships, one at Lubert-Adler, where I was working on real estate from a private equity angle, a lot of Opco/Propco kind of retail investing. I worked in CMBS at Morgan Stanley, and ultimately landed at Brookfield in 2008. I was a little underutilized, so I started interviewing around about two years later, because it had been a slow market, as you recall, that was with the recession.

So I interviewed and my mom said, “You know what? Get out of real estate. Get into a more sophisticated form of investing, so you can differentiate yourself. Because a lot of real estate owners are street smart, but not really financially sophisticated.” So I took a job for a hedge fund and I spent eight years there. I ended up managing their oil and gas portfolio that was about 10% of their 60 billion of assets under management; it was a long-term value fund. I learned how to value cash flow. Basically, businesses should be like lemonade stands – money in, money out, some form of capitalizing the business, and some way to distribute the proceeds. The skills I gained there, focusing on valuation, were 100% applicable to those that I use now today in real estate evaluation work.

Ash Patel: Well, you make all of that sound easy.

Andrea Himmel: I ended up starting a private equity fund. We hit a home run and raised 300 million dollars from Elliott Management, which is Paul Singer’s fund, and had a 96% return on our first fund, and a 3X multiple. Then at the time, since I was a startup, I was working out of one of my mom’s buildings. She had always told me “You can never work for me.” But I had earned her respect over the years, so she invited me to work for the company.

Ash Patel: Amazing. A lot to cover here. Your mom started this business in 1978 – was it investing in real estate in New York City?

Andrea Himmel: It was. A lot of it, however, because she didn’t have the cash to buy much, she was acquiring ground leases in the boroughs, and in emerging neighborhoods, such as Fourth Avenue, which is now Park Avenue South, or Harlem in 1979. They did a lot of ground leases because there’s no major initial upfront capital payment. She went on and purchased options, and ultimately [unintelligible [04:09] She got started doing that. She actually met her business partner at a lecture that Larry Silverstein was giving at NYU, and his guest was Harry Helmsley. Harry said, “Does the audience have any questions?” My mom’s hand went up and she said, “What’s your greatest accomplishment?” Harry Helmsley said, “What are you doing tonight?” Of course, that’s unacceptable today, I think, but it grabbed the attention of Stephen Meringoff, who later approached my mother and said we should team up and be owners together. So they borrowed recourse, which obviously we don’t do anymore, but they borrowed recourse up to 90%, because financing back then was totally different from the RTC days, and built a portfolio over a few decades.

Ash Patel: And Harry Helmsley, the owner of the Empire State Building, and from his wife, Leona Helmsley.

Andrea Himmel: Yeah, we were all family friends, and he became a mentor to my mom. My mom actually very confidently broke her way into real estate by sneaking into REBNY galas, which is the Real Estate Board of New York. She had gone to HBS and she said to many prolific developers at…

Ash Patel: HBS is Harvard Business School?

Andrea Himmel: Yes, it is.

Ash Patel: Got it.

Andrea Himmel: She said, “You know what? I’m putting together a real estate panel for Harvard Business School. Larry Silverstein, do you think you qualify for this? Harry Helmsley, do you qualify? Seymour Durst, do you qualify for my panel?” Instead, what that did was it turned them into her mentors over the years, and ultimately peers. She became a well-respected name, following in the footsteps of giants.

Ash Patel: Incredible. And your mom was a pioneer because in 1978, and even through most of the ’80s, New York was not what it is today. It was a rough place.

Andrea Himmel: But as Harry Helmsley told her, Grand Central is not going to get on rollerblades and go anywhere. There are still certain districts, certain neighborhoods, and we still feel the same today, that are emerging, even though they may be Grand Central, or Penn Station. But we think location, location, location, as well as leaseability and all sorts of things.

Ash Patel: Andrea, I don’t want to make this podcast about your mom, but one last question. You mentioned she did ground leases and then got financing. How does that work?

Andrea Himmel: So she did a lot of ground leases where…

Ash Patel: With no money?

Andrea Himmel: [unintelligible [06:50] back then it may have been a few 100,000 or 100,000 a year in your ground rents. There may be upfront key money, but usually, there wasn’t.

Ash Patel: Also, she was the lessor.

Andrea Himmel: Yes, she was…

Ash Patel: Not the owner.

Andrea Himmel: Not the owner of the fee. So she had run the property, operate it, bear all the CapEx, all that. And through refinancing and stabilizations of properties, she was able to amass a portfolio.

Ash Patel: Alright, so then you had a career in private equity. You were underutilized… Tell me about that.

Andrea Himmel: I just out of college was so overly zealous to have my brain pecked and my energy leveraged.

Ash Patel: And you wanted to rule the world, right?

Andrea Himmel: I wanted to grow, I wanted to make my world larger, and my brain larger… I was at Brookfield, which at the time — right now, they’re an incredibly dynamic and prolific company that’s very nimble. Back then it was a bigger public company, and I think I needed a more nimble environment, so I preferred to find somewhere where I would really be challenged intellectually.

Ash Patel: Yeah, a lot of us have first jobs where we’re under-utilized. Good for you for making the move. You then went to a hedge fund in the oil and gas space – was it a real estate play? Or was it a pure oil and gas business?

Andrea Himmel: At the time, I started with three and a half billion dollars of cash and to manage, and it ultimately is now 60 billion. We were investing in equities, so publicly traded companies such as Schlumberger, or Hess, or Exxon. At the time, it was less environmentally conscious, so we didn’t have a philosophical lean in any direction. But we sought undervalued companies for long-term holds, and based on true distress in the market, or anxiety among investors. I did that on the equity side. Then when oil prices in 2016 collapsed to $26 a barrel, from $125, I saw an arbitrage in the private market to buy assets that were priced as if oil were $26, whereas equities were trading as though oil were at $70. So I moved to the private side, raised a fund, it was rejected by 2000 investors, it took 2001 meetings to actually get a commitment… And our first one we tripled, our second fund is still being deployed. It’s a fascinating industry, it’s also a real asset, as far as it can be 1031’d. I think of it as real estate below grade… So it was applicable.

Ash Patel: Right now, you focus on warehouses and office buildings?

Andrea Himmel: Correct. We’ve been in the industrial space since 1986. We’ve been in the office space even longer than that. And we feel that there’s a tremendous amount of capital froth in the industrial space right now, so we’re focusing our efforts on growing our office portfolio. We like to zig one another’s zag. We’re contrarian investors, and we can do that because we can arbitrage time, because we have a balance sheet. So if we can be long-term holders and buy something that’s in distress, we’re a fortunate buyer. Not to mention we’re very nimble in structuring. So if the seller needs some sort of tax-efficient structure or some legal structure that an institutional buyer wouldn’t be able to accommodate, we’re able to do those sorts of things.

For example, there’s a warehouse in the Bronx that we loved, we bid on it… The owner’s problem was he couldn’t monetize the real estate without monetizing his plastic business first. So we made a bid with a private equity fund to buy both the business and the real estate, and do an Opco/Propco separation of the two, so that we can ultimately get to the real estate.

Ash Patel: And you ended up selling the plastics company?

Andrea Himmel: That did not execute that deal.

Break: [00:11:10][00:12:50]

Ash Patel: So you have the money of a hedge fund, but you have the nimbleness of a small company.

Andrea Himmel: We do always partner on deals with equity partners. So while we’ve done a few deals on our own, for example, we paid 25 million for a 120,000 square foot building in Long Island City, the noodle factory in 2017… We focus on really anything within office and industrial. I can get into like how we approached that.

Ash Patel: Let’s do it.

Andrea Himmel: So because I was trained in research at the hedge fund I worked at, we said that in the industrial space, we wanted a macro supply-demand thesis. We said we don’t even know what supply is in industrial. In New York City in 2003, when Mayor Bloomberg was in charge, 200 square blocks were rezoned from industrial to residential. A lot of factories converted to loft/resi or whatever. So supply, we know, was on the decline. Demand was rising, because the reason that the pandemic has accelerated, people want delivered items, and they want them delivered to them more quickly, so warehouses need to be located more central to the urban core, or to their end customer. That’s called last-mile delivery. We saw demand rising, we saw supply falling, and then set out to decide what are our parameters. Any site that’s between two and 20 acres, let’s call that M zone – we want to know about.

It turned out there were 1,500 of them. 500 of them were owned by government agencies from whom we would not be able to buy. 500 were owned by real estate investors, who are too sophisticated for us to buy from. The final third or 500 sites that remain are owner-occupied. Take the plastic frisbee guy, or a packaging company, someone who actually uses their space, recognizes at some point that the real estate is worth more than business, and decides whether they want to monetize on the real estate. We wanted to focus on that stock of folks, because they seem to be the least able to add value from a real estate perspective, and the most willing to transact. We entrenched ourselves in the world of owner-occupied stock. Whether that’s knowing the tool company really well, spending time with the principals who own the building, and understanding the tax issues they may face having owned it for 40 years under a trust, with six kids, or… We can get down into the gritty details and be pretty nimble with them. So that’s our industrial approach.

Ash Patel: Do these principles continue to operate that location?

Andrea Himmel: Yeah, they operate really because their business cash flow is dependent upon their labor, and their labor would quit if they announced that they were looking to sell the real estate or shut down the company; so they would immediately lose cash. What we’ve seen with a bunch of the owners is the fear that they lose their labor, and these are 3% of all warehouses in the US are actually at all robotized, so everything is a lot of labor.

Ash Patel: I don’t understand how that works. Do you buy the building, or do you get an option on it?

Andrea Himmel: You can structure it however you want, but it’s up to the seller. What does the seller want to do? Do they want a lease back for two years, while they figure out where their company can go and relocate? And then you own it free and clear, in which case you’re buying the fee. We’re not interested in the simple sale-leaseback, because that’s kind of like a poor return. We’re really focused on doubling our money on a deal at least, so we work with the owner and solve for whatever their problems are. So if they want something that’s tax-efficient because of low basis, we can say if it’s 100-million-dollar deal, we’ll give you 50 million as an option payment to buy it in 10 years at 100 million, and the 50 million option payment is nontaxable. So we do structures like that.

Ash Patel: Got it, okay. They can continue to operate their business for years to come, but you have the option to buy the building.

Andrea Himmel: Or we buy the building and they lease it back at some below-market rent for a few years while they try to find their new location, or shrink, or sell, or do whatever they’re going to do their business. Then we have been an empty property that we have to lease.

Ash Patel: Got it. With office buildings, what are you seeing today in New York?

Andrea Himmel: Distress on a vacancy level… But wow, is leasing activity up. The vacancy is about 6% higher than normal, it’s about 18%, and the average is about 12%. So we still have a fair amount of available space, and a large amount of that is sub-leased space. But anecdotally, just from within our firm, we just signed a 100,000 square foot lease with NYPD at 525 West 57th Street, a 70,000 square foot lease with NYU downtown at 411 Lafayette, in addition to maybe 13 to 15 leases in Chelsea, Noma, and Flat Iron area. That compares to zero activity last year at this time, so we’re seeing the market really pick up.

Ash Patel: What is MIPD?

Andrea Himmel: NYPD.

Ash Patel: Oh, NYPD. New York Police Department. Got it. Are you buying these at distressed prices?

Andrea Himmel: We only are willing to buy at distressed prices. We don’t value assets based on IRR or some return metric like that. We always measure return on invested capital as a multiple; we’re really basis-buyers who try to make money on the buy.

Ash Patel: You mentioned when you were with the hedge fund in the oil and gas industry, you learned a lot about cash flow. And I was going to ask the question, do you buy value-add properties if you’re so focused on cash flow?

Andrea Himmel: We’re not focused on cash flow. As an investor, I like to invest in companies that are profitable. That’s why I don’t know how to value venture capital from that angle; I don’t know how to value a company that has negative profits, I just don’t. But my perspective – ordinary income, the current yield, we don’t care about that. We can actually forego that if there’s a path to a reasonable yield. And if that means that it’s an unleased property, whether it’s office or industrial, we have the confidence that being a vertically integrated company, we can lease it up. We’re willing to take that risk, because that’s a business we’re in, and we have 40 years of experience doing the management, too.

Ash Patel: Andrea, when did the company go all-in on office?

Andrea Himmel: It’s a great question. I know that we had a property on 125th and I think Lexar Park, and it’s a major –now fully-developed site. But we were there in the ’70s, we’ve been in all the neighborhoods, we’re in Queens as industrial in 1986, and then office at least around 1986 or 1984.

Ash Patel: So in 2020, you suffered a bit of a hit.

Andrea Himmel: Yeah. We saw our buildings, just like the market, really hit 10% occupancy level. We had a lot of blend and extends, or at least conversations. But our arrearages have caught up; we’ve actually extended tenants to our accretion, to our benefit. We have a building that is highly leased to the entertainment industry and nonprofit for entertainment industry tenants, because it’s in Times Square. That building, I’d say, might have had more tenant requests to get rent abatements and such. But we worked with our tenants, we were very generous and we continue to try to be.

Ash Patel: Blend and extend is when you re-up somebody lease for maybe a discount in rent for a period of time.

Andrea Himmel: Yeah, and you just get more term. It’s great if you want to borrow against the asset, because having term allows you to borrow to a greater percentage of the capital stack. We’re conservative when it comes to debt, but it’s hard, for example, to finance month-to-month leases on one extreme, and it’s easy to finance a 50 or 30-year lease on the other.

Ash Patel: Andrea, was your office vacancy caused by defaults? Or was it caused by tenants just not renewing their lease?

Andrea Himmel: There are a few categories. Upon renewal, a few tenants just did not renew. But honestly, we’ve [unintelligible [21:32] spaces. Then there are tenants who tried to get out of their lease and we said no, and we have big security deposits, so they’re kind of stuck in that position. Then there are tenants who agreed to have a conversation and negotiate some form of an amendment to the lease, where we can both be mutually beneficial.

Ash Patel: And with your research background, what research went into your decision to double down on office?

Andrea Himmel: Great question. I think of our firm and what we’re looking at – it is above normal levels of vacancy. We’re in a cycle where we’re somewhere near a low, although there really has yet to be seen some distress. But we’re looking out to office — we could say, if we were really negative, “Wow, I have a building that’s 30% vacant, or 10% vacant, and it has 30% rollover, and five years of leasing risk, because who knows when people come back to work… And I have to carry the building, its taxes, its insurance, and everything else, the mortgage, for five more years… Screw it, I’m just going to Florida.” And that’s what we’re seeing.

I made a database – going back to database making – of private owners who are similar in size to us… Similar or smaller, like between 10 and 20 properties. So it started as a list of 2000 properties and 65 owners that we focused on, and then narrowed it down to a list of 15 owners each with an average of 10 properties or 150 properties. We are focused on certain neighborhoods, and we are focused on certain asset types. We think there’s great re-use potential in the garment district, which is totally distressed, from the life science perspective. We think that certain neighborhoods that are unsexy will emerge again.

Break: [00:23:38][00:26:36]

Ash Patel: Where do you get your data from?

Andrea Himmel: I use a few subscription apps or softwares. Like I use Reonomy, PropertyShark, and Costar. I also look at public tax records; ACRIS, in New York, is what you use. I sometimes follow court litigation to see if there’s a partnership in trouble. I track weekly transactions of properties to say “Oh, hey. Actually, so and so who we thought was never a seller is starting to sell assets. Maybe that’s a good data point.”

I track a lot of indicators. Obviously, the interest rates, the inversion of the 30-year coming below the 20-year a week ago or two weeks ago was a big trigger for me. Then obviously, all these data points we have on inflation… It changes the cap rates we’ll use to underwrite and discount rates to value.

Ash Patel: So with projected inflation on the horizon, you’re not using the norm for cap rates, you’re actually using a higher cap rate?

Andrea Himmel: Yeah. We’re conservative, but not conservative to the point that we’ll price ourselves out of the deal. For example, if something were today to trade on a four cap or let’s say a five cap, I’m talking 6% then; or five and a half percent. Nothing like on an exit, nothing crazy. If there’s an assumption that there should be cap rate compression, for example, the stabilization of the building offset by the growth in it.

Ash Patel: Andrea, you mentioned that you know the garment district is going to come back. Why?

Andrea Himmel: It’s M-zoned, meaning it’s manufacturing zoned. The buildings – not all of them, but some of them are built structurally so robustly, with [unintelligible [00:28:22].17] to HVAC systems, to ceiling heights, that they can accommodate life sciences clusters. New York City was the number one in the country last year for venture capital funding of life science startups.

Ash Patel: What is life science?

Andrea Himmel: Life sciences, anything from biotech to anything working with living organisms, basically. It’s research, its R&D. We have a building, 525 West 57th Street, it’s a life science-oriented building. It has the premier MS researcher, Dr. Sadiq, and he has a vivarium, which is where living organisms are studied, and requires certain very technical features on a lab level. We also have Genzyme LabCorp, and — I forget who it became later on. But we had a 200,000 square foot vacancy in that property, because CBS left after decades of paying very low rents. We leased half of that already to the NYPD, as I mentioned, and then we have another 100,000 to lease, but we think we’re close on leasing that, too.

Ash Patel: Do you just use leasing brokers?

Andrea Himmel: We have an internal leasing team, because we’re vertically integrated with a management company that’s dedicated just to our buildings. But we will always work with outside brokers if someone brings us a tenant. We aspire to integrity in the brokerage community, because I think brokers are the lifeblood of the industry, and are really undervalued and underappreciated. So we make sure that if someone brings us a deal or a contact, that we reciprocate in kind.

Ash Patel: What does your leasing team do that’s creative to try to get these tenants in?

Andrea Himmel: It’s a great question. We’re amenitizing buildings. Our buildings aren’t that large, they’re not million square foot buildings; they’re small, they’re 200,000 square feet, so we don’t have a great deal of space to dedicate as an amenity. The rooftop isn’t that large, or [unintelligible [00:30:27].01] So for us, it’s more about — we foresaw a strong location, a good building, meaning it has good ceiling heights, good light, good air, good infrastructure, and we’ve been proactively investing in its maintenance and capital over the years.

Ash Patel: Andrea, I read an article this morning that said, “Companies that offer a four-day workweek will have a huge competitive advantage in the future.” So all of this pressure to work from home, work less, what is that going to do to office space?

Andrea Himmel: It’s called a six-billion-dollar question with inflation. But we don’t know yet. We can’t quantify, and I’d be arrogant to say I could, the impact that work from home will have long-term on office demand. It will no doubt take away from office demand. However, there are countervailing forces that may cause some net positive effects, such as the de densification of office places. People want corners, they want windows, they want light, they want to be in their own offices; they don’t necessarily want to be sharing spaces or hoteling like some companies are doing, or hot-desking. We’re seeing a lot of it leasing in our portfolio, because our buildings are such that the windows are operable, which is rare, they often can walk to their floor, because these aren’t 80-foot towers, they’re 12 to 15 story buildings. Maybe not in the 15-story are they walking, but for the most part, tenants like these factors. Also, the floor plates are about 15,000 square feet in general for us, so that allows for one to two tenants per floor, which is good from the perspective of the tenant thinking “I don’t know the COVID policies of my neighbor.”

Ash Patel: Yeah. So my opinion is the work from home will not last because of the lack of collaboration, and at some point, lack of productivity.

Andrea Himmel: I’m most productive at my office. We’re closed down right now because we had a COVID case, but it was resolved and everyone else in the company is negative. But it’s amazing to me that… All week I’ve been out and about at conferences and meetings. You have to see people, this is a tangible business. We would never buy a building that we didn’t kick the tires on.

Ash Patel: Yeah. You’re like me, you think at some point, people are returning to the office and the work from home is going to be short-lived.

Andrea Himmel: Certain industries, it will be more work from home. Like, I foresee law, for example, doing that. Although I think it’s really hard for them to find talent, promote, and create upward mobility. Software, maybe they work from home. But the people that we see remaining working from the office actually require more square feet per person than when we included the ones that are now departing from the office.

Ash Patel: So no more cubicle farms.

Andrea Himmel: Correct. I hope.

Ash Patel: Andrea, what is your best real estate investing advice ever?

Andrea Himmel: Be over prepared. If it doesn’t work on the back of an envelope, using Excel to go get into the weeds too much is just going to create too much margin for error.

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

Andrea Himmel: I’m ready.

Ash Patel: Let’s do it! What’s the hardest lesson you’ve learned?

Andrea Himmel: It’s a great question. The hardest lesson is, because I worked for my mother and her business partner, in the beginning years, I didn’t push back often. We had so many properties off-market that today are worth multiples of what they were. I knew, from analysis paralysis, as well as good analysis and gut, that these were deals we should have pursued. I should have pushed harder against their opinion. I’m at the point now where they take it more seriously when I have recommendations, and they often manifest in strategies… But at the time, I wish I had the confidence to push back more.

Ash Patel: Andrea, what’s the Best Ever book you recently read?

Andrea Himmel: A New Earth by Eckhart Tolle; it’s similar to A Power of Now.

Ash Patel: What was your big takeaway from that book?

Andrea Himmel: Be present.

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

Andrea Himmel: I serve on the board of directors of Habitat for Humanity, as well as the Manhattan Chamber of Commerce. I mentor a lot of students, I’m a big sister to a little sister for 18 years now. I also support 10 women in Uganda in Sierra Leone through Child Fund, which is a nonprofit. I plan on starting a village savings and loans association. I really think philanthropy, giving is receiving.

Ash Patel: Andrea, how could the Best Ever listeners reach out to you?

Andrea Himmel: You can email me. My email is ahimmel@hmprop.com.

Ash Patel: Awesome. Andrea, thank you so much for sharing your story, with your mom being a pioneer in the ’70s, to you going a couple of different routes and coming back to real estate, and just dominating New York City real estate. It was a pleasure to have you on the show today.

Andrea Himmel: Thank you. It was my honor.

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

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JF2653: What Their 12 Unit Purchase Taught Them About COVID Asset Management with Jeromie and Anne Marie Sheldon

In March of 2020, Jeromie and Anne Marie Sheldon closed on a 12 unit deal right as COVID-19 was taking the world by storm. The pandemic caused additional problems on top of the regular challenges that come with any property–rowdy tenants, delays, labor shortages–and yet one and a half years later, the Sheldons’ property is thriving. In this episode, the Sheldons discuss their business model and how they navigated being “COVID Closers.”

Jeromie and Anne Marie Sheldon Real Estate Background

  • Jeromie recently retired as an Air Force Pilot after 24 years of service and is now flying 747 overseas for UPS out of Anchorage, Alaska.
  • Anne Marie is a Licensed Physical Therapist.
  • They are both CREI, LPs in syndications, Active apartment owners.
  • Both actively and passively involved in CREI.
  • Portfolio: Started out with a SFR 2015 full cycle. Currently, Passive LP deals = 2000 + doors, Independent GPs on a 12 unit & 5 unit locally in WNY. 
  • Also own a townhouse- LTR (12 beds for pilots called “crashpads”) in Anchorage, AK.
  • Based in Grand Island, NY (close to Niagara Falls & Buffalo, NY)
  • You can say hi to them here:
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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the Best Real Estate Investing Advice Ever Show. I’m Joe Fairless. This is the world’s longest-running daily real estate investing podcast, where we only talk about the best advice ever, we don’t get into any fluffy stuff. With us today, Jeromie and Anne Marie Sheldon. How are you two doing?

Anne Marie Sheldon: Great. Thank you so much for having us on the show, Joe.

Jeromie Sheldon: Yes, Joe. Thank you. It’s an honor and a privilege to be on the show with you.

Joe Fairless: Well, it’s my pleasure. Just behind the scenes Best Ever listeners, I called in eight minutes late to this interview, and they were waiting very patiently for me, so I appreciate both of your patience and I’m looking forward to dive-in in my last interview [unintelligible [01:08]. Jeromie recently retired as an Air Force pilot after 24 years of service. First, officer, thank you for your service. I respect what you did for our country, you, and your colleagues.

Jeromie Sheldon: Thanks, Joe. It’s much appreciated. I’m so honored to have served our great nation, and just a blessing to be part of that team.

Joe Fairless: Anne Marie is a licensed physical therapist. They’re both commercial real estate investors, actively and passively. They focus on apartments. In fact, let’s talk about their portfolio. They started out with a single-family rental that they took full cycle in 2015. They’re currently passive investors in over 2,000 doors, and they’re independent general partners on a 12-unit and a 5-unit locally where they live, in New York. They live in Grand Island, New York which is close to Niagara Falls in Buffalo, New York. With that being said, you two want to give the Best Ever listeners a little bit more about your background and your current focus?

Jeromie Sheldon: Yeah, like I say, you kind of hit it there with our background, with me coming out of the Air Force, Anne Marie is a physical therapist, and she also helps teach our kids at home. We’ve got a busy home, with six blessings. But our big focus really is to grow a portfolio as many of your listeners are doing. We joined a program in 2018 and got into some limited partnerships.

Joe Fairless: Which program?

Jeromie Sheldon: It was the [unintelligible [02:36] program, and then we’ve also had some personal coaching with Anna Kelly, and then we were also part of a mastermind. That’s probably one of our main points is we’ve wanted to just focus on educating ourselves in this space. We’re both professionals and we feel that education is very important and would probably qualify [unintelligible [00:02:54].17] advice. And then, like I say, we’ve limited partners in about five deals across Arizona, Texas, and Florida, just saw one go full cycle and gave us significant returns. We’re very happy.

Joe Fairless: Nice. Congrats.

Jeromie Sheldon: And then we also wanted to get our hands dirty a little bit with working with property management and just getting into the weeds of managing our own properties. So that’s why we got involved with the 12-unit and the 5-unit here in New York, just to make sure we kind of understand the full aspects of commercial real estate; really, before we felt comfortable trying to do a syndication and taking other investors money, we wanted to be able to make sure we understood all aspects of it. The long-term goal is to get into syndications, but we feel it’s a process of moving that forward, and growing our assets to a point where we kind of have a long-term vision of growing that asset. And then being able to start a retreat center. We won’t get into that, but that’s to minister and give back.

Joe Fairless: You were passively investing in deals, and then you decided to do some active deals, the 12-unit and the 5-unit. What did you think of that process?

Anne Marie Sheldon: Well, it was great to see the passive deals first and also to interact with a lot of different investors and learn through that. We could see that we were lacking an understanding of asset management. So with the 12-unit, when we jumped in, the first thing we were doing once you close the deal and the work begins, we started doing our CapEx projects. That was a great learning experience, because our property management company is helping us run that 12-unit. But as far as the large projects, like the parking lot, LED lighting, things like that, we really wanted to oversee that. We wanted to get the bids from the contractors and really be hands-on in that process. So that was a great learning experience there, just to kind of understand what it’s like to work with contractors, what it’s like to get into these bigger projects, what the money is going to be, and how that’s going to improve the NOI and the value of the property. So that was one big learning experience for us in the beginning.

Joe Fairless: What did you learn from working with contractors?

Anne Marie Sheldon: We learned a couple of things. Sometimes it’s straightforward, and other times — one issue we really ran into is it’s a 12-unit. So when you’ve got a contractor, like for a parking lot, maybe they’re a commercial contractor doing parking lots – they’re looking for at the mall parking lot, that large institutional parking lot. You’ve got a good-sized parking lot, much bigger than residential, so you’re not falling in that category, but you’re not exactly falling in the commercial category fully. So it’s not a big enough deal for some, but it’s too large of a deal for others. We found that sometimes a 12-unit was falling in that situation. For example, the stairs going into the building need to be replaced. But in order to do that, that’s concrete work, that’s removing concrete, and that’s building specific molds to go back to replace like-kind with like-kinds, so you don’t have to pull a permit and do a lot of different changes. Well, we find the contractors are wanting to do the regular molds they have for residential; or if they’re commercial, concrete, they want to do the big parking lot. That’s been a big struggle in the labor shortage too, because a lot of times they don’t have the workers that they used to have. So we’re getting backed up as well.

