JF1785: Side Hustle Nets $7.5M In Real Estate In 10 Years with Matt Spangenberg

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Matt shares his Best Ever Advice with us, which includes his first rental property that he was cash flowing over $1k per month. He used the equity he had from his personal property, which was obtained through working as much as possible to make money and pay down his mortgage. When he found out he could use that equity to purchase property, Matt knew real estate was a business he could scale. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


Best Ever Tweet:

“I spent a year of my life just working as much as possible and saving money” – Matt Spangenberg


Matt Spangenberg Real Estate Background:

  • 36 year old real estate investor who started from nothing
  • Used a HELOC to do 30 BRRRR deals
  • Acquired $7.5 Million in real estate over the last decade as a side hustle
  • Owns 51 units with 7 closing next month
  • Based in Pennsylvania
  • Say hi to him at karleyinvestmentholdingsATgmail.com
  • Best Ever Book: Never Split The Difference


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Theo Hicks: Hi, Best Ever listeners. Welcome to the best real estate investing advice ever show. I am your host today, Theo Hicks. Today we will be speaking with Matt Spangenberg. Matt, how are you doing today?

Matt Spangenberg: I’m doing great, Theo. How about yourself?

Theo Hicks: I am doing fantastic, thank you for asking. A little bit about Matt before we get started – he is a 36-year-old real estate investor who started from absolutely nothing. He actually used a HELOC loan to do 30 BRRRR deals. That’s the buy, rehab, rent, refinance, repeat strategy. He has acquired 7.5 million dollars in real estate over the past decade as a side hustle, and currently owns 51 units, with seven additional units closing in the next month. He’s based in the Lehigh Valley, Pennsylvania, and you can say hi to him at karleyinvestmentholdings@gmail.com.

Now, me and Matt were talking a little bit before we went live, and he mentioned two deals in particular that I am looking forward to diving into during our conversation. One of those deals was where he was able to create over $350,000 in equity, and then another one was 100% owner-financed.

Before we hop into discussing those deals, can you tell us a little bit more about your background and what you’re focused on now?

Matt Spangenberg: Sure. So my email is actually karley with a k. Everything else you said was good, but it’s Karley with a k. Karleyinvestmentholdings. So as far as my background, I grew up as an average person, I left home at 18… I bought my first house at 20 years old; I worked my butt off, saved money for a down payment, 20% down, thought that was the way to do it. But as a 20-year-old I bought a foreclosure, as is, no water, no electrical; everything was off. But I just had the guts to just buy it. I didn’t really know what I was doing. But I fixed that up. My wife and I got married three weeks later. We were hanging sheetrocks together, we were painting together, doing all that… But the cool thing was we bought that, we got a good deal on it, and the market went up in 2004-2005, and we were able to get a HELOC and get a $100,000 home equity line of equity because of the equity we had made in that first house we bought, that we lived in. So that’s kind of how I got started – getting the first house young, building up sweat equity, and then getting a HELOC.

Theo Hicks: So that $100,000 HELOC loan – was that the foundation that you used to acquire the remaining 29 BRRRR properties? So you just kind of rinse and repeated with that same capital?

Matt Spangenberg: Absolutely, yeah. My first deal was a twin in the local city of [unintelligible [00:05:00].26] near me. I bought it for 68k because it had a fire. So then I’m 24 years old and I have a 100k line of credit; I see a house for sale (actually, my brother found it and brought it to me, told me about it). 68k, I bought it… I got laid off from my job; the market crashed, I got laid off, so I didn’t have much to do… I went in and started working on this house, fixing it, painting it, doing it all myself.

I didn’t even know about the BRRRR. I’d never heard that term before. This was ten years ago. I fixed it up, got it rented… I was in it total for about 95k, I would say, after I bought it for 68k and put some money into it. I went to the bank and said “Hey, I wanna refinance this”, and they came out and appraised it at 130k, and gave me a loan for 100k. I was like “Man, this is awesome. I’ve just got 5k back.” And my mortgage tax insurance was $900/month for this place, and I rented it to local college students and they paid me 2k a month. So my first rental property I was clearing $1,100/month, and I was hooked and off to the races.

Theo Hicks: Did you buy that property all-cash? Was it 95k out of your own pocket, or did you mention that you got a loan for 25% down?

Matt Spangenberg: No, the first rental property I used my HELOC for, and I bought cash with my HELOC for 68k, did the improvements with my HELOC. Then I refinanced it, got 80% of appraised value, which is all my money back, paid my HELOC  back down to zero, and then had that house basically no money out of pocket, and $1,100/month cashflow, with no money out.

Theo Hicks: That’s a slam dunk. Where did the money come from for that initial down payment on your first house, at 20 years old?

Matt Spangenberg: My first house, at 20 years old, I just worked my butt off, man… When I was 19, I did nothing but work every night and weekend. I saw my fiancée on Friday nights and Sunday afternoons, and other than that I just worked for a whole year and was able to save $28,000. My first house was 98k, and I put 25k down, and that was it.

Theo Hicks: That’s a great success story, and I’m glad you were able to do that, to work hard and make that money. It sounds like you’ve essentially created this 7.5 million dollars business with just that $28,000 cash-wise; the rest is coming from your own sweat equity and spending time doing it yourself.

Matt Spangenberg: Exactly.

Theo Hicks: So I wanna dive into these two deals. Let’s talk about the first deal that you mentioned, when you were able to create over $350,000 in equity. Walk us through how you found it, how much you paid for it, how much you put into it, and how the heck were you able to create so much equity?

Matt Spangenberg: Sure. I was doing single-family homes; I used my HELOC maybe 20 times myself, I just kept doing one at a time. Then I realized “Man, if I partner with a friend, we could do more.” I only had 100k to work with, so talked to a friend who had a home equity line of credit, and him and I said “Hey, let’s go together and we’ll have more money to do bigger deals.”

So I was driving by this property, a rundown six-unit apartment building; all rundown, dilapidated, and there was a “For Rent” sign out front. It said “Apartments for rent.” So I called the phone number, talked to the guy, who was in his eighties, and I said “Hey, I’m calling about your apartment for rent.” He says “Okay, how many people are gonna be living there?” and I said “No, I don’t wanna rent it, I wanna buy your whole building. Would you wanna sell it?” And he said “Um, I don’t know. Maybe. Make me an offer.”

So I just pulled up the tax assessments, which means nothing; the tax assessment was 300k, and I said “Would you take 300k?” He said “Sure. 300k.”

I didn’t have the money, so I called my friend and I said “Hey man, I’ve got this deal. I think it’s a great deal.Do you wanna go in on it with me? We’re gonna need money down and money to fix it.” He said “Yeah, I’m in.” So that deal – we bought it for 300k, we went to the bank, and because I had done so many BRRRRs and refis with the local bank, they knew me and they knew I could do this… And I said “Listen, I want you to finance 80%. We’re gonna put 60k down, 20%, with our HELOCs, and then we’re gonna fix it and then we’re gonna come back and refi.” And the bank said “Okay, sure.” So we bought it for 300k.

We went in, and the rents were $600, $550… There was stray cats everywhere, there was [unintelligible [00:09:08].22] infested apartments, there was mice, and rats, and hoarders, and all the typical stuff. But we went in, bought it, and started fixing the vacant ones up. We gutted them down to the studs, new plumbing, new heating, new everything, ripped out [unintelligible [00:09:23].13] This was a 100-year-old-building. And when we were all done — it took us about a year, because we were doing it on the side. So we had to get one tenant out, fix the apartment, rerun it…

We put 500k into it, maxed out our HELOCs, maxed out our savings, borrowed hard money… Anything we could get. We borrowed money from friends, family, whatever, to come up with the 500k ourselves. So when we were done, we took the building from rents of $600 and $550 to $1,350 and $1,500/month rents. Hardwood floors, granite countertops, central air. We took it from a D class building to an A+ class building.

Once we finished, we went back to our bank and said “Hey, we’re done. Let’s refi. Let’s get some money out.” So we were in it for 800k, and they came out and appraised it, and it appraised at 1.2 million. So we got a loan for 850k, we got all our money back, paid back all the loans, put 50k in our pockets, and it still cashflows amazing.

Theo Hicks: Talk about a success story… So you said it was a D property when you bought it, and then you upgraded it to an A… Did you know that the market would be able to support this A property? When you bought it, did you know that the market was a B market, but you found this really rundown property that you knew if you fixed it up, put in all those high-end amenities you’d be able to get higher rents and find those tenants that were willing to pay those higher rents?

Matt Spangenberg: Yeah, and the reason being is because I have 30 single-family homes in that same town, where I’ve done the same thing – bought old homes, fixed them up, and was able to get top dollar. So to me it was like “Oh, this is just six homes, and I can just repeat what I’ve been doing.”

Theo Hicks: Okay. And then you mentioned that you put that $500,000 into it, and obviously you and your partner friend fronted some of that cash, you said you maxed out your HELOC loans, got some hard money loans, asked friends and family for cash… How did  you present the opportunity to those friends and family in order to convince them to invest?

Matt Spangenberg: We kind of just told them our track record. “Hey look, this is what I’ve been doing. I’ve been buying these homes, and I’ve acquired (at that time it was maybe) 3 million in real estate by buying one at a time”, and showed them my track record. Then I said “Would you like to invest the money with us? We’re giving you a promissory note, we’ll give you an 8% return on your money. We’ll probably use it for a year or two.” And they were like, “Okay, sure. I’ve seen your track record, I see what you’re doing, you know what you’re doing… I’d love to make 8% on my money, as it’s sitting in the bank right now.”

Theo Hicks: So that’s the one deal; you created $350,000-$400,000 in value. What about the other deal that you mentioned to me? The one where you were able to get for 100% owner financing. Can you walk us through that deal as well?

Matt Spangenberg: Sure. That was another six-unit apartment building in the same town. The guy was in his seventies, owned it for 30 years; it wasn’t as dilapidated, but it definitely had a lot of deferred maintenance and a lot of updating needed. So that deal – I actually knocked on the guy’s door and said “Hey, I see you own this property over at 123 Main Street. Would you be interested in selling it?” And he says “Nah, I don’t wanna sell it. I like the cashflow.” And he says “And I don’t wanna pay capital gains.” I said “Okay, I understand. If you were to sell it and get rid of that headache, and sell it to us, we would allow you to owner-finance it.” He said “What would that mean?” I said “Well, we would pay you every month, and you’d still get the cashflow, you’d get no headaches. We’d do an installment sale owner finance, so you only pay your capital gains each year on the profits you make.” He said “Well, I’d want $450,000 for that building if I had to sell it.” I said “Well, I’d love to give you that if it’s worth that. Let’s go look at it.”

In the meantime I was actually reading the book “Never Split the Difference”, Chris Voss, about negotiating. And I used all the tactics – I used guns blazing on the poor old guy, I used all the different tactics of negotiating. I got him down to $310,000 from $450,000, and then he said “I don’t know if I wanna sell for that little.” I said “Well, you know what – to even make the deal sweeter for you, why don’t we do interest-only for two years, and then we’ll buy it from you?” He said “Well, how does that benefit me?” I said “Then we’re gonna basically give you…” — it came out to like 15k in interest we would be paying. “So we’re gonna pay you 310k, interest-only two years, which is 15k and 15k, so you’re gonna get 30k in interest from us, and then we’ll buy it for 310k. So you’re actually gonna get 340k if you look at it that way.” He said “Oh, I like that.”

