JF1352: Breaking Ground On Your First Development Deal with Kenny Wolfe

Kenny has an extensive real estate background, and is just now starting to get into development, working on his first build now. Joe and Kenny discuss the politics, funding, and logistics of going from talking about a development to actually doing it. Even if you don’t ever want to do a development, the lessons Kenny has learned in this process that can apply to any real estate investor. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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Kenny Wolfe Real Estate Background:

  • Owner of Wolfe Investments, a private equity real estate firm in multifamily, commercial, hard money loans, and property development
  • Been involved with $95M+ worth of transactions, 2,374 multifamily units, & multiple commercial acquisitions
  • Working on our first development property now
  • Based in Plano, Texas
  • Say hi to him at http://wolfe-investments.com/
  • Best Ever Book: Rich Dad, Poor Dad

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

Kenny Wolfe: Hey, Joe. How are you today?

Joe Fairless: I am doing well, and nice to have you on the show. A little bit about Kenny – he is the owner of Wolfe Investments, a private equity real estate firm and multifamily commercial hard money loans and property development. He’s been involved in almost 100 million dollars worth of transactions, which includes 2,374 multifamily units and multiple commercial acquisitions.

He’s working on his first development property now, and we’re gonna talk all about that. Based in Plano, Texas. With that being said, Kenny, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Kenny Wolfe: Sure. Thanks Joe, and thanks for having me. Just a quick background on me – I started in real estate about seven years ago. We began by investing passively twice in multifamily properties here in Dallas-Fort Worth. One was a yield play, one was a value play, so we were in there to learn and see what business model we like and didn’t like for multifamily investing. Then in about 2012 we syndicated our first multifamily property; it was 76 units in Wylie, Texas. We still own it, and it’s a good little property for us.

Then we continued to buy more properties here in DFW. We started to buy more here, and then prices got a little out of hand from what I saw, so I started thinking outside the box and looking at other markets, such as Oklahoma, Colorado, Ohio, just kind of opening it up.

So we eventually got into [unintelligible [00:02:33].18] Oklahoma City multifamily, and then we added Columbus, Ohio just a few years ago as well. Then we also branched out into other markets in Texas, such as Waco, Amarillo… Those markets as well.

So that’s kind of how we got started in multifamily, and then from there our investors kept asking when is the next multifamily deal, and it’s been harder and harder to find a true good deal these days, so we branched out to hard money lending 18 months ago. We’ve done multiple single-family and small multifamily loans on that.

Then about a year ago we branched out and started buying commercial properties, triple net leases, double net leases properties here in Texas and Oklahoma… And then yeah, you’re right, we’re about to break ground on our first development project here in Dallas-Fort Worth. It’s small, but it gets us into the game. I’ve learned a lot, and we haven’t even broken ground yet.

Joe Fairless: So we could talk about a whole lot of stuff based on that timeline and the different things that you’ve been doing… Let’s start with where you’re at now, and then if the other things become relevant, then we’ll talk about some of the other things. The first development project – you’re about to break ground, you’ve already learned some stuff… What are you developing and what have you learned?

Kenny Wolfe: Well, there are some townhome lots across the street from one of our existing multifamily properties we own, and I tried to get the city to change the zoning to multifamily… Because owning that property across the street, I know there is a need for it in that submarket of Dallas-Fort Worth, and the city wouldn’t change their mind.

Joe Fairless: What submarket is it?

Kenny Wolfe: It’s in Wylie, Texas.

Joe Fairless: Okay, in Wylie. Got it.

Kenny Wolfe: So we’re not gonna fight the City Hall, we’re gonna do exactly what they want there, so we’re gonna build some townhomes there.

Joe Fairless: So you’re building some townhomes… How long have you been working on the project since you decided that you’re gonna go with the flow and not try and swim up current?

Kenny Wolfe: Probably about four months. We went ahead and bought the land, and then — we had talked to the city before about the land, but we were trying to feel them out. I bought the land and then had it converted from four townhome lots to six.

Joe Fairless: And what process did you have to go through – time and money – to get it from four to six?

Kenny Wolfe: We had to buy the land. We’ve got a great local bank, and they gave us an 80% loan on the land, and then in about a week or two we’ll get a construction loan where they lend us the full 80% of the cost to build it. So we’re out 20% so far on all the land purchase and all the fees and architects and all that kind of stuff. So right now we’re probably at 75k right now.

Joe Fairless: And the process for getting it from four to six, for someone – well, myself and anyone else who has not done that before… What does the process entail?

Kenny Wolfe: It’s a lot of calls to the city and meetings up there at their office, and then really it’s just making sure that your architect can read all the city requirements of the [unintelligible [00:05:15].03] So we kind of get it approved, and then we send it over to the city, have them look at it, mark it up… And all they really did is just made a small, minor change, and then from there we had to present that to the planning and zoning committee, and once that passed, we went to the city council and they passed it as well.

Joe Fairless: When you present t the planning and zoning committee what do you need to have with you and what questions do they ask?

Kenny Wolfe: It was actually pretty smooth, to be honest with you. If we’re trying to rezone it, we’d have to really do a big sales pitch, with slideshows and all that kind of stuff. But we were using what the zoning was already in place, there really wasn’t much to present. All they got was the new layout of the lots.