Jeromie Sheldon: So we got through about 10 to 12 concrete folks, and I think we finally have landed on somebody that can do the workforce next spring. But it’s been a struggle, like I say, with COVID, and the labor shortage; there’s not a lot of folks out there that want to do concrete, and the folks that are out there are so busy, a little job like what we’ve got doesn’t work for them.

Joe Fairless: I heard you say that you’ve got a property management company, but you wanted to invest time working on the CapEx. But wouldn’t your property management company have a contact that you could work with?

Anne Marie Sheldon: In fact, they did. They had about two contacts. One of them stood us up. We came to the property, they didn’t show. I got in touch with the owner of the property management company and he goes, “I got stood up as well.” He dropped them from our list. Then we went on to the next person, and they were too busy at the time. So I think that was a situation; we went through so many actually, but I think that was a situation where they couldn’t do those particular molds, because these are very unique stairs with a very narrow driveway, so you can’t use a standard residential step mold; you’re going to have to do something customized. Now we hit a wall with the property management company trying to find someone, so we just continue to go off contacts and off leads from other people.

Joe Fairless: We jumped into the details quickly, which is great… But if we can take a half step back just to get a little perspective on the 12-unit… What do you buy it for and how did you find it?

Jeromie Sheldon: We found it through a local broker here in [unintelligible [00:07:55].11] We acquired it at 60k a door, which is pretty decent for this area. It’s an all-bills-paid unit, so that was also a little bit into our factor. Location is what really drove it. It’s in a suburb of Southern Buffalo, and it’s right on the main street, and essentially, the crime, the schools, the High School is just down the streets, it’s a nine out of 10. It had been on the market for about a year; and the street appeal – the previous owners were pretty much doing everything themselves, so the street appeal was probably not good. We were able to work a pretty good deal; they were asking 750k and we got it for 720k.

Joe Fairless: Okay. How long ago was this?

Jeromie Sheldon: We consider ourselves COVID closers. So as the wave of COVID was coming across the world, we closed in March of 20.

Joe Fairless: Wow. Yeah, right there. Like right on the cusp of Armageddon.

Anne Marie Sheldon: Yeah. Everyone was going, “Do what?” Everybody was looking at us and going “Do you want to still do this deal?” [unintelligible [08:58] in a hurry. They were thinking we were going to back out.

Joe Fairless: Obviously, you got financing. Was that tricky? Maybe not, obviously… Did you pay cash? I guess I didn’t ask that?

Jeromie Sheldon: No. The financing actually was probably one of the easiest things. We used a local bank here in town. I think probably part of it is because we’ve got a W2 and we had the other assets. We had the stuff invested in the syndication, so we were able to show all that. So I think they were comfortable with us.

Then the other piece of it was I think the location; the bank president had actually looked at the property when it was for sale about eight years prior and was considering buying it, so they knew, location-wise, we wouldn’t have any issues with keeping it full. We’ve been blessed, through COVID, we’ve had no non-payers. Everybody has been paying rent, a couple slow, and then we did have one person… We talked about this same [unintelligible [09:48]. We did cash for keys, and we had one person that was causing a lot of issues right after we took over. We gave them some money and said “Hey, we’ll help you go find another place.” They took it and ran. We got to a new tenant in there, we fixed it up, and they’ve been great.

Joe Fairless: How did you determine how much money to give that person to leave?

Anne Marie Sheldon: That was interesting… Our property management company said, “Let’s just write him a check for $500, or something.” I said, “First of all, this guy’s not a check guy. This guy’s a cash guy. So we’re going to handle cash.” Not us, but the property management company. So here’s the situation… His rent was around — we bumped it since then quite a bit– but it was around 750 a month. What he was doing was he wasn’t paying rent, he was subletting it to someone; so he was actually getting rent, we found out through the grapevine, through the other tenants that he had a sublet that was paying him. So $500 a month when he was getting $750 or $800 from someone else wasn’t going to get him out. So we said, “Let’s go with $1,000, because we’re going to bump the rent on this unit to $950.” And this moratorium is just starting, so we’re thinking this is going to go on for a year. You potentially could lose $10,000 or more from this guy. So we felt like $1,000 cash was what was going to dangle the carrot for him.

The property management company said… He said he would think about it for a couple days, and when they said “We’ll give you cash”, then he signed the document to say he would agree to those terms. And then  when they gave him the cash, I guess his comment was “Cash is king, this is great.” [laughter] He was not just not paying and subletting, but he was in fact doing all kinds of things on the property – intimidating tenants, playing music super loud… It’s a really quiet community and village, and there were three other tenants threatening to move out, isn’t it? So we probably also could have lost rent from those other units as well. So $1,000 was kind of a drop in the bucket to get rid of that.

Break: [00:11:48][00:13:20]

Joe Fairless: Knowing what you know, having asset-managed the property, as well as gotten in there on some CapEx stuff for a little over a year or a year and a half, what would you do differently if presented a similar opportunity on your next acquisition? Maybe you didn’t do it wrong, but what would you do a little differently on the next deal if it’s the exact same 12-units, similar block, similar challenges, and now you’ve got another chance at operating it a little differently?

Jeromie Sheldon: I think one thing would be restructuring the deal so we didn’t have to come out of pocket for as much of the CapEx. We probably would have been willing to offer full price, or even a little more if we could have worked some of the CapEx into the loan proceeds. So I think that looking back – we had the capital, but especially going through COVID, the worry, and that type of stuff, it would have been nice to probably hold some of that back. But we felt we needed to do it to improve the place, to tell the tenants that, “Hey, new owners are here and we’re going to make improvements.” But it would have been nice to be able to finance fixing the parking garage and putting new lighting in. So in the future, I think we will definitely look at how we could get more proceeds out of the closing to go ahead and take care of some of the CapEx without having to come up with it straight out of pocket.

Joe Fairless: Anything come to mind for you Anne Marie?

Anne Marie Sheldon: I think another thing that we do differently is when we were looking at property management companies, we only looked at a few. Looking back now — and we’ve learned a ton over the last two years and we still have a lot to learn… But one thing we did learn is we didn’t really vet that the property management company properly. When I say vet, I mean we did ask them certain key questions, but we didn’t really get as transparent with our business plan as we could have. And I think we could have done a better job on the front end, saying “When a unit turns, this is what we picture happening with the unit, this is what we want to do, this is the rents we’re trying to achieve.” We did tell them what rents we’re looking at, but we didn’t really tell them the steps in between that we were looking to do. So I think we kind of caught them off guard on the first few turns, because when you take over a property, a lot of times a couple of turns happen right away, with new ownership. And immediately, the maintenance… It was a busy time, it was the summer when the first turns happened, and COVID happened, and they were short of some staff. But when we went to say “Okay, we want everything, from new flooring, to all the covers painted, to new vanities, new fixtures, new trim” it was more than they were used to. They were used to like the quick turns, just steam clean the carpet, do the small little ramp up, or no ramp up and just kind of keep going. I don’t think they foresaw that we were going to do moderate to heavier turns on some of the units… Because some of these units were neglected. It’s a 1960s building; they were not only neglected, but they were out of date. And to get the ramp-ups we wanted, we’re going to have to do some considerable changes to the unit. So I think just being more transparent and more direct with what we were trying to do instead of muddling through that on the first turn could have been even better,

Joe Fairless: What are the rent increases that you are achieving, and how much per unit are you investing on those turns?

Jeromie Sheldon: Most of the stuff that we’re turning, like for instance, we’re turning one right now that just moved out… They were paying $750, we’re going to bump it to $975. For this unit, we’re doing some of it ourselves. I think it gets back into ensuring that we’re real estate professionals, so we’re trying to show that active involvement. But for this unit, we’re going to put in probably about $3500 to get it… We’ll put in a new flooring, we’re doing the painting, doing some updates in the kitchen, and that type of stuff, the bathroom.

Joe Fairless: And you can get $225 rent increase on that $3500 renovation, not including your time?

Jeromie Sheldon: If we weren’t part of it, it would be more than $3,500.

Joe Fairless: Yeah, I get that. But not including your time, which is a lot of money. But just without including your time, it’s $3500 in order to get a $225 rent increase?

Anne Marie Sheldon: Yes.

Jeromie Sheldon: Yes.

Joe Fairless: That’s a 77% return. That’s a pretty good return. Again, not including your time, but still, those are some favorable numbers as an investor.

Anne Marie Sheldon: Yeah. We didn’t put a lot of time into this one. It depends on what your definition of that is. But the reason we chose to assist on this one is our kids. It’s kind of funny, but a quick side note… They want mountain bikes and want double suspension mount bikes, we have six children… And we were like “We’re not buying everyone just a brand-new double suspension bike.” [laughter] We said when they work at the units with us – which isn’t that often, it’s more in the summer – we pay them; we pay them all different hourly wages depending on their age. One of our sons, we pay him more than he gets in his job, more than minimum wage. So we said, “There’s a short spurt of time, three or four days, we’re going to go paint. If you guys want to get these bikes, if you have the money for the bike, you’ve got to raise the other half. Here’s your opportunity. You want to come paint or just clean up behind us, whatever, you can make half the money and we’ll pay you for it.”

Joe Fairless: I love it.

Anne Marie Sheldon: That’s why we did this unit this way. Typically, in the last few units, like in our 5-unit, we are not involved in the painting or the [unintelligible [18:45]

Joe Fairless: Got it. That’s great. That’s beneficial for many reasons. Is there also benefit there from a tax standpoint, paying your kids? I’m vaguely familiar with something where you can pay your kids and…

Jeromie Sheldon: I think you’re right. We’ve talked to our accountant, but I think we can pay each one of the kids, I think it’s up to $6,000, and that comes off of the business income. And they don’t have to worry about paying federal income tax on that money. So yes, it’s a way for us to pay our children through the company. It’s obviously an expense on the company that our kids get to take advantage of. We’re firm believers in this as a family business and everybody partakes in it.

Break: [00:19:27][00:22:21]

Joe Fairless: Anne Marie, how many hours a week do you work with your licensed physical therapist role?

Anne Marie Sheldon: Currently, I’m not working with the role. I’ve kept my license and my education up. I’m helping people pro bono on the side, friends and family that need help, but I’m currently staying home, homeschooling the kids.

Joe Fairless: Oh, wow, homeschooling. Okay. And you got six kids?

Anne Marie Sheldon: Yes.

Joe Fairless: Okay. Alright. So the question that I was setting up is still relevant. Because Jeromie, you retired, but you’re now flying 747s overseas for UPS, out of Anchorage, Alaska. So how do you two prioritize your time? Because you’ve got six kids… One of you definitely has a full-time job. Jeromie, I don’t know how many hours you’re doing, but I’m assuming it’s more than 10 per week on average. How are you prioritizing?

Anne Marie Sheldon: I think a couple of things… One, we learn to time-block. We knew about time-blocking, but not as detailed as Anna Kelly, our coach. She really taught us more details and models in our personal coaching time with her on how to do that. So I think that has really helped.

Also, with Jeromie being active-duty military, it was a lot busier in some ways than it is now, in that he flies 14 days a month now, but he has 14 days a month completely off. So the last three weeks, he’s been home, he’s been helping, and we’ve been doing more on the real estate side. We’re networking for things to grow our business.

For me, I’m doing homeschooling, from about the hours — that’s nine to three or nine to two. I do drive around for different activities, but my senior is driving now, so that helps. What I’ll do is your nine to midnight, nine to 11 shift, I do a lot of those things. Sometimes we’ll do the networking in the early evening, and I will do the asset management type things in the early to midafternoon. Sometimes you have to do things in the morning, and then the kids, I’ll direct them on what they’re doing independently, or two of them are helping each other. But it’s kind of a rotating juggling act a little bit there. But just kind of trying to find those blocks of time.

Joe Fairless: Taking a step back. What’s your best real estate investing advice ever?

Anne Marie Sheldon: I think for us, there’s a couple of things. We feel like there are some non-negotiables that we have, and it’s taken a little bit of time to develop. When we’re looking at a deal, when we’re looking at a partnership, we have certain foundational things that we agree on that we’re looking for. So I think sticking to those and not getting really excited about a deal, an opportunity, and jumping in too quickly, or a partnership. I feel like a partnership is a marriage with someone else. We want to be aligned and we also want to be transparent with our financial situation and their financial situation, so that you’re not jumping in and then finding out later that there’s a hitch in there and somebody’s finances aren’t going to work for that deal. So we feel like those things are foundational things. And it sounds really simple, and I think it is, but sometimes it’s hard to stick to your guns and stay with that when you’re in the excitement of deals and partnerships.

Jeromie Sheldon: Or there’s pressure to get into a deal. I think we’re fortunate that a lot of our real estate income that we’ve got, we’re not living off of that. That has helped us out as well as we’re able to vet the deals and say, “Does this really make sense for us as a family?” And then, like I say, the non-negotiables, if it doesn’t really meet that, and we’re okay, just passing on that, being patient and waiting for the next opportunity.

Joe Fairless: What deal have you two lost the most amount of money on?

Jeromie Sheldon: We got into a deal, it was a flip of 4-unit in Dallas. This one was – essentially, we were providing the debt fund for it, and we got caught up in COVID, or the team of contractors got caught up in COVID. It was supposed to be in and out in a year; they were going to get everybody in, as soon as the leases were done, move them out, do complete rent-outs, then get them released up, and then have the entire place sold within a year. That didn’t happen, obviously, with COVID, contractors, lockdowns, all that type of stuff. The team finally got the last property sold in June, so it was almost a two-year hold versus a one-year hold, so we ended up losing about 20% on the money we put in to that deal.

Joe Fairless: How much did you put in?

Jeromie Sheldon: We each put in 100k. We lost about 20k each, so about 40k total to that deal, just because, really, the business model didn’t work because it got slowed down by an entire year.

Anne Marie Sheldon: Yeah, the flipping model.

Joe Fairless: If presented a similar opportunity in Dallas, would you do it, because you chalk it up to “Hey, that was COVID”? Or would you not do it because “Okay, it was COVID but also XYZ variables, and I’m not comfortable with that so I wouldn’t do that type of investment.”

Jeromie Sheldon: Yeah, it’s something that we would think twice about in the future. We didn’t do as good a job vetting the group either. We felt – the debt fund, okay, we’re just going to get X amount of return, we’re not into it for the equity. So I think we would really think hard and fast again about a model that is really predicated off of a one-year timespan. So yeah, probably do some more homework.

Joe Fairless: It sounds like you would pass…

Jeromie Sheldon: I think so. Yes.

Anne Marie Sheldon: Yes.

Joe Fairless: [laughs] Fair enough. We’re going to do a lightning round. Are you two ready for the Best Ever lightning round?

Anne Marie Sheldon: Yes.

Jeromie Sheldon: Yes, sir.

Joe Fairless: Alright. Best Ever way you like to give back to the community.

Anne Marie Sheldon: For us, we as a family, for Thanksgiving and Christmas, we join up with the regular Gospel Mission here in town. We go to different apartment complexes, like the lower-income section eight areas and we deliver meals with them. We bring joy to them, have conversations, how are you doing, pray for them. That’s one way we love to get back.

The second way is – our long-term vision, is to use the proceeds from real estate to purchase a wellness ranch healing place where we can continue to give back to veterans with PTSD, and help them get well and get back on their feet again.

Joe Fairless: Keep me posted on that. If there’s anything I can do to help out with that. How can the Best Ever listeners learn more about what you two are up to?

Anne Marie Sheldon: If they want to get in touch with us, we’re on Facebook, LinkedIn, Instagram, all the social media sites. Our email is sparrow@equitymanagement.com. Those are probably the best ways.

Joe Fairless: Jeromie and Anne Marie, thank you for being on the show. Thanks for talking in detail about your experience both as an LP, what’s worked, what hasn’t worked, and as a GP. Those 12 units, contractors, debt, closing, being COVID closers, the business model that you’re employing, and setting expectations with the property management company prior to closing. Thanks for all the insights you shared and your experiences. Hope you two have a Best Ever day and we’ll talk to you again soon.

Anne Marie Sheldon: Thank you so much, Joe. We appreciate it.

Jeromie Sheldon: Appreciate it, Joe. All the best. Thank you

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JF2236: Sophisticated Advertising Strategies With Kevin Urrutia

Kevin is the Founder of Voy Media and is an expert in growing brands using sophisticated paid advertising strategies. Kevin was very open in today’s episode with sharing multiple ways to help you grow your own business through some great online organic and paid strategies.

Kevin Urrutia (U-root-tea-a) Real Estate Background: #skillset

  • Founder of Voy Media
  • Expert in growing brands using sophisticated paid advertising strategies
  • Based in New York, NY
  • Say hi to him at: https://voymedia.com/
  • Best Ever Book: Dot Com Secrets

Click here for more info on groundbreaker.co


Best Ever Tweet:

“Utilizing organic content from users who are posting on Facebook, Instagram, or twitter usually end up working better for us” – Kevin Urrutia


Theo Hicks: Hello, Best Ever listeners and welcome to the Best Real Estate Investing Advice Ever show. I’m Theo Hicks and today we are speaking with Kevin Urrutia.

Kevin, how are you doing today?

Kevin Urrutia: Hey, I’m doing great. Perfect. Thanks for having me on.

Theo Hicks: Thanks for joining us. Looking forward to our conversation. A little bit about Kevin. He’s the founder of Voy Media. He’s an expert in growing brands using sophisticated paid advertising strategies. He is based in New York, New York. You can say hi to him on his website, which is https://voymedia.com/.

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

Kevin Urrutia: My background is actually in computer science. That’s where I went for college. Kind of always growing up, I’ve always wanted to do a startup. That sort of startup phase and sort of mentality has made me always interested in my own company. Right after college—I grew up in New York, I moved out to California, San Francisco to work for https://www.mint.com/ and then another company called Zaarly, just because I’ve always wanted to do something with startups and essentially tech. But even when I was there, I always had an idea of making my own products, my own services, my own apps.

Me and my partner, Wilson, who runs the agency with me, we were building stuff all the time. But we always had an issue where we just didn’t know how to market things or we didn’t know how to get customers. We thought we had a great product, great service, people will just magically come in, and that’s obviously not true. With anything that you have nowadays, you need to think about marketing.

Eventually, that kind of led to us starting our own eCommerce businesses, because we were still working but we still had that itch to do something. It’s always something internal like you want to do something. We both quit our jobs and we then sort of started doing our own eCommerce brands. At that time, Amazon FBA was really popular, so we were learning through podcasts, through websites. We did our first sort of eCommerce brand that was working well and then we started another one. We call it the stairstep approach, where the first few companies that you make, maybe you don’t have success, but you’re learning stuff on the way. When you’re learning that, that next company just gets better. Ultimately it led us to doing Chester, which is our luggage company that we grew to basically $1.5 million to $2 million in a year, through our other previous experience. But then that also led us to starting Voy Media which is our agency that we help other DTC brand owners, just because taking some of our previous experience, we saw that a lot of founders we talked to needed help with that, because that was their first company, where for us, this was our fifth or six sort of company, and we can sort of share and learn that experience and sort of mentor them, but at the same time, help them with their campaigns or Facebook ads, for example.

Theo Hicks: Perfect. At Voy Media, that’s where you help these companies, maybe it’s their first company and you help them grow their sales, grow their brand through these various online advertising strategies?

Kevin Urrutia: Yeah, Facebook, Instagram and obviously, like Snapchat, for example.

Theo Hicks: Okay. One of the things you mentioned was the Chester Travels, your luggage brand. And before we were talking, you mentioned the amount you grew it to, but we’re also able to go from, obviously, zero traffic to the website to 60,000 per month. I think, best ever listeners who are listening, at this podcast we always talk about thought leadership and having your website be the hub, and then using social media and things like that to direct people to your website.

Do you mind walking us through some of the strategies that best ever listeners can start implementing today if they want to go from whatever their traffic is now to 60,000? If they’re going to double their website traffic, what’s some advice we have for them?

Kevin Urrutia: One of the biggest things that we see here where a lot of founders or partners that we work with is they don’t really think too much about organic traffic or organic SEO. For me, one of my things I first learned when I was starting my first business – obviously, I didn’t have any money, so I was like, “Okay, how can I get ‘free traffic’?” As I was searching online on Google, people are like, “Oh, you need to do SEO, it’s free traffic.” Obviously, SEO isn’t free traffic. But the skills and the mentality behind SEO really has helped me with all my other businesses now. Just knowing to look at what product people you are searching for online is super helpful. That comes from just using Google Keyword Planner.

Even for us, when we started Chester, we were looking at the sort of volume of luggages and we were really surprised about how many searches a month that keyword got, and there was only a few brands actually selling luggage. Of course, that was a mix of things, where it’s like luggage is actually pretty expensive to produce and there’s also shipping fees. But even then, the pure knowledge of using Google to find keywords that people want to buy is helpful in order to get the traffic. For example, for us, we use Ahrefs, which is one of the best SEO tools I think out there.

We saw keywords that people were searching for.  For example, something that we ranked top 10 for was best flight tracker. Best flight tracker has about 5000 searches a month, and then we wrote an article talking about all the best flight tracker apps, that way people can go to our website, obviously find information about the best life tracker apps, but then at the same time, we can introduce them to our brand, Chester, and then show them, “Hey, because you’re probably looking for a flight tracker, you’re maybe going on a trip or you’re on a trip right now.” This is a great way to interject yourself into that conversation.

Another thing too is you really want to be thinking about what keywords people are searching for your product or service that you’re selling. For us, we’re selling luggage. We know that there’s hundreds of airlines, right? For example, there’s Norwegian Airlines, theres Hawaiian Airlines and people always have these questions about, “Hey, what are the fees?” We went to Google and we saw, okay, Hawaiian airline baggage fees, we saw that that has 4000 searches a month. We then, with our team, strategized and wrote an article about what are all the Hawaiian airline baggage fees. For that, we did research. We just called—sometimes you can find information online, sometimes we would just call the Hawaiian Airlines and say, “Hey, look, we’re interested in traveling, what are your fees?” And then we would write that down, and then we would put it into an article, and then that one, we also ranked in top 10.

Now, when people look for airline baggage fees, they’re probably trying to figure out what luggage you want to buy, so it’s the perfect query or search term for us… Because we’ll say, “Hey, look, our luggage fits this standard airline that you’re looking to get, so you should probably buy our product.”

Theo Hicks: Sure. Using an example of luggage, you’ve got luggage and then whatever your product is, and when you think of topics that are directly related to whatever your product is. So rather just in writing articles about luggage, you went and said, “Okay, well, what do people use luggage for?” They use it for flying. Then you found keywords for airlines and then wrote articles on that. Is that what the process is? You have a product and you just think of anything related to that product and see what the top keywords are and write an article on that?

Kevin Urrutia: Exactly. And sort of think about what issue your product is solving? What are the pain points in that? Because if you’re looking for that, then you can write content that really addresses that. And then you realize that there’s so many variations for that. Here for us, for example, obviously, we have Hawaiian Airlines, we have Norwegian airlines, we have Delta, we have Frontier, we have Iceland Air. Eventually, you’ll find out there’s so many variations of that, that you just need to just sit down, eventually just crank out all these articles for all these variations. That’s the way we think about it. But yeah, people are asking these questions, you need to answer them.

Another one that we’re really popular with that we see a lot of traffic is password photos. People want to know, how do I get a password photo? What is a password photo size? All these queries that maybe not related to luggage in general, but they’re related to travel. And then you need to think about sometimes you go outside of your niche to a bigger sort of audience, because that’s going to drive the volume, and then that’s going to lead to the sales. People are going to recognize your brand and they’re going to think about you. At least for here, what we think about is we want to be an information hub for traveling, and then luggage is a mechanism that we sell products and make money.

Theo Hicks: Yeah. Basically figuring out what kind of category your product falls into.

Kevin Urrutia: Yep.

Kevin Hicks: Yours is luggage, and the overall category is basically travel. Maybe to get a little bit more tactical. Let’s say I find my keyword and I’m writing my article, is there a certain number of times I want to mention that keyword? How often should I be writing these articles? Do you write them yourselves or do you hire someone that writes them? I know those are a lot of questions.

Kevin Urrutia: For something like this, we hire writers. With content, I think what people need to realize is that you want to be spending a lot of money on content, because it’s going to be good quality content. Of course, you can pay for cheap content, a lot of people do. But we’ve done that before and it looks bad. You have to edit it, you have to reformat it. For me, I don’t have time to be doing that. I’d rather pay a premium. That way, once a writer gives me the article, it’s good to go. Basically, that’s how I think about it. But obviously, some people think that my time is worth more editing, then go ahead and do that. But I just don’t have the time to do that anymore.

But basically, we use a job listing board that has great article writers right now. But we basically just go post it on there and say, “Hey, we’re looking for travel experts.” Another thing that we also do to find good writers is just go to blogs that are already talking about travel, and then most authors have bylines, so then you can easily find their Twitter or their LinkedIn, and then you can reach out to them to ask them to write on your blog, too. We also have another financial blog too and that’s what we do. We went to Yahoo Finance, we went to all the top finance websites and then we contacted their bloggers and then we just emailed them.

Another great way to get this too is look for industry events. For example, if there’s a travel industry event, most likely the page has ‘who’s speaking’. Those speakers are speakers, but a lot of times they’re writers too. If you know that they’re speaking at this event, they’re probably really up to date with the content or the topic. Those are great people to bring on to write your articles.

Theo Hicks: How often are you writing articles? How often do you recommend someone writes articles when they’re starting out, and they want to grow their traffic?

Kevin Urrutia: I think, five to 10 articles a month to sort of really kickstart the process. But as you start growing and as you start to have more money essentially – because as you get more money you can reinvest it – is do as much as you can; 20-30 new articles a month.

For me, the way I think about it is there’s no limit. If I have money and I want to keep investing, I think of it as an investment vehicle. SEO and content is a thing that’s going to keep growing and making me money. I want to keep writing and writing. Obviously in the beginning, you don’t have money, so you want to at least do one or two a month. But as you’re growing, as you’re bringing traffic, you just keep reinvesting it. That’s a great way to think about it there.

Theo Hicks: Sure. We focused on the organic traffic, the SEO, the free traffic. Now, let’s transition into paid traffic. You said you’re an expert in growing brands using sophisticated paid advertising strategies. Do you mind walking us through what these strategies are? What’s the best use of your money when you’re paying for advertising?

Kevin Urrutia: Something that we’ve done for Chester here, the way we like doing it, it’s a two-fold way; we love using organic content. Organic content for us is probably UGC. So content that people post on their Instagram, people post about them traveling. What we like about the luggage space is that people inherently love posting when they’re traveling. It’s a way to show off, right? “Look, I’m going on this trip,” and they love showing off their luggages, they love showing off their bags that they’re carrying.  So for us, it works really well. What we do there is we partner with the influencers or even just normal people that tag us with Chester Travels on Instagram, and then we tell them, “Hey, look, we really like your image. We would love to use it for advertising. Is that okay?” And then we just ask them a message. Sometimes, they ask for money, but we tell them right now we’re not paying money. We just want to get your approval to run the image.