Now, obviously, to us interest-only is great, because now we have more cashflow to put back into the building… And because he owned this for 30 years, he really had attachment to it, he really liked the building, and we said “Listen, if we buy it from you we’re gonna do a new roof, we’re gonna do new windows, we’re gonna update the outside, put some siding on… We’ve got a lot of improvements we wanna do. So we’d be happy to give you a down payment, but if we give you a down payment, that’s  [unintelligible [00:14:14].16] gonna get an interest. If we give you 20k-30k, that’s 30k less in interest you’re gonna make. Or instead, if you wanna do 100% owner financing, we’ll take that 20k-30k and we’re gonna dump it right back into the building right away. So you’re not losing the money, you’re getting that in equity.” And he said “Okay. I’ll finance it, 5%, interest-only two years, 100% finance.”

My partner and I were looking at each other shocked, because we went in with a low anchor, expecting to go up, and we stuck to it and he took the low anchor. So that was a great deal.

Theo Hicks: That’s a great deal. The entire concept of identifying the pain point and then presenting a solution… This is like a picture-perfect example of that. You knocked on his door… Well, first of all — because me and Joe talked about this before, because we’ve heard the door-knocking strategy on single-family homes, or we’ve heard the door-knocking strategy on places where multifamily properties have the owner actually living in the building… So  you actually knocked on this guy’s personal home; so you looked up the property on the assessor site, you found out where he lived and you showed up to his house, asking him about his property, correct?

Matt Spangenberg: Yeah, exactly. I didn’t even know what I was gonna say when I got to the door. I just knocked and just winged it when he answered the door.

Theo Hicks: That’s fantastic. That’s probably the first time hearing that particular type of door knocking… But what I was saying is that you identified his pain point; he didn’t wanna sell it because of capital gains, so you fixed that by rather than buying it straight up, you paid him cashflow each month, so he’d only pay taxes on those, as opposed to paying massive tax on the sale. He also wanted the cashflow, so you were able to solve that by giving him the interest-only for however many years, that $50,000. He didn’t want the reduced price, so instead you presented this interest-only… I mean, you [unintelligible [00:16:04].08] and you essentially were able to remove all of the pain points.

Matt Spangenberg: Yeah. And I told him — obviously, he’s in his seventies, and he wants to go to Florida for a couple months in the winter, but he mentioned when he goes down he gets calls from the tenants… So  I said “Listen, if you do this deal, you can be sitting on a beach in Florida and you’re gonna get your checks every month from us, and you’ll get no headaches from any tenants.”

A month and a half later when we closed, after we closed, he said to us “I never thought I’d sell it for so cheap, but I’m really happy I sold it. And the thing that got me is when you said “You could be sitting on the beach, collecting your check from us and not have a headache.” That’s what sealed it for me.”

Theo Hicks: It’s everyone’s dream… So good for you. Alright, Matt, for the money question – what is your best real estate investing advice ever?

Matt Spangenberg: Best advice would be just to be creative. You’ve gotta think outside the box. If you see a door closed, look for windows. You have to be disciplined. So many people today wanna have everything upfront… But I spent a year of my life when I was 19 just working my butt off and saving that money, and that’s what started the whole empire – just being disciplined and not giving up.

Theo Hicks: Solid advice. Alright, Matt, are you ready for the Best Ever Lightning Round?

Matt Spangenberg: Sure.

Theo Hicks: Alright. First, a quick word from our sponsor.

Break: [00:17:26].16] to [00:18:14].24]

Theo Hicks: Alright Matt, what is the best ever book you’ve recently read, besides Never Split the Difference, which you’ve already mentioned?

Matt Spangenberg: Oh, man! That was my book. I was gonna say Never Split the Difference. That’s a good one. There’s always Rich Dad, Poor Dad. I’m in the process of reading Fake right now, by Robert Kiyosaki. That’s pretty good, too. It talks about reserve banking stuff. But Never Split the Difference is the top one.

Theo Hicks: Alright, I’ll give it to you.

Matt Spangenberg: Alright, thanks.

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

Matt Spangenberg: I would hustle and find deals. If I had no money, I would go out there, knock on doors, call people, and I’d find deals. Once you find the deals, you will find the money.

Theo Hicks: Besides your first deal and your last deal – and go ahead and say the two deals we’ve mentioned already – what is your best ever deal?

Matt Spangenberg: Alright, so I’ve got another one that I bought back in January – it was a seven-unit, off market deal. The guy wanted 450k and I got him down to 370k, but all my money was tied up in other deals that I had going, so I went to a friend of mine and said “Hey, do you wanna make 8% on your money?” He said “Yeah. What do you need?” I said “Give me 75k for two years.” He said “Okay.”

So he gave me 75k and I used that as the 20% down, and got 80% owner financing from the bank for the rest. So that’s another seven-unit I bought with none of my own money, with hard money, friend money for down payment, and bank financing for the rest.

Theo Hicks: And then what is the worst deal that you’ve done?

Matt Spangenberg: Worst deal… I don’t wanna say worst deal; maybe a mistake I made would be over-improving a unit. I bought a C, C- apartment and I thought I could make it an A, and it wasn’t the neighborhood, and I put 25k into remodeling it, putting in hardwood floors, granite, all that stuff, and the rent was like $75 more than if I didn’t do any of that stuff. So I was just kicking myself, like “Man, I over-improved that…!” I guess I just didn’t know the neighborhood.

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

Matt Spangenberg: I give money to my church, commissions [unintelligible [00:20:09].15] I also love to help young guys or girls coming up that wanna learn about real estate, wanna learn about debt, and leverage… And the good debt, not the bad debt. I love to open young people’s minds up. When you start telling them about real estate, and cash-on-cash returns, and no money down – I just see their eyes light up when it clicks.

Theo Hicks: And then lastly, what is the best way to reach you?

Matt Spangenberg: The best way would be email. I’m not on Facebook, I’m not on Instagram, I’m not on Twitter… I think I’m on Bigger Pockets, but I never check that. I’m too busy finding deals and working that stuff to go on social media. So the best way would be to email me at karleyinvestmentholdings@gmail.com.

Theo Hicks: Matt, I thoroughly enjoyed this conversation. I learned a lot. It’s always great to hear success stories where it’s literally just 100% about hustling, and just grinding, and especially doing it at such a young age.

Just to recap what we discussed – you mentioned how you bought your first property at the age of 20, you worked for a year to save up money for the down payment, and you happened to be laid off from work, so you and your fiancée at the time worked on the — you actually got married a few weeks later…

Matt Spangenberg: Yup.

Theo Hicks: …and you guys were the ones that put all the sweat equity into the house, and were able to create $100,000 in equity, which you used as a HELOC, and that was the foundation of your business. We went over two deals in particular. One is where you were able to create 350k. It was your first deal, where you (in a sense) raised money; you had a business partner who brought some capital and you raised money from other people that you knew, and you were able to do that because of your track record, and you explained to them “Hey, I’ve done this before. I know what I’m doing. I’m definitely gonna make money.” Also because of your relationship with the local bank you were able to pull out all of that capital to pay back your investors and put $50,000 in your own pocket.

The specific numbers were you bought it for $300,000, put $500,000 into it, raised the rents from around $600 up to $1,300 to $1,500, appraised for 1.2 million, and got a loan for $850,000.

Then your second deal, which was the first one I’ve ever heard of someone knocking on the door of an apartment owner. They don’t live there, you found their house, knocked on the door, didn’t know what you were gonna do, didn’t know what you were gonna say, ended up buying the six-unit property well below the price that the owner wanted because of the negotiating tactics you learned from Never Split the Difference, and essentially every single pain point, every single reason why he didn’t want to see, you were able to solve for him. Ultimately, the thing that closed the deal was when you mentioned how he can be sitting on the beach, getting paid, instead of having to deal with any headaches from the tenants moving forward.

And then, of course, your Best Ever advice, which you’ve obviously implemented in your own life, is to be creative, think outside the box, and be disciplined. You worked your butt off for a full year, saving money, seeing your fiancée only a few times a week, and that’s what allows you to launch this 7.5 million dollar real estate empire, and I’m sure that it’ll only go up in the future.

Matt Spangenberg: Absolutely.

Theo Hicks: Matt, I really appreciate you taking the time to talk to us today. Best Ever listeners, thank you for listening, and we will talk to you soon.

Matt Spangenberg: Thanks, Theo.

JF1771: From Medical Device Sales To Full Time Real Estate Investor & Apartment Syndicator with Jason Pero

Listen to the Episode Below (00:25:22)
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If you’re in the position of working full time and investing part time, so was Jason. For some, that’s fantastic and they wouldn’t have it any other way. For some others, they are looking for a way to leave their full time job and invest in real estate full time. We’ll hear how Jason did that seven years ago, and how he has continued to scale his business since then. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


Best Ever Tweet:

“Focus on your mindset and personal growth” – Jason Pero


Jason Pero Real Estate Background:

  • Started investing in real estate since 2001, left his day job in 2012
  • Currently owns nearly 700 rental units, recently completed first syndication deal
  • President of his local REIA/Apartment Association representing over 1600 members
  • Based in Erie, PA
  • Say hi to him at jasonperoATyahoo.com or 814.397.8037
  • Best Ever Book: Poor Charlie’s Almanac


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

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

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


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, Jason Pero. How are you doing, Jason?

Jason Pero: Doing great, Joe. Thanks for having me on.

Joe Fairless: Great, my pleasure. A little bit about Jason – he has been investing in real estate since 2001. He left his day job in 2012. He currently owns nearly 700 rental units, and recently completed his first syndicated deal. He’s the president of the local REIA apartment association, representing over 1,600 members. Based in Erie, PA. With that being said, Jason, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Jason Pero: Sure. As Joe said, I’ve been investing in real estate since 2001. My wife and I did it the old-fashion way; for the first 12-15 years we saved our hard-earned money and just pumped it into real estate, saved up for down payments, traditional bank financing… Got it to about 300 units. Then I left a medical device sales job in 2012, to focus on running our real estate portfolio on our own.

At that time we started taking on private investors, doing some private money… And that sort of led into where we’re at now, which is syndicating deals and looking at much larger projects. I completed an 86-unit syndication this fall, working on a 205-unit currently, and just having a lot of fun with it.

Joe Fairless: Did I hear you right, you were in medical device sales?

Jason Pero: Correct, yeah.

Joe Fairless: So you had 300 units, you were buying properties (as you said) the traditional way, and you had a full-time job… What were your co-workers saying about your investing approach?

Jason Pero: Well, it was interesting, because I think that some co-workers probably thought I was crazy. Why would you wanna leave a high-paying W-2 job to go mess around with rental properties? But I had a lot of co-workers that were following similar paths. I had met different guys in Nashville, TN, or Cincinnati, OH or other markets, that had bought rental properties as well, and… It was hard to leave that comfort of the day job, but when I saw other guys do it with maybe much less backing, it kind of gave me the confidence that I was ready to jump at the time.

What’s interesting though – some of the guys I still keep in touch with, from when I left 7-8 years ago…

Joe Fairless: [unintelligible [00:04:22].12]

Jason Pero: …they’re still miserable at their day job, and not really moving forward in life.

Joe Fairless: Right… Okay, so 300 units – we’ll get into the syndication stuff, but I just wanna be clear on this… So 300 units – how many units was the largest property?

Jason Pero: At that time, the largest property was about 30 units. I had purchased some properties that were either in the same neighborhood, or very close to each other, side by side, but the largest individual property at the time was 30 units.