Most of the time 90% people say, “Okay, that’s fine.” 10% say, “I want money,” but we just say, “No, we’re not giving any money.” Then eventually they’re like, “Okay, fine, just run it.” But then we then take that organic content and put it onto Facebook. That’s really one of the best ways that we see right now that’s giving us the best ROI, is taking organic content that people would see natural on Instagram or Facebook and running them as an ad, versus — we’ve tried for Chester. If you look at our website, we have professional photos that we paid thousands of dollars for, those perform worse than these organic content of someone just looking rolling their luggage at the airport. Those work so well compared to everything else, and we tell people, we need more of that content. What we do here is, we look at why that organic content works so well and then we try to reverse engineer it and then give these people that gave us a great organic content, a script now that shows that emotion, that sort of feeling that we’re looking to portray. Because if you look at it sometimes, sometimes people will send products out there. We’ve done it on some brands. They’ll sell products out there and then they’ll do a video, but if you look at the actual expression of the person, it’s like, this is the first time that they’re ever seeing it. And you can really tell that that’s not organic in the content. Where for us, what we do is we tell influencer, “Hey, use it for a week or two, and then we’ll go and do a video with you. That way you can fully experience the product,” versus, “Hey, this is the first time opening it. Let me look at the lines right now.”

Theo Hicks: These are kind of like testimonials.

Kevin Urrutia: Yep.

Theo Hicks: Okay. For the influencers, when you give them the script and tell me to use it for a week or two, are you having to pay them or no?

Kevin Urrutia: If we want them to do a script, yeah, we usually to pay them something. For us, payment is usually in cash or it’s another luggage. So yeah.

Theo Hicks: Perfect. And then the first part of the step, you said, where it was like people are just posting their travel pictures, are they tagging the company’s name? [unintelligible [00:16:14].22]

Kevin Urrutia: Okay, yeah. Basically, if you have product or service, and that sort of email flow or funnel, you should encourage them to tag stuff, like, “Hey, we would love to see the product in the wild. Tag Chester Travels to our team to keep up,” right? And then people would love to just show off and do that. Yeah, usually you want to give them a tag that they can do, or at least make it very simple for them to find your Instagram, because a lot of people like tagging things naturally without them even knowing that you’re looking at it. Make sure you have an Instagram handle. Make sure you have an Instagram that looks clean, that looks good. That way people can say, “Oh, wow, they actually care about their profile on Instagram.” If you have something that looks ugly, then no one’s going to tag you because no one wants to show off something that’s ugly.

Theo Hicks: Okay, Kevin, what is your—traditionally it’s the best real estate investing advice ever. But since you are in marketing, what is your best marketing advice ever?

Kevin Urrutia: Best marketing advice? I think the best marketing advice I have is probably for people to think about funnels and sort of upsells in their sort of process of a product. For funnel for me, that means obviously you get someone with a website, right? And then they buy your product or service. Usually, what most people do is let’s say for example, you go to https://www.nike.com/, you buy a shoe, that’s sort of like the end of the checkout experience. What we’ve seen work well for eCommerce and sort of brand owners right now is that on that thank you page, you have another offer, another product that you can sell that they can quickly add to the cart without having to enter their credit card again. We still see that to be one of the biggest average order value boosters for eCommerce owners, and not that many people are doing it, but the best information marketers do this all the time. The reason why they do is because it works so well.

At least for us here we’re seeing this happen more in the ecommerce space with a lot of these checkout apps for Shopify, for example. But it’s funny, because 10 years ago, internet marketers have been doing this for so long. Before back then, it was seen as spammy, but now it’s okay. It’s like, oh, this is just the way to do it now. It’s pretty interesting to see that shift in mentality, where before, it’s like, “Oh, my God, this is so spammy.” Now, it’s like, “Okay, you need to do this,” and it’s okay now.

Theo Hicks: Okay. Basically,  kind of thinking it from an example I have – I bought him some pizza from Domino’s. Right when I clicked Checkout, and it says, ‘Do you want a brownie?” Instead, I check out, I order my pizza and it says, “Oh, by the way, do you wanna buy a brownie?” I click yes. And then it automatically buys that brownie for me without me having to go through the process of putting in my information again.

Kevin Urrutia: It’s so quick and simple. The reason why it works so well is because you already got that first sale, which is the pizza and now it’s like, okay, it’s in addition, and if you don’t need to enter your credit card, that’s great. Something like Stripe does this really well, where they save a token for the next hour of your credit card that you can then use this to keep charging to it.

Theo Hicks: I like that. All right, Kevin. Are you ready for the best ever lightning round?

Kevin Urrutia: Yes.

Theo Hicks: Okay.

Break: [00:18:54] to [00:19:41]

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

Kevin Urrutia: The best book I’ve recently read was probably going to Dotcom Secrets by Russell Brunson.

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

Kevin Urrutia: Like I said before, SEO, content marketing. It’s probably the best thing out there to sort of establish authority and get people to look at your products or services.

Theo Hicks: It sounds like you’ve started a lot of businesses before. Is there any business that didn’t work out that you ended up losing money on? How much did you lose? What did you learn?

Kevin Urrutia: We started this company called Dog Subscription Box. We wanted to make like a bark box competitor because we saw that they were growing. But for that company, we were sourcing all the products for all-natural organic dog products. We had the boxes, we had the custom logo, we had the design. We invested maybe 5 k to 10 k in that. This was like me doing it in between another company. But eventually we just decided this is going to be so operations heavy and the margins were so thin because we couldn’t get really good deals on some of the products because we didn’t have volume yet.

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

Kevin Urrutia: I think for me, what we do here is we host a lot of weekly webinars and weekly sessions with other founders, entrepreneurs, where we answer all their questions that they might have about Facebook ads, or about how to think about creatives for their companies.

Theo Hicks: If Best Ever listeners want to listen to those webinars or join one of the webinars. Is that Voy Media?

Kevin Urrutia: Yeah, https://voymedia.com/ or we also have our Facebook group. It’s called Facebook Ads Explosive Growth and we host webinars there too. We also will do deep dives in some top brands. And tell you guys, okay, what landing pages are working, what email are working, what creatives are running and how to do that for your brand as well. We post that on our YouTube as well, too.

Theo Hicks: Perfect. I think you kind of already answered that. But I’ll ask anyways, what is the best ever place to reach you?

Kevin Urrutia: The best place probably https://voymedia.com/ or just kevin@voymedia.com, so you can email me and then I love answering emails. LinkedIn too, I’m pretty active on LinkedIn as well.

Theo Hicks: Perfect. Kevin, well, thanks for joining us today and giving us your marketing expertise on how to grow a brand. Best Ever listeners, we kind of talked about this a lot in the context of—his luggage brand is travel, but be creative and figure out a way to apply all the advice he gave today to your real estate investing business. At the end of the day, you’re still selling a product. Just take out luggage and travel and add in whatever specific real estate niche you’re in and then your overall category being real estate or finance, whatever.

But overall, we talked about how to grow traffic to your website. You’re a real investor, you have a website. It kind of falls into two categories, which was the organic traffic and then the paid traffic. We talked about how to figure out what types of keywords to focus on and then based on what people are searching for, different variations of that keyword, different keywords than a overall category that you’re in.

You gave the example of luggage being your product. One example was the luggage fees. And then variations of the luggage fees and every single Airline has a bunch of articles right there. And then figuring out how to write articles that are focused on travel in general. Anything that’s related to your product or content on that based off of the most popular keywords in order to get traffic to your website.

You mentioned that you are at the point now where you’re hiring writers. You gave us tips on how to find these writers. You mentioned that you will look for other travel experts. You can go to blog posts that write about traveling, reach out to those bloggers. You look up industry events, and then reach out to the speakers who are going to talk at that event. And you said that five to 10 per month is a good ballpark goal. There really is no limit. You can write 50 per month if you want to. Obviously, if you’re starting off writing by yourself, you can do a few months, but probably 10 is the minimum.

It’s interesting, so you basically use this organic traffic and then you leverage that for paid advertising as well. The specific example you gave us; Instagram, people are posting pictures of themselves traveling, you found out that you had a lot more success when you used these organic pictures in your ads than spending all this money on some professional picture. You’ll partner with influencers or people who just post pictures of them walking through the airport with your luggage, asked them to use their image and you’ll use that image on Facebook as an advertisement. And they said you get more in-depth where you send a piece of luggage to a big influencer, they use it for a few weeks and then you send then a script for a video ad.

These are, basically from a real estate investor perspective, think of these as testimonials. Your best ever advice was to think about things in funnels. Your example was don’t just stop at once they buy your product but to have an extra step after that, and your example was on the thank you for ordering page, have another product or service that they can buy without having to put in their credit card information again.

Kevin, thanks again. I learned a lot. I always enjoy having these marketing type conversations because usually it’s just about real estate investing. I appreciate it. Best Ever listeners, thank you for listening. I hope you enjoyed the interview. Have a best ever day and we will talk to you tomorrow.

Kevin Urrutia: Thank you, Theo.

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JF2196: Underwriting Multifamily Acquisitions With Robert Beardsley #SkillsetSunday

Robert is the author of The Definitive Guide to Underwriting Multifamily Acquisitions and today he will be sharing the process of underwriting so you will be able to take away some ideas to implement into your underwriting process. 

Rob Beardsley Real Estate Background: #SkillsetSunday 

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Best Ever Tweet:

“On a larger property, a $100,000 additional expense on your cap-ex budget isn’t really going to make or break the numbers, but missing your rent pro forma by $25 can make or break your deal” – Robert Beardsley


Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless. This is the world’s longest-running daily real estate investing podcast where we only talk about the best advice ever; we don’t get into any of that fluffy stuff. Well, first off, I hope you’re having a best ever weekend because today is Sunday, got a special segment for you – you know what it is – Skillset Sunday. Today on Skillset Sunday, you’re going to learn the process for underwriting multifamily acquisitions, and well, I figured we should interview the author of The Definitive Guide to Underwriting Multifamily Acquisitions, Rob Beardsley. How you doing, Rob?

Rob Beardsley: Doing very well. Thanks so much for having me on.

Joe Fairless: Well, my pleasure, and looking forward to our conversation. A little bit about Rob – he’s a principal at Lone Star Capital Group. In the past three years, he’s led over 100 million of multifamily acquisitions, based in New York, New York. With that being said Rob, first, do you want to give the Best Ever listeners a little bit more about your background just for some context, and then let’s go right into how to underwrite multifamily acquisitions?

Rob Beardsley: Absolutely. So the quick background in terms of real estate is I grew up in a real estate family. Both my parents worked at home, and I heard them on the phone all the time making deals, running a real estate brokerage firm in Silicon Valley. So I really absorbed a lot of real estate that I didn’t even realize until I actually got in the business later on… Because initially, growing up in Silicon Valley, my parents pushed me to go into tech and learn to program and go to school for computer science, and that’s what I did. Of course, eventually, I had to come back to my family’s passion and business, which is real estate, and the path I chose was multifamily. And shortly thereafter, I was very fortunate to meet my business partner at none other than the Best Ever conference.

Joe Fairless: I know what conference that is. I recognize that name.

Rob Beardsley: Yeah. So that’s been a very fortunate thing for us. Kevin and I founded Lone Star, as you said, and we’ve been enjoying the process.

Joe Fairless: Well, let’s talk about the underwriting process. So first off, why write a book about underwriting acquisitions for multifamily?

Rob Beardsley: It’s not the sexiest topic. It has gotten a little more interesting over time, but most people don’t write a book that’s pretty much a how how-to manual. So that’s something that I really wanted when I first started in the business, because there was just really no one resource that you could turn to and learn this. You could maybe take a $2,000 weekend workshop or find some other mentor who would maybe help you out, but there was no book, and I love consuming content through a book. So I started having a lot of people also ask me, “How did you learn and what book did you read?”, and I had nothing really to offer to them. So I told myself very early on that I would compile my thoughts and write a book on this, just because I felt that it was something that I’m passionate about, people are asking me a lot about it.

And then the additional point is the passive investor side. I think passive investors – they don’t even know that they don’t know this, and they should endeavor to get proficient at underwriting and evaluating deals if they want to actually be in the game long term, as a passive or active investor. So that’s something that I’m hoping to address which is a big need in the market.

Joe Fairless: So let’s talk about the way you structured the book, and then we’ll get into some specifics. So how did you structure the book?

Rob Beardsley: I tried to keep the book as short as possible. It’s not a memoir or anything like that. Like I said, it’s a very straightforward how-to manual. So I start out with just a quick introduction about what is underwriting, why is it important, and why should you learn it, and how should you go about learning it. As far as learning it, you can choose to build your own underwriting model, and whether that’s in Google Sheets or Excel or some other program, I recommend and say, “That’s perfectly fine. You’ll learn a lot doing that.” But if you don’t have the time, definitely just pick one that you trust. There’s many out there that you can get your hands on. I recommend getting all of them. So that’s the start of your journey. And then the actual process that I go through the book really starts from getting the information that you need, whether that’s directly from the seller or from the broker that you’re working with all the way through what data do you need in terms of websites and what should you be looking for, for key metrics, and then plugging that in. Every single input of my personal spreadsheet, I actually go over and give you guidelines on how to input it. So it really– it leaves nothing left out. Every single input is addressed, which I think would have been really helpful when I was first starting.

Joe Fairless: Every input addressed – is that every input for the spreadsheet that you use?

Rob Beardsley: Yeah.

Joe Fairless: Okay. And you mentioned earlier that you recommend getting all the versions of the underwriting spreadsheets that you can come across. How do you determine who’s right and which aspects you should include in yours and which ones you should not?

Rob Beardsley: That’s a great question, because not many people would think that there is deviations. You would think, “Well, this is math and this is cut and dry,” but it’s really not. There’s a lot of art and science and subjectivity, and I think why I recommend going out there and looking at all the different spreadsheets that you can get your hands on is because it will expose you to the different ways that people are handling certain assumptions and forecasts, and you can evaluate all of them and say, “I really like this. I don’t really like this.” One of the reasonings that I personally use in developing my assumptions and forecasts is  what’s the easiest to explain and what’s just the least complicated? Because if someone’s going to evaluate my deal or check my work essentially, I don’t want to have to come up with some crazy explanation about, “Well, I got to this number because I used the trailing three income, but then I also use the trailing 12 expenses, but then I adjusted the taxes.” So I favor simplicity.

Joe Fairless: So let’s talk about some things – and perhaps you mentioned them. Let’s talk about some things that you don’t like about other underwriting models that you’ve come across.

Rob Beardsley: I think a simple one that some people may overlook is your pro forma should be built on a monthly basis, because annually is just not granular enough and it’s more prone to make mistakes. As you’ll find, once you’re getting more involved with more deals and looking at different situations that are more unique, you’re going to want to have the control on a monthly basis, and having that monthly basis will allow you to tweak certain things such as renovation schedules and stabilization timelines. A big mistake people make is just being too aggressive with assuming they’ve got a 200-unit property on their hands, and they’re going to renovate all 200 units in the first year and the rents are gonna be up 20% in year one. That almost never happens. So on an annual basis, it may push you to make that assumption or push you to make the two-year assumption, so having a monthly can really let you be more accurate and potentially more conservative.

Joe Fairless: You mentioned earlier you go into what information you need to run your analysis. What information do you need to run the analysis?

Rob Beardsley: So the bare bones starting point is always a trailing 12-month profit and loss statement and a rent-roll. Both of those are very important and they’re different in their own ways. So quickly just to go over that if people aren’t familiar, a trailing 12-month profit and loss is also known as just a T12, and that shows the trailing 12 months of historical operations for the property, all the revenue, all the expenses to essentially come to a net operating income. So that’s a 12-month snapshot, whereas the rent roll is just one day, one snapshot in time. They complement each other, because the rent roll will tell you potentially what’s going on today or on a more recent basis, whereas the T12 gives that historical context, which is really important.

I was actually talking with a 30-year veteran in the business who said, “Yeah, I’ve probably forgotten more about evaluation than you know.” He said that “Back in the day, we would always look for the trailing 36.” They didn’t even call it a T12 back then. He’s like, “I don’t even know what you mean when you say a T12.” So they would look at the trailing three years, and he said, “Yeah, if you went that third-year back, you’d always see what the seller was potentially hiding.” I thought that was really interesting, because a lot of people these days aren’t even looking so much at the T12, and lenders and investors alike are willing to discount the later months in a T12. And really focus on the T3 or even T1, which – there’s some truth to that, but it is an interesting take.

Joe Fairless: So that’s the minimum… What’s the best-case scenario? You have a good friend who is selling you the property. They don’t care about money. They just want to make sure you make all the money that you possibly can by evaluating this property in its entirety, so they give you everything you could possibly wish for. What is that?

Rob Beardsley: That’s a really interesting question, because that’s starting to get into more of due diligence, which, obviously, we all know due diligence is hugely important. But in terms of underwriting, what I would potentially want to see is color to help inform my assumptions. For example, understanding the tenant base. Where do they work, and obviously, how much money do they make, and understanding the average tenancy, because if I know the average tenancy, I can calculate the turnover rate which will help me pin down my repairs and maintenance costs. If I know how much they make and where they work, I can better evaluate the risk of the income, and I can understand how far we can potentially push rents before we get into territory where there’s just unaffordability. So those would be helpful.

Looking at their maintenance log and seeing– this is actually very interesting, more on the due diligence side… But evaluating the maintenance log and seeing what are the most common maintenance requests, that might inform you of deferred maintenance and potential opportunities to cure deferred maintenance or potentially even create savings somewhere. So I would say, from the seller, those would be extremely helpful. Do you get them prior to executing a PSA often? No. But those would be helpful.

And then aside from what the seller can offer, there’s great public information and data services as you know, like CoStar and Yardi, that will provide a lot of that information. But we look at free information online as well, like Justice Map – highly recommend that resource – to really look at the incomes and the demographics on an extremely granular level.

Joe Fairless: CoStar is one resource to use. What paid subscription services do you use right now?

Rob Beardsley: CoStar and Yardi.

Joe Fairless: Why do you use both and not just one?

Rob Beardsley: Well, the simple answer is because we have the luxury of both. But really, they do the same thing. What I will say though if anybody’s considering them right now, Yardi does a little better job with sales and loan data and CoStar does not. This is specific mostly to Texas, so I can’t speak for all across the country, but that has been my experience. But CoStar does other things well.

Joe Fairless: You mentioned Justice Map as a free resource. What are some other websites you know you’re gonna go to, to check out a property’s area whenever you’re looking at a deal, that are free?

Rob Beardsley: I forget the exact domain, but it’s greatschools.com, I believe.

Joe Fairless: Yeah, Greater Schools or something, yeah.

Rob Beardsley: Right. So schools are hugely important, especially if you’re looking at a property that has larger floor plans like three bedrooms, schools are very important.

Joe Fairless: You’re actually right. It is greatschools.com.

Rob Beardsley: You were quick on that.

Joe Fairless: So greatschools.org, final answer. Alright, move on.

Rob Beardsley: So schools are important. Other places I like– I forget. I’ve got a bunch of links that I’ve just have copied and pasted into my underwriting model, so I can just click on them quickly from there. If I want to reference crime, I think it’s crimespot.com or something like that. So crime, schools, and then this is something that I actually heard you say on a podcast just the other day, which is looking at Reddit to understand where the hipsters get their coffee. I thought that was super interesting.

Joe Fairless: Yeah. I think someone I interviewed mentioned that. I don’t remember but yeah, I agree. That is very interesting. They really get the flavor of the community by going to Reddit, and take it with a grain of salt, certain profile people are on Reddit, but it’s just interesting. You mentioned that every input that you have in your underwriting model, you address it in the book. What are some inputs that you added to the spreadsheet that perhaps others might not have?

Rob Beardsley: That’s very interesting. So I’ll talk about the core model itself, and then maybe branch out to the sensitivity analyses and things that are more add ons. But I’ll talk about the core, which is one interesting component is the stabilization timeline, which in terms of value add, this is where models all start to deviate and they aren’t all the same. In terms of income and expenses, it’s pretty straightforward. Everyone’s pretty much the same. But the way that somebody projects how their value-add plan takes place over the first one, two, three years is very unique. So some people choose to input how many units they’re going to renovate per month, and then they have some schedule that they run, and then they calculate how many units are renovated and multiply that by the certain rent.

Rob Beardsley: So everybody’s got their own way, and again, going back to simplicity, the way that I have chosen to build that out is to simply have a stabilization timeline calculated with months. So you’d input a 12-month stabilization timeline, for example, and you would have your in-place rents and your pro forma rents. So right off the bat, you’re in-place rents would grow to your pro forma rents linearly over your stabilization timeline. So if you had, let’s say, $900 rents and your pro forma was $1,000 and your stabilization timeline was ten months, well, the model would just slowly build that rent up by $10 per month over those ten months, until it achieved the $1,000. Similarly, with your loss to lease, your vacancy, bad debt, concessions. The way that the model works is it all starts with the in-place numbers. So what’s currently happening at the property, and then it slowly linearly changes just like the rent to what our stabilized assumption.

So if we have 3% bad debt, but we think we can clean it up to one point, we’re not just going to go to 1% in the first month of ownership. The way we would do it is over our stabilization timeline, we would slowly linearly trickle it down. So that’s something I think is unique and really keeps it simple. But actually, if you compare it to some other ways, it’s quite a bit more conservative, just given the timeline. Obviously, you can use a faster timeline, but I think construction and project things typically take longer than you’d expect. So that’s one really important thing to address, because it actually has a lot of impact on the results of your underwriting more so than you’d expect. You wouldn’t expect that “Well, if I finished my renovations in 12 months versus 18 months–“, you wouldn’t expect that you’d get potentially a 2% bump in your IRR.

Joe Fairless: Yep, that’s substantial. One aspect that you mentioned was make sure that you’re factoring in monthly and not annual in your calculations, which yes, definitely, and I’m glad that you mentioned that. One thing it made me think of is, if you are doing monthly and you are getting granular with your assumptions, do you factor in the leasing period? For example the summer, you lease more units most likely than December?

Rob Beardsley: No, the simple answer is no.

Joe Fairless: How come?

Rob Beardsley: Well, again, coming back to simplicity. So one thing I like to say– and I could be wrong. There’s plenty of people much smarter than me. But one thing I like to say is my underwriting really isn’t trying to precisely forecast the future, including the depths of the winter and the booms of the summer. Similarly, if I think rent growth — obviously we all know rent growth isn’t just going to simply be 3% or 2% every year for eternity. But we use some more general assumptions like that to keep things simple and to just have a general understanding, and to — again, coming back to simplicity, I can easily compare apples to apples of different deals when I use more general assumptions and try to keep things as simple as possible. When I start really getting in the weeds and trying to get too specific, then it’s harder to compare to another property because you’re making so many assumptions. So my goal is to be as accurate as possible with as few inputs and assumptions as possible.

Joe Fairless: How do you know how to walk that line? And what is too granular, versus what is “You know what? I probably should go granular on this thing”?

Rob Beardsley: That’s a tough one, but I think the answer is understanding what is most sensitive to your outputs and your results. So an interesting example I give is people would be surprised to know that on a larger property that we’re used to dealing with, a $100,000 additional expense on your cap-ex budget isn’t really going to make or break the numbers. But missing your rent pro forma by $25, that could make or break your deal. So a $25 difference in your rents is a far greater impact than the $100,000 difference in your capital expenditures budget. So understanding what actually moves the model can tell you, “Okay, this is what I really need to focus on and make sure I get it right.” So we’re very, very focused on our rents and making sure that we’ve got our rents right, and that they’re defensible via comparables. That’s the next chapter of the book is once I tell you how to input every single input and say, “Okay, well, how do I prove that I’m right?”, and you need to do that with most importantly, rent and sales comps.

Joe Fairless: Rob, I enjoyed this conversation, and I know a lot of the Best Ever listeners have as well. How can they learn more about what you’re doing and get in touch with you?

Rob Beardsley: So the best way to check us out is at lonestarcapgroup.com. There, you can check out our articles, newsletter and most importantly, click the link at the top on the homepage and you’ll get a copy of my underwriting model that we talked about today emailed directly to you.

Joe Fairless: Rob, I enjoyed, as I mentioned, our conversation. I hope you have a best ever weekend and talk to you again soon.

Rob Beardsley: Thanks so much.

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JF1755: Learn About A Loan Product We Have Never Discussed: HUD 223F #SkillSetSunday with Judah Rosenberg

Judah is joining us as a very accomplished Vice President for a huge lender that we’ve probably all heard of, Greystone. Not only does Judah deliver amazing value today with the knowledge of the HUD 223F loan, but he’s also demonstrating his mindset that has helped him succeed at such a high level. You’ll hear Judah’s stutter in this episode, which is part of his story of overcoming his stuttering and putting himself in uncomfortable positions (like doing this podcast) a great episode that everyone can learn something from. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


Best Ever Tweet:

“One other catch, HUD only allows for bi-annual distribution. If you’re syndicating, you’d only be able to pay your investors twice per year” – Judah Rosenberg


Judah Rosenberg Real Estate Background:

  • Vice President Greystone, a national commercial real estate lending, investment, and advisory company.
  • Greystone’s affiliated businesses include a $32 billion loan servicing portfolio, $2 billion in completed property development projects, and a portfolio of over 8,000 affordable housing rental units and 3,000 skilled nursing beds.
  • Based in New York, NY
  • Say hi to him at https://www.greyco.com/ or 917.204.8854 or judah.rosenbergATgreyco.com


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


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, Judah Rosenberg. How are you doing, Judah?

Judah Rosenberg: I am great, thank you, Joe.

Joe Fairless: My pleasure, glad to hear that you’re great. A little bit about Judah – he is the vice-president of Greystone, which is a national commercial real estate lending investment and advisory company. Everyone knows Greystone, right? Greystone’s affiliated businesses include a $32 billion loan servicing portfolio, $2 billion in completed property development projects, and a portfolio of over 8,000 affordable housing rental units and 3,000 skilled nursing beds. Judah is based in New York City. With that being said, Judah, do you wanna give the Best Ever listeners a little bit more about your background and your current focus within Greystone?

Judah Rosenberg: Sure. First off, I actually moved from New York to Los Angeles about four years ago. It’s been a great move. Historically, since the company is headquartered in New York, our West Coast footprint wasn’t as large; there was just a tremendous opportunity to not only help grow the business on this side of the country, but also the weather here isn’t too bad.

Joe Fairless: [laughs]

Judah Rosenberg: I actually started at the company probably about eight years ago. Interestingly, I started by analyzing new deals for debt. At that time, because of my stutter, I had a tremendous fear of picking up the phone. The phone would ring, and I just could not bring myself to pick up the phone. So while analyzing deals is obviously a really crucial learning process, in my heart I knew that I really wanted to be in a sales role, but my fear was so intense that I avoided the phone at all costs.

Fast-forward to today — I actually moved into a sales role a few years back, because what I knew inside is that I absolutely loved to build relationships; I love to make new connections… So right now I focus most of my time originating HUD, Fannie Mae Freddie Mac and bridge loans for the Greystone debt platforms.

Joe Fairless: Got it. So for the last couple years you’ve been in a sales role… So what’s a typical client transaction look like for you right now?

Judah Rosenberg: I spend probably about 75% of my time focused on growing our HUD platform. I’ve had this affinity for the HUD programs, and it’s probably because a) they are unique; the terms, in my mind, for a long-term holder – I think the terms really can’t be beat. And it’s a specialized product; there’s not many groups out there who are doing it well. Over the last few years I’d say that we’ve been the lead innovator in this space.

I guess you’re probably thinking now “So what are these great terms?”

Joe Fairless: Yeah, exactly. Please tell us.

Judah Rosenberg: Okay, sure. The first thing which I would say is that the biggest misconception about HUD that I run into all the time with even very large groups is that HUD is not only for affordable properties. HUD is absolutely for market rate properties… And actually, a large percentage of our HUD volume is in HUD financing for market rate properties.

The HUD finance programs can be used for multifamily and healthcare, new construction, refinance and acquisitions. I think that the program which I would like to share the terms with now are the HUD 223(f) program. The terms are it’s an 85% LTV loan, it’s a 35-year term, 35-year amortization; it’s non-recourse, it’s fixed rate, with rates below 4%. It’s assumable. There’s a 10-year step down prepay, so there’s no yield maintenance, there’s no [unintelligible [00:08:02].13] feasance, and after 10 years there’s no prepay.

One thing about the program which is great is that HUD is agnostic to location. Even if you’re in a tertiary market where perhaps Fannie or Freddie or some of the banks either don’t wanna lend in, or will not be that aggressive on their terms, HUD will still be at that same LTV, and all the terms will be exactly the same in all markets.

The next interesting thing is that HUD does not have a net worth and liquidity requirements. What that means is that you can take advantage of the really spectacular terms even if you don’t have a high net worth and  a ton of liquidity. Those are the general terms of the loan

The transactions that excite me most have to do with  a really interesting nuance for value-add. HUD has this really cool nuance, where if you renovate somewhere between 15% and 20% of the units at a property, then HUD will allow us to underwrite all of the unrenovated units to those future rents, assuming that those unrenovated units will get renovated through the financing of the HUD loan. So what that means is that even though you only have 15% to 20% of the units at your property renovated, you’re achieving 80% LTV of the stabilized value.

Joe Fairless: Wow. This loan sounds tremendous. There’s gotta be some reasons why people don’t do it. Let me just ask a couple questions, and then I’d love to hear your thoughts… Can you get a supplemental loan on this loan?

Judah Rosenberg: You can get a supplemental loan. However, the supplemental loan has to be used for improvements at the project. You cannot use a supplemental to cash out. However, through this value-add strategy, because you’re financing based on the improvement plan, you can really get close to 90% to 100%, because we are utilizing the numbers in the proforma.

Joe Fairless: And with the HUD 223(f) loan, how much time does it take to get approved for the loan? The reason why I’m wondering is if I find the property, I like it, what do I need to negotiate with the seller in order to make sure I have enough time?

Judah Rosenberg: Sure. That is a great question. Okay, so it has been taking us somewhere between 4 and 6 months to close the 223(f) HUD loan. So what we do… So there’s no seller — I’m not gonna say “never”, but it’s very rare to find a seller who will wait that amount of time for the new buyer to put a HUD loan in place. So what we do is we have a bridge to HUD execution. What we do is we will close on our balance sheet bridge, while we simultaneously process the HUD loan. So what you can do – for the value-add plan you can close on the bridge, you can renovate a sample size of the units, so you can prove out the higher rents, and then put a HUD loan in place.

Joe Fairless: Okay, that’s good to know. So with that process I imagine that increases the cost of getting the financing, because you’re doing a bridge loan to a HUD 223(f) loan – one, is that true? And then two, what are they doing for 4 to 6 months if they’re not looking at your net worth and liquidity?

Judah Rosenberg: [laughs] Right. So the thing I would say is that only a few years ago — it used to take about 12 months to close. But through some technology that we built, we’ve really been able to cut down the processing time. Our goal is to be able to close a HUD loan as quickly as you can close a conventional loan.

So there are absolutely added costs to doing a bridge loan, and then you have to weigh those costs compared to getting 90% to 100% financing for your project.

Joe Fairless: Right… Which is a fair trade-off.

Judah Rosenberg: Yeah, I would say so. To add to that, there are higher costs associated with getting a HUD loan done. I would say that the first cost is called mortgage insurance premium. HUD is acting as an insurance company. They are taking the risk, and are saying that “In the event of a default, we will cover 100% of the loan amount, and repay the lender.” In exchange for that, HUD will charge either 25 basis points  annually, if you go green. If you don’t go green, then it’s a 60 basis point fee annually.

Today, with rates where they are, you could potentially lock a HUD loan at a 3.75% rate. That rate is locked in, it’s a fixed rate for 35 years. If you go green, it would be 25 basis points on top of that rate. And if you don’t go green, it’ll be a 60 basis point fee annually.

Joe Fairless: Okay. Most people go green, right?

Judah Rosenberg: Yeah. When you talk about the difference between 25 BPS versus 60 BPS over the course of — even if you’re only gonna have the loan in place for 10 years, that’s a significant amount of money to be saved.

Joe Fairless: Yup. This has been very informative, the HUD 223(f) loan. We’re gonna actually make this a Skillset Sunday episode, so that investors who are interested in learning more about a great long-term loan for a project, whether (as you said) it’s a new construction, or a new finance project acquisition, then this is a great option.

Anything else as we wrap up that you think you should talk about as it relates to the HUD 223(f) loan?

Judah Rosenberg: Yeah, I’d say the one other catch is that HUD also only allows for bi-annual distributions. So if you’re syndicating, you’d only be able to pay your investors twice a year. As you can see, this program really excites me, and I’ve seen groups who are growing their portfolios, who don’t have a ton of net worth, who don’t have a ton of liquidity, and they’re doing so well using this strategy to grow their portfolios, especially if they’re focused in some markets where other lenders are not that excited about.

And then on the flipside, we have some older investors who love the idea that they could put on a fixed-rate 35-year loan, and because it’s fully-amortizing and there’s no balloon payment, that they can potentially pass down a debt-free property to their kids, and to their great-grandkids.

Joe Fairless: Thanks for mentioning that. That’s something that should be underscored for sure, the fully-amortizing 35-year term. Well, thank you so much for being on the show, Judah. How can the Best Ever listeners learn more about you and get in touch with you?

Judah Rosenberg: The best way is either a call – my number is 949-734-2665. My cell – I’m pretty easily accessible – is 917-204-8854. My e-mail address is judah.rosenberg@greyco.com.

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

Judah Rosenberg: Okay, thanks Joe.

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JF1681: Stop Trading Time For Money – Says This Self Storage Investor with Kris Benson

Kris has an interesting story we’ll hear on this episode, how and why he turned to real estate after a career in sales. The biggest reason for him was to quit trading his time for money and spend more time with his family. So how did he do it and how can you learn from his story and apply it to your own life? Tune into this episode to hear how he transitioned into real estate, we’ll also hear how the company he works for has become one of the 30 top commercial self storage operators. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


Best Ever Tweet:

“At some point you gotta get in it, you’re gonna make mistakes, but if you don’t jump in, you’ll never move forward” – Kris Benson


Kris Benson Real Estate Background:

  • CIO for Reliant Investments, a subsidiary of Reliant Real Estate Management
  • Reliant Real Estate is one of the top 30 commercial self storage operators in the U.S.
  • Based in Saratoga Springs, NY
  • Say hi to him at www.reliantinvestments.com
  • Best Ever Book: The Alchemist


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

Kris Benson: I’m doing fantastic! How are you, Joe Fairless?

Joe Fairless: Well, I am glad to hear that. I am doing fantastic as well, looking forward to our conversation. A little bit about Kris – he is the CIO for Reliant Investments, which is a subsidiary of Reliant Real Estate Management. Reliant Real Estate is one of the top 30 commercial self-storage operators in the U.S., and he’s based in Saratoga Springs, New York. You can learn more about their company, we’ve got the link to their website there, so you can just click that and go check out the company.

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

Kris Benson: Sure. How far back on do you wanna go? My story is pretty interesting.

Joe Fairless: Let’s hear the interesting story.

Kris Benson: [laughs] Well, one, Joe, I appreciate you having me on, and congratulations to you and the Best Ever listeners. I think I looked — are you at over 1,600 episodes?

Joe Fairless: Oh, yeah. By the time this one airs, who knows where we’ll be.

Kris Benson: Congratulations, that’s fantastic. My background is kind of interesting; how I got to real estate – I had my first child in college; I know I’m starting early, but that obviously wasn’t on purpose, but it was a blessing in disguise. The upside, Joe, is that by the time I’m 45 both of my kids will be out of the house, which is fantastic. But what it made me do is grow up pretty fast.

The arena that I grew up in was business-to-business sales. I got my first job out of college with a company called ADP, a payroll company that you and your listeners may have heard of…

Joe Fairless: Sure.

Kris Benson: And I worked my way up through that business-to-business sales hierarchy. My last corporate sales job was with Intuitive Surgical; they’re the developers of the da Vinci robot. I was super-blessed to be a part of that company and the technology that they bring to market. For  your Best Ever listeners, just google “da Vinci robot.” If you don’t know about it, it’ll blow you away.

With that being said, at about probably 27-28 we were kind of always grinding, because we had a child very early, so we had to put food on the table and pay the bills… And by the time I was 27-28, I had made some money – I was a successful salesperson – and realized that that really didn’t make me very happy; what I really wanted was the ability to make money and not work my butt off for it…

Joe Fairless: Yup.

Kris Benson: …the idea that I’m sure many of your listeners and probably interview guests, of trading time for money, was not that fun. And it’s funny, I still remember waking up and thinking “How am I gonna do this the next 30 years?” It was at that point that I said, “Okay, I’ve gotta find a way of passive income.” I had never read Rich Dad, Poor Dad. I wish somebody had given that to me when I was 14, 15; I may have had a different perspective… But that idea of passive income started with that book.

So once I figured out “Okay, there’s an opportunity to do this a different way”, I chose real estate as the way to do it, because to be quite honest, I don’t know if I was creative or smart enough to build my own business. I think I’m more of an executer, and real estate is one of those things where it’s pretty black and white. It’s numbers, and you can choose numbers, and it doesn’t take a lot of comprehensive brain power…

So that’s kind of how I got started in real estate. Just a quick overview of how I got to self-storage…

Joe Fairless: Before you get into self-storage – and maybe you’re leading into this – but what did you buy initially, with real estate?

Kris Benson: Sure. Duplexes.

Joe Fairless: Okay.

Kris Benson: I thought I was gonna be a class B+ Plumbworld. My initial thought, Joe, was if I could net $200/unit at the end of each month, that was my plan to get me to replace my income.

Joe Fairless: Yup.

Kris Benson: And at  the time, my thought was if I could replace or get pretty close to that $10,000/month number, I was in pretty good shape for the lifestyle; we lived pretty modestly. It may have not replaced my income, but if I wanted to, I could have shut everything down and lived pretty much the same. So we did that, and we ended up with 22 units, all duplexes, not too far from where I live, in Saratoga County in Upstate New York. It was a nightmare. I realize very quickly I wanted nothing to do with that.

Joe Fairless: You had 11 duplexes, so times two, 22? Or you had 22 duplexes, so you had 44 units?

Kris Benson: Yeah, sorry. No, 22 units, across 11 buildings.

Joe Fairless: Okay, got it.

Kris Benson: I still own one of them, I’ve got one left… But what I realized very quickly – and I wish I could credit the quote who said it, but there was a quote that said “Big deals and small deals are the same amount of work, you just make less money on small deals.”

Joe Fairless: [laughs] Or you lose less money on small deals.

Kris Benson: Well, that part of it, too. But the effort that we were expanding – I realized that $200/month of net income, if I had to get to 50 units, I had to double what we already did, and I hated the people; I don’t mean to be elitist, but I hated dealing with the tenants. We had some pretty good management company structures in place, but the tenant aspect of it drove me nuts. So we divested. Fortunately, I have a wife who’s very understanding and risk-tolerant, so we sold them.

Interestingly, Joe, I decided that we were gonna build an apartment complex. I started calling around and got connected with a church member that I knew when I was a kid; I hadn’t talked to him in 15 years. He owned a construction company in the town I grew up in… I said, “Hey, I’ve got a little bit of money. I wanna build some apartments. What have you got?”

Timing is everything… He had just had a discussion with the municipality who had this parcel of land that they wanted to do something with, and long, long, long story short – we ended up building a 64-unit apartment community there. We actually just had a meeting with that municipality yesterday, and they’re asking us to do some additional development in the land behind it. So that was sort of my foray into commercial real estate, and that’s where the light bulb started to go off for me.

Joe Fairless: That’s jumping into the deep end, with barely knowing how to swim; and you might have some floaties on your arms, but that’s about it. That is incredible. So one not important question, but I’m just curious – why do you still have that one duplex?

Kris Benson: My brother lives in it.

Joe Fairless: Okay. And with the apartment complex – I’ll just ask, because I don’t know how to formulate the question properly, but how do you go from 11 duplexes to developing a 50+ unit apartment community?

Kris Benson: I had a great partner. What ended up happening with that guy that I called from church – and I’ll give him a little plug, it’s Buck Construction, out in Whitesboro, NY. So the answer is you do it because you’re stupid and naive. That’s why you do it. Because you don’t know how much you don’t know, until you get done and you kind of look back and say “Wow. That could have really gone the wrong way.”

What I really had was a partner who was full of integrity, and wanted to help. When you talk about the floaties and the deep end – he was the life jacket. I had a life jacket in Steve and his experience; he’s been a builder for 30+ years, has done a ton of apartments, usually for other people. They have a portfolio in the family that they’ve owned a long time.

There were some bumps in the road, but the answer essentially is he held my hand–

Joe Fairless: What were some bumps in the road?

Kris Benson: That list is long… The first one that we uncovered pretty quickly was we were over budget on our first phase by 6%. That 6% was on about a five million dollar development budget… So it was just over $270,000, and I was the equity partner, so we ate that. Fortunately, we were in a position to do it, and we were able to recoup it in another phase. We did them in 16 unit phases, so we did them slowly, and we improved on phase two and three, and subsequently four. But the first one — although he had a ton of construction experience, there were some macroeconomic things that sometimes go on that you can’t control for… So we ate those costs.

Joe Fairless: You do it in 16-unit phases because the lender required you to do it that way?

Kris Benson: No,  we did it — not to get too much in the weeds about the particular project, but I think the lender would have let us do the whole thing. We were more concerned with the market that we were going into. It was a really unique market, in that it was a town that had an air force base in it in the ’60s, ’70s and ’80s, and it was built around the air force base, and in the late ’80s the air force base left… So the community was decimated. 40% occupancy in their residential units. When Steve first came to me and told me where the land was, I said “You’re crazy. We’re not building there.”

Joe Fairless: Right.

Kris Benson: And interestingly, what happened was the air force base had a whole bunch of federal grant money, and they build a bunch of tech incubator companies that have exploded, so now there’s over 6,000 people who work on the base, and most of them don’t live in the town, because the town doesn’t have any housing.

So when we built it, we were building, Joe, a business model that didn’t exist. Our price per square foot with the market comps was over by close to 40%… But we were the only place in town if you wanted granite countertops, hardwood floors and stainless steel appliances; you were only gonna find it at our facility. So we were able to charge a really strong rent premium over what the market has done, and we’d wanted to test it in small phases, to ensure… I was stupid, but I wasn’t that stupid; I wasn’t gonna put my life savings into something all at once. I was gonna do it over a period of 3-4 years.

Joe Fairless: How much did you initially risk in the deal?

Kris Benson: Before or after the budget issue?

Joe Fairless: Before.

Kris Benson: It originally worked out to be about 200k, the upfront equity.

Joe Fairless: So you doubled your upfront equity on the budget overage.

Kris Benson: Sure did. We made it up in the construction budget on further phases. Originally, that was the thought – hey, we can go through $200,000/phase.

Joe Fairless: Sure. But at the time, you’ve got 200k upfront, and then the first phase is over 240k, so now you’re in for rounding up half a million… What gave you the confidence to say “You know what – fine. I’ll go in for now almost half a million, and I trust that we’ll do better in future phases”?

Kris Benson: I don’t know if I ever thought about that. Naivety. [laughter] There wasn’t really a catalyst moment where I said “You know what, here’s why I’m gonna do it.” I think it was just kind of in the moment, “Hey, let’s borrow, beg and cheat”, and I did. I borrowed and begged to get the other 240k when we were over… And I don’t know if there was an actual catalyst moment other than we said we could do it, so we were gonna do it.

Joe Fairless: Alright, last question on this one, and then we’ll roll into what you’re doing now… Do you still have the property, and if so, how’s it doing?

Kris Benson: Yeah, we certainly do. We got two refinances since the original construction. I don’t have all my original capital out, but I got a pretty significant chunk. We refinanced it to CMBS notes, so we got some good non-recourse, long-term debt. The project is doing fantastic. I think we’re 92% occupied, with a waiting list of about five people, but here in Upstate New York nobody wants to move in the winter time, so we feel that we’ll be in a good position come spring, once the winter breaks here.

And then, as I’d mentioned, the municipalities – there’s some acreage behind where we built, and the municipality is asking us to look at it… They’re looking more single-family residence, just to fill some of their housing needs in the city, but they’re asking us to take a look at that now… So yes, that probably will be the best investment I’ve ever made. It will take a little bit of time, but ultimately that’s probably gonna be the best investment I’ve ever made.

Joe Fairless: So what are you doing now?

Kris Benson: Just to kind of interlude… Once I started the commercial real estate, my original goal was to syndicate my own projects… But that was really challenging to do with the job that I had. I had a little group that was kind of following me around investing, because they knew I was doing some investing, and when I realized that there were multifamily operators who would essentially allow us to raise money and earn ownership on the back-end, that’s where the light bulb really went off.

I’m a salesperson at heart, so we did some investing in some primary markets; we participated with some Ashcroft properties, as you know, and we’ve done a bunch of other ones… So once I realized that there was an opportunity to grow that investor base, and an appetite for these alternative type assets, that’s where I realized that was gonna be my path.

What happened was I didn’t like what was happening in multifamily, and I know as an expert in the field you know this – the cap rate compression has been very challenging to find value in that asset class… So I started looking at some other asset classes; the one that I really liked was self-storage. There’s some interesting statistics around it, but I’m gonna leave you and your listeners with one interesting one. If you look at the National Association of REIT Data – this is essentially all the publicly-traded REITs; they have all their historical data online… And you can go online and look at the performance of those REITs across a pretty large dataset. So I looked at data from 1994 to 2017, and storage performed at just about 17% a year.

Now, if I’m looking at apartments over that same 23-year period, apartments did about 13%, so both had incredible returns… But I was really surprised at what that asset class had done, and then more importantly, what it had done in the last recession; that last cycle of 2007-2009 storage was down less than 4%, and apartments were down just under 7% in that same category. So for me, it had that nice balance of a really strong return, and some recession resilience, so that was the opportunity I went to pursue.

I went and found three self-storage operators that I really liked, because my original thought was to go do some investing with them, like I had done on the multifamily side… And essentially, long story short, I fell in love with one of them – it was Reliant; I’m probably giving away the ending… But I fell in love with Reliant.

Essentially, they needed help building the equity arm of the business, so how they raised money. In the beginning of 2018 I joined them as partner in Reliant Investments. Essentially, my role really is as part of the investment committee, doing some oversight in the acquisitions, but then also to build that investor arm of the business, where they can raise private equity for projects that they’re acquiring.

Joe Fairless: For the apartment complex that you wanted to develop you reached out to a fellow church member who owned a construction company, and you said “What have you got?” And then for self-storage you said you went and found three self-storage operators… How did you find them?

Kris Benson: There’s an almanac that comes out every year from a company called MiniCo.  They’re a self-storage industry publication. They rank the top (I think) 100 self-storage operators…

Joe Fairless: Based on what?

Kris Benson: Well, there’s two rankings. They have how much square footage they own, and then they have a second ranking based on how many properties or square footage that’s managed; there are some operators that do just third-party management. They don’t own the facilities, they just run them. And then there’s some operators that are vertically integrated – they own them and they’re running them.

Joe Fairless: Okay.

Kris Benson: So the first six are publicly-traded companies, companies that you and your Best Ever listeners would know about – Public, ExtraSpace, CubeSmart; the ones that you see up every highway intersection… And now that you guys are listening to me say storage, you’re gonna look out the windows of your car and see self-storage facilities everywhere.

So I went through that list and started calling them, and I got three calls back. Well, I think I went through the top 30, that’s where I started. So I just started digging through the ones that I could find easy contact information; that’s how I got in touch with them.

Joe Fairless: And your intention was to invest with them initially, or were you intending on doing more of a business partnership, so you were screening them for that?

Kris Benson: No, it was much more to find an operator that I could invest in, and then also opportunities for the group that had kind of grown organically with me alongside of me. The idea was “Hey, if I can come to you with equity for your projects, will you allow me to earn back an ownership interest on those projects?” And that was the goal, to build up enough ownership interest in enough projects, where the mailbox money or the passive income that was coming from that allowed me to kind of do whatever I wanted.

Joe Fairless: How did you transition from that conversation to now being the CIO for Reliant Investments?

Kris Benson: [laughs] It’s a long story… We had invested in two projects with Reliant, so  I knew how they operated, what types of projects they were doing, and I was actually in Atlanta with my job, with Intuitive Surgical; we have an office that’s 15 minutes away from where Reliant was at the time… And I met Todd for dinner; we were looking at a property together, that he was interested in acquiring… And if you knew Todd Allen, who’s one of the principals of Reliant, he’s a very upbeat, bubbly guy; he was just beaten down… And I said “Hey, what’s going on?” He explained some of the challenges they were having in their business model as far as acquiring properties, which specifically the issue was raising money was all falling on his shoulders… Which was incredible to me, because their track record is exceptional; they’ve been a beneficiary of a great real estate market, but they’ve also been a really good operator… So their track record is incredible. So for me as a salesperson it was hard to understand why they couldn’t sell this story. And the answer was because no one was doing it actively.

That’s what led to the discussion of — I told him what I was doing, and he said “Would you come work for me?” I said, “You can’t afford me.” That was my first start. I was trying to get in a good negotiating position… And we just kind of worked through how we could make it work, where he needed somebody to focus on this end of the business, so that he could focus on his expertise, which was operational. That’s his bread and butter, and what he does; he loves to dig into the nitty-gritty on the operations side of the business.

So it was sort of a random conversation, Joe. I know a lot of your listeners are trying to find things that they can use in their journeys… The one thing I would say is I’ve had the best opportunities given to me from cold calls. Just picking up the phone and asking. It’s amazing what kind of things come about.

We talked about the apartment community – literally, I hadn’t talked to Steve Buck in 15 years. I stopped going to church consistently (sorry, mom) probably when I was 15 or 16, and I hadn’t talked to Steve since then. And the same thing happened with Reliant. I’m at Reliant as a Chief Investment Officer because I called them and said “Hey, I’m interested in investing in self-storage. Would you be willing to talk about it?”

It’s a hard thing to do, and I know you’ve done a lot of it as well, but boy, there’s incredible opportunities that rear their heads if you’re willing to do it.

Joe Fairless: Based on your experience in the different types of investing that you’ve done, what is your best real estate investing advice ever?

Kris Benson: I think I just said it… Did I blow my top there?

Joe Fairless: [laughs] As Tony Robbins says, repetition is the mother of skill.

Kris Benson: That’s true. That is true. I would say there’s two things. I would say at some point you just have to jump in. If you’re dipping your toe in the water, and trying — and I realize everybody’s life situation is different, so it’s easy for me to say from the outside looking in… But for me, fear was always a big challenge. I’m okay with risk, I’m not okay with not knowing what’s going to happen; in my personal make-up, that creates a fear that can paralyze me.

At some point I think you just have to grit your teeth and jump in, with the real estate piece, because you can only learn so much from listening to podcasts, going on Bigger Pockets, reading books. At some point you’ve gotta get in it, and you’re gonna make mistakes, there’s no question; and it’s gonna be scary… And it still is. Some nights I wake up still and I’m like, “Oh my gosh, everything’s imploding.” But until you get in it, mix it up, you’re not gonna move forward.

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

Kris Benson: Amen. Let’s do it.

Joe Fairless: Amen, that’s interesting, given your [unintelligible [00:22:20].15]

Kris Benson: That was for mom. That was for my mom.

Joe Fairless: [laughs] First though, a quick word from our Best Ever partners.

Break: [00:22:29].27]  to [00:23:50].23]

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

Kris Benson: I just re-read an interesting book called The Alchemist, by Paulo Coelho. I think I’m saying his last name right… Really interesting life-story book. Everybody should read it.

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

Kris Benson: Hah! Along we got, Joe. A lot. I would say that one of the most recent ones, just because it’s top of mind, is we didn’t redo a comp study that was about three months old on a self-storage facility we were looking at. And we took it out to sell it to the market. One of our investors found two development projects that had been approved that we didn’t tell them about, so as you can imagine, when you’re predicting the market demand and supply and you don’t tell the investor that there’s two new projects coming on – that was a big mistake, so we had to revamp our entire process around how we execute on comps studies.

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

Kris Benson: I would say my first duplex, because it was the one that got me going. It got me off the sidelines and into the playing field. From a financial aspect, it’s gonna take a little while to do it, but that apartment community that we developed ultimately will be probably the best investment I’ve made.

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

Kris Benson: For me – we have two boys, 13 and 17. I would say it’s coaching. Our schedules are pretty crazy, so I have the opportunity to do some coaching with their athletics, and I really enjoy that. We’re losing one to college next year, but I’ve got a few more years with the 13-year-old, so I do a lot of coaching with whatever sports they’re in. The youngest one right now it’s lacrosse, so I really enjoy getting on the field with everyone.

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

Kris Benson: You can reach me — Joe, I think you said the link to our website will be there. Reliantinvestments.com is a great one. By all means, your Best Ever listeners are welcome to reach out to me via e-mail at kbenson@reliant-mgmt.com. I’d be happy to chat with them and share a little bit more about my story.

Joe Fairless: Awesome. Well, holy cow, what a ride from 22 units to co-developing a 64-unit apartment community, and how you approached it, the thought process and the 16-phase chunk certainly was helpful to mitigate some of the risk, whether or not that was a thought process at the time; we talked about that… But then also how you’ve transitioned into self-storage, really putting yourself in a position to really connect the dots for something that you were interested in doing, from reaching out to the owner of the construction company, to reaching out to the self-storage companies, simply by looking at an almanac, and then calling them up… And now fast-forward a couple years and now you’re the CIO for one of the top 30 self-storage operators in the U.S.

Pretty cool how you put yourself in a position in order to partner up with the right people, and then learn from them, but also help them with your skillset. Thanks for being on the show, Kris. I hope you have a best ever day, and we’ll talk to you soon.

Kris Benson: Okay. Thanks so much, Joe. Have a good rest of the day!