Joe Fairless: Okay. And then were the majority of them single-families?

Jason Pero: I had a handful of 25 to 30-units, a handful of 10 to 15-unit-sized properties, and then a bunch of duplexes; 50-80 duplexes.

Joe Fairless: Okay, so you were buying 10 to 15, 25 to 30, and then you had a bunch of duplexes… So how did it progress when you started, in terms of unit size?

Jason Pero: Our first deal was a duplex that we purchased for 32k, Erie, PA. I used the first $3,500 I saved up to buy that property. At the time, the cashflow paid for my student loan payment… And I was happy. I thought that was the greatest thing ever. Then the next year we saved up, purchased a duplex, purchased a 4-unit, right before we got married. And then kept saving our money… The next year we bought a 4-unit and a 7-unit. Then we kept going along that path.

Then in 2005 I met a gentleman who became a mentor of mine in the business, but he had 56 units in multiple locations, but there was a couple 8-units in there, there was a 16-unit, and just some various-sized properties… And he said “Hey look, I’ve got this group of properties. I’ll sell it to you for 1,1 million, and I’ll hold the paper, but you have to come up with 10% down.” So I borrowed against my 401K, borrowed against savings, cashed in some savings, I took out some lines of credit… I did all these things I probably shouldn’t do, that financial planners tell you not to do… But I did it, and it was successful, and that kind of launched us from this world of 23 rental units up to 79 rental units.

Joe Fairless: Let’s pause right there real quick… When you were borrowing against the 401K, lines of credit, you were married at the time, so how does that conversation sound between you and your wife?

Jason Pero: Well, that was probably the best sale, or the best thing I ever did… Early on, when my wife and I were dating, and we bought our first rental properties, I sold her this idea that “Hey, we could be rich someday. We keep buying rental properties, and we can work for ourselves.” We were in our early twenties, and I’m happy I went down that path, but… It seemed to make sense that “Hey, by the time we’re 30 or 40 we can retire, we can have these rental properties paying for our lifestyle…” We had much smaller goals at the time, but she bought into my dream, and I had this passion and excitement and idea about what this life would look like, and she bought into it, and she supported me with it, and she participated in it as well, as far as looking for properties…

Those first few years we did all the work ourselves. I am not handy whatsoever – I still am not handy – and we would go in and try and fix the vacant units up, and we would try and pretend like we knew how to fix a leaky faucet, and things like that… But she was ultimately my biggest cheerleader, still is, and just bought into the dream. She kind of works in the background, but still helps me run all the high-level pieces of our business. I think that was a really important key (maybe for your listeners), that if you are married or in a relationship, having a spouse that’s supportive, or at least see eye-to-eye with you on some of these things is really important… Because they’re gonna have your back when things are good, but then you wanna make sure they have your back when things maybe are a little challenging, too.

Joe Fairless: So there was no pushback on borrowing against the 401K, or getting lines of credit during that time.

Jason Pero: No. We were young, and I think was before we had kids, early-mid-twenties, and she said “Gosh, if you really feel strongly about this, I’ve got you. We’ve got this.” The idea was that if we borrowed against the 401-K, the cashflow from the investment was going to be able to pay that back. And at the same token, we both had really good W-2 jobs that we still had enough cashflow to be able to pay back that 401K. It wasn’t as if we were doing that as a desperate move. It was an idea that made a heck of a lot of sense at the time, that “Hey, if I have to borrow $50,000 but this property cash-flows 50k/year, I’m gonna be able to pay this back in a year…”, so it just seemed to make sense.

Joe Fairless: Meeting your mentor was an important part of your journey… How did you meet the mentor?

Jason Pero: Our initial meeting – he had put an ad in the local newspaper, and the ad said “Local investor retiring. Up to 128 units, owner financing available. Call this number.” So I called the guy, had a meeting with him on (probably) an early Saturday morning or something like that, and we just sort of hit it off. I think he saw something in me that reminded him of his younger self. I kind of grew up without a lot of means, and that type of thing… So I was really impressed with this guy. I said “Oh my gosh, he left a great day job to go and do this real estate thing”, and he seemed to be living a really good life. We did this real estate deal, but we ended up meeting every few weeks, or at least once a month for coffee, and just sort of talking the business and becoming friends… And ultimately, I bought out the rest of his portfolio and really [unintelligible [00:09:47].26]

Joe Fairless: How many more units was that?

Jason Pero: 72.

Joe Fairless: 72. So a 56 plus another 72.

Jason Pero: Yup.

Joe Fairless: Got it. And that makes up a big ol’ chunk of the 300… How did you buy the 72?

Jason Pero: What was interesting is actually some of the pieces of what I originally purchased from him I had ended up selling to a local company; their name is Erie Insurance, and they’re a big employer here. They provide [unintelligible [00:10:15].12] and all that kind of stuff… They had approached me about a property that they needed to buy and tear down, so they could complete construction of a parking garage, but they didn’t wanna pay me any more than I had paid for the property. I said “Well, I’m not gonna do that…”

Joe Fairless: There’s your dilemma…

Jason Pero: Yeah, I’m not gonna give up this cashflow. But I had a handful of other properties near their corporate headquarters that they were willing to pay quite a bit of a premium on, and it made me worth my while. I mean, it wasn’t life-changing money, but it was enough that it would get my attention.

So what I did is I sold those properties and 1031-exchanged into this 72-unit deal. But he 72-unit deal was broken up into three properties. There was a 16-unit, a 26-unit and a 30-unit that comprised that deal. The 30-units were these really nice luxury townhomes, really high price per door (100k/door), and I just could not wrap my head around those numbers at the time, and… The guy’s name is Dick. Dick had said to me “Look, I’ll hold the paper 100%, 5% fixed for 25 years on the apartment buildings in the city, but you have to buy these townhomes (that were in a little suburb outside of Erie) and cash me out of those.” And that’s what we did. It took a lot of convincing on my end, but it was probably the best deal I ever did in my life, just because it was able to catapult me into working for myself, but also get me into a higher and better class of property as well.

Joe Fairless: Oh, absolutely. So at that point did that put you at the 200-250 mark?

Jason Pero: That 72 was the deal that was the catalyst for me to leave my day job. I had actually quit my day job about a month and a half before the deal was closing. I just wanted to take a little bit of a break and wrap my head around what my new life was gonna look like after quitting that day job. It was maybe a month and a half, maybe two months in between the job and then closing that deal.

Joe Fairless: Using your best guess, where would you be today if you hadn’t called on that newspaper ad?

Jason Pero: Boy… I don’t know. I would say I’d probably be at 40 or 50 units, maybe 100 if I was lucky. I think a part of it was responding to that ad, and at the same time I really bought into this idea of personal development, and got turned on to Tony Robbins and Jim Rohn and all of the personal development classic gurus… And then I just started diving in and started journaling, and started focusing on trying to improve myself… So I think that sort of happened at the same time; not because of the gentleman I reached out to, but I think it really was a good lesson for me, to try to keep an open mind and meet anybody you can, because you never know what kind of door that’ll open.

Joe Fairless: Let’s talk about the one you syndicated recently. I believe you told us it was an 86-unit?

Jason Pero: Yes.

Joe Fairless: Okay. So you syndicated an 86-unit… Tell us about it.

Jason Pero: Okay. I started to get turned on to the idea of syndicating — gosh, probably when I left my day job, I just couldn’t wrap my head around it. Fast-forward a few years and I met a gentleman who ended up being my co-GP on the deal… But I ended up linking up with Rod Khleif, I was on his podcast, and met a bunch of folks through his mastermind that were all syndicating deals… And I said “Oh my gosh, I can do this. This is easy.” It was like one little missing piece of information in my mind that I had to get comfortable with.

So I came back from this first mastermind meeting, I called this guy Mark that I had beginning to be friends with, and we were trying to figure out how we would work together or syndicate a deal together. I said “Hey, we’re ready. Let’s do this.” We got our ducks in a row, talked to our syndication attorney, but didn’t have a deal.

Summer came along, and a real estate broker friend of mine had called me and said “Hey, we have an in on an 86-unit deal. It’s gonna hit the national brokers pretty soon, but you have the first look at it.” We went in, loved the property, thought it would fit and be a great deal that we could go out and raise money for. This was my first raise; I’d done one-on-one joint ventures in the past, but something where I had to go out and actually sell shares of an LP – that was the first time.

We had offered 4,5 million. The appraisal did not come in exactly where we wanted it, so we were able to negotiate $350,000 off the sales price.

Joe Fairless: Did it come in 350k below 4,5?

Jason Pero: Yeah, it came in a little higher than what we negotiated down, so it did work out in our favor… But we got it for 4,15 million. Sort of very much a modern building; it was built in the 1980’s, but had been updated. The previous owners took really good care of it.

Joe Fairless: Why were they selling?

Jason Pero: They had gotten divorced a few years back. They had amassed quite a bit of property during their marriage, but they got divorced, gone on with their lives, but they still had this real estate business that they were trying to run together… And as you can imagine, that’s probably a big challenge, having your ex be your co-business owner. So they just started the process of liquidating their portfolio and figuring out how they’ll split their lives apart, and especially on these things that they’d co-owned together for so long. So that was really the catalyst for them to try and start thinking about selling.

We got it under contract – it was kind of a normal timeframe, but a little shorter, a little more regimented than I was used to… But we went out and raised the capital, I put some of my own money, the gentleman who co-sponsored the deal with me put some of his own skin in the game as well… And the raise was heck of a lot easier than I thought it would be.

Joe Fairless: What was the total raise?

Jason Pero: We raised 1,5 million.

Joe Fairless: Wow, congrats on that.

Jason Pero: Yeah, thank you.

Joe Fairless: How much did you invest in it?

Jason Pero: I originally committed 200k, and I backed it down to 100k, because we over-raised. We over-funded our raise, so I ended up pulling it back, and I ended up only with 100k in the deal.

Joe Fairless: And what was something that was challenging about the deal? It doesn’t sound like the money raise, but maybe some other component of it, that you didn’t expect it to be so challenging.

Jason Pero: Well, the money raise was hard because it was the first time I did it, but it wasn’t as hard — just kind of a quick side-bar about it was that I’d never done it, so it seemed really challenging from the outset, but once you do it and you have a deal that makes sense, there are investors looking for places to invest their money. And once I realized that, it became easy.

But one of the big challenges in the deal was there was a difficult seller, one of the spouses. We needed a slight extension, just because it was a Freddie Mac; it’s the government, and sometimes things are really quick, and sometimes they’re not. We would have thought that I was asking for their first-born by asking for an extension… And it was one of those scenarios where this individual was banging their fist on the table, and high drama as it relates to that part of the negotiation of the deal… But I think it was mostly theatrics; that’s just how this person had done business, and that’s what they’re used to… Because at the closing table we all hugged, and she was very pleasant, and everything was really easy… So looking back, that’s just the way that they do business, and it really wasn’t that difficult.

We offered up hard money and said “Look, we’re gonna close this deal. We have everything funded. It’s really just coming down to the lender, and we need a few more weeks”, and really just try to sell them on the confidence in us that this deal is gonna close and a couple more weeks isn’t gonna hurt anybody, and we’re committed to this deal; we put up a significant additional capital as hard money, so I think that we’ve just put our money where our mouth is, and we were confident it was gonna close.

Joe Fairless: And what fees do you take on that deal?

Jason Pero: For the first deal I did not take any acquisition fee. We did a normal split. When I say normal – we took an 80/20 split, but my company does the management, so I do benefit a little bit on the back-end. And I worked the asset management fee into the property management fee as well.