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syndication deals with Marc Belsky

JF1519: How To Find Equity & Debt For Your Syndication Deals with Marc Belsky

Mark has over $3.5 Billion in transactions under his belt. He specializes in helping investors find equity and/or debt for their deals. He can help you with most aspects of putting together a syndication deal and today he’s giving us free tips to help us with our deals. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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Marc Belsky Real Estate Background:

  • Managing Director of Eastern Union Funding and lead affiliate of Eastern Equity Advisors
  • They have a proven track record of introductions that have resulted in investments from $500,000 to over $50,000,000
  • Done about $3.5B in transactions
  • Works with his team to raise institutional equity for acquisitions and recapitalizations on behalf of multifamily and commercial real estate owners
  • Last year his team successfully raised over $100 million
  • Based in Valley Stream, NY
  • Say hi to him at https://www.easterneq.com/  or mbelsky@easterneq.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


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, Marc Belsky. How are you doing, Marc?

Marc Belsky: I’m great, how are you?

Joe Fairless: I am doing great, and welcome to the show. Best Ever listeners, you probably recognize Marc’s name, because he and his team are sponsors of this podcast, but more relevant than that – he’s done approximately 3,5 billion dollars in transactions. He’s the managing director of Eastern Union Funding, and the lead affiliate of Eastern Equity Advisors. He brings debt to deals, he helps bring equity to deals, and you can learn more at his company’s website, which is in the show notes page.

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

Marc Belsky: Sure. I’ve been in the business about 20 years, I started off on the principal side. I’ve spent about 15-16 years on the principal side, which as I’ve heard from many clients, gives me a unique perspective of really understanding how to finance deals, both on the debt and equity side. I focus primarily on middle market deals. We’re focused on loan sizes of one million up to 100 million dollars, and then on equity of about five million to 40-50 million dollars.

We’ve recently completed about 250 million dollars of equity raised, representing over a billion dollars of real estate deals, and I probably did about another 150 million dollars worth of debt in the last ten months… So we’re having a great year, and we really are focused. We do a lot of multifamily deals, we [unintelligible [00:04:25].21] but most of what we do is in multifamily, I would say.

Joe Fairless: Why did you switch from the principal side to the lending side?

Marc Belsky: Sure. Again, more brokering than lending, but the secret is I also am still on the principal side. I saw an opportunity, basically… The way it started was I saw an opportunity in the capital raising for the middle market. There’s a lot of big shops that are out there that raise for these big, massive institutional deals, and when people are doing the smaller deals or syndicating deals, they go to their friends and families etc. and I saw a niche that just wasn’t being covered by anybody, which was, again, middle market equity.

So while I was still buying my properties [unintelligible [00:04:57].10] about doing equity, and we ended up getting into it. Then over time, as the business just became larger and busier for me than my investment business, [unintelligible [00:05:10].08] for my own account, but as a business, [unintelligible [00:05:15].05] business than just investing.

At this point, it’s become my primary focus. I’m dedicated to it 18-20 hours a day almost some days, and I work full-time… Again, giving the fact that I am a principal, and I come from the principal side, it really gives me a unique perspective when I get involved in deals and I have clients, and even with banks and lenders. One of the stories I tell all the time is when you have  a real estate deal that you’re buying and you need a mortgage – suppose you’re buying a property for 10 million dollars and you get a 7 million dollar mortgage… You can go to any mortgage broker in the country and they’ll help you get that 7 million dollar mortgage based on whatever your NOI is. What most brokers don’t know is really what happens between that 7 and the 10 million dollars. That’s where I add the most amount of value, because I’ve done so many deals on the principal side, and I own real estate myself, and I’ve been buying real estate for close to 20 years, that I understand really how to do the deal on the equity, but more importantly as it relates to debt as well. I’m not just pitching the bank on the NOI; I really understand the real estate transaction, how it works, what the value is, why the bank should be lending, and there are multiple stories I can share – I’m sure we don’t have time for today – where banks said no at first, and then after I was done with my pitch, I convinced them to say yes, because I really happened to understand the real estate and the transaction. It wasn’t just looking at a piece of paper and taking the NOI and dividing it by what the property can carry as far as the debt is concerned.

Joe Fairless: Can you tell us one of those stories?

Marc Belsky: Sure. A good example was that there’s a shopping center that we did about six months ago. It went to committee, and about two weeks before closing, the bank calls us up and they say they have a problem; they wanna cut the loan proceeds because they thought that the center maybe couldn’t perform the way they originally underwrote. So we said “What are you talking about? What changed?” Long story short was that it was a grocery shopping center, and the grocer was doing something like $400/square foot over a 50,000 square feet space, and the lease was coming up in about four years. They felt it was a good store, because they were doing about 25 million dollars, so that makes sense – 25 million divided by 50,000 is about $500/foot.

What happened was the bank suddenly started panicking whether or not they were gonna renew. We spoke to the tenant, and the tenant said they’re doing very well. The problem was that they were just in too much space. So because I have an owner’s perspective, not just a broker looking at numbers, I was able to convince the bank that the issue is not that they’re doing $500; if they would just give back 15,000 square feet and they would do that 25 million dollars over 35,000 square feet, they would do over $700/foot, which is very healthy for a grocer. Not only that, but they were paying below market… So then a) they would renew their lease, because they’re below market; b) they would take a smaller space and they’d have a high-performing price per square foot, and c) the owner would be able to take advantage of leasing that 15,000 square feet to another tenant at a higher market rate.

So we got on the phone with [unintelligible [00:07:46].24] officer and had to walk him through this process and explain to him how and why [unintelligible [00:07:52].13] not just “Hey, there’s a grocer that’s not doing so well with a short-term lease.” The grocer actually was doing really well, they just had too much space for that location… And we ended up closing the loan a couple weeks later.

Joe Fairless: When you have that conversation, how much convincing is needed? Because I imagine the actual lender – I know you’re the broker – tends to be fairly rigid, at least from experience, in their underwriting and how they look at things.

Marc Belsky: To say the least, they’re definitely rigid. Look, every bank’s got that box, but at the end of the day, that’s the value in having a broker. We meet plenty of people along the way; some people have brokers, some people don’t, and I can tell you, sometimes I look at clients who say “Oh, we’ve got that right”, and I see the mistakes they make.

My job as a broker is to know the market and understand what happens. For example, if I’m a principal and I’m buying a single building and I’m going directly to a bank and something comes up, I don’t really have market data to provide to the lender to say “Well, you did this elsewhere” or “Another lender did this elsewhere”, but as a broker, if things come up throughout the process, I can say a) “Hold on a second, lender… You know that your competitor did this. You don’t wanna lose a business. Why don’t you match it?”  or b) Well, we did this on the last loan” etc, because we do such volume.

As a company, we’re gonna do about five billion dollars this year in debt placement, and close to 1,000 deals. As I said earlier, we do middle market deals, we focus on 1 to 100 million dollars, but our average loan size is only about five million dollars. So we do a tremendous amount of volume here. We have a lot of data to share, so when we get on the phone with a lender, we really know how to push all the points and the hot buttons of what we think they’re interested in, because we know what the market is doing.

A good example of that – I’m doing a deal right now in New Jersey, a construction loan. We went to a lot of lenders, and we actually brought the equity to the deal as well, and the equity wanted to use some lender from another state… And at the end of the day, the lender from the other state wasn’t able to understand the market as well as our lender, and the reason why we [unintelligible [00:09:31].22] is because we knew that lender did all the deals specifically already in this market… So it wasn’t just throwing a dart against the wall; we knew based on the knowledge that we had on another deal in this market that this lender was the one that did construction on the other deal, and we were able to successfully bring that lender.

It was two partners. One partner wanted us to bring this lender, and the other partner was like “Oh, I have my own relationship with this [unintelligible [00:09:48].18]” and he really pushed against it. Ultimately, he came around, recognizing the value that we were able to bring, and we ended up getting a better deal, with a better spread, and just a better overall loan for the real estate deal.

Again, it’s a lot of market knowledge and data that we bring to the table when we speak to a banker, and many times they appreciate it. They’re in the business to make loans, right? We sometimes forget, because they’re so rigid, that they’re there to put out money. We assume that “Hey, they’re a bank, they’re tough, we’ve gotta put on a suit when we go to the bank.” The reality is that they have to put their money out in order for them to make money. So when we were able to show them a clear path for them to do that in a conservative way, that they can put out the money and not lose it, they’re very appreciative for us.

Joe Fairless: Not needing to name names, but just an example of where you said “You know, your competitor did this”, and then the first group ended up doing it, because their competitor did it… What would be an example of that?

Marc Belsky: An example of that… Look, we have that literally on a daily basis when we’re competing on loans… Bridge loans are a good example of what happens, because this is balance sheet lending, and people have control of their own balance sheet. So if somebody is charging a point on a deal, and the other lender is charging half a point, then the first lender says [unintelligible [00:10:53].22] “Well, your competitor is charging half a point. Why don’t you match it?” That happened.

It happens on equity. I’m working on a deal right now where the client [unintelligible [00:11:00].06] couple of shops, and one of the shops wanted to do the deal, and a second shop wanted to do the deal. The first shop was a little tough about it, and he’s like “Well, I need this, I need that.” Then as soon as he found out there was some competition on the deal, he started softening up, and he’s like “Well, I maybe could do this, I maybe could do that.”

So again, it happens so often that it’s even hard to say. Forget about even giving an example, it literally happens [unintelligible [00:11:17].02]

Joe Fairless: What are some questions that beginning investors ask you that if you answer it now, if they’re listening, then they’ll have the answers? Because I know as a sponsor of this podcast you get a lot of inquiries, and some are from investors who are kind of just starting out, so what are some common questions that they ask and what are your responses?

Marc Belsky: Good question. I just have to think what the most common ones are… Look, they say that the bank never wants to lend you money when you need it. A lot of people are starting out and they need the money, and the banks don’t wanna lend you money. Banks wanna lend money to people who don’t really need it. This is a big problem in how the banking business works… But I think it comes as a big shock to some people that banks won’t lend the money. “I have a property I wanna buy.” “Well, what’s your credit score? How much liquidity do you have? What’s your net worth? What’s your experience?” I think there’s this misconception that just because I’m buying real estate, I’m gonna get a loan. When a bank lends, they look just as much at the borrower as they do at the property… More so at the property, because obviously they have some collateral to take back… But ultimately, if there’s a guy that never bought anything in his life, or has no net worth or liquidity or doesn’t have good credit history, it’s probably hard to get a loan… So I think that’s probably a big misconception that people have, that “Hey, I’m buying a property… Let me just go ahead and get a loan.” I would say that’s probably the most common misconception that people starting out have.

Of course, you’re gonna ask “How do I do that?” The answer is you buy small, you invest together with other people, you partner up with other people… You know, what we’ve done in the past is we’ve introduced some of our larger clients to some of our smaller clients, to help our smaller clients grow… And the main thing I can tell is “Look, be prepared to give up–” There’s many people that started out and became big, and didn’t own everything. Sometimes it’s better to be a small fish in a big pond when you’re starting out, instead of owning 100% of the pie. Just be prepared to give out pieces to people that are getting in the way, and that’s how you grow.

Joe Fairless: When you work with a client, what’s your typical project, your sweet spot?

Marc Belsky: Partially by design, partially by default, I would say it’s a 10-15 million dollar check for a multifamily deal. For example, we just closed a deal last week of 10,1 million dollars equity check in Tampa, Florida. It was a 39 million dollar acquisition, so there was a 28 million dollar loan connected to that. Something like that is probably right [unintelligible [00:13:25].14] We do a lot of those.

I was running my numbers yesterday [unintelligible [00:13:30].06] I think I’ve financed, between debt and equity this year, over 6,500 units already. Again, we just hung up a  call for an office building in Texas, and as I said earlier, we did a shopping center. I’ve done industrial deals. I’m closing at the end of the month a ground-up self-storage deal in Arizona. But at the end of the day, most of what we do is multifamily, again, middle market, between 5 and 40 million dollars. Most of the check sizes we’re doing are between 8 and 20 million dollars.

When I say “partially by design, partially by default”, it’s because like anything else in life, the more multifamily deals I do, the more assignments I get from them, the more my name gets out there, and the more assignments I do, the more I close; the more I close, the more my name gets out there and then the more requests I get. And at the end of the day, multifamily is probably the easiest asset class to understand, likely the easiest asset class to finance, and surely the easiest asset class to raise capital for.

Joe Fairless: When you are looking at self-storage, multifamily, ground-up development for something else, how much of a challenge is that to your brain, to switch gears from one to the other?

Marc Belsky: Again, the easiest thing down the fairway, as I said earlier, is just the typical, traditional multifamily type deal… But the good news is I’ve been doing this for a long time, and I have a lot of knowledge and a lot of different type of deals. I’ve closed office, retail, hospitality, multifamily, industrial, healthcare… I’ve done a lot of it over the years, and time buys experience for you. So for me it’s not such a big challenge, but it’s definitely the more challenging of deals. When you’re buying a [unintelligible [00:14:52].10] multifamily, you’ve gotta find out what the market occupancy is, what the commission structure is, what the demand is for vacant space, it matters on obviously what the credit history of the tenants are, you’re gonna have to understand how much traffic goes in front of the building every day, the [unintelligible [00:15:04].11] There’s just a lot more brain-damage to understand commercial deals versus multifamilies, which is why I said what I said earlier, [unintelligible [00:15:12].13] probably easier Thank god I have the experience to do that, and I’ve done quite a lot of deals over the years, as I said earlier… But ultimately, multifamily is still easier, but thank god I understand all of it.

Joe Fairless: With the commercial deals where you used retail as an example, would that be the most  — I don’t wanna use the word “headache”, but the most in-depth research and time, compared to the other types of asset classes, like industrial or storage?

Marc Belsky: No, I think8 it’s really bifurcated between commercial and multifamily, because again, even in an office building, what’s the [unintelligible [00:15:45].28] but they wanna buy a building at X% occupied, and they wanna take it up to Y. The question is what’s the market occupancy? If the market occupancy doesn’t equal Y, why is it that they think they can bring it to that occupancy? And the answer is because understanding the submarket is another level of what you need to do. You need to go down and understand what the demand is, how many square feet in this submarket are the building’s comparables really? If there’s two million square feet in this submarket, how many square feet of this submarket is really competitive to the building they’re buying? Meaning, I [unintelligible [00:16:20].06] older buildings that have no recent cap-ex upgrades in them etc. What’s the real occupancy in that?

So there’s a lot of layers that go into even office, and industrial is the same thing. So one is not more difficult than the next. They’re both pretty different than multifamily collectively. Obviously, with regards to retail, you have the added target on your back with the whole retail [unintelligible [00:16:40].14]  that people think is common with Amazon, and even Walmart going online now, all that kind of stuff. That’s just an added target. But other than that, I wouldn’t say one asset class, once you get into commercial, is more difficult than the next.

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

Marc Belsky: The number one advice I can give you as an investor – are you saying someone that’s investing as an LP or someone that’s syndicating deals?

Joe Fairless: Whichever direction you wanna go.

Marc Belsky: Someone that’s investing as an LP, find people you trust, because all the deals in the world, if you’re in bed with the bad person, it’s completely worthless. If they take advantage of you when things are down, the greatest returns in the world are completely worthless. And life’s too short.

Number two is somebody who’s on the syndication side, what I’ll say is it’s more important to make money in life than it is to be right. You don’t always have to be right, you don’t always have to get your way, you don’t always have to get everything you need to get. If you want to grow, just sometimes swallow hard and do what needs to get done to get a deal done.

Joe Fairless: When you were on the principal side, is there an example of that where you had to swallow hard just to get the deal done, and then it ended up making sense?

Marc Belsky: There is. I had a partner actually, who I decided wronged me, and I had to be right… And this was my biggest lesson – if you’re gonna ask what my biggest lesson in real estate was, it was exactly this, which is why I’m sharing it. We got into a disagreement and I decided I need to be right, and I just walked away. And it was more important for me to be right, and we just separated.

Over the next three years, he went on to buy a huge portfolio in the right timing, and I started again, and I didn’t get that big, and I ended up selling this business, which I’m very thankful for… But thank god, three years later he showed up at my house one day, and made up with me, and we’re actually buying real estate again, because I learned over that period of time that it was less important to be right than it was to make money. So I learned how to make up with people, and sometimes just swallow hard, and then get a clear pathway to make money.

Joe Fairless: Powerful. Yeah, I appreciate you sharing that. We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Marc Belsky: Go for it!

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

Break: [00:18:33].27] to [00:19:21].02]

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

Marc Belsky: Other People’s Money. I’m an obsessive reader of real estate biographies. I don’t believe in reading real estate how-to books and learning on the job, but I’m an obsessed reader of stories about real estate. If you’re familiar with New York, there’s a building in Peter Cooper Village-Stuyvesant Town, that was bought for 5,4 billion dollars back in ’07-’08, and then they lost the building a couple years later, and there was a book written about that story. I think that’s the last major real estate book I’ve read. But I’ve read a ton of autobiographies. The last one I read I think is called Other People’s Money, and basically it highlighted what happened in 2008 and how people were playing with other people’s money, and they were buying this real estate at crazy valuations. It was a fascinating book, a tremendous history of the real estate, understanding how [unintelligible [00:19:55].11] works, and how foreclosures work, and [unintelligible [00:18:57].11] Again, a lot of this stuff being in the market then and now you know, but it’s just fascinating to read. It’s called Other People’s Money.

Another fascinating book I actually read as a kid – it was a book about Ian Bruce Eichner, who built 1540 Broadway, in New York. It was called “How 1,000 men and women spent 10 years building a tower and lost a billion dollars”, something to that effect. Just look for Ian Bruce Eichner. That was a powerful story. It really got into the detail of New York.

I’ll admit it, I read books from President Trump as a kid, I read books on Trammel Crow, I’ve read books [unintelligible [00:20:25].00] I am an obsessive reader of biographical real estate books.

Joe Fairless: I like that approach. I think I’m gonna read more biographies. What’s the best ever deal you’ve done that we haven’t talked about already?

Marc Belsky: The best ever deal I did was probably a deal I bought with this partner that I was saying earlier. We bought it in a matter of four days, and it was the riskiest deal. It was actually on Memorial Day; I was at a barbecue and he called me saying “Listen, we have an opportunity. You’ve gotta come tomorrow morning to see this. You’ve gotta wire me money, you’ve gotta do this, you’ve gotta do that.” And we went in there and we just bought a small building in Brooklyn. It was a 7-unit building, and we underwrote it at a certain exit, and we did significantly better. We sold it pretty quickly. It was a building that just had some legal red tape that needed to be cleared out, it was a vacant building, and it was problems — like everything else, nothing works out the way it is. We went into the building, a tenant moved in illegally, we had to get the tenant out, we called the cops… All the [unintelligible [00:21:14].00] but ultimately we planned to clean the red tape and sell it six months later. It took us a little more time, we sold it about nine months later, but we actually sold it for a lot more than we thought  we would, and I think we made a 3X in a matter of nine months.

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

Marc Belsky: On the principal side, I can tell you (thank God) nothing yet; knock on wood, as they say. But on the debt and equity side, I had a recent mistake… I had a large deal I was working on, and I was sitting with a client and he gave me his word that he wasn’t working with anybody else, (I was working on the deal really hard) and there was a lender that we were talking to, but he just wasn’t being as responsive as we would have liked.

I get a call one day from the client, and he says, “Oh, by the way, I signed the deal with that lender through another broker.” The mistake was I should have been more aggressive with that lender. I tell my guys all the time, “You get paid to push and to follow-up. That’s the key to this business.” The key to the business and the seat that I sit in is just push and follow-up.

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

Marc Belsky: Charity is actually very important to me, so I give what I like to think is a fair amount to charity, but I can tell you that I give it very quietly. My most favorite type of charities to do is people that really cannot help themselves. I give to charity for people who just can’t put food on the table. I pay people’s groceries bills, I pay people’s private tuition, because their kids were getting thrown out of school… Just things where you’re really at the bottom of the bucket and you’re at the end of the rope and there’s nobody else there. That’s really where I most enjoy giving… But I’ve given to so many things over the years… I really believe in that.

I’ll tell you something else, my personal opinion – giving is not just charity; giving is also time. I always try to see with any of the charities I’m involved with if I can volunteer my time, as well.

Joe Fairless: How can the Best Ever listeners get in touch with you and learn more about what you’re doing?

Marc Belsky: Sure. The best way probably is by e-mail, which is mbelsky@easterneq.com. My office number is 212-897-98-75.

Joe Fairless: Marc, thanks for being on the show, talking about the different types of ways that investors can benefit by working with a broker, and how you gave some specific examples of how you’ve helped get transactions to the finish line when initially perhaps the finish line was not visible at the time.

Also, talking about the different types of asset classes and what you look for, as well as the type of sweet spot that you have with your clients. Thanks for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Marc Belsky: My pleasure. Thanks for having me.

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business entrepreneur Todd Fox

JF1364: From Quizno’s To Real Estate Development & Everything In-Between #HappyMemorialDay with Todd Fox

Against the advice of his parents, Todd started branching out from his Quizno’s franchise. He bought his first property at an auction and thought he might lose his shirt. That first property ended up being extremely profitable, but he still was not all in on real estate. Once he decided to really focus his efforts on real estate investing, he blew up, even after a bankruptcy. Now his company is completing $50 Million of new construction.  If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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Todd Fox Real Estate Background:

  • Started investing in real estate 9 years ago
  • He had $20,000 and no clue what he was doing
  • Spent first few years working 100 hours a week, learning the business from the inside out
  • Now in 2018, his company Visum Development Group will complete just under $50 million of new construction in this year alone
  • Based in Ithaca, NY
  • Say hi to him at https://www.visumdevelopment.com/
  • Best Ever Book: When I stop talking, you’ll know I’m dead

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

Todd Fox: I’m doing good. Thanks for having me, Joe.

Joe Fairless: My pleasure, nice to have you on the show. A little bit about Todd – he started real estate investing nine years ago, he had $20,000, and according to him (not according to me), had no clue what he was doing. Spent the first few years working a hundred hours a week, learning the business from the inside out, and now his company, Visum Development Group, will complete just under 50 million dollars of new construction this year alone. Based in Ithaca, New York… With that being said, Todd, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Todd Fox: Yeah. So background – you are 100% correct, I had absolutely no idea what I was doing with real estate. Actually, at the time when I bought my first property, I had owned a Quiznos franchise, and I was just absolutely miserable with that career path and what I was doing; I wasn’t happy, I was looking for something else… And I was actually dating a girl at the time, and I went to visit her, she was moving into a new place; I’m driving down the street in Ithaca, and there’s like 30 duplexes, on both sides of the street, identical, nothing’s different, other than the color of the siding.

I get to the end of the street, I’m like “This guy has gotta be making money, or he would have stopped after the first or second duplex.” I asked “How much do you pay in rent? Are you guys paying utilities?” and I started doing back of the napkin stuff, and I said “Listen, do me a favor – reach out to your landlord, ask him how much it cost to build one of these buildings”, so she did. I’m like, “Alright, this guy is making money. I could do this.” I knew nothing other than I just felt like I could figure it out. That was kind of my attitude.

I needed to be doing something different, and if this guy was doing it, I can do it, too. So I ended up basically just kind of copying his model, doing 3-bedroom 1-baths, and searching for properties. I came across this estate auction; it was like a 3-bedroom house, and everybody was there, buying… They were flippers. I go to this auction, I got 20k to my name, literally. The auction starts, it’s “One thousand dollars here! Two thousand dollars there!” and everyone’s raising their hand, and my hand is just pounding [unintelligible [00:03:23].08] “Sold for $32,000!” and everybody’s looking at me and I’m like, “Oh my god, what did I just do?”

This old guy walks past me, he’s like “Oh, this kid is gonna lose his effin’ shirt!” and I’m like “Oh my god, am I gonna lose my effin’ shirt?” [laughter] “I don’t know what I’m doing right now!”

Luckily, I’d had the foresight to meet with an architect just to make sure I could actually build what I wanted to build on the site. I called her up and I’m like, “Listen, Claudia, I don’t know what I’m doing right now. I think I actually just bought this property… I really need your help. I don’t know a single contractor.”

She was like, “Alright, calm down, calm down. I’ve been doing this for decades, I know a bunch of really good, reliable guys.” She helped me with the bidding process, and I ended up getting the thing built on time and on budget, and I actually got more in rent than I’d projected. That was kind of my start into real estate, just trial by fire.

Joe Fairless: Since you said you got more in rent than you projected, it sounds like that was a buy and hold?

Todd Fox: Yes.

Joe Fairless: With 20k in your pocket, how were you able to do a buy and hold? Because I imagine all the money that you had – plus, there was a 12k difference – went towards the project.

Todd Fox: Yes, we ended up redeveloping the site, it was a new construction. So we tore down the existing home… And I’d gone to my mom and I said, “Mom, I need to borrow some money, because I think I just bought this house.” She’s freaking out and she’s going “What do you mean you’re going into real estate? You own this Quiznos! What are you doing?!”

After like a couple of weeks of trying to convince my mom, she finally came around, and that’s how I got the first property.

Joe Fairless: Was it 12k that you borrowed from her, or was it more than that?

Todd Fox: No, it was right about that, and that time, that was about enough to be able to have a down payment for the house, and they used that as part of the 20% down… So it pretty much covered it.

Joe Fairless: And since that was all the money that you had, how were you able to hold on to it and receive the monthly rent, versus selling it and getting the cash back out plus profit?

Todd Fox: At the time, I never even thought about refinancing or anything like that. It was making about $20,000 a year profit after everything.

Joe Fairless: Wow.

Todd Fox: Yeah, it was a good investment right off the bat.

Joe Fairless: Yeah, it sure was. [laughs] It was approximately 32k all-in, and making you 20k in year one – is that accurate?

Todd Fox: Yes.

Joe Fairless: Well, you should just keep doing that then, right?

Todd Fox: That was the plan, and ironically, that didn’t really give me the bug yet. At that time, I had actually started working on an internet startup with a friend. I had actually gone through a personal bankruptcy, because I had sold my Quiznos, and a  year later the guy ended up defaulting on paying his rent payments, and the landlord came after me because I still had a personal guarantee…

So I really wasn’t even in the mindset of real estate at that time, and I ended up moving down to Brooklyn and working on this internet company… And it didn’t end up working out for me. So I’m sitting in my apartment, just sitting there thinking like “Alright, what am I gonna do next with my life?” I had gone through this bankruptcy, at this point it had been about a year, and this internet company didn’t work out, and the only income I had was this rental property that was making me $20,000 a year.

I’m like, alright, if I could just get ten of these things, I could make a quarter million a year, and it’s passive income, I don’t really have to lift  a finger, so why don’t I just do that? And at that point, if I wanna start another company or I wanna travel, I can do that, because you have all this passive income coming in.

So I had written on my wall I was gonna own ten duplexes within the next three years, and then I started meeting with banks… And every bank I talked to was like “What? Are you crazy? You just had a bankruptcy a year ago. We’re not gonna lend to you. Come see us in seven years, kid. You’re out of your mind.”

I talked to my mom, and my mom was like “No, I’m not gonna help you out… Are you crazy? You just had a bankruptcy!”

Joe Fairless: What terms did you give her on the first 12k? I imagine she got her money back, right?

Todd Fox: Yeah, she got her money back, and that time she didn’t ask for any interest; she just wanted to help her son out…

Joe Fairless: Oh, you should have given her some interest rate on that, that way she would loan to you later.

Todd Fox: Oh, believe me, I’ve been able to take care of [unintelligible [00:07:32].26]

Joe Fairless: [laughs]

Todd Fox: I was bootstrapping it back then. So here I am, I’m like, alright, I wanna make money in real estate. This makes sense to me. But I literally talked to every bank I could and they all told me “Listen, it’s not gonna happen. Go find another career path.” Luckily, I didn’t listen to them, and that’s one of my double-edged sword things in life, where it’s good and it’s bad, but I don’t always listen to people and take advice, but this time it ended up working out pretty good for me.

So I realised, listen, if I could find these deals, all I’ve gotta do is just find someone that can basically co-sign on the loans for me. I had a friend that was looking at investing in Connecticut. He was like, “Alright, show me the deals that you’re working with.” I said, “Listen, I’m getting double those returns in Ithaca. If you can help put up the money for these projects and you can help get the bank financing, we’ll go 50/50 on these projects. I’ll manage them, I’ll find the deals, I’ll take care of the leasing…”

He ends up partnering with me, and… It’s interesting, because I got really close to giving up. I was sending out letters to people, I was knocking on doors, and I had about 50 doors slammed in my face, or phone calls, or people who were like “Listen, if you call me back, I’m gonna call the police, because you’re harassing me.”

Joe Fairless: [laughs]

Todd Fox: I think probably the best deal I ever did was really that first one where I knock on the door and the guy opens up and says “Yeah.” He actually had a piece of land that was across the street and I said “Have you ever thought about selling the land across the street?” He said “Only if you buy my house.” I said “Okay, can I come in and see?” The guy shows me around the house… The house is probably worth about 425k; it was actually a three-unit that he lived in, and the land across the street was a double lot and it was worth about 100k.

I said, “Okay, well what do you want for the land?” He said, “Well, probably 25k for the land…” I’m like, “Okay.” I said, “What do you want for the house?” He said, “260k.” I’m like, “Are you sure about that?” He said, “Yeah, absolutely.”

Joe Fairless: You said, “Are you sure about that?”

Todd Fox: I said “Are you sure?” because in my mind I’m like “This thing is worth 425k easily.” I’m like “Is this really happening?” I’m like “Am I taking advantage of this guy?” I asked him, and he said he lived there, the house was paid off, and he always had in his mind that he wanted to sell it for 260k.

The next day I had my attorney write up the contract, and that was really like when I caught the real estate bug and that was my a-ha moment, because I’d just made basically 200k by knocking on this guy’s door. If I turned around and I sold these properties, I could cash out with 200k, and that was just like, okay, all the podcasts that I was listening to, and the books that I’d read – it’s true. This really does happen, if you just keep putting in the work.

Joe Fairless: Knocking on the door – how did you identify the neighborhood where you were knocking on doors, and then when you knock on a door, what do you say?

Todd Fox: So at that time our county didn’t have anything online, so I had to go down to the county assessment office, I had to pull out tax maps, and really what I was looking for was vacant lots, because I just wanted to replicate what I already did. I built this duplex, it makes me 20k; if I could just find building lots like that, I could just keep replicating my model. So it was a process to even be able to get that information, and I’d sell letters out to people, I’d go and knock on doors…

This guy – I knocked on his door, and he answered, and I said “Hi. This may sound a little strange, but I was wondering if you ever consider selling your land across the street.” That’s where he kind of looked at me and said, “Yeah, I’d sell it, but only if you buy my house.” I was just like, “Wait, what?” I was just not expecting that.

You hear a lot of different thing… People think that you’re there just to harass them. I literally had doors slammed in my face before… So I just tried to make a friend, and just smile as much as I could, and it just worked out.

Joe Fairless: What did you end up doing with the property that had the house on it, and then what did you end up doing with the one that was vacant?

Todd Fox: The property that had the house on it – we renovated it, because it was dated; we redid the floors, kitchens, baths and everything like that. I rented it out and it cash-flowed great. Then the double lot across the street – I ended up building two more duplexes. I basically took the exact same floor plan, didn’t have to pay for an architect, because I already had the house, and I just built two more of those duplexes on there.

Joe Fairless: How long ago was that?

Todd Fox: 2012.

Joe Fairless: And fast-forward to today, have you reached your “I wanna get ten of them to cash-flow 20k/year?”

Todd Fox: We well surpassed that. I really started falling in love with real estate, and like I said before, I was working 100 a week, I was laying floor, changing toilets out, unclogging toilets… Just learning the business from the inside out, and I really fell in love with it. And I said to myself, “Okay, I’ve kind of mastered this duplex thing… What’s the next step?”

I started looking at multifamily buildings. Now this year alone we’re gonna have just under 50 million in new construction. So the ten duplex thing – we far surpassed that a long time ago, which is crazy, because every time I talk about it, it’s mind-boggling to me, because at that time, ten duplexes was like this monumental goal. It was like “Am I really gonna even be able to do this? Everyone’s telling me I can’t even get a loan… What am I getting myself into?” And then all of a sudden you start to have some success, and you start to get really good at your craft, and you realize you can kind of take that next step and you can do an 18-bedroom, and then you can do something larger. One project gets 207 units, that is under construction right now… So it scales. I’m putting in the time and the energy and the work, and having this success.

Joe Fairless: That 50 million dollars under construction this year – what’s the value of the largest project within that 50 million?

Todd Fox: 37 million.

Joe Fairless: And what is that?

Todd Fox: It’s a 207-unit, it’s geared towards student housing for Cornell University.

Joe Fairless: Can you tell us about that project?

Todd Fox: Yeah, it’s about 85,000 square feet, it’s a five-story building, high-end, luxury student housing… So you’ve got a sauna room, and a jacuzzi, and the lounge, and all that stuff.

Joe Fairless: What’s your team’s role in that and who are the other partners involved?

Todd Fox: The partners that I have — it’s investors that I’ve kind of built up over time. I started out with one investor, which is actually kind of a neat story. Actually, my first duplex – the guy’s daughter was renting from me, and he called me up and said “Hey listen, I reviewed the lease, everything looks good, but that’s not why I’m calling.” I said, “Okay, why are you calling?” He said, “Well, you know, I’m interested in investing in the Cornell market, and I was wondering if you have any deals.”

So he was my first investor, and we ended up really hitting it off. He’s actually brought in his friends and stuff into deals, and their group invested almost four million dollars into this project. So it’s investors that I’ve kind of built up over the years, and my investor group has essentially kind of grown organically. It’s like, you do a really good deal with someone, you execute on time, on budget, and you do another deal, and the next thing you know it just kind of snowballs, and you build up that trust and that relationship. Then they wanna kind of tell their friends and family about it, and essentially why we’ve been able to scale at the rate that we have is the investors that we’re working with.

Joe Fairless: And how is it structured with investors on a deal like this?

Todd Fox: Every single deal that we do is basically structured differently. With this one it’s pretty interesting, just because we’re able to create so much equity into the deal, that we’re going to refinance the building in year two; the investors are gonna get 100% of their capital out, plus an 8% preferred return, and then they’re gonna maintain about 50% of the equity in the building, which then produces about 8% or 9% on their original investment.

Let’s say they put in a million dollars – they’re gonna get their million dollars back in year two, they get their 8% preferred return, and then they’re gonna make about $90,000/year going forward in perpetuity.

Joe Fairless: And what if in year two the million isn’t able to be paid back?

Todd Fox: The investors basically will have essentially 100% equity. We don’t get our equity kicker until they’re made whole. So 100% of the cashflow will go towards paying off the investors.

Joe Fairless: Got it. And then once they have the original investment  back, plus 8% preferred return that’s accrued, then you do a 50/50 split?

Todd Fox: Correct.

Joe Fairless: Cool. I’ve seen some development deals that have, say, 12% preferred returns, and I always wondered how the heck does the development have a preferred return at all if there’s no cashflow, but then someone told me “Hey, dummy, it’s just accrued until cashflow can be distributed.” Is that basically how you approach it?

Todd Fox: Yeah, it is… And again, what’s really unique about this deal is just the amount of value that we’re able to create in it… So we’re gonna be all-in into this project about 23 million dollars. That’s hard costs, soft costs, land costs. We have an as-built appraisal at 37 million. So the bank will finance 75% of the appraised value… So not only are we gonna be able  to get 100% of our money back, but based on their equity, we’re projecting an additional 40% return. It’s not written or guaranteed into the operating agreement, but it’s most likely going to happen.

So if they put in a million dollars, based off the refi money they’re gonna get their million back, a minimum 8%, and most likely, it’s gonna be an additional 400k. And because it’s a refinance, you don’t pay capital gains on that money.

Joe Fairless: When you are looking at that project and then you’re also working on your other ones, how do you prioritize your time and where you put your focus?

Todd Fox: I have the most incredible team around me, and without them we wouldn’t be doing any of the stuff that we are right now… I just have super-intelligent, talented, passionate people, and it’s really just delegating, allocating whatever time needs to be for whatever project, based on the team that we have. So it’s really all about the team that we have at Visum.

Joe Fairless: How many team members do you have? Not including on the ground people nailing nails with hammers, but just full-time team members.

Todd Fox: Construction-wise we employ hundreds of people a year, but within the Visum office there’s five people, and I make six. And then we’re actually looking to hire two more team members.

Joe Fairless: What are the roles, high-level, of each of the five?

Todd Fox: We have one person who basically is focused on leasing and managing the projects, we have an in-house project manager who’s basically at the various job sites every day, just making sure everything is staying on schedule. We have someone in-house that’s basically focused on raising money, investor, relations, staying in constant communication with the investors based on the current projects, as well as constantly raising new money.

We have two people that are in the office that are just focused on new deals and new markets, so we’re basically expanding our horizon; we’re looking pretty much as far South as Florida, and as far West as Nebraska. So we’re basically just focused on finding new opportunities in new markets.

Joe Fairless: As far as asset management, does that fall under the project manager’s responsibilities?

Todd Fox: During construction?

Joe Fairless: After.

Todd Fox: After construction. We’ve decided recently that we’re gonna do all of our property management in-house, just so you can kind of have your finger on the pulse of the market and get a better understanding of where things are going… So we’re hiring a couple additional people from the property management side.

So we’ll have three people that are dedicated to that, and then we’ll scale that based on the demand and how many hours is really needed, as the new projects come online.

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

Todd Fox: I feel that I could spend hours going through that… I think if we’re kind of talking for people that are trying to get into the business or just starting out, it’s trying to find a really good contractor, having a good contract in place; don’t ever pay them, unless work has been completed. I know there’s contractors out there that they want 50% down, which I always tell whoever, like “Listen, there’s always this thing what-if. What if this person gets hit by a bus? They might be the most honest person in the world, but you pay them $20,000 and they get hit by a bus tomorrow… Good luck trying to get that money back.”

And I think on a more high-level type of advice, I would say everything you do, just do it with integrity. I think that’s really one of the main reasons why I’ve been able to grow my business the way that we have. It’s always being honest, being a man of your word, executing, putting other people’s interest ahead of yours… It’s all about relationships in life. It’s all about taking care of other people and putting their interest ahead of yours. If you do that, you’re gonna be successful.

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

Todd Fox: Definitely.

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

Break: [00:20:25].19] to [00:21:08].05]

Joe Fairless: Best ever book you’ve read?

Todd Fox: I’ve got two, and it’s really difficult. So the first one would be “When I Stop Talking, You’ll Know I’m Dead”, by Jerry Weintraub. It’s an autobiography… If you haven’t read it, you’ve gotta read this one…

Joe Fairless: Never heard of that one.

Todd Fox: Oh, man… Every other page, you’re jumping out of your seat. So it’s this guy, he grew up in the Bronx, came from poverty, and ended up managing Elvis Presley when he was in his early twenties, and managed Frank Sinatra… And it’s just the most crazy story, because it’s this guy who never took no for an answer; he just went out and he just made things happen. He wasn’t the most intelligent guy, he just went out and did things… It’s such an incredible book.|

And then the second book would be Shoe Dog, by Phil Knight, which is another autobiography, and it’s about the guy that started Nike. And again, the guy started with nothing, bootstrapped his business, was on the verge of bankruptcy for the first five years or whatever, and ended up just growing his company into Nike. They’re both such amazing and inspiring stories.

Joe Fairless: You like the bootstrapping stories, and it makes sense based on the challenges that you came across early on.

Todd Fox: I can definitely identify… I remember when I first moved back to Ithaca to work on the real estate – all my credit cards are maxed out, and I went out to dinner with my wife, and we are at this Vietnamese restaurant, and I thought I had money on my one card, or I wouldn’t [unintelligible [00:22:29].28] and I think the meal was like $35, and I think I had like $16 on my card… So I put that on there, and then I went to my car and I’m grabbing one dollar bills and change… I remember being at the counter, counting out change. It was embarrassing, but I put everything I had back into my businesses. Those books, especially Shoe Dog, I can totally identify with his story.

Joe Fairless: If someone’s in that position and they don’t end up in a position of monetary success that you’re at, why would you say they don’t?

Todd Fox: I think one of the biggest things that holds people back in life is just getting outside of their comfort zone, it’s fear of failure, and I’ve personally always viewed failure as an opportunity. I’ve made so many mistakes in my life… I make mistakes on a daily basis, but you learn so much from those mistakes. I think if you can just have that paradigm shift and change your perspective and realize that if you fail, that’s a good thing, because you’re gonna learn from that experience and you’re gonna grow from that experience, and you’re probably not gonna make that mistake again, and it’s just gonna make you a better, stronger, more intelligent and capable person. So I think that’s really the deciding factor right there.

Joe Fairless: What’s your favorite mistake that you’ve made?

Todd Fox: Again, I feel like I could spend hours kind of going into that. Favorite mistake… There’s been so many, so it’s kind of hard for me to even pin it down.

Joe Fairless: Maybe the last one, or maybe a mistake on a transaction that might come to mind.

Todd Fox: Again, trying to think about first starting out, I paid a contractor – and this is why I said, never pay someone ahead of time… And it was like $6,000, and again, you know, I’m bootstrapping, so to me at that time it was a lot of money… And the guy just disappeared on me. I had already rented the space out to tenants, they were supposed to be moving in in like four weeks, and I didn’t have any money to renovate the place, and I didn’t have a contractor… So that’s why I say, never pay people ahead of time.

Joe Fairless: What’s the best ever deal you’ve done that’s not anything you’re working on now, and was not your first one?

Todd Fox: I think it’s definitely that second deal that I talked about, just because it was such an eye opened for me, and I really was on the verge of giving up. I’d been sending out letters, I had so many doors slammed into my face, and had that deal not happened, I might not be where I am today… And  I hope that people can listen to that and realize that that can be you. If you just persevere and you keep knocking and you keep moving forward, eventually it’s gonna happen… Because it happened to me, it’s happened to probably everyone that’s been on your show, or all these other podcasts, or all these books that people write… Just keep doing the right thing, and eventually something good like that is gonna happen, and it’s gonna change your life.

Joe Fairless: It’s one thing to hear someone say they view failure as an opportunity, it’s another for someone when they hear that think “Okay, when I come across a failure, I’m gonna think of it as an opportunity”, but it’s a whole other to actually apply that whenever we’re in the middle of a failure… So any thoughts on taking it from concept to action for the Best Ever listeners?

Todd Fox: That’s a really good point, and there are definitely a lot of times where when it’s happening to you, it’s really hard to deal with, especially depending on what it is that you’re going through at that time… But self-reflection is important, and I think if you can realize that “Hey, whatever I’m going through right now, there’s a solution to it…” Every problem in life has a solution. At the end of the day, what you’re going through may really suck at the time and be hard to deal with, but at the same time in the grand scheme of things it’s probably not that bad. So if you can just kind of remove yourself from the situation for a little bit and try and gain some perspective and say “Okay, this is what’s happening… What good can actually come out of this? How am I gonna grow from this situation?”

I think sometimes that’s all you’ve gotta do – you have to just take a step back and try and gain some perspective.

Joe Fairless: When you are approximately 16 dollars short on a dinner out with your wife, how do you step back from that at that time?

Todd Fox: Yeah, that’s great… Because it was highly embarrassing. It was extremely frustrating, because I’m sitting there and I’m like, “Man, how did I let myself get in this situation? Because I don’t wanna live like this. I’m trying to grow a business, but at the same time, if I can’t even take my wife out to dinner once a month, that’s not a way to live.” So you sit back and you say “Okay, what could I be doing differently with my business? Do I need to slow down a little bit in certain aspects, so that way I can start to build up a reserve?”

It takes hitting a wall for you to realize, “Hey, I need to take a step back, because I just ran into this wall. How do I move forward from here?” There’s a lot of things that are always gonna happen that are unexpected, that you don’t anticipate, and it’s just figuring out how to get through it, that you possibly can.

Joe Fairless: It’s interesting how you said “How did I let myself get in this situation?” versus “Oh, why me…?”, more of the victim mentality, versus “I let myself get here, so how can I get out of this situation?”

Todd Fox: Yeah… You know what, it’s a very interesting perspective, and you’re absolutely right. I think that’s an important thing in life if you wanna be successful – you always need to be accountable. You can’t always blame people or things and feel sorry for yourself. Life happens, and there’s always gonna be things that are out of your control, and you’ve just gotta deal with it.

If you make a mistake, you need to sit back and say “Hey, I made a mistake. How am I gonna fix it?”, as opposed to “Oh, the world owes me something” or “This person didn’t treat me right”, or “My contractor ripped me off…” It was like with my contractor – I was more mad at myself than I was at him for stealing the 6k. I wasn’t like, “I can’t believe this happened to me. I’m giving up on real estate.” It was more like, “Okay, Todd, you’re an idiot… You paid this guy money when you shouldn’t have.” And you know what, I never made that mistake again.

Joe Fairless: That’s certainly a lesson we can all apply – if we’re not already – when we get stiffed by a contractor or someone else, in life. Instead of being mad at them – which rightfully we very well could be, and perhaps in many cases should be… The common denominator when we go throughout life in other circumstances will not be them, it will be us. So how do we fix ourselves, so that we can mitigate that risk from happening again?

Todd Fox: Right, absolutely.

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

Todd Fox: I love mentoring people, I love helping people, even competitors. I just think about when I had my first duplex, I had this kid that I went to high school with and he came in and he was saying he wanted to get out of his career, and he wanted to get into building duplexes… I ended up giving him my blueprints, which were probably worth $10,000 at the time, and I remember I was talking to people and they were like “Why did you do that? He’s gonna be a competitor, he’s gonna hurt your business. You gave him $10,000 worth of plans for free…” I was like, “Yeah, but he’s a good guy… I don’t know, I wanna help the guy out.”

Then fast-forward like 5 or 6 years, and this guy now works at my company, he’s one of my best employees. He ended up selling his duplexes, which – he was a competitor… And he reinvested all that money into my business. So in me trying to help that person, just because I felt like it was the right thing to do, paid dividends down the road.

So I believe in helping everybody that I can, and sometimes it bites me in the butt, because you get people that screw you over, but to me it’s always very gratifying when you can do something for other people.

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

Todd Fox: I think the best way to get in contact is going to our website, visumdevelopment.com. We’re also on Facebook and Instagram @VisumDevelopment.

Joe Fairless: Inspiring story, that’s for sure. The takeaway is we should all buy a Quiznos franchise, go bankrupt, and then start knocking on doors, because clearly that’s a model for success. [laughter]

Todd Fox: Yes. You can also skip the bankruptcy and the Quiznos part, and then go knocking on doors, but…

Joe Fairless: Oh man, you’re skipping the best part though… That’s where the character building comes into play.

Todd Fox: Absolutely, I couldn’t agree more, and believe me, I learn more from those failures than anything else.

Joe Fairless: Well, I’m grateful that you were on the show, shared not only your story, but then also how you’re structuring your development project, the 207 student housing units near Cornell in Ithaca, New York, with investors, as well as the mindset that you have that helps propel you forward… Being accountable for your actions, asking “How did I let myself get in this situation” versus “Oh, I can’t believe this happened to me.” It didn’t happen to me, I LET myself get into this situation. And that’s generally speaking. Everyone starts out at different places, everyone has different things happen to him/her, but generally, when we have the approach of “I’m  in control, and I need to be accountable for my actions”, that’s generally a good approach.

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

Todd Fox: Thanks, Joe.

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Best Real Estate Investing Advice Ever Show Podcast

JF1151: Getting The Most Value Out Of Your Home Office with Craig Cody

Craig is here today to tell us about tax deductions that many of us may be missing. As real estate investors we are also business owners, as such, there are many deductions that are advantageous for us. If you have a home office, there are many deductions that are available to lessen your tax burden. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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Craig Cody Background:

  • President and Founder, Craig Cody & Company Inc.
  • Certified Tax Coach, Certified Public Accountant, Business Owner
  • Former New York City Police Officer with 17 years experience on the Force.
  • Has co-authored an Amazon best seller book, Secrets of a Tax-Free Life.
  • Based in Manhasset, New York
  • Say hi to him at http://www.craigcodyandcompany.com/bestever  – Visit for a free copy of his book – 10 Biggest Tax Mistakes That Cost Business Owners Thousands
  • Best Ever Book: Traction


Made Possible Because of Our Best Ever Sponsors:

Fund That Flip provides short-term fix and flip loans to experienced investors. If you’re looking for a reliable funding partner, their online platform makes the entire process super easy, and they can get you funded in as few as 7 days.

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


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

With us today, Craig Cody. How are you doing, Craig?

Craig Cody: I’m good, how are you?

Joe Fairless: I’m doing well, and nice to have you on the show. If you can’t tell from his accent, Craig is in New York. I could tell as soon as he picked up the phone, baby. A little bit more about Craig – he is the president and founder of Craig Cody & Company. He is a certified tax coach, a certified public accountant and a business owner. He is a former New York City police officer with 17 years experience on the Force. Thank you, sir, for your service, first and foremost.

Craig Cody: You’re welcome.

Joe Fairless: He has co-authored an Amazon best-selling book, Secrets of a Tax-Free Life, and most recently authored the book Ten Biggest Tax Mistakes That Cost Business Owners Thousands Of Dollars. Based in – you’re gonna have to help me with this pronunciation…

Craig Cody: Manhasset.

Joe Fairless: Manhasset. Is that Long Island?

Craig Cody: Yes, it is, Long Island.

Joe Fairless: Sounds like a Long Island town… Manhasset, New York. With that being said, Craig, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Craig Cody: Well, as you know, I was a former New York City police officer, I had a great run for 17 years, I retired, I went to work for an accounting firm that did a lot of international work; I slowly built up my own firm, and now I’ve been on my own for a number of years now. I have a staff of ten, three other CPA’s, and we’re focused on tax planning for business owners and real estate investors.

Joe Fairless: Alright, well that’s what we are – we are business owners and real estate investors, so we’re in the right place. Your latest book, Ten Biggest Tax Mistakes That Cost Business Owners Thousands – what are some mistakes that are made?

Craig Cody: The biggest one is failing to plan. People don’t communicate with their CPA, their CPA doesn’t communicate with them; most accountants are really good, they put the right numbers in the right boxes, but it kind of stops there. There’s not enough communication back and forth, and it takes two to tango; it’s not just their fault. But people spend more time researching a call than they do how to structure their [unintelligible [00:03:07].09] how to structure their real estate, how to depreciate that real estate, where if they took some time, they’d probably save themselves a lot of money.

Joe Fairless: So now that we’ve heard that, what do we need to do in order to plan? How should we approach this?

Craig Cody: You need to work with your team of advisors, who should be a CPA, an attorney and whoever you work with in the real estate field, and get the information that they’re experts on; get that information from them and share it, and make your decision based on that information versus just flying by the seat of your pants and not using your resources.

Joe Fairless: So drilling down a little bit more specifically, I wanna make sure — so a CPA is a team member, an attorney is a team member… What did you mean when you said “whoever you work with in the real estate field”?

Craig Cody: That could be the broker that finds you your deals, it could be your finance person that finds you the money… Whomever you have that’s part of your team and helps you do your transactions.

Joe Fairless: Got it. And why are they involved in this?

Craig Cody: Well, everybody has their own area of expertise, and isn’t it better if everybody talks together? I may say “I think you should do it this way, because you need to accomplish this” and the attorney can say “Yes, that’s a great idea, but if we do it this way, it’ll accomplish what you want, plus it will accomplish what I want”, and why not get the best use of that information?

Joe Fairless: Let’s just say it’s a broker, for example – why do they need to be involved in tax planning?

Craig Cody: Well, I guess when it comes down to the broker, if that’s the person that’s finding you your properties, you could probably make the point that “He knows how much I can spend, so he should be involved in that or he should know that I’m qualified.” I would say the broker might not be the tip of the iceberg, but all these people that are part of your team, whoever you use regularly to find your investments, purchase your investments, they should be involved in some level. I don’t see a lot of downside there.

Joe Fairless: Yeah, I’m just trying to identify what the purpose of them being there is, but if just more to know where you’re coming from, so they can — I don’t know. I’m not sure, actually…

Craig Cody: If you could get some value out of it, why not?

Joe Fairless: Got it.

Craig Cody: If you don’t think you’re gonna get any value out of it, then…

Joe Fairless: Okay. Alright, so we’ve got the team – CPA, attorney and maybe someone who helps us get transactions or maybe not, depending on our situation. As far as failing to plan – I’ve rounded my team up, we’re sitting down; what do I say?

Craig Cody: Okay, let’s start with “What type of entity are we gonna purchase this asset in?” If it’s real estate, it’s probably going to be an LLC; not always, but probably. You’d be surprised how many pieces of real estate I’ve come across that are in C corporations or owned individually. I’m not an attorney, but what’s the bad thing about owning that thing personally and what’s the bad thing about having that piece of real estate in a C corporation? Let’s talk and let’s figure out a way to do it that’s gonna accomplish what everybody’s expertise is and get it involved in there.

Joe Fairless: Okay. After we identify what type of entity we’re buying it in, what other questions or topics need to be addressed?

Craig Cody: Okay. Well, let’s say we got it into an entity; how are we going to depreciate this? Are we going to do a cost segregation study? Is it a residential rental property? What’s the value of the building versus the value of the land? Am I gonna save money? Is it cashflow positive? Am I gonna save money if I do a cost segregation study? What is a cost segregation study?

Joe Fairless: For anyone who’s not familiar, then you just google “cost segregation Joe Fairless.” I’ve had a couple guests on the show talk about it.

Craig Cody: That’s something in the accounting world, but that is something that will help you keep more of what you’re making.

So you have your team together and you’ve chosen your entity, you’ve looked at depreciation… Now we look at “Okay, what other benefits can I get in the tax world? What can we do?” Can you hire your family? Do you need a home office? Do you use a home office? What can a home office do for you? How do I write off my car expenses? What other things can I be doing that I’m not doing that will generate tax deductions for me that are legitimate? Have those conversations. But if you don’t plan, you can’t have those conversations.

Joe Fairless: So number one is gathering the team, asking these questions, and thanks for giving us some questions to ask.

What’s another tax mistake that business owners are doing?

Craig Cody: I’m trying to keep them in real estate, so let’s talk about a home office. Are you managing your property yourself or are you using a management company? If you’re managing it yourself, where are you conducting your business? Are you doing it out of a home office? Are you taking advantage of everything that’s allowed inside that home office? Are you deducting a percentage of your utilities? Do you have an on-premise athletic facility?

The code says if you’re having an on-premise athletic facility, with a home office you can deduct the cost of that. That could be a pool, it could be a gym in your basement.

Are you taking advantage of medical expense reimbursement plans? Most real estate, if it’s not owned individually, it’s typically inside of an LLC, and an LLC allows you to have a section 105 medical expense reimbursement plan that lets you deduct the out of pocket cost that you have for medical expenses.