Joe Fairless: Do you have your own property management company that’s managing it?

Jason Pero: I do, yeah. With all of our units we self-manage. I think there’s some efficiency in having your own team. There’s certainly a lot of challenges, and that’s a whole other topic in terms of having your own employees… But I think you can control the process a little bit better, you can control costs a little bit better. We certainly earn that management fee, but at the same time, local investors know who I am, they know of my company, and there’s some faith that someone with 18 years of industry experience – that I’ve got my boots on the ground and I can make things happen. I think that puts our investors’ minds at ease, knowing that somebody has their hands on the wheel and looking at things at all times.

Joe Fairless: What’s been a tough part of having a management company that you own and oversee?

Jason Pero: I think the hardest part is you sort of have that tendency to get involved in too much. If there’s a tenant issue, or complaint, or concern, you’re gonna hear about it. So we had to develop thick skin. You have to be a problem-solver. If there’s a maintenance headache – not that you’re out there personally fixing it, but you have a team of guys or gals on the payroll dealing with problems, fixing those maintenance problems, fixing things that break, turning over vacant units… So I think the challenge is just keeping everything in order; I’ve learned to hire those that are better than me, including office manager, business manager types that can keep everything on schedule and deal with the customer service part of it, deal with some of the employee issues, and things of that nature.

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

Jason Pero: I think the best advice would be to focus on your mindset and your personal growth. Most of real estate investing is transactional. That’s easy. I think the hard part is being able to develop yourself into a better human being.

Joe Fairless: What’s the way that you like to act on that advice, tactically speaking?

Jason Pero: Sure. One of the things – I spend a lot of time, number one, listening to podcasts like yours. That keeps you up with industry content, it keeps you up with the mindset of fellow investors. I’m always reading, whether it’s business books, personal development books… And then journaling – setting goals, reviewing and refining those goals as an ongoing process… Just writing, just jotting down ideas, jotting down thoughts. If a quote strikes me in something that I read, writing down and kind of reflecting on it. I spend a lot of time doing that.

It’s hard to take 30 minutes a day to do that, for me at least… Go where that inspiration hits you. Or if it’s Sunday morning and you’re having a cup of coffee and two hours to read or journal – do it then. But I think it’s important to take time, at least every week, to focus on making yourself a better person.

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

Jason Pero: I sure am.

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

Break: [00:20:25].25] to [00:21:08].29]

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

Jason Pero: Poor Charlie’s Almanack.

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

Jason Pero: The worst deal I’ve done was buying a car wash and laundromat.

Joe Fairless: Please elaborate.

Jason Pero: I thought it’d be a great idea to have a laundromat, because I had laundry machines in my building, and I said “Wow, this is easy. It’s passive income.” There’s nothing passive about owning a laundromat. [laughter] So it was a time suck away from things… I was basically running a business on top of running another business. So I was able to sell that to somebody – and hold back the financing on my end – who had the time and energy and drive to be a small business owner. It wasn’t something for an investor.

Joe Fairless: What  aspect did you think would be passive that was the exact opposite of passive with the laundromat and car wash?

Jason Pero: I thought wrongly — with our apartment buildings you have laundry machines, and whether it’s a third-party service that manages it (which is how we do it now), but back in the day I used to go and collect all my own quarters, and thought “Wow, this is really easy. That’s easy money.” But I didn’t think through — now, this is going back seven years or so, after I quit my job and bought the laundromat… I didn’t really think through what it would take in terms of hiring and firing employees, watching inventory, lining up with folks to fix broken machines when they break down… All that type of stuff, I just didn’t think it through, and just really totally underestimated the amount of work it would take to run such an operation.

Joe Fairless: I probably would too, coming from my apartment investing experience… I’d be like “Oh, a laundromat. We’ll just collect coins, and that will be that.” But yeah, you’re getting yourself into a big ol’ operation.

What’s a deal that you’ve lost money on?

Jason Pero: Well, number one was the laundromat. That was one.

Joe Fairless: How much did you lose?

Jason Pero: Well, it was just  a slow bleed. I would say there’s two components to it. I would say that I probably lost $10,000/year in actual capital that I had to invest in that to make it work… Because I just didn’t have the time to actively manage it. But also, all the time that I did spend doing that was taking away from what I could have been doing in terms of personal development, sourcing other real estate deals, focusing on the deals that do drive revenue and drive profitability to a company.

Joe Fairless: Best ever deal you’ve done?

Jason Pero: The best ever deal was that big 56-unit deal. And I’d say it’s the best because it took me from just buying onesie-twosies, to — that was the first million-dollar deal, and  I think that was the launching pad for every other deal that I’ve done since.

Joe Fairless: Yup, it makes sense. What’s the best way you like to give back to the community?

Jason Pero: Sure. I love to give back. My wife and I are involved with a number of philanthropic organizations locally… But in terms of actual time and energy, I love to give back to helping out younger investors that maybe are on a similar path that I was on when I started, and just need some guidance. I think I was very fortunate to have some really solid mentors along the way. Nothing is more satisfying than being able to mentor somebody else coming up in the business and helping them along on their journey.

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

Jason Pero: I’m sure you’re gonna put my number in the show notes. They can reach out via email, text, they can find me on Facebook or LinkedIn as well…

Joe Fairless: Jason, thanks for being on the show, talking about the evolution of your business – the first deal, and then the tipping point that really catapulted you to where you’re at now, and that is responding to the newspaper ad, and developing a connection with the gentleman who ended up mentoring you some, and then also selling you another 72 units that he had in his portfolio… Which takes you to a whole different level.

And then your recent syndication, your approach with that, the management company that you have created, and some challenges along the way there and how you overcame them… And to stay away from laundromats and car washes. Unless you’re a really bored person; then it sounds like that would be a very active job to keep you busy.

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

Jason Pero: Thanks. You too, Joe. Have  a great day.

Ari from Kapel Real Estate on flyer for the Best Show Ever

JF1651: How To Control $1.5 Million In Real Estate As A Part Time Investor with Ari

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Ari decided to take more control of his financial destiny, so he began investing in real estate. We’ll hear his story of working full time at a job while working on a real estate portfolio part time. For most of us, this is how we get started, and hearing a successful example to follow can help anyone who wants to be in the same situation as Ari. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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

With us today, Ari from Kapel Real Estate. How are you doing, Ari?

Ari: I’m doing great, really honored to be on the show. I feel like I’m talking to a real estate celebrity, this is very exciting for me! Thank you for having me on.

Joe Fairless: Yeah, my pleasure, and looking forward to our conversation. A little bit about Ari – he went from being a journalist to marketing for 10+ years, and now a part-time real estate investor. He controls over 1.5 million dollars worth of real estate, while he’s working full-time. His company is Kapel Real Estate, and based in Chicago, Illinois. With that being said, Ari, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Ari: Yes, absolutely! I consider myself a journalist with an entrepreneurial mindset, who became an accidental landlord. After investing in single-family homes, I actually got $12,000 deposited into my bank account from just one home because of a clause that I put in a lease, and I was comparing that to my annual bonus I get at my job in sales and marketing. I said, “Hey, I’m doing the wrong thing. I really have to take more control of my financial destiny”, and I thought real estate was a really good opportunity to do that.

Joe Fairless: What was that clause?

Ari: The clause was “If you break the lease, you have to pay three months of rent, plus stay there for an additional three months.” So the tenants just went ahead and paid me six months of rent.

Joe Fairless: Huh. So if you break the lease, you have to pay three months of rent, plus you have to stay there an additional three months, but they broke the lease, so they weren’t staying there, so essentially if you break the lease you have to pay six months’ rent?

Ari: Essentially, yes.

Joe Fairless: And I’d love for you to continue what you’re about to say, but just a follow-up question – I believe there are laws in place that if the fees that you charge tenants are above and beyond what’s typical when you go to court, then the ruling will not go in your favor, because it’s like “Well, this is way above and beyond what you should be charging.” Was that ever a factor whenever you were drafting that up, or did you have an attorney look at that clause?

Ari: Yes, I did, and I just wanna caveat this by saying that I am not a real estate attorney. What I did is I had this drafted up with real estate attorney, within the state that this property is located and it was compliant with the regulations, because the penalty was just three months; it was actually a three-year lease, and then they had to stay an additional three months while I find another tenant.

The tenants actually decided, because they were going to be leaving, just to pay the six months all in one go.

Joe Fairless: Okay. Yeah, with it being a three-year lease, I imagine that helped your cause. And the state that the property was in – is that Illinois?

Ari: Pennsylvania. Most of my investments are in Pennsylvania.

Joe Fairless: Okay. Please continue. I just wanted to clarify that.

Ari: Great. So I was doing the math after I was investing in the single-family homes, and I saw, “Hey, if I’m getting cashflow between $200 and $400 a month, it’s probably gonna take me 10 to 15 years to reach financial freedom, so I should look at something else.”

So I really spent a lot of time figuring out what I should look at and kind of aligning a little bit with my strengths, and I identified that apartment buildings were a good opportunity. Specifically within the apartment buildings, I kind of looked at what I’m good at, what I’m not good at, and really spent a lot of time finding my niche.

With single-family homes and things of that nature it’s very difficult for me — I don’t have time to drive for dollars, so I can’t get the deals good enough. I’m not good at fixing toilets, appliances, anything electrical, carpentry, things of that nature, so I can’t kind of DIY it. I can’t DIY, be a property manager, because I have a demanding full-time job, so I felt I wasn’t able to get the returns that a lot of my competition was able to get with the smaller units, but I found a white space in the market where I thought I could get better results, and I wanna tell you a little bit about the white space.

Joe Fairless: Cool.

Ari: There are apartment buildings that are around a million dollars or somewhere around that range, that are too big for the local real estate investing crowd to want to sink their teeth in, but they’re too small for the big institutional money to go in after. So when we make offers on these sort of properties, we see that we don’t have a lot of competition, and we’re able to get it at a good deal.

Joe Fairless: How many have you purchased?

Ari: We recently purchased a 20-unit deal, and we’re also in the process with some other deals.

Joe Fairless: Okay. So let’s talk about that 20-unit deal. What was the purchase price?

Ari: The purchase price – we ended up getting it for only $780,000. It was listed on the market for over $900,000, but we really went in there understanding a lot about the sellers, the sellers’ motivation, building credibility, and we put together a very strong offer to be able to get it under contract.

One of the things that we utilized in our offer strategy that I think is very helpful is very big Escrow money. We put $100,000 in Escrow, contingent on financial and inspections in order to close this. In that alone, we were very transparent about our financial background, our financial profile and our net worth, and we gave them a lot of information that really put them at ease to know that we really could close.

That coupled with relationship building, we were local to the area, we saw them, we built rapport, really solidified our offer and getting it under agreement. And we moved very quickly, too.

Joe Fairless: Where are you based, Chicago, or Pennsylvania?

Ari: Well, I’m from Chicago, but now I’m based in central Pennsylvania.

Joe Fairless: Okay, got it. So this property is also in Pennsylvania.

Ari: That’s correct.

Joe Fairless: Cool. And you mentioned you knew the seller, or you got to know the seller and their motivation. What was their motivation for selling?

Ari: Well, they were part of a partnership, and one of the partners owns a restaurant chain, and they were looking to expand into New Jersey, so they wanted liquidity. Actually, the ownership team had actually put some really strong improvement in place. They weren’t looking to sell this, they were fixing it like they wanted to hold on to it. What they did for the heat pumps, the air handlers, they fixed the roof, they black-topped the parking lot… They made a lot of good, sound improvements on the building, like they were gonna hold it for the long haul, but one of the partners needed to get out.

Joe Fairless: How did you find the deal?

Ari: I found the deal going to a local meetup. We have a lot of meetups in Central Pennsylvania, that a  lot of times at the front of the meetings anybody that has deals puts it out there. I had gone through the process of trying to build a relationship with commercial realtors, I had gone through the relationship of marketing online, marketing directly to sellers, but this was kind of a word of mouth at a meetup… And it wasn’t actually just presented to me, it was presented to the entire meetup group, but I was the kind of guy that went full steam ahead on it, and moved quick on it.

Joe Fairless: You said “we”, who’s “we”?

Ari: “We” is me and a group of people that I have that invest, but they’re a little more passive.

Joe Fairless: How do you structure that with them?

Ari: We structure it through the operating agreement with the LLC. It’s a smaller amount of people. Again, I’m not a real estate attorney; I would say please check with your real estate attorney on how you wanna do it… But we have it a little bit more the promissory note, LLC operating agreement structure.

Joe Fairless: And how much of your own money did you put into the deal?

Ari: I put probably about 50k of my own money, and I raised over $200,000.

Joe Fairless: And what type of financing did you put on it?

Ari: Ten-year fixed, because I know we’re kind of towards the top of the cycle, so I wanted to have more long-term debt on this asset.

Joe Fairless: What lender and what type of program did you use for that ten-year fixed?

Ari: I got a portfolio lender with a local bank in the region. It’s a 20-year amortization, and I got it for 4.89%, which was really a good rate at that time. I also was able to negotiate with the bank, built a good relationship, so we were able to lock it up for that amount of time at a good rate. I know money is hard to come by nowadays.

Joe Fairless: The $50,000 that you put in, and in total there was $250,000 worth of equity into the deal, correct?

Ari: Some of that $50,000 was due diligence costs, so I would say the amount that I put into the equity of the deal, my personal money, was closer to 25k-30k.

Joe Fairless: Okay. But you got reimbursed at closing, right? For the due diligence costs.

Ari: Because this was my first deal, I actually did not charge any sort of acquisition fee. I’m not charging any management fee, I’m not gonna have a disposition fee. So this was really — because I’d had results with smaller properties, I wanted to demonstrate that I could have those results on a larger property. So for my investors I didn’t charge any fees at all.

Joe Fairless: For the loan, did you and your investors have to submit financials to get approved for it?

Ari: Yes, we both had to guarantee.

Joe Fairless: Okay. When you say “both”, did you just have one other investor?

Ari: One other investor put up the most money that they had, to guarantee. The other investors put up a smaller amount, so the bank didn’t require their personal guarantee.

Joe Fairless: Got it. How many months ago did you purchase this 20-unit?

Ari: We closed on it on March of 2018.

Joe Fairless: Okay, so about a year ago. And one last question about going into it, and then we’ll talk about how it’s gone over the last year – what was your business plan going into it?

Ari: My business plan going into it was purchase it, make a few improvements, a few adjustments, hold on to it… We weren’t planning to do either a reposition or add much value to it. We thought it was a solid investment. We had ten-year fixed money. We wanted to try it out, see how it was performing. We didn’t have a big refi out. We have ten-year fixed money, so this is kind of like what I look at as the backbone of our real estate investing business, this would be that solid asset that keeps performing for us over ten years. We didn’t plan to juice this or pull money out at all. We plan to refi in ten years.

Joe Fairless: So what’s transpired over the last year or so since you’ve had it?

Ari: Over the last year or so we’ve found out that a good amount of tenants were not paying as much rent, or they weren’t paying on time, so we’ve actually had 11 turnovers, we had to buy a lot of new heating systems, we had three evictions, new HVAC systems… But long story short, we increased gross rents at the end of the day by 15%, and we reduced our fixed maintenance costs by 8%. So all in all, we’ve added about $250,000 worth of value to this property in the first six months. That was not something that we were setting out to do, but when we saw the rent wasn’t coming in, we tested the market with a little bit higher rents, and the market responded well. We had good results with it.

Joe Fairless: Did you attempt to put in a similar clause that you had when you received the $12,000 deposit for your one house with these units?

Ari: That’s a good question. We’re using a professional property management, and they standardly don’t use that sort of clause in language… But now that you mention it like that, I’m gonna talk to them about it to see what makes sense to do with this asset.

Joe Fairless: So you’ve got the 20 units, and do you still have single-family homes?

Ari: Yes, I’ve got a single-family home. We’re about to close on another five units as well. We’ve got a fourplex and another single-family home, but really the sweet spot that we wanna focus on is the million-dollar range up to two-million-dollar range apartment buildings.

Joe Fairless: You said you’re about to close on the five units… The single-family home – how long ago did you purchase that and what did you buy it for?

Ari: We purchased that single-family home back in 2013, and we purchased it for about $230,000. That was our original kind of — first house I ever bought with my family; it’s a house-hack, essentially. We could sell it, but we were approached, someone wanted to rent it, people that were viewing it. So we crunched the numbers and we rented it out.

Since the market has gotten so hot in that part of Pennsylvania, that town we bought it in, we just recently sold it for $280,000, so we got about $50,000 higher than what we bought it for.

Joe Fairless: And then is the five-unit under contract right now?

Ari: Yeah, we’re about to close in the middle of February.

Joe Fairless: Cool. And what are the numbers on that one?

Ari: It’s a single-family and a fourplex. We were able to get it for about $215,000, or something like that… And there’s upside in rent from a cap rate perspective. It’s close to a 8%-9% cap. These are good investments, and we are very much value investors, which is why we haven’t been as active in 2018. It’s not that we haven’t evaluated, we just haven’t gotten under agreement on a lot of stuff because of the cycle of the market right now.

Joe Fairless: The lessons that you learned on the 20-unit, if you were presented the exact same scenario where you come across a 20-unit, it’s literally the exact same thing – anything you would do differently going into the deal, that you learned from the initial acquisition of the first 20-unit?

Ari: I may do the apostille certificates on the rents, to make sure that we’re getting the rents…

Joe Fairless: The what certificates?

Ari: From what I understand during the due diligence, there’s the option to do some sort of apostille certificate, where you can verify that the rent is actually coming into the property manager’s bank account, or wherever. That’s one piece I would probably do differently.

When we did the inspection, the inspector noticed that there was a connection to an underground storage tank that may or may not have oil in it, environmental issues in it. So we didn’t even follow up with that until the last minute, and we were very worried that there were some issues with it… So we did  a full environmental test, where they did the soils and everything, and everything’s okay, and everything turned out fine, because it was handled properly, closed out properly… But if it wasn’t, that would have been very challenging. So I would have looked at that clue that we got from the initial inspection a lot earlier. And spending a little more time with due diligence on the market rents, because this place didn’t appear to be under-rented if you look right next to it…

But the quality of what these units had — because every tenant can control their heat and A/C and everything like that, and it has dishwashers in it, which in the area around it the rentals did not… And we’ve actually been able to raise the rent more. If we would have done probably a broader analysis of the greater submarket, we would have seen that value was there earlier.

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

Ari: I would say identify your niche and competitive advantage and leverage it very aggressively to differentiate from the crowd, because you’re always gonna have competition, there’s always gonna be people that can do things better than you… So what’s your unfair competitive advantage? For me, I had a corporate job, so me connecting with  banks, commercial realtors, things like that that was more business-related came easier and more natural to me, and I made better relationships that way, than if I was trying to talk to a motivated seller in a residential environment.

That, and I think study a lot about offer; for me I think it’s so important, and I try to read as much as I can about offer strategy and how to structure offers in negotiation.

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

Ari: Yes!

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

Break: [00:19:10].18] to [00:20:08].06]

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

Ari: Best ever book — besides the Best Ever Real Estate Investing Advice by you, Joe, is “Crushing it in Commercial Real Estate” by Brian Murray.

Joe Fairless: Best ever deal you’ve done?

Ari: This 20-unit deal in central Pennsylvania.

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

Ari: Well, one thing is in the accounting I was using my same CPA, and basically what they did was they depreciated all my renovation costs across 30 years, and I had to catch it later and then pay to do the refilling, to do that properly. So I’d say get a professional real estate CPA earlier.

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

Ari: I really like to do things like trash cleanup and plant trees in the places that I invest, just to spruce up the community.

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

Ari: You can go to my YouTube channel, Kapel Real Estate, or you can email me at kapelrealestate@gmail.com.

Joe Fairless: Well, thank you so much for being on the show, talking about your 20-unit, how you structured it with your partners… You know, one follow-up question on that structure – is there any preferred return on the structure, or is it just whatever percent ownership in the deal, that’s the percent of cashflow that you get?

Ari: There is a preferred return.

Joe Fairless: What is it?

Ari: It is currently at 5%.

Joe Fairless: Cool. And you said currently, so does it change throughout the deal?

Ari: No, I would say that’s where it is right now. It does not change throughout the deal.

Joe Fairless: Cool. Well, I really enjoyed learning about that deal, and thanks for bringing it up, talking about the lessons learned, and what you all have done over the course of the past 12 or so months to improve the property.

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

Ari: Thanks so much, Joe. I really appreciate it.

Best Show Ever flyer with Ben Risser as guest

JF1385: Evaluating Value-Add Apartment Syndications with Ben Risser

Listen to the Episode Below (21:59)
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Ben has been building his real estate portfolio since 2010, and is here today to walk us through his process for evaluating and underwriting a value-add syndication. As an aerospace engineer, Ben is very thorough and methodical in his approach to underwriting, which is a fantastic as a listener looking to learn more about the value-add apartment syndication process. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


Best Ever Tweet:


Ben Risser Real Estate Background:

  • Syndicator of commercial real estate and business consultant
  • Began building real estate business in 2010 and has syndicated $7 Million in commercial real estate
  • Based in Lititz, PA
  • Say hi to him on Facebook and LinkedIn as “Ben Risser”
  • Best Ever Book: Rich Dad, Poor Dad


A couple of notes from Ben:

“One thing I stated that I would clarify, regarding being conservative on rental upside.  I underwrite to a lower upside until I have more experience in a given market, or have collected a sufficient quantity and quality of data to increase the statistical confidence in the rental upside estimate.”

His revised “Biggest Mistake Ever in Real Estate” answer:

“Buying a fixer upper house, under the condition with your wife, that you’ll renovate it to what she wants, and then having two more kids.”

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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, Ben Risser. How are you doing, Ben?

Ben Risser: Good! How are you doing?

Joe Fairless: I’m doing well, and nice to have you on the show. A little bit about Ben – he is a syndicator of commercial real estate and a business consultant. He began building a real estate business in 2010 and has syndicated seven million dollars in commercial real estate. He’s currently managing nearly 10 million dollars in projects, we’ll get specifics on that… And he’s based in Pennsylvania. How do you pronounce that town that you’re in?

Ben Risser: Lititz.

Joe Fairless: Lititz.

Ben Risser: Lancaster County.

Joe Fairless: Lancaster County, Pennsylvania. So with that being said, Ben, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Ben Risser: Sure. My background is aerospace engineering; it could be more different than commercial real estate. I went to school for it, I worked at Boeing for quite a while. I left aerospace engineering about a year or so ago, and went with my real estate business full-time, that I, as Joe mentioned earlier, started in 2010, and focused in earnest on multifamily syndication maybe a little over a year ago. So that’s my main focus right now – multifamily syndications, as well as we do underwriting for private equity folks, for other syndicators on a consulting basis, as well.