We see that with a lot of older clients, where maybe they’re doing a little bit of remodeling in the teeth area, and with the younger clients it’s braces and stuff like that, that are typically $6,000-$7,000 a pop, so they get to deduct that, which fortunately most people don’t get to deduct their medical expenses on schedule A, because they would have to be so large that it would have to be something very bad.

Once you have a home office, now you can write off your mileage from your home office to your different properties. It just opens up a whole lot of areas.

Joe Fairless: When you work with someone – and this can be a real estate investor or a business owner, because as real estate investors we are business owners, so if you need to think more broadly about this, that’s fine… What are the first steps that you do when you sit down with a person?

Craig Cody: The first steps we do is we get copies of their last two years’ tax returns. If they’re using some type of accounting software, we’ll get a portable file from them, and we’ll do an analysis. We’ll go through our analysis and we’ll basically uncover missed opportunities missed deductions.
We’ll present those via a WebEx or a Zoom call, and we’ll basically say “Okay, we see X amount of dollars in missed opportunities in deductions. That’s gonna save you $20,000 a year. Over five years, that’s gonna save you $100,000. If you wanna do a plan with us, we’ll do a plan for you.” We get paid upfront for the plan, it’s 100% refundable, and nobody’s ever asked for their money back, because it’s instant gratification.

So we do a plan, and from there clients will ask us if we’ll help them with their ongoing accounting work.

Joe Fairless: Got it. That makes sense. As far as the missed opportunities for deductions, any one or ones come to mind that you haven’t talked about already?

Craig Cody: There’s retirement plans, you see those all the time. They’re not that prevalent in the real estate arena. At Mill’s Entertainment you have what we call the [unintelligible [00:10:39].00] that allows you to rent your home to your business for up to 40 days a year and not have to pay income tax on that income. There’s a couple of higher-level ones that we’ve come across with people that are a little bit more high net worth…

Joe Fairless: Like what?

Craig Cody: It could be conservation easements.

Joe Fairless: What’s that?

Craig Cody: A conservation easement is when you invest in a property, and then that property gets donated, basically, for conservation purposes, and you wind up getting a tax deduction. That’s typically a multiple of your investment. They have to be done correctly and with reputable companies, and we typically do them with clients that are involved in the conservation movement or are very charitably-inclined. They’re not just doing it to get a tax deduction, they’re getting it because they wanna do some good. And as a side note, they actually get a decent-sized deduction out of the deal, too.

Joe Fairless: What’s something else for high net worth that you look at?

Craig Cody: We have captive insurance that we see a lot of.

Joe Fairless: What’s captive insurance?

Craig Cody: To keep it real basic, it’s self-funded insurance, and you’re ensuring certain risks, and you basically get a deduction for the premiums that you pay for that insurance. Once again, this is high net worth, and then down the road if you have no claims or there’s money left over after claims, when you take that money out it’s capital gains, versus ordinary income.

Then we’ve recently gotten involved in some international retirement plans that are perfectly acceptable and allowed by U.S. treaties where people get to take advantage of these. In the U.S. how much can you put away a year? $18,000, maybe $50,000. In a lot of foreign countries you can actually put away a lot more money than that. So there are treaties that allow clients to do different things, and shelter some money.

Joe Fairless: Based on your experience, what is your best advice ever for real estate investors as it relates to taxes?

Craig Cody: My best advice ever is communicate, plan, and look at your depreciation, and make sure you’re doing it correctly and in the most advantageous way. I can’t tell you how many times we see depreciation is a mess.

Joe Fairless: What do you mean by a mess?

Craig Cody: They miss it, they move from one accountant to another accountant to another accountant, and somewhere along the line they got missed and it wasn’t picked up by the next accountant, and by the time they get to the third accountant it’s not even around. I’ve seen that many times – people that are doing their own taxes (God forbid) and they have all these passive losses, and next thing they know they use a different computer to do TurboTax and they don’t move all that passive loss history over, and it’s gone.

I look at 2014 and I see $60,000 in passive loss carryovers, and then I go to 2015 and I see it starting at zero. Where did it go?

Joe Fairless: Can you capture that retroactively once it’s identified?

Craig Cody: Yes, you have to amend the return. But if you don’t know what you don’t know…

Joe Fairless: Yeah, someone’s gotta point it out first.

Craig Cody: Another thing with real estate investors that also have other businesses that they operate is when they have these passive losses, you look at opportunities to generate passive income. So would I rather take that deduction  today, or would I rather wait 5, 10, 15 or 20 years until I see that property? I’d rather have that deduction today.

Joe Fairless: Great stuff. And as far as cost segregation, Best Ever listeners, one of them is episode 750, titled “Why You Are Losing Money Not Understanding Cost Segregation And How To Use It.” So episode JF750 with Jeff Hobbs. Are you ready for the Best Ever Lightning Round?

Craig Cody: I’m ready.

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

Break: [00:14:32].00]  to [00:15:30].18]

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

Craig Cody: Probably the one I’m reading right now is Traction, and I’m trying to think who is it by… It’s a very popular book. I’m about a third way through it and it’s living up to everything I’ve heard about it.

Joe Fairless: Yeah, a couple people recently have mentioned that, I’ll have to check it out.

Craig Cody: Best ever business deal you’ve done? Take that however you wanna interpret it.

Joe Fairless: I’m gonna say how about the worst business deal I’ve done, which was I sold my Manhattan co-op in 1992 for $125,000 and it was just sold two years ago for $565,000.

Joe Fairless: Where was it?

Craig Cody: Manhattan.

Joe Fairless: I know, but where?

Craig Cody: West 96th Street between Columbus and Amsterdam.

Joe Fairless: Okay.

Craig Cody: A one-bedroom with a Pullman kitchen.

Joe Fairless: Well, you sold it in ’92? That’s a lot of years, ’92 to 2015. What’s the best ever way you like to give back?

Craig Cody: To give back? I like to give back by just being a good person. I like to say “You know what? Leave people with a smile.” It was something I learned when I was in the police department. Make a friend, that’s the way I like to give back.

Joe Fairless: And how can the Best Ever listeners get in touch with you and learn more about your company?

Craig Cody: They could go to our website, which is www.CraigCodyAndCompany.com, and if they actually go to /BestEver, they can request a copy of our book, The Ten Biggest Tax Mistakes That Cost Business Owners Thousands, and we’ll send you out a free copy of that book.

Joe Fairless: Oh, cool. Alright, I will amend the notes in the show notes page. Thank you for being on the show, and Craig, thanks a lot for talking through some mistakes that we need to watch out for. First and foremost, let’s make sure we’re planning ahead by getting the right team members at the table, asking questions like “What type of entity are we buying the asset in? How will we depreciate this? Are we doing a cost segregation study? (episode JF750 has that info on cost segregation) What about the home office? What are other things that I can be doing that I’m not doing to minimize my exposure to taxes?”, because taxes are our number one expense, and a lot of people don’t think of it that way, but they’re our number one expense… So thanks for being on the show, giving us some tips; I hope you have a best ever day, and we’ll talk to you soon!

Craig Cody: Thank you very much! Have a great day, too!


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Cheryl Eisen and Joe Fairless

JF1119: Staging Your Listings Can Help Sell Faster, And For More Money! With Cheryl Eisen

Cheryl was located in NYC, and found it very difficult to separate herself from every other agent in the city, and there is a lot! She started staging for additional income. It definitely helped her income, as she is now wildly successful, staging homes for very high profile people. Cheryl shares a lot of great information for us to take in today. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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Cheryl Eisen Background:
-President, Interior Marketing Group, Inc.; a Premier Luxury Real Estate Staging Firm
-Helps move billions of real estate each year with doing $1B in real estate in 2016 alone
-Some clients include Kim & Kanye West, Ivanka Trump & Jared Kushner, Bethenny Frankel, Paris Hilton
-Recently expanded to Turn-Key Furniture Rental and Interior Design services, providing the same expedited luxury interiors for long-term rentals and permanent living
-Based in New York, NY
-Say hi to her at www.imgnyc.com
-Best Ever Book: The Start-up Playbook

Made Possible Because of Our Best Ever Sponsors:

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


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

We’ve spoken to Barbara Corcoran from Shark Tank and a whole bunch of others. With us today, Cheryl Eisen. How are you doing, Cheryl?

Cheryl Eisen: Great! Hi, everyone.

Joe Fairless: Nice to have you on the show. Everyone is giving you a collective hello back, I’m just filling it for them. A little bit about Cheryl – she is the president of Interior Marketing Group, which is  a premier luxury real estate staging firm, and has recently expanded to turnkey furniture rental and interior design services. She helps move billions of real estate each year with doing one billion in real estate in 2016 alone. Some clients include Kim and Kanye West, Ivanka Trump, Paris Hilton, and a whole bunch of other famous people. With that being said, Cheryl, do you wanna give the Best Ever listener a little bit more about your background and your current focus?

Cheryl Eisen: Sure, absolutely. Hi, everyone. I started about ten years ago by selling real estate for the Corcoran Group, and I realized that it’s very hard to sell real estate in New York City when there’s so many great brokers to compete with, so I decided to start staging the properties, which is something I’d seen on TV. As I started staging, my selling got more successful, and the brokers were saying “Who staged this property? Can you stage mine?” and I quickly became the stager to go to in real estate, and that’s sort of where I made my name.

Joe Fairless: So with staging it’s gotta be an art and a science… I imagine, I don’t know; I’m guessing there’s an art and a science to it, so how do you successfully stage a property?

Cheryl Eisen: I think it’s just understanding marketing principles, I think it’s that simple. I don’t have any design background, I just sort of was watching what buyers were responding to in terms of what would make them buy a property one over the other? And it was really how they connected with the space. So when I look at a space, I try to figure out what’s going to feel comfortable and homey to them without alienating them. That’s sort of how I design a space; it’s not so much what looks pretty, it’s actually what will buyers react to and not react to? So we stay away from those things which are like taste-specific things like colors. But people respond to whites and sort of like ethereal things, and comfort, space, light… Those are the ways in which I learned how to design for buyers.

Joe Fairless: Since this is an audio interview, versus us being in front of maybe a PowerPoint where you can show before and after pictures – it can be a little challenging, but I’d love if you could too give us an example of a before and after… What a place looked like before and what you did afterwards specifically.

Cheryl Eisen: A lot of times the most impact I think we make is when we get something called an estate condition property, which is a property where it hasn’t been touched since the ’70s or ’60s; I think everyone’s seen one of those, with the formica table tops and falling apart bathrooms, and the walls sort of crumbling. One of the things that makes such an impact on those properties is when we come in, we paint everything, put beautiful light fixtures in, beautiful furnishings and rugs, and it totally transforms the space into a place that you can actually envision moving right into, versus sort of a crumbling shell of a place that existed in the ’60s and ’70s. You can actually paint almost anything – table tops, cabinets… And when you add beautiful light fixtures as well, it starts to feel new. If that’s a good visual, I’m not sure…

Joe Fairless: Yeah, it is. You said earlier that you’ve got no design background – you’ve said that, right?

Cheryl Eisen: That’s correct.

Joe Fairless: I have no design background, and if you told me “Hey, Joe, we’ve got a new client; go in there, paint everything white or neutral colors”, I guarantee you, I still wouldn’t pick out the right color gray. So just going a little bit deeper, how did you know the details of the items?

Cheryl Eisen: It was actually trial and error. Again, when I watched buyers, I saw what they responded to – what colors they seemed to respond to, what sort of furniture they seemed to respond to, what type of things actually enhance an apartment versus distract  from it… So I started using those colors.

With paint colors specifically, there’s so many shades of gray… Some of them turn blue, or green, or purple, and I learned actually by having a place turn completely purple that this gray is not to use. We had to totally repaint and find the grays, so now I stick to that pallet.

I also stick to certain types of furniture that I see worked in almost every space. Low-profile furniture, not too period-specific… Simple rules, if you follow, it’s pretty easy.

Joe Fairless: It sounds like it’s to be as neutral as possible, versus picking one angle and going all in on that angle.

Cheryl Eisen: Correct. I think neutral homes are appealing to a broad audience, and the whole goal when you’re selling real estate is to have broad appeal, versus like 10% of the population would be interested in this space. Even if the color blue alienates 4% of the population, why take that risk? So we stick with neutral tones, but we layer them with different textures [unintelligible [00:06:41].02] sort of fluff, and beautiful woven fabrics, and this makes it feel deeper and more sophisticated, but without distracting your eye with tons of things to look at, like colors and trees and anything like that.

Joe Fairless: Outside of paint colors, when you walk into an apartment – because you’re in New York City, right?

Cheryl Eisen: Yes.

Joe Fairless: So we’re primarily talking about New York City apartments – is that correct?

Cheryl Eisen: Yes.

Joe Fairless: Okay. Until you dominate the world, right?

Cheryl Eisen: Exactly.

Joe Fairless: So New York City apartments… Let’s say you walk into one that you haven’t staged, but someone has attempted to stage it and you just find yourself shaking your head and maybe smiling like “Oh, my gosh… Why did they think that was a good idea?”, what would be that example?

Cheryl Eisen: I’ve seen that happen, actually… About 18% of our work is bad staging that we have to come in and completely redo. What that staging is – from what I’ve seen in New York, in any event – is where they’re trying to just decorate a home like a decorator, instead of doing it for a buyer. So what you’re looking at is the furniture, the art on the walls, and not the beautiful home with the views, or the selling points of the actual home; you’re distracted by the actual furniture. That’s one big mistake people make.

The other one I think is when it’s staged, then it really looks staged. It looks cold, like you’re trying to fool someone with some furniture in there, and I think that does the opposite of what we want it to do, which is really look like a home, something soft and something you wanna just swap into, into a bedroom, for example.

There’s a fine line between overdoing it and underdoing it, but I think the right staging really makes a huge difference.

Joe Fairless: Now if we can, let’s draw parallels to an apartment building owner who has a model unit that he/she shows to prospective renters. What would be some tips that you have for him/her when they go to stage that unit for prospective renters?

Cheryl Eisen: I remember when I was looking for rental apartments in New York City. Firstly, it’s a very sobering process, because things are so small… But when you first walk into a rental building, I think it just feels so sterile in rental… The walls are white, it’s very stark. When I see model apartments that are done well and rental apartments, it’s because they’re finished; put some paint on the wall, it looks like it’s warm and home. Maybe even some wallpaper. Floor-to-ceiling [unintelligible [00:09:12].07] flanking the windows really makes a big difference. It feels flowy, makes you wanna walk over there.

Showing how to use space, that you can actually put a desk chair by the bed, it’s not just a tiny little bedroom. Then people can understand how they can function in the space. “Where is the TV gonna go?” is one of the main things people ask, so you sort of show them by placing it.

Joe Fairless: I’m sure that you might not have come across this as much now, because you’ve got some high profile clients you’ve worked with and you’re well-established, but at the beginning of this, I bet you came across a lot of “Yeah, I can do staging myself” or “Okay, fine, if you wanna stage it then I’ll give you t$10”, and you had to really qualify why they should pay you to stage and how you can make them more money. First off, am I correct in that assessment?

Cheryl Eisen: You are, and even in the luxury spaces it still happens.

Joe Fairless: Okay, so what’s your response to that?

Cheryl Eisen: Well, in the beginning when I first started, I really had to do proof of concept, so I had to start by investing in it myself. I said “Let me stage this” — my first listing, in fact, was a one-bedroom apartment the seller tried to stage himself and tried to sell himself. It was on the market for like a year; it didn’t sell, no offers. So I said “Let me just try this thing; let me list this apartment, but let me totally redo it.” So I totally redid it with IKEA furniture, and paint and accessories, and the first day on the market it sold for full ask, and they wanted everything in it. So I started to build an ROI (return on investment) and I was also planning statistics on return on investment for staging, which proved the concept immediately. So I love to give the statistics, because it’s real hard evidence, but also what I like to do is bring them to one of our listings that’s staged in person, so they understand the emotional reaction one would have when they walk into a home that’s beautifully staged, versus an empty space or even like a badly-staged space, and that’s how I sort of justify why the investment is important.

Joe Fairless: What’s the ROI go-to stat that you use?

Cheryl Eisen: It’s different every year, but I think things sell for 34% more than unstaged homes, and they sit on the market half the time. So the statistics are very strong, and this formula seems to follow the same statistic. You can really do the numbers if you analyze tons of data in your little metro area.

Joe Fairless: And where do you get the data from in order to look at staged versus unstaged selling prices?

Cheryl Eisen: Rebny has a website, and I think there’s a real estate staging association, but also Reby, the Real Estate Board of New York has statistics at the end of each year. If you put it in Excel or analyze the data, you can figure it out.

Joe Fairless: Do you have music?

Cheryl Eisen: Do I have music?

Joe Fairless: Yeah, do you have music in your apartments when you stage them?

Cheryl Eisen: I liked to put in soft jazz for a while, but I found people wanted to hear what was outside, so we have to turn it off. If they’re buyers or renters, they wanna hear how loud it is outside the window – either birds chirping or cars honking – so I think that’s an important selling part, to stop doing that.

Joe Fairless: Okay.

Cheryl Eisen: We do however like to have a candle burn, but a very subtle one, so it doesn’t seem like you’re trying to hide anything… But it does put a person in a soothing mood, and that’s been proven too, from psychology things, so we like to do that.

Joe Fairless: Where do you put the candle?

Cheryl Eisen: We put it in the foyer, so the second you open the door you’re hit with a very calming sense.

Joe Fairless: Interesting. Do you think the people wanting to hear the outside noise is specific to New York versus if you’re in Dallas, Texas, you can have some jazz on?

Cheryl Eisen: That must be the case. But then you wanna make sure that it’s the type of music that no one’s going to be irritated by. Some people are irritated by jazz, so you have to do the broad appeal thing anyway. But I think it is specific to New York or any city where there’s a lot of noise outside the windows, in most cases.

I think in a home in the suburbs there might just be crickets, and that’s okay.

Joe Fairless: Based on your experience in staging and just as a professional in general in real estate, what is your best advice ever for real estate investors in terms of staging?

Cheryl Eisen: When you’re looking at a property to invest in, I would say don’t get a property that needs an enormous amount of work. It’s too much to do, it keeps it off the market too long. Find something that with some paint and some beautiful light fixtures and some staging it can go on the market immediately, whether renting or selling.

Find something that has good bones, something that you can fix up yourself if you need to, then put it on the market, instead of something that would take an enormous amount of work and distraction.

Joe Fairless: And I know you’ve said this a couple of times, but I’ve been taking notes, and just so I make sure I have it in my notes… When you go into an apartment to stage, what are the maybe three or four things you absolutely you make sure that you do?

Cheryl Eisen: I have some go-to things – for example, you can never have enough giant mirrors in the staging. You put it across from a window, for example, and suddenly they double the window space; they double the space, in general, and it gives the feeling of more space. And they double the light. These are things that buyers respond to. So giant mirrors, and they don’t have to be expensive; you can get them at Ikea. That’s number one.

Number two is the paint color, because it looks finished. As soon as you walk in, there should be a paint color, like a neutral… Something that’s very subtle, nothing overwhelming. That’s number two.

And number three is light fixtures. They really make a home feel more custom, more unique, and they also create ambient lighting. Those are the three things I always add. It doesn’t have to be expensive.

Joe Fairless: I love it, that’s incredibly helpful. Alright, we’re gonna do a lightning round – are you ready for the Best Ever Lightning Round?

Cheryl Eisen: I’m ready.

Joe Fairless: Okay. First, a quick word from our best ever partners.

Break: [00:15:27].09] to [00:16:25].26]

Joe Fairless: Here we go – best ever way to get Kim and Kanye as a client?

Cheryl Eisen: Oh, wow… To get them as a client you just have to know the people that work for them. There will be someone who is known by the people that work for them, it’s all about that.

Joe Fairless: Best ever way to build a business in real estate from the ground up? Let me be more specific – best ever skillset to have in order to be successful in building a real estate business?

Cheryl Eisen: I would say patience, because it doesn’t happen quickly. Somebody who understands ROI, how much it’s gonna take to sell a place, and redo it, or put it back on the market, someone who understands the market and the macroeconomics of a market. That’s helpful. People who are smart can almost be successful in anything they endeavor to do.

Joe Fairless: Best ever book you’ve read?

Cheryl Eisen: I’ve just read The Startup Playbook by David Kidder. It’s just a great book for entrepreneurs in general. It’s a compilation of tons of famous entrepreneurs – Elon Musk, Cheryl Sandberg – and it’s very palatable and digestible because they just give advice on little specific moments, lessons they’ve learned, and I just think it’s really great. It helped me a lot in growing my business.

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

Cheryl Eisen: I love personally mentoring women. I’m letting them see how they can realize their potential. It’s just something I’m personally passionate about. I think this next generation should be breaking the glass ceiling. Still, even now that there’s a record hit, there’s still less than 7% of women CEOs running Fortune500 companies. That numbers should change, in my opinion, and I’m very passionate about that.

Joe Fairless: Best ever way the Best Ever listeners can either get in touch with you or learn more about your company?

Cheryl Eisen: They can visit our website at imgnyc.com. I’m also on Facebook, Cheryl Eisen, I’m on Instagram, Cheryl Eisen, and I respond to people when they reach out. I love to give advice.

Joe Fairless: Great, you’re everywhere, apparently. Cheryl, thank you for being on the show. Thanks for talking about how you’ve built your business in a very specific category, and it started by selling real estate and then seeing “Hey, there’s a lot of competition”, and what’s the book – Blue Ocean Strategy, I believe… You build a business where there’s not a lot of competition; otherwise it’s a red ocean, a lot of blood in the water. This really is an example of a blue ocean strategy.

And the tips that you gave – the three that stood out to me that you summarized at the end… One, you can never have enough giant mirrors. Put them across the window so it doubles the space, doubles the light, doubles everything that they love. Second is the paint color – have a very subtle paint color. And third is the light fixtures, so that it makes the home feel more custom, more unique.

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

Cheryl Eisen: Thanks, Joe.

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JF978: How 9 MILLIONAIRES Were Made with This Simple Trick #SkillSetSunday

He’s a professional consultant from New Zealand and helps other people get their business off the ground with their own ideas and unique talents. There are too many gold nuggets to not take notes, be sure you bring your full attention to this episode, enjoy!

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Sam Ovens Real Estate Background:

– Millionaire Consultant & Creator of Training Programs For Consultants at OVENS International
– CEO & Founder of SnapInspect; A property inspection app for property management companies
– Created 9 Millionaires & 136 6-Figure Consultants from his trainings
– SnapInspect has an office in New Zealand, North America with over 2,000 clients in 16 different countries
– Based in New York, NY
– Say hi to him at http://www.consulting.com 

Click here for a summary of Sam’s Best Ever advice: http://bit.ly/2pe6ukl

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Sam Ovens real estate advice


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 best ever weekend. Because it is Sunday, we are doing a special segment called Skillset Sunday, where by the end of our conversation you will have a specific skill that you will then be able to apply towards your real estate investing ventures. Now, today it is a unique skill, in that this is a skill that you can implement prior to starting your real estate ventures, to have the capital to actually use to invest. That’s the focus of our conversation – how to generate cash flow to use for your real estate investing.

With us today to talk us through that – Sam Ovens. How are you doing, my friend?

Sam Ovens: Good, thank you!

Joe Fairless: Nice to have you on the show, Sam. A little bit about Sam – he is a millionaire consultant and creator of a training program for consultants at Ovens international. He has created nine millionaires and 136 six-figure consultants from his trainings. He created SnapInspect, which has an office in New Zealand, North America with over 2,000 clients in 16 different countries. That is a property inspection application for property management companies. So he does have some experience within the real estate category. He’s based in New York, New York. You can say hi to him at his website, which is the show notes page.

Before we get into it, Sam, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Sam Ovens: Sure. I did the normal sort of thing – went to school, went to college and then got a corporate job, and then realized that I didn’t like my corporate job pretty quickly. I decided I wanted to be an entrepreneur, so I quit my job and then I moved back home with my parents into their garage, and decided I was gonna start a business. I didn’t know anything and I had no money either, really… I had probably about $1,000 or something, which was supposed to keep me alive.

The first couple of businesses I started were just cool ideas; that’s how a lot of people start, they’re just like “What’s a cool idea?” I started a job board, and then an office lunch delivery business, and they both failed, and I spent my first year pretty much just failing. Then that’s when it really hit me that all these businesses I’ve created, they were just cool ideas which I’d come up with. I just thought “What’s a cool idea?” and then I created it and went out there and tried to sell it, and then no one wanted it.

That’s when I really realized that no one wanted the things I was coming up with, and the ideas that were cool in my head weren’t exactly things other people would pay money for.

It was like a big wake-up call, so the next time around I decided to go to the market first and ask them. So I went out to the market first and I said, “Hey, what are some problems that you guys have? Maybe I can help you solve those.” So I went out to the market and I found out that property managers had a massive problem with property inspections, so I decided to start helping them with property inspections and I came up with SnapInspect. For the first time ever, something I created worked, and it was because I got outside of my own head and went to the market, and I created something that people actually needed, instead of something which I thought people would want.

That worked, and that kind of evolved… I grew that business up, I ended up selling my shares in that to my business partner, so I’m out of SnapInspect now. Then I became a digital marketing consultant, helping businesses get customer online, and then that’s involved into — now I help people start consulting businesses. I help people who have a skill or want to have a skill start their own private consulting business. We have online trainings that help people do that.

Just recently we acquired Consulting.com, so now we’re really growing into a company that has multiple offices and a big team, and it’s less about me now and it’s more about a company. It’s gone from being a private consulting business to being kind of like an e-learning platform. Like most entrepreneurial stories, it started one way, ended up somewhere totally different, but that’s kind of how it happens.

Joe Fairless: What was the need that SnapInspect solved the problems, based on your original research?

Sam Ovens: Property managers – when I spoke to them… This was back in 2012, or something… Back then, the way they were doing property inspections is they were going to the property, carrying a clipboard with a printed checklist; they’d have a pen, they would complete the inspection checklist like that, and then they would have a digital camera with them, they’d take photos, and then they’d go back to the office. There they would open up a template on Microsoft Word, manually copy the information over into the template, and then upload the photos from the digital camera to the computer, format them, put them in, save it as a PDF, attach that PDF to an e-mail, then send that e-mail to the owner.

The average property manager managed 130 properties and they had to inspect each one twice a year minimum, legal standard. So we’re talking about like 600 of these inspections, and each one of them was quite an ordeal of just shuffling things around, and it was very inefficient. People hated it, it was their number one problem.

If you spoke with a property manager then – I’m sure even if you spoke with a property manager now – and you were like “What’s the number one burden of your day-to-day in your job?” they would say “It’s property inspections.”

Joe Fairless: So you put it in a digital template or format, so they could easily upload the content and then the output would be something they could send out.

Sam Ovens: Yeah, I created a mobile app; you just take photos, you complete the checklist, and then it creates the PDF and e-mails it to the owner as you walk out the door.

Joe Fairless: Now we’ll transition into what we kicked off the show talking about, and that is how to generate cash flow for investments so that we can invest in real estate? How do we build up our cash flow? Your focus was teaching how to get online customers, now it is help to start a consulting business… Take it away – how should we structure our conversation so that by the end of this the Best Ever listeners will know how to generate cash flow so they can start investing in real estate, if they haven’t already?