Joe Fairless: And when you say “we”, who’s we?

Ben Risser: I have a couple of gentlemen that I work with as independent contractors who kind of have the same background as I do; they have the same educational background, and also one of the things I like is I’m a chartered financial analyst candidate, so I managed to find a gentleman who also is pursuing that too, so we think alike, and he makes an awesome underwriter.

So I have about two underwriters helping me out with all the deals coming across my desk right now.

Joe Fairless: You all sound like a bunch of smart cookies, first off… [laughs] Secondly, one thing that I’ve seen in my business is it’s better – I’ll speak for my business – for me to have business partners who have complementary strengths, not necessarily the same background, same educational approach that I have, otherwise we’re replicating things and I’m not able to bring in others who can compliment me. You mentioned that you’ve got all the same stuff, so educate me on why that’s a good thing.

Ben Risser: Absolutely, that’s a great question. So I agree in terms of business partnerships we definitely want to  have somebody who is a complement; a lot of the times it’s a polar opposite. My partner on the North Carolina deals, Matt Faircloth – we test out as polar opposites. Me and Matt are great partners, because he’s strong where I’m not, and I’m strong where he doesn’t care to be strong… So the two individuals that I have working for me are working as underwriters.

My background being in engineering, I’m just addicted to analysis. I can’t help but analyze things to the nth degree, and then my law for business and economics is a really good fit also. These guys are basically helping me scale up my capacity for acquisitions activity, and after I get more assets under management, I’ll probably scale up to support asset management activity… So I’m really trying to set myself up to scale, and not get overrun with working in the business and always give myself some bandwidth to work on the business.

Joe Fairless: That makes sense. Thanks for elaborating on that. The seven million dollar syndication – is that one deal, or is that multiple deals?

Ben Risser: That is one deal currently, and that would be the deal I’m doing a partnership with Matt Faircloth and [unintelligible [00:04:40].11] North Carolina, and then that’s also the ten-million-dollar project which we’re in the beginning phases of the value-add stage of the project… So we’re working very closely with the construction management, the property manager to really change the branding of that product on the market and make it competitive and everything it can be in the submarket it’s in.

Joe Fairless: Oh, wow. Alright, let’s talk about that. Just so I’m super clear – the seven million dollars is also the ten million dollars? Help me understand this.

Ben Risser: The purchase price was 6.65 million, and the project value, the all-in project cost is almost 10.

Joe Fairless: Got it. Alright, I’m with you. Cool. So what can you tell us about this project? I’d love to learn more and hear what you’ve got going on.

Ben Risser: Sure. This property consisted of two multifamily products that were adjacent to each other, and we’ve purchased them both together and rebranded them as a single property, [unintelligible [00:05:37].07] It was a very under-performing asset; it had very poor property management, so it basically checked all the boxes as far as what us value-add syndicators look for – the management was under distress, the property was under distress, and it was basically a D, C- property residing in a B market. It was just ripe for value-add.

So far, I’m the guy that crunches the financial performance numbers and all that, and it looks like we’re on track to exceed our expectations.

Joe Fairless: Wow, outstanding. How long ago did you all buy these properties?

Ben Risser: I started underwriting this June of last year, and we closed on it in January 2018, so it was quite the marathon to get through closing… But we did finally close on it in January of 2018. It took us a little while to get going, and I can speak to that in the best investing advice ever, about some of the lessons learned. Now we’re kind of in full swing on the value-add.

Joe Fairless: I would love to hear them in a bit when we talk about your best advice ever. As far as the two properties that you bought, you said they’re adjacent from each other, and you rebranded as one… Why rebrand them as one, versus keep them separate?

Ben Risser: Well, I think the products – they were originally built and owned by the same developer, and somewhere along the chain of title they got separated, they got into different ownership, and I think they came back together. So they were trying to operate it as a joint property, and they had a nasty barbed wire and razor fence going right through the middle of the property, but yet they still had this concrete pad that connected the two properties… And when you walked the property, it just made sense to join the two properties.

So we were ripping out all that nasty fencing, which is also a safety hazard – no insurance company wants to ensure a property with razor wire… But the properties are similar enough, and just the layout lends itself to market it as a single asset.

Joe Fairless: They’re similar enough in terms of unit mix as well?

Ben Risser: And the appearance. The shingle color, the brick, the structure… It all just seems like it was almost built as a single property, and for some reason it was parceled as two.

Joe Fairless: When you looked at the exit, and knowing you’re next-level aerospace engineering background in underwriting, when you looked at the exit I’m sure you modeled it based on two individual exits, versus combining the portfolio. One argument for keeping them separate would be you can sell one off and keep the other, versus if you consolidate, then you have one sell, and it doesn’t give you as much flexibility… How did you think about that from an underwriting standpoint?

Ben Risser: When we underwrote the property, we combined the financials and we just viewed it as a single asset, and really the upside in this particular value-add  — actually adding the value is not from appreciation, so we did not model selling them out separately, although I can see what you’re saying, that it gives you a little bit more versatility to sell off half of it and keep the other. But the deal structure, the equity structure, the financing – all of that was done by viewing the two properties as one.

Joe Fairless: When you mentioned earlier underperforming and property under distress, management under distress – can you elaborate on that, just in case a Best Ever listener is not familiar with what that might mean?

Ben Risser: Sure. I think we had about 60k-70k in delinquency, which is unpaid rent. There were a lot of people — they’ve put a lot of warm bodies in units that pumped up the occupancy, but they really weren’t paying the rent.. So there was all that kind of tricks going on, and there were verbal, uncontracted agreements between the people in the office and the tenants, and there were just all kinds of shenanigans going on.

Joe Fairless: [laughs]

Ben Risser: And there was some drug activity, and I think the police were instructed by the prior owners to stay away… So it really allowed the property just to degrade, and the clientele in that property just got worse and worse. We rolled out the red carpet for the police department and they just had [unintelligible [00:09:48].18] for like a week or so.

Joe Fairless: The police were instructed to stay away from the property…

Ben Risser: Yeah. This is a place where — we didn’t really know this when we took ownership of it, but pizza shops didn’t deliver there, people just didn’t wanna go in there.

Joe Fairless: Do you remember the physical occupancy and the economic occupancy when you took over?

Ben Risser: Yes… It was better when we took over versus a month or so later, because those things got larger. So the occupancy I believe when we took over was right around 20% vacant, and then we had more on economic loss – I think it may have been like 30% economic loss… But after we took ownership and did the whole new sheriff in town, a bunch of people just kind of excused themselves, and when we’d file evictions, they’d skip… And we went to 40% economic loss, but that’s okay, because that’s not the tenant base we’re going for; we’re looking to build a safe, clean, family-friendly, workforce housing. That’s what we’re looking to bring to the market there, and I think the market is going to reward it.

Thus far, the interest that we’re getting on the renovated units and the rent surveys we’re taking – it’s all looking very good.

Joe Fairless: That is great to hear, especially for those residents who are living there and just looking for exactly what you’re providing, and would like some safety.

Ben Risser: Yeah, there’s the residents that are grumpy that things are changing because they don’t like change, and then there’s the residents that are grateful and happy that you’re doing what you’re doing.

Joe Fairless: Yup, absolutely… As with all things in life, right? [laughs] Okay, let’s talk a little bit about investor structure – how do you structure that with your investors?

Ben Risser: This particular deal was a 70/30 split, where the limited partnership (the investors) owned 70% of the asset, and the GP owned 30% of the asset. We have a 6% pref starting year two, and an 8% pref starting year three and thereafter. That was the general deal structure, and we purchased the property with a bridge loan, and all in all it involved about 3.2 million in equity raise, which my partner Matt Faircloth accomplished within his own network, and then I did all the underwriting and helped along the road to closing, and I also help with asset management now.

We kind of had a GP split worksheet where each person kind of takes ownership for various responsibilities in the GP, and it [unintelligible [00:12:05].22] That’s kind of how we operate.

Joe Fairless: On the investor structure, the 70/30 split makes sense. As far as the preferred returns – 6% in year two… So year one, because there’s so much heavylifting, there’s basically no returns, or no preferred returns either?

Ben Risser: Right, so for this particular deal, since it was such a heavy lift, we went out for our investors and basically said “Hey, year one, if we can bring you a return, we will, but don’t count on it, because this is the situation of the property. It’s truly a big value-add, so there’s not a lot of cashflow in year one because you’re reorganizing things and kicking out the tenants who aren’t paying, and spending a lot of money on various things to improve the property.”

Joe Fairless: Got it. And then year three and thereafter it’s 8% – is that correct?

Ben Risser: Correct. That’s how we structured it, just to pick it up, and then we’re looking to refi as soon as possible. We underwrote the refi into year three, but we might be able to refi before that.

Joe Fairless: I think you all will certainly do a refi before that. What is your best real estate investing advice ever?

Ben Risser: Well, I would say – and this is based on my lessons learned from this first syndication for me; Matt’s done several syndications already… But I would say underwrite conservatively; you’ll thank yourself. I have a few different bullet points here. I’d say validate the cap-ex estimates as soon as possible; have your cap-ex team ready to roll on day one. Have your marketing strategy ready to go day one. Work with the best property management company you can find. It’s super critical.

Joe Fairless: Yes. Amen to all of those things. Let’s dig in. Underwrite conservatively – what do you mean by that specifically?

Ben Risser: If you get emotional or start to find yourself rationalizing the rental upside, you need to step back and pour a cold bucket of water on yourself, because you’re gonna hate yourself if you underwrite to an upside that is too optimistic. And then expenses – we underwrote to expenses that are greater than the expenses we’re realizing right now, and it’s a good thing, because it’s giving us some breathing room because [unintelligible [00:14:16].06] So when you’re conservative on the income side and the expense side, you don’t know exactly how it’s gonna shake out once you’re in the deal, but you’ll be glad that you were conservative on both sides.

Joe Fairless: As far as underwriting to an upside that is too optimistic – optimism is subjective… So what specifically with your underwriting would be too optimistic versus just right? How can we quantify that?

Ben Risser: I would say there’s the upside that you’ll find in the OM. You kind of take that one with a grain of salt. Then what’s really important during your due diligence process is go out and do your actual boots on the ground rent surveys with your competitors, and do your online research and see what people are asking, and to the best of your ability find out where things are actually running, because what they’re asking for isn’t necessarily what they’re all getting. And then whatever you get, subtract $30-$50/month off of that.

Joe Fairless: Wow. How come?

Ben Risser: That was just out of conservatism. We underwrote pretty close to what we saw on the market, and thankfully, after we’ve taken ownership, we’ve realized that the market will rent for significantly more than what we underwrote to based on the product that we’ve been bringing to market. So it’s a double-edged sword, because if you underwrite too conservatively, you’ll never close on a deal… But there’s this line that you have to draw, and it comes from experience; the more experience you have, the tighter — or I should say the less personal error you can kind of assume in your underwriting, because you can be a little bit more sharp on it.

We underwrote to slightly less than we estimated the market to be, and it turns out it’s working out alright and we were able to close. I understand sometimes that eliminates a lot of deals.

Joe Fairless: Can you give an example of the expenses, where you were being conservative with expenses — maybe one particular line item…?