Sam Ovens: Well, generally you have to have cash flow to build up a large stake, like a war chest of cash to invest. Unless you’re lucky enough to get given some, which I’m sure most people aren’t — that was the big hurdle for me… I was like, “Well, I’ve got no money to invest, so there’s no point in learning how to invest unless I’ve got money to invest”, and it’s like the chicken and the egg problem, which one comes first?

That’s when it really dawned on me that when you’ve got no money, cash flow is the most important thing in the world, because you have to keep yourself alive and you have to stay in the game. And most importantly, I found you have to have confidence. If you don’t have a certain amount of cash in the bank, you start making lousy decisions, and you’re desperate, and you’ll want to jump at a deal which you usually wouldn’t jump at if you had enough cash to float you through the year.

Warren Buffett talks about it a lot – he even calls it “cash float.” Berkshire Hathaway always has at least 36 billion on cash, purely because he never wants to worry, because when you worry, you make poor decisions.

So I realized this, and I was like “Okay, so you need cash to really be a good businessman, but how do we get it?” All the product businesses I looked at, they were capital intensive; you had to spend money upfront. To built a software product, you had to spend money upfront. So when it came to developing SnapInspect, for me, I had a great idea, the market validated it with me, they saw that this would work, and we all paid for it, but I didn’t have the thing to sell to them.

So I was kind of stuck here, I was like “Well, this is a good investment, but I don’t have the money to front it”, so I was forced to figure out a way to generate the cash to fund the investment and bring it all to life, and that’s when I first turned to a consultant. Plain and simple, I knew that a lot of businesses and a lot of people out there, they need help with different things, they have problems, and a lot of problems people have aren’t just product problems… Like, there’s not a product to solve everyone’s problem; a lot of them are services and advice, and there’s a whole market out there for people that just need advice, and that’s just talking to someone and they give you money in exchange for it, and you can actually charge quite a lot of money for that.

I realized that the stuff I had in my brain just from understanding a little bit about marketing and sales and stuff, to me it was worth nothing because it was just what I knew, and everyone always undervalues what they know, but to other people, I had no idea that that was worth money. So I started talking to other people and asking them about what their problems were, and then if I could help them, I would say “Okay, well I can help you with that. I’ve got experience with this thing, I know how to solve this problem. Would you be willing to have an agreement together where I train you on this or consult you on this, and you pay me in return?” I was able to get a few deals like that… None of them were huge, they were like $500-$1,000. And just by selling those things, I was able to get enough money to build SnapInspect and actually get it off the ground.

So it was through selling my advice that I got enough money to front an investment, and I think having a consulting arm really for any business is a great thing to have, because if you need cash flow or if you need to get some liquidity at any point in time, you can do that.

Joe Fairless: So for the Best Ever listeners in varying backgrounds, because we’re all over the United States mostly – 93% of the listeners are in the U.S., and then 7% all over the world – where do we go from here? …Where yes, agree, Sam, it makes sense; we should start a consulting arm for our business to help generate cash flow. Now what do we do?

Sam Ovens: Well, if it’s something you actually want to do, you have to go to the market. You need to know what you’re gonna be selling. People feel like they have to go out and just learn a whole bunch of skills and acquire a whole bunch of knowledge, and it’s the wrong way to go about it. If you just go out and you start learning – learning for what? What are you optimizing for? Your mind is an algorithm, and if it doesn’t have an output function set for what it’s optimizing for, it’s just gonna make a mess.

Whenever you’re gonna learn or whenever you’re gonna acquire information and knowledge, you need to have a reason why, you need to have some sort of intent. And then once you have the intent, it’s very easy to acquire the knowledge. Where you find that intent is you don’t [unintelligible [00:13:31].05] because you don’t know what you need to know.

The way I make it really simple for people is it’s like imagine that there’s a girl called Suzie and she’s sitting on a park bench, and you’re sitting on a park bench opposite of her, and you’ve gotta guess what Suzie wants for lunch. You have no idea what Suzie wants for lunch; you could sit there and think about it all day, you could read every book there is, you could listen to every podcast, you could read every blog… You could own Google, and you still wouldn’t really know what Suzie wants for lunch.

This is kind of what entrepreneurship is about, and people kind of messed it up a bit… They try and learn all this stuff and then guess what Suzie wants for lunch, but you’re never gonna know, no amount of information can tell you. The easiest way is to just go over and ask her. That’s what entrepreneurs need to do, any type of entrepreneur. This doesn’t matter what niche, what country, what anything.

Very simply, Suzie is the market. You need to go out to your market. If your market is real estate investors, if your market is property managers, if your market is whatever – you can go and talk to your market and be like, “Hey, what are the most painful problems that you face on a day-to-day basis as an X?” And X could be a property manager, it could be an accountant, it could be a real estate investor… You ask them that, and then you’ll be quite surprised – people love telling you about their problems. They love talking about themselves, and they’ll tell you. And you don’t just listen to the first one, because one person can be wrong, one person can be an outlier; you need to listen to enough of them. I would say a sample size of about 20 or more.

After you’ve talked to 20 people in one specific niche, you’ll start to recognize a pattern, and you’ll start to recognize reoccurring themes between these conversations, as I did with property managers. I started to notice that out of 20 property managers I spoke to, probably 18 of them hated property inspections. I was like, “Okay, this isn’t just one person. This is like a widespread issue here.”

You’ll be amazed at how easy these things are to find. If you talk to the market and you care for them and you don’t have any agenda or any bias in your mind when you go there… A lot of people – they already know what they want to sell to the market, so they go there and they’re asking questions to position it just so that they can sell their thing. You’ve gotta remove all the bias; you can’t have an agenda, otherwise you’re gonna skew the conversation. You literally have to have no bias.

You talk to them, you find out what you want, and then you create the offer. That’s where you get the information and you create the offer, whether it’s a product or a service or a consulting business or whatever, and that’s how you find out what to sell.

Once you know what to sell, then you know what skills to acquire, and if you don’t have those skills in order to solve their problem – it’s very easy, you can go and learn them.

Learning things is very easy. Knowing what things to learn is the hard part. So that’s how we figure out what to learn, we optimize off the market. We go speak to the market, find out what Suzie wants for lunch, figure out a solution to give Suzie what she wants, and then acquire all the knowledge and information necessary in order to fulfill Suzie’s want.

Joe Fairless: On the very first step, which is really knowing who you’re speaking to, knowing your audience, knowing which niche you’re focused on – do you have any suggestions for the Best Ever listener who hasn’t identified who they should be speaking to?

Sam Ovens: Yeah. Well, the first thing is you have to pick a niche. The man who chases two rabbits catches none. The guy who tries to chase all of the rabbits, he’s like “Screw chasing one, I’m going for everything. I’m gonna chase everybody.” And he goes chasing everybody and he gets nothing. Then the guy who just chases one rabbit, he always ends up catching it. Business is very much like this.

A lot of people, a lot of entrepreneurs are too afraid to narrow their reach because of what they might miss out on, but they don’t understand without narrowing their niche they don’t get anything. So the key is to pick a niche, that is mandatory. You can always make it wider later, but to begin with, it has to be nice and narrow.

To answer the question “What niche to pick?”, it honestly doesn’t matter. You can’t pick the perfect niche, there’s no way to do that. This isn’t a science, or at least a science that exists at this present moment in time. There’s no way to study and theorize on what niche to pick. The best thing to do is just to pick one… Just use your instinct.

Imagine someone has a gun to your head. They’re gonna blow your brains out in ten seconds. What niche are you gonna pick? Whatever you say is a good one to start with, because we can always change it. Like I said, your mind is like an algorithm, it optimizes. If something doesn’t work, it’s like “Okay, we don’t do that again.” If something does work, it’s like “Maybe we’ll do more of this.” So it doesn’t matter what you start with, it’s just that you need to start.

I told you my story before about how I started with an online job board, then an office lunch delivery business, then a property inspection app, and now I’m here… I’m probably doing the thing right now which I should have always been doing, but I was only able to find that by doing the wrong things. So that’s the key – pick anything, and just do it. If it’s not right, then change it. If it is right, do more of it. Trying to get it right, you’ll never have picked anything.

If I was still trying to pick the perfect niche, I’d still be back at the starting blocks, five years ago.

Joe Fairless: Once you identify what should be created based on what your target audience says they have a problem with – so you’ve got the offer, and then you went and learned whatever is necessary, assuming they didn’t have that knowledge, how do you know how to price or structure the consulting program?

Sam Ovens: That’s a very good question. We’ll handle the structure of it first, and then we’ll handle the price. In terms of the structure, I like to use this thing I call ‘minimum viable offer’. I blatantly stole that from the guy who wrote Minimum Viable Product, which is MVP – Eric Ries, The Lean Startup. He found in the sales world that people were building these big bloated products that had like a thousand features and they were like rocket ships, and people were sick and tired of all of this crap; they just wanted something lean, and just something that was simple and could do the job…

So these new protagonists emerged in the market who were people who focused solely on minimum viable products and made them dead simple, and they were actually able to beat the fancy, complex products. It was a case where simple beats complex. In the consulting world right now it’s gotten complex, so it’s a ripe time to come in with that same strategy.

I came up with the term ‘minimum viable offer’ – it’s the same as minimum viable product, except we’re selling services instead of products. So we look at the customer’s problem and we ask the question to ourselves “What is the least amount of work I can do to get that person what they want?” I’m not trying to show off how smart I am, I’m not trying to talk about this new theory that I read in this book, I’m not trying to talk about any crap which they don’t need… I’m just trying to offer the least possible, because that means it’s easier for me to deliver, it means it’s simpler for the client, it’s more simple to communicate, and it’s a lot easier to do.

So you really have to start with that question, “What’s the least amount of work possible that I can do to help this customer achieve their result?” and again, like everything in life, you’re not gonna be able to figure this out perfect before you do it. So you kind of come up with a hypothesis; you’re like, “I believe this is going to work” and then you form your hypothesis and you go out to a customer and you sign them up, and you start doing the work with them. Then they either get the result they were after or they don’t. Then you go back to your hypothesis and you’re like, “Okay, where could I have improved this? Where did I go wrong? What should I do more of, what should I do less of?” Then you form a new hypothesis, you go back to the market, you implement it again, and it’s just an iterative process, each time coming closer and closer to the perfect offer.

So that’s how we create the perfect offer – it’s minimum viable, and we use the scientific method of hypothesis, iteration and feedback to optimize it to get it to that perfect product market fit, or in our situation, service market fit. So that’s how we do that.

Then in terms of pricing the offer, what I like to do is price around 10% of value. You have a price on costs. I think costs-based price is a very stupid way to do things. That came about from the industrial revolution when people were selling steel and oil and things, and we’re not in the industrial revolution anymore.

These days it’s all about value. You really have to determine what is it worth for this person to have their problem fixed. Let’s say we’re in real estate investing and this guy has a bad deal; it’s bleeding him out like 2k/month. If he doesn’t fix that, it’s gonna cost him 2k/month for some horizon of months; you could assume maybe six months – it would cost him $12,000. Then if we would have priced our offer, if we thought we could save him from that deal, we could say “Okay, the value would be $12,000 for him”, and to make it a blockbuster deal, we wanna price on 10% of value.

If he’s gonna save 12k if we charged him $1,200 for that, then it’s a no-brainer, right? That way you’re gonna have an awesome offer. We don’t wanna be too greedy and be like “We’ll charge him 10k.”  We could absolutely do that, but my view is that you want to blow people away. You want to be like the iPhone. The iPhone is pretty cheap for how much value you get.

When you have an offer like that, it just goes crazy. You don’t even need to market, you don’t need the webinars, you don’t need all this crazy copywriting which all these copywriters do and put highlighter and countdown timers everywhere… It’s just a bloody good offer and people talk about it.

That’s what happens when you price it about 10% of value, so that’s how I recommend everyone prices things.

Joe Fairless: I love that. And just to ask a clarification question on the pricing – do you recommend pricing based off of, say, monthly retainers of 10% of value, or a one-time thing, or any combination thereof?

Sam Ovens: That’s a good question. It totally depends on the nature of the problem. If the problem is kind of a one-off sort of thing, then you’d probably just have a one-off fee. If it’s an ongoing thing, which is like you’re going to be working together for a while, and personal training is one of them – you just don’t get fit and then that’s it; people who have tried to do that, they often end up not fit again.

So it totally depends on the nature of the problem. If it’s an ongoing thing, then you would have a retainer; if it was a one-off sort of thing, you would go one off. You’ll be able to tell what makes sense when you see the problem.

Joe Fairless: Sam, is there anything else that we haven’t discussed as it relates to generating cash flow so that we can then invest in real estate that you wanted to mention?

Sam Ovens: We’ve talked about some good theory and everything about how to go out and make money, but the big thing that I see every day with entrepreneurs is that they become great money makers but not very good money keepers. Pretty much everyone I’ve observed – even my heroes who I observed five years ago – it’s amazing to see that all the money that’s gone through their hands, they still don’t have any of it… So I think there’s massive amounts of information missing in this industry, and in terms of accounting and finance and being financially responsible.

I think everyone’s being so pulled on the bias of “Make money!” It’s all about making all this money, and it’s great, people have learned how to make a lot of money, but they haven’t kept any of it. It’s kind of like, if we observe history, when pro athletes first started making a lot of money, in boxing or in football or in basketball or whatever, the first people were the pioneers of their industry; the first people who did it, they lost it all. Only the modern day people can look at their mistakes and learn, and that’s why they have financial managers, and they’re more sensible now.

I think it’s more than just making the money, I think it’s also hanging on to it, especially in investing. I understand now that in business once you’ve got money, it’s more of capital preservation than trying to make more. Protecting your downside is more important than trying to make more, and that’s the number one thing that becomes an issue once you have some money.
So I think a lot of people need to read some books on accounting and on finance, and just on managing money, because the biggest thing — I’ve seen so many millionaires do it… They’ve made millions, and they don’t have millions anymore. So that’s the only other piece of advice I would add.

Joe Fairless: I was interviewing a gentleman, and his mentor was Ross Perot… And Ross had a famous saying that he’d always mention prior to investing in something; he said, “It’s more important to be focused on return OF capital than return ON capital”, and that’s exactly what you’re talking about here.

Sam Ovens: Yeah, absolutely. It’s a concept which you don’t learn to appreciate until you have some capital. Because most people are swinging for the fences all the time, because they’re like “What does it matter if I lose 1k?” But once you’ve got a pile, it’s more about protecting that pile than trying to add to it.

Joe Fairless: Where can the Best Ever listeners get in touch with you or your company?

Sam Ovens: My website – the new one, which is live right now, but it’s just one page… There’ll be a full blog there and everything in the next few days. It’s Consulting.com.

Joe Fairless: And what will they find when they go there? On that one-pager, what will they find?

Sam Ovens: They will find a basic video about what we do – we provide training programs helping people become consultants. The reason why I’m saying it now is because in like two or three days’ time there’s gonna be a proper website there, which has a lot more information… Because we’ve only just acquired that domain name.

Joe Fairless: Well, congratulations on the new acquisition and thank you for being on the show. You walked us through six steps to start a consulting program, so that we can go invest in real estate if we haven’t already. Step one is pick your niche; as you said, if you chase two rabbits, then you get no rabbits… So find your rabbit and go chase it. Two is know your audience. Three is know what you should be selling to your audience; talk to them, do 20+ interviews. Four is create the offer based  on what they want, and then five is know how to structure it with your minimum viable offer approach. You test and optimize that. Six is getting the pricing right, and you recommend pricing it at around 10% of value.

Thanks so much for being on the show, Sam. I love your quote also — you had a couple of money quotes, in my opinion. One is “Don’t undervalue what you know. Most people do.” And also, “Learning things is easy. Knowing what to learn is the hard part.” Ain’t that the truth?

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

Sam Ovens: Thanks, you too!



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JF963: Why You Should Raise BILLIONS in Capital with a 506(c) Offering versus a 506(b)

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/

Click here for a summary of Mark’s Best Ever advice: http://bit.ly/2ooDRjP

Made Possible Because of Our Best Ever Sponsors:

Want an inbox full of online leads? Get a FREE strategy session with Dan Barrett who is the only certified Google partner that exclusively works with real estate investors like us.

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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 mentioned Facebook, I mentioned newspaper, we did a webinar, we’re on CrowdStreet… Those are all things that get our name out there.

The webinar was helpful because we get one-on-one questions, we get a bunch of people and interest built around that specific concept of hosting a webinar, and you can record it and then send it to others, so it gives you sort of a platform and another contact point to reach out to people.

Then we did a video. We always do a professionally recorded video, including drones footage and all types of different angles of the property and the surrounding area. That’s probably our most expensive question about if we should do this, because…

Joe Fairless: How much?

Mark Mascia: Well, there’s multiple different pieces, because you have the voice over, you have the actual video editor, you have the video recording – all those different things. I think when you put them all together it’s probably $10,000-$15,000.

Joe Fairless: Oh, Mark! I gotta get you my video guy. $3,000, all in. With a drone. We’ve got a drone, text overlays, everything.

Mark Mascia: Alright, awesome. I definitely have to check that out. I appreciate it! See, that’s why we do this, right? We all share and learn; I’m learning, too.

So yeah, that’s something… It’s also just a piece for existing investors, family offices to feel like they’ve been to the property instead of having to fly down there themselves. That’s what we used to do… Not on our dime, but we used to fly down and meet them and do a physical tour, and now we do more video, which is better for everyone.

I mentioned existing investors – the referral, probably in everyone’s experience has been why you start with your friends and family, because they know you, in terms of raising capital. If you perform for them, they will refer you to their friends and family, and so on and so on. That’s typically been the best source for us overall.

Joe Fairless: Do you have a way that you encourage that? Any intentional way?

Mark Mascia: I tend to let them know that it’s actually benefitting them, because people are wonderful; I think inherently people wanna do what’s right and be good and help others, but people are also sort of like short-term selfishly motivated, so what I try to do is focus on the benefits to them and why they should take action, because ultimately that’s what motivates most people in the short term. So by showing them that it actually lowers the cost of capital if they can refer somebody – I don’t have to pay the 2%, 3% or 4% to use crowdfunding or to do this advertising avenue that I’ve been speaking about… So it’ll decrease that, and then it’s also a social proof thing. From the standpoint of what I’ll try to do is people that do know each other or people that don’t know each other, some of the family offices that didn’t know each other, I introduced them to each other. Now they know each other, so when I say “XYZ family office is investing. Don’t you guys wanna to invest as well?” they go “Oh yeah, of course. If they’re invested, we’ll do it, too.”

So there’s a little bit of trying to get people in the same room or same social network of some sort, even if it’s just because I introduced them, so that there’s that social proof aspect where people feel obligated or inclined to invest because of someone else.

Joe Fairless: Any other pros, before we get into the cons?

Mark Mascia: The ability to develop this kind of long-term relationship quickly. What I mean by that is in 506(b) you had to know somebody for long enough to prove that you had a relationship with them. Now it’s like, I don’t have to prove any relationship. As long as they’re an accredited investor and they can invest, and as long as they’re a human on earth, I can talk to them about what I’m doing, and that’s just the base thing.

The costs are the same. You’re not spending any more money to file these documents, to do anything else. So from that standpoint, there’s really no reason not to do it in that way, in my opinion. It’s still got the same unlimited amount of money you can raise, so it’s not like you have a certain maximum doing it this way, so sometimes you should go the other way. You can raise unlimited funds. I think those are all important points.

Joe Fairless: What are the downsides of 506(c) versus 506(b)?

Mark Mascia: Definitely the overwhelming upsides, in my opinion; that’s why we’re doing it here. We’re only raising like 2.8 million dollars for this current deal, it’s a very small deal. But some people who raise much larger dollars and deal with very sophisticated investors, especially those that they’ve dealt with in the past, this can be a little bit of an annoyance… Because what has to happen under a 506(c) is they have to actually be accredited by a third party. So either they need to send you personally documentation of their accreditation status – and just as a reminder… I’m sure you’ve heard it a million times, but to be accredited as an individual, you need to make $200,000 a year, or with a married couple you need to make $300,000 a year, or have a net worth of a million dollars, excluding your personal residence.

So you have to have proof of either W-2 income statements, tax returns or a proof of your net worth. A lot of that, people don’t like to share. If they’re super wealthy, they’re very protective of their privacy and things like that and they don’t want people to see that, so generally they’re not gonna wanna send that to you. Well, that’s okay, the 506(c) allows you to do it under a third-party. That means either they need to send a letter and all their documentation to any attorney that [unintelligible [00:20:53].29] a currently licensed CPA can do that, or a stock broker. So there’s three other avenues where a third-party, not you sponsor or them the investor, but a third-party can verify them.

But again, this process – filling out that paperwork, proving that they’re wealthy, can be frustrating, can slow down the process, and can sometimes offend people, honestly. We’ve had people that have invested with us in the past who were like “Well, I never had to do this before” or “I’ve never had to do this with any other real estate deal I’ve invested in. Why are you so difficult? What’s wrong with you?” So there’s definitely a bit of more of an education problem… Not that they’re not smart or educated in life, but they’re not necessarily educated to the ways of these rules… Because these are not my rules, these are the SEC’s rules, and that’s what I always tell them. It’s not that I’m trying to be hard-lined about this, it’s the SEC has these restrictions and I’m just trying to follow the law. So that’s a definite downside.

Now, how real that is is really gonna depend on your investor base and on your relationship with them. Most people, when you walk them through why and how easy it is once they’ve done it once, they tend not to care… But again, you have to do this every 90 days, so that’s the other annoyance.

Joe Fairless: You have to do what every 90 days?

Mark Mascia: Get them accredited… Not for the investment that they’re in, but let’s say I’m raising money for this Camelot center deal in Spartanburg, South Carolina today; we have another deal under contract. If I don’t get that next deal ready and in front of that same investor within 90 days, they have to do it twice. So even if it’s the 91st day and I wanna get them to invest in that second deal after they invest in our deal that we have now, they can’t, unless they resubmit all the paperwork. And that’s just kind of like stupid. You just invested in that last deal, you just proved to me you’re accredited in the last deal 90 days ago, now all of a sudden the SEC magically things that it all completely changed and now you’re worth nothing or make no income… It’s a little onerous in that respect as well…

So just to be clear – not once they’re invested. If they’re invested with you, as long as you’ve got the accreditation paperwork upfront, you never have to do that again in that specific deal. But for all future deals, every 90 days you need to get a new update on whether they’ve accredited or not. That’s frustrating.

Joe Fairless: One strategy is to do 506(c) but only bring in new people, and then the next deal do 506(b) with your current people and funnel the new people in there. Then do another 506(c), bring in all new people… That way there’s no changeup in the process for you existing investors.

Mark Mascia: Yeah, that would definitely work. The problem is if any of your existing investors wanna get in on your new deal… The biggest problem we have is finding enough good deals for our investors. If I could find 20 deals, they would be happy. Unfortunately, we find a handful of deals every year that are good enough… So if I say, “Hey, by the way, you can’t invest in this one because it’s only new investors, I think that would be more of a turnoff than anything else. But if you can tailor it that way, it definitely would work, I agree with you.

Joe Fairless: I guess you could always say, “Yeah, you can invest in this one, but here’s the wrinkle in the process.”

Mark Mascia: That’s a good point. I hadn’t thought of that, so I appreciate it… But again, for us certainly that wouldn’t work, but for other people it definitely might.

I think the other thing is from a 506(b) standpoint you’re also a little bit more protected in terms of it’s been around forever. It’s been around since the 1930s or 1940s or whatever it was when it was originally enacted, so there’s been tons of case law, lawsuits, all types of things that you put you very clearly in the right or in the wrong, with very limited gray area… Whereas 506(c) – the new regulations have only been around since September 2013, in which case there’s been almost no clarifying points beyond. There hasn’t been tons of lawsuits and things like that because it just hasn’t been around that long.

So there could be some additional risk there. How to quantify that risk – who knows? Clearly, I don’t think there’s that much risk because I’ve talked to a bunch of attorneys and this is what we’re doing, but time will tell what that actually looks like.
The other thing that gives you protection is under 506(b) it’s self-accreditation. That means if someone comes to you and says “I’m wealthy, I’m accredited”, and you as the sponsor have the right to rely on that, they will essentially have committed fraud if they tell you otherwise, in which case that nullifies their ability to sue you.

So in a lot of ways you’re sort of saying, “I’m not in this process. They told me they’re rich.” If they’re not rich and they try to sue you and say “Hey, you shouldn’t have let me invest in this deal. You should give all my money back”, you say “Hey, you told me you’re rich, so clearly you lied. That means you can’t sue me.” So there is some additional protection in that respect as well, that you’re losing here because you’re now using some sort of verification process and they could say, “Well, I just called somebody and they signed off on it. It wasn’t true, so you shouldn’t have let me invest.”

Joe Fairless: Sounds like those are the three main downsides that you can think of. That is, they can be annoying for the investors because they have to be accredited by a third-party, there’s some gray area because it’s rather new, and then the self-accreditation process likely protects you more because they’re saying they’re accredited by completing the paperwork, so they would have committed fraud if they actually aren’t accredited.

Anything else that we haven’t talked about as it relates to why you choose to do a 506(c) versus 506(b)?

Mark Mascia: No, I think… Like we’ve mentioned before, they’re both the same in terms of the amount of money you can raise, in terms of the process, in terms of what you’re allowed to risk, whether that’s real estate development or real estate investment of long-term nature – anything can be done. Unlimited amounts of money, the same blue sky paperwork in terms of what you have to file with all the states… So in that sense it’s like you have to learn this and do this the same either way, so you might as well do the one that gives you more flexibility in what you could say.

Joe Fairless: Mark Mascia, where can the Best Ever listeners get in touch with you?

Mark Mascia: E-mail is always best. It’s mark@masciadev.com, and I’m sure you’ll have that in the show notes as well.

Joe Fairless: Yeah, well I’ll put your website in the show notes, and that way the internet trolly things that some people have don’t grab your e-mail address. You’ll thank me for that.

This has been wonderful. I loved talking about this stuff, and this was such an educational experience, coming from someone who’s currently in the middle of it, and you’ve got half a billion dollars worth of assets under management that your company has part ownership in… So talk about the pros, as you so succinctly recapped – it diversifies your investor capital base, that way you’re not relying on one source of capital, because you’re able to publicly advertise and you’re able to meet new investors just to make sure that you have additional investors coming in and you’re not relying on one, which kind of ties in the first thing.

You can convert people quicker, versus having the pre-existing relationship, because you are doing the 506(c), and then the raise is unlimited, just like the 506(b), and the cost is the same, just like 506(b). And then I love how you got into the equity raising tactics, the crowdfunding website, Facebook advertising, who your target audience is, newspaper ads, webinars, the video, and then ultimately the word of mouth, referrals and how you social proof and mention how it lowers the cost of capital, because you lower your advertising budget if they refer their friends or whomever.

Then the three downsides… The primary one, I believe, the risk in the legal liability for the gray area, but the here and now is it can be annoying because there has to be verification by a third party. And then the other two – there’s more gray area with 506(c); with 506(b) there’s a self-accreditation process.

Thanks so much for being on the show, Mark. I hope you have a best ever weekend. Enjoyed it, as always. We’ll talk to you soon!

Mark Mascia: Thanks a lot, Joe.


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