Ben Risser: When you get the financials from a broker, they all have things bucketed and broken out differently, and they’re not always clear. Sometimes service contracts are included in the RNM, sometimes they’re not, or sometimes some are and some aren’t… So to the best of your ability you’ve gotta parse things out. We actually underwrote with a lower RNM per door expense during the renovation period, and then we ramped up our RNM expense after the renovation period, and I think that’s in addition to a $250/door operating reserve we’ve put in there, and a lot of lenders like to see that anyway.

But I think the service contracts – we ended up underwriting to a little bit more than we were actually gonna get under contract, because after we took ownership, we have an amazing maintenance supervisor who is the best negotiator ever, and he’s talked down a lot of our initial contract estimates, so we’re actually doing better on service contracts than we underwrote to.

Joe Fairless: As far as validating cap-ex (capital expenditures), as far as getting the cap-ex started day one – what can you tell us about those two things?

Ben Risser: We had some challenges getting our bids assembled on time. We have a great construction management company, but they had some HR issues that slowed us up ahead of closing, and it kind of delayed our schedule on pooling together our budgets and getting all of our bids unsigned, so that right after closing we could get all of our contracts signed and get the boots on the ground as soon as possible. So we just kind of ran late on getting all the contracts signed… It just didn’t start as soon as we would have liked it to, and the same happened on the marketing end, where I had every intention of pulling together the marketing strategy, and having the signage, a good concept, where pretty much right after closing I could almost set a signage company to start building and get them on the calendar to install.

So the validation – after closing we found there were knicks and knacks, and this and that, that added to our per-unit cost on cap-ex… And I’m just thinking, was there something I could have done ahead of closing where we could have understood, like “Oh yeah, actually it’s gonna cost you $1,500 more a unit than you’re underwriting to.” The earlier you can discover those things, the better.

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

Ben Risser: Sure.

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

Break: [00:18:36].18] to [00:19:19].19]

Joe Fairless: Best ever book you’ve read?

Ben Risser: Rich Dad, Poor Dad.

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

Ben Risser: That we haven’t talked about… This was my first real estate transaction, so I can’t tell you of another deal like this…

Joe Fairless: Fair enough, fair enough. What’s a mistake you’ve made on this transaction that you haven’t mentioned yet?

Ben Risser: I would say — I can’t think of one I haven’t mentioned yet, because I think I aired my laundry pretty–

Joe Fairless: [laughs] Fair enough. What is the best ever way you like to give back?

Ben Risser: I am passionate about fighting human trafficking and anything I can do to support organizations that combat that, I’m all ears.

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

Ben Risser: My e-mail, b.risser@providencecapital.org.

Joe Fairless: Ben, thank you so much for being on the show and giving us a very detailed analysis and overview — maybe not overview, but a detailed walkthrough of your property that you’re doing right now… The 6.6 million dollar purchase, overall when all said and done – looking at around a 10 million dollar property. The two properties that you bought adjacent from each other, why you all chose to group them as one versus leave them as individuals, and then the four lessons learned, and perhaps maybe not learned, but just lessons that are reinforced through the process, because it sounds like you are underwriting conservatively… So number one, underwrite conservatively. Two, validate cap-ex asap. Get the cap-ex stuff started day one, and get the marketing started day one. Those are the four things.

And just talking through how you structured it with your investors, and just the overall value-add play. Really grateful you were on the show. Lots of good stuff, especially for apartment investors, and then also just for real estate investors to hear how a big project is done.

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

Ben Risser: Thank you so much, Joe.

Best Ever Real Estate Show Banner

JF936: How to Raise MILLION$ to Buy Notes #SkillSetSunday

Listen to the Episode Below (27:36)
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Raising money to buy debt, that’s correct… Sounds strange but it pays off! Our guest has been a previous guest on the show and he is a successful investor with many hats, and today he is sharing with us how it’s possible to raise millions of dollars to purchase notes. You don’t want to miss this!

Best Ever Tweet:

Dave Van Horn Real Estate Background:

– President of PPR Note Co., managing several funds that buy, sell, and hold residential mortgages nationwide
– Over 30 years of residential and commercial real estate experience
– Also is a Blogger, national speaker, and founder of Strategic Investor Alliance (SIA)
– Began as a contractor and has done everything from fix and flips to Raising Private Money
– Based in Philadelphia, Pennsylvania
– Say hi to him at http://www.pprnoteco.com


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Chris Clothier and Joe Fairless

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 don’t talk about any fluffy stuff, we only talk about the best advice ever. I hope you’re having a Best Ever weekend.

Because it is Sunday, we’re doing a special segment called Skill Set Sunday. By the end of our conversation you’re gonna come away with a skill that maybe you didn’t have before, or perhaps you’ll hone your skill. The skill that we’re gonna be talking about today – I love this topic – raising capital.

We’ve got our Best Ever guest, Dave Van Horn, who is going to raise at least 50 million dollars this year, and has already raised 50 million dollars. Dave, how are you doing?

Dave Van Horn: Hey, thanks for inviting me to the Best Ever podcast, Joe.

Joe Fairless: My pleasure. Well, if you recognize Dave’s name, you are a very loyal Best Ever listener, because Dave was on episode number 39, way back 12th October, 2012. You were one of the first episodes that I did when I started doing this thing daily. I started being a psycho about it, and I was like, “You know what? I’m gonna do  the podcast daily and see how it shakes out.”

In episode 39 he talks about his best advice ever and more of his background. We’re not gonna talk about that in detail, we’re gonna talk about raising money and what he raises money for. He’s based in Philadelphia, Pennsylvania. You can say hi to him at his website, it’s in the show notes page.

Dave, do you wanna give the Best Ever listeners a little bit about your background, just to get some context?

Dave Van Horn: Sure, Joe. The last podcast was more about my real estate background. I started in construction, became a realtor when I was 26, then became an investor, and then did fix and flips and buy and hold. Then I became a lender, and then got into notes. My primary role in the notes space is as a fundraiser. Then I did a bunch of stuff in-between: I sold insurance, I did property management, I traded options, and then I had a wife and two kids, too… But all those things played a role into what I can do today.

My actual fundraising started over time through the real estate side. I started out with the typical real estate investor, where they’re raising money for one deal, or eventually drift into private money or hard money, and then it just morphed and morphed and morphed, and I eventually got into raising commercial real estate capital. I did that, and then off into the notes space. So it kind of evolved.

Joe Fairless: Right now, in your role, you are raising money for what?

Dave Van Horn: Primarily – I wear a few hats, but primarily I’m heavily into the notes space, which is one of the four family residential mortgages nationwide, and we buy from the big players and the banks. We buy large quantities of distressed mortgages mostly, and we don’t deal in commercial and we don’t deal in unsecured or student loan debt, or that type. So we’re in the debt space, basically.

Joe Fairless: Let’s add some context to that for perhaps some Best Ever listeners who aren’t familiar with note buying. I’ve never done note buying, so I don’t have direct experience in it. When you raise a million bucks and you buy a million dollars worth of residential mortgages, it’s different from, say, when I raise a million dollars and I buy an apartment community, because I’m raising a million and I’m putting a loan on it, whereas you’re raising a million and you’re buying the loan, is that correct?

Dave Van Horn: Yes, you’re right. We can’t really leverage like you could. When I raised capital for commercial real estate in the very beginning, I was doing it with mobile home parks, for example. We bought 32 million dollars worth of mobile home parks and we raised 8 million dollars for down payments, closing costs and fix-up. So you can see, you’re able to leverage to financing – whether it’s owner financing or bank financing; in the resident note space, you’re putting it up cash, but you’re buying it at a big discount.

Some loans can be releveraged; first mortgages are easier to releverage for the bank, but it is much more difficult buying distressed assets and saying, “I want a loan on that”, because think about it – they wouldn’t get their mind around “How can you collect on what they can’t?”

Joe Fairless: So you’ve raised money for mobile home parks, and you’re primarily raising money for notes. Who are your business partners who are bringing the equity? I’m not looking for names, I’m just looking for — yeah, I want their social security number, they bank account number… No, I’m looking for how you know them, that’s the root of the question.

Dave Van Horn: It’s funny that you say that, because my fundraising started in the real estate side, and in the very beginning I actually started a group called REING (Real Estate Investor Networking Group), and actually it still runs today. There’s a branch in Chicago and one in Philadelphia. When we first started, it was 12 people at lunch, and over a six-year period, we ended up in five states and six cities, from Baltimore to New York. Obviously, it grew, and we have about 8,000 people in our database. That was before the crash, in around 2008.

We had this real estate group, and one of my roles in the group — we did networking, we had dinner, people would bring their deals to the meetings that we did monthly, and I used to interview the speakers. What would happen over time was people would come to me saying, “Can we present to your group?” and a lot of times I’d get an opportunity to raise capital for them. I had a large network, so they would say, “Hey, would you help us raise money for mobile home parks [unintelligible [00:07:59].15] and commercial offers, condos, and things like that. That’s how it started.

Then one of our speakers happened to be a gentleman out of New York who was raising capital for pools of distressed mortgages. Of course, he came down and spoke, and everybody thought it was a great idea, and of course I didn’t do anything for like three years… But I had a partner who did, and then around the time of the market changing, we were like — my one partner today was a former lender and I was a real estate guy, and we were like “Hey, which side of the fence do we wanna be on in this downturn?” We reached out to the guy in New York and he showed us the collection side of the mortgage space; he knew we can raise capital, because we were doing it for commercial real estate.

So it’s definitely a little bit harder to raise money, especially… We started out in second mortgages, so I’ll give you an idea, Joe… You know what it’s like with an apartment space, for example – it’s much different to raise money for apartments or mobile home parks than it is to raise it for delinquent upside down second mortgages with no equity in bankruptcy. [laughter] If you can raise money for that, you can raise money for anything.

But I was fortunate and really blessed that I was able to learn from this one company who was in New Jersey and they were raising money for mobile home parks in Michigan and Indiana, and they did have one place in Pennsylvania. The beauty of that was by raising capital for them, I was able to learn how to raise capital and get paid to do it. That part was really cool.

It was a situation where the deal was good, but their partnership turned bad. But I learned a lot… The new venture appeared in the REING group with the note space. It was like a blessing in disguise. I think the reason I have the success I have today was through some of the hiccups along the way earlier on.

Joe Fairless: I wanna focus on the delinquent upside down mortgage in bankruptcy raising money part, but I do have a question just to close the loop on the mobile home stuff. How were you compensated? How did you know what to charge them for helping gather everyone to raise the money for their deals?

Dave Van Horn: Most of the time it’s through points or a salary plus bonus, that was typically how we were set up. We have different entities. The one deal was like four mobile home parks, and then some of the other mobile home parks were individual parks, but they were all over a hundred units. Then one storage center sat by itself, and the other storage center was part of a park.

There’s a lot of owner financing in that space. That’s a fundamental difference I see today between mobile home parks and apartments – the apartments are easier to get financing on. It’s kind of the same way in the note space… I said seconds are hard to leverage, but first mortgages are easier to leverage; well, it’s the same way if you compare mobile home parks with apartments – apartments are much easier to leverage (the banks can get their mind around that), whereas mobile home parks, it’s a little riskier, it’s a motor vehicle title, it has all this nuance to it, so it’s a little different animal.

Joe Fairless: Just to give a Best Ever listener an idea of what they could make… An example where you raise money for a mobile home park and you’re part of the LLC and you get a salary plus bonus or points – how much is that? How do you know to say “Yes, I’m worth this much because I’m gonna help you raise a million bucks”, or whatever you did?

Dave Van Horn: Well, I was pretty naive back then. We were typically paid points, or… What we were really doing was a lot of times the minimum investment was pretty high – a quarter million dollars was the minimum investment in some of these vehicles… So we didn’t always have a quarter of a million dollars, so we would start our own entity and maybe create 11 shares at 25,000/piece, but the 11th share is my share, and I didn’t really put any capital up. That was one way.

Then sometimes we were bonused from the company for raising money from them, so it was a combination of things. Sometimes we were paid for our marketing expense, and then on the other side we were paid through a piece of the action by putting the deal together, so to speak. So you can get paid both ways… We were fundraisers and investors as well, me and some of the other people raising capital for the group.

Joe Fairless: Now, I love how you said earlier “If you can raise money for delinquent upside down mortgages in bankruptcy, you can raise money for anything”, and I agree. Tell us what insights have you acquired that help you raise money for the perception of what I just said?

Dave Van Horn: [laughs] It’s kind of like “what’s the best advice on that”, right? It’s kind of like honing in on what you’re best at, and that took me a while to figure out in my life. At the time, I did all these crazy things… You’re like “This guy’s unbelievable, how can he do all these things?”, but it was really like a search to figure out what you were good at. What it turned out was that I was really good at this capital side of things… It’s not so much what I do, but how I do it, and it’s about focusing on my strengths, not my weaknesses. I’m not very good at guitar or speaking French, and I could study my brains out and I’ll probably be mediocre at best…

So it’s focusing on what I’m good at, and it’s really about the way I do it – I think it’s by helping people. In the beginning I almost went down the path of the typical guru at first, and gladly switched gears, because what I realized was it’s really about me sharing and helping other people build and preserve their wealth, that type of thing, whether it’s through education and things like that, or low-cost information, books…

It’s really that “give value first” type of thing. I think if you focus on what you do best… And the typical business of raising money is really “Me, me, me, me, me! Hurray for me! I wanna make a lot of money”, or something like that, whereas if you notice, the people that really are good at raising capital have a bigger purpose a lot of times in themselves.

Even when we were doing the mobile home park thing, they were actually building a Christian academy and they were funding it from the proceeds of the parks. So they had a purpose that was bigger than them. You’ll see that today with some businesses, startups where they’ll be digging wells in third world countries. Actually, my assistant’s doing that – she’s going to Nepal this summer. It’s part of the business model, and the charity is built into it. That’s always a cool thing, if you can do that right at the outset.

I think sometimes there’s some good ways to do things to raise money, because it’s much easier to raise money for charity, for example, than to raise money for Dave or Joe. But it’s really about giving value first and helping others, and I think with all the different experience I’ve had, it’s easy for me to do that. It’s really through this content creation and experience that I share with others, and I think people get to know you and it builds trust and confidence. People start to become more comfortable, they become more confident.

Joe Fairless: Okay. I’m taking notes, and I’m hearing that, and I also want to dig in a little bit deeper, because I would love to know… People are investing in delinquent upside down mortgages that are in bankruptcy… So I hear you that you’re adding value first, you’re creating content, you’re educating people, you’re building the relationship; the bigger purpose – I understand how that can be positioned and hold true, where you’re helping people work out their mortgage so they stay in. You don’t wanna repossess it, so you’re doing what you can there – so you do have an altruistic angle that you can talk about. That being said, delinquent upside down mortgages in bankruptcy – how do you position those conversations specifically when you’re talking to people?

Dave Van Horn: Well, obviously you have to do a little bit of education, because people are only gonna invest in what they know. In the beginning, we would relate notes to real estate, and most [unintelligible [00:16:07].03] an investor, and we have three types of investors. We have an investor who would invest in a note, and then we have people that invest in a fund, and then we have people that need more information, and you provide free or low-cost information. It’s really to get them to understand the investment.

In the beginning it’s kind of simple because everybody’s in the note business already, they just don’t know it. You have a credit card, you have a student loan, you have auto debt, you have medical debt, you have mortgages… The country is just loaded to the gills with debt, but people don’t think about receiving a check, they just think about writing checks every month. I’m talking in general… I’m sure the Best Ever listeners are a lot more savvy, you get the idea.

Joe Fairless: I get it, yeah.

Dave Van Horn: So it’s really about “How do I come across the aisle and start to think like the bank, or becoming the bank?”, and what are the advantages of that. And one of the things that intrigued me from the investment side was if I could buy something at a discount with a high yield that’s backed by a piece of real estate, “Hey, that’s pretty intriguing.” And by the way, it fits one of Maslow’s hierarchy of needs, because everybody needs a place to live, right? So there’s more to it than just equity, for example.

There’s things like emotional equity, for example. With a junior lien, why would somebody stay if their house was upside down, and the reason is because they need a place to live. It doesn’t have to make sense, other than what do they pay monthly and what would it cost me to move from here. Or there’s emotional equity – “I raise my kids there, I finish the basement, I know the neighbors, what will my family think, it would cost me more to move into another place with first month/last month security, pay for a mover… Or do I just figure something out on my junior lien and stay here?” So there’s all that going on.

I always describe emotional equity as “Joe Fairless at his mid-life crisis, buying a red convertible. He drives it off the lot, it drops ten or twenty grand in value, but he looks cool… The girls like it, so he buys it.” Now, does it make sense financially? Hell no! [laughs] That’s emotional equity, right? When you apply that to a house, it’s even more powerful.

Joe Fairless: The number one thing – for a lack of a better word, because I can’t think of a better, bigger word than that – that investors want to make sure of in their investment is they don’t wanna lose money. Studies after studies prove that out, that if you ask someone or do an experiment with someone and you either take 50 cents from them or give them 50 cents, they’re much more pissed off if you take it, than they are happy if you give them 50 cents. And if you give them 75 cents but take 50 cents, they’re still pissed off about the 50 cents. How do you address that with your business model? Because that has to be a question that comes up continuously, or at least the thought process of “I don’t know if I wanna invest in upside down mortgages that are in bankruptcy…”

Dave Van Horn: Well, first of all they’re not all upside down, and they don’t always stay upside down. There are assets that are covered with equity, like first mortgages, and then there’s assets that are partial equity, and then obviously there are some assets that are no equity, but they’re priced accordingly and they have different yields. And then there’s different ways to spread the risk.

One of things you mention is how do you sell an asset that’s partial equity or upside down, and what we found was we listened to the buyers and they were concerned, too. Part of it is track record, and part of it – we actually have a warranty on our performing notes. The warranty puts some people at ease. Now, the warranty is only as good as the company, because if the company goes out of business, then the warranty would be very valid, right?

The other side is some people will go “You know what? I have a portfolio of 20 notes, and 15 or 18 of them all have equity (I feel good about that), but here’s a note with partial equity. It’s a lot cheaper, it has a lot higher yield – maybe I’ll take a flier and invest that. Or I’ll invest 10% of my portfolio in this crazier asset class with more yield.”

Then other things happen too, like for example phantom appreciation. If you had a note that was partially covered by equity, and the market comes back. Maybe it’s a note in Phoenix, or Florida, or whatever, and the real estate market comes back, and now all of a sudden that note I got a great price on, the equity comes back and the property behind that note, and all of a sudden the note’s worth more, and I didn’t really do anything, the market did that. And I was collecting payments all along, and I could sell my note for the same or more than what I bought it, and I might have been collecting on it for three or four years. That’s a neat phenomenon, too.

Joe Fairless: If I buy a note that is upside down, what’s the warranty cover me for?

Dave Van Horn: Our warranty was investment principle minus payments received, and still is, when you buy a performing note. It could be first or second mortgage.

Joe Fairless: When you buy a performing note…

Dave Van Horn: Yes. Now, if you buy a non-performing note, we only warranty the lien position and that it’s a valid lien, and it’s in the lien position as advertised.

Joe Fairless: Okay, got it. So if you buy a non-performing, then it’s…

Dave Van Horn: You’re a more savvy person, usually you should know what you’re doing. It’s a little more dangerous game.

Joe Fairless: Okay, that makes sense. What else, if anything, should we talk about as it relates to raising capital?

Dave Van Horn: I guess it’s really about focusing on your strengths, getting to know your true self, what you’re good at – for me it was raising capital. I think a lot of it is how you do it. When I think about my best ever deal – on the raising capital side it has been where people have invested a couple million dollars or something, and I haven’t really met them yet. That’s just a testament to the systems and processes you have in place as far as your web presence, your profiles, your content creation that you do, the stories that you tell, the experience that you show… Because you know how it might take several touches for someone to feel comfortable, to move forward with an investment; it makes sense, right? But if you can become more efficient at that, maybe…

It’s sort of like a podcast is – a podcast is more efficient than me flying on a plane to a hotel in Ohio, so I can reach more people, potentially. So it’s kind of like that… It’s “What can I do more efficiently to provide information, comfort, advice, everything from paperwork — it’s really the systems and the process of facilitating investors, giving them the information they need in a more efficient way, maybe that’s what I’m saying.

It’s really not a salesy type thing, it’s finding ways for them to get to know you better, sooner. It’s kind of interesting when some people invest with us…

Now, the other thing is we do provide outlets to connect with them, though. We do make ourselves available, whether that’s Q&A conference calls, or actually have events for our ideal customers, so to speak. I run a group called Strategic Investor Alliance, and that group is really a venue for high net worth investors to meet with me and people that I know, and also to look at other investment vehicles and other experts. It’s like a group that I put together — it’s different than what I used to do with that real estate group years ago. I used to facilitate and network with all these real estate investors.

Today, it’s a little higher level group, but very similar in the concept of we just share resources, and we vet investments, and I bring in other investment vehicles, other funds. Some people look at me kind of strange and they go “Well, why would you do that? Why would you bring other investment vehicles? Aren’t you raising money?” and the answer is “Yeah, but my investors – and myself; I’m an investor – like to look at a lot of investment, and I like to vet them”, and we all have different strategies. Our group acts like a Yelp for various funds, investments and other types of alternative investments that we all like.

Then we bring in experts, too: lawyers, accountants, asset protection, legacy planning and all that stuff. We do all these things that we have in common, and I think that by sharing that type of value, that shared values approach – I don’t know if I raise more money from that, but I think people see the value in it. We don’t sell anything at this group, for example; it’s just information and shared resources.

I think a lot of investors like that because they can validate their investment strategy, they can help to build a solid portfolio of investments, and they can see what other investors like them are doing. I think it’s a unique way to do it.

Joe Fairless: Dave, where can the best ever listeners learn more about you and get in touch with you?

Dave Van Horn: Probably the best way is through my site at pprnoteco.com. Anybody can reach out to me direct at biggerpockets.com/users/davevanhorn.

Joe Fairless: Dave, thank you for being on the show, talking to us about the lessons that you apply to raising money in a perceived difficult area of raising money (that’s for sure)… How you help people first, through education, content creation… I love this money quote: “Find ways to get them to get to know you better, sooner.” I think that’s really the epitome of — well, adding value… I think there should probably be an added value part in there too, in that quote. What you’ve talked about before, that’s great stuff.

Also, identifying your core audience – as you said, you have three: an investor who will invest in a note, an investor who will invest in a fund, or an investor who needs more information, and seeing where they are in the marketing funnel, and then giving them what they’re looking for.

Lots of great stuff… If you’re raising money for delinquent upside down mortgages in bankruptcy, then you can raise money for anything, and that’s why I’m grateful that we had our conversation, to share that with other Best Ever listeners who are raising money as well.

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

Dave Van Horn: Thanks, Joe. Take care!

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