Joe Fairless: Okay. And basically from going from four to six, you’re able to build two more than you would have before?

Kenny Wolfe: Right, yeah. We’re able to build two more townhomes on that same price for the land. They were really some strangely cut up townhome lots to begin with; they were really big, so it made sense to make them smaller.

Joe Fairless: Okay. And the same with city council? Did anything stand out there?

Kenny Wolfe: Same thing. It was pretty easy. Like I said, we weren’t gonna fight city hall, so it went pretty smoothly.

Joe Fairless: So what lessons have you learned? Because you said you’re about to break ground, and you’ve learned a lot of lessons.

Kenny Wolfe: My experience has been in buying existing buildings, so I’ve learned a lot already… Especially here in Texas we don’t have the best soil; we have expansive clay, so how much it costs to do a proper foundation, the steps involved in getting all the pricing and quotes working with an architect on not just the lay of the townhome lots, but actually what the townhomes look like on the inside too, the layouts there… So that’s been a lot of fun.

Joe Fairless: With the foundation being expensive, since it’s expansive clay, how much does it cost to lay a foundation for one townhome?

Kenny Wolfe: Well, I can tell you the dirt work… So the dirt work right now – our options were either to do 17-foot [unintelligible [00:07:10].07] or soak the dirt, pack it in, soak it again, do that multiple times to build up a nice solid dirt foundation underneath what we’re about to pour. That’s coming in right around 100k just there alone, the dirt work.

Joe Fairless: Wow. What are the economics of this deal, from a big picture?

Kenny Wolfe: I think we’ll double our money in about 18 months on this deal. It’s because we’re just in a hot market here in DFW. We’re building these for about $100/foot, maybe $105/foot, so that means that we’re able to sell these for probably $165/foot. So there’s a pretty big delta between what we can build it for and what we can sell them for.

Joe Fairless: As far as the other steps involved with working with an architect, what are some things that on the next development project, should you do one, that you would do differently?

Kenny Wolfe: I would engage them sooner. I probably brought them in maybe a few weeks too late. I would bring them in sooner from the get-go. It’s really just getting used to the architect, and sitting down… I’d probably have more of a meaning as to kind what we’re looking for, the interior layout and the exterior layout.

Joe Fairless: And when you say “engage them sooner”, what point of the process is that?

Kenny Wolfe: On the next one we’re gonna engage them probably before we buy the land.

Joe Fairless: Wow, really?

Kenny Wolfe: Yeah, I would. I think it would make it so much smoother if we had that plan already in place.

Joe Fairless: And what costs are associated to engaging them prior to even buying the land?

Kenny Wolfe: It depends on the size of the project really, but they’ll start working if you pay about half… Typically, it’s about $1/square foot on the building size.

Joe Fairless: So they receive approximately $1/square foot for the building that they’re building?

Kenny Wolfe: Right, yeah.

Joe Fairless: And how many square feet are the six total townhomes?

Kenny Wolfe: Well, I guess they’re getting $1,20. [laughter] I was just doing some quick math… Because the total (all six) are gonna be around 10,000 square feet.

Joe Fairless: Got it. So did I do that math right? 1.2 million?

Kenny Wolfe: Yeah, that’s what it’s gonna cost to build. Probably a little less than that. But the architect’s fee is 12k on the deal.

Joe Fairless: Oh, right. Yeah. I shouldn’t have multiplied. I was like, “Wait a second… I need an architect podcast and go back to school and be an architect.” Okay, yeah, I got calculator happy. So there are clearly differences in developing something ground-up versus buying an apartment building or doing a triple net lease property, and you’re in the middle of your first development… But do you anticipate it being worth the time and the money and the higher degree of risk that’s involved with development?

Kenny Wolfe: Yes, I do, because like I said, just on this small project I think we’re gonna double our money in probably about 18 months. What I like to do is be the guinea pig for a lot of our new investment offerings, so this is really gonna launch us into something bigger. We already have offers out on an acre and a half here in DFW, and then another 3.7 acres here in DFW as well.

Joe Fairless: What are some lessons that you learned when you went into different markets? You said you went to Colorado Springs, Oklahoma City, Columbus, Waco and Amarillo, after investing in your backyard.

Kenny Wolfe: Our first property was 76 units. We weren’t there on site, we had to go probably every other month, every three months, once it was stabilized… So I realized that I could really do this from anywhere, and buy anywhere, as long as I have the right property management company. And I had just a personal rule, being able to get there and back in a day, from here in DFW. So those were kind of the things that got me started thinking, if you’re only going every other month or so, it’s easy to spread out to these other markets where there might not be as much competition.

Joe Fairless: As far as the other markets where there’s not as much competition – specifically I’m thinking of Waco and Amarillo, just because I’m familiar with them pretty well… On the flip side, because when you entered there wasn’t as much competition, when you exit there’s not gonna be as many buyers looking to buy that property because of the markets that they’re in… So have you sold those properties? And if so, did you experience that, or was that not the case?

Kenny Wolfe: We haven’t sold those properties yet. I think Waco is about as hot as it has ever been right now. I’ve got so many people that like Waco right now. But we’re more of a long-term hold investor. We like to go in, do our business plan, get a supplemental loan for cash-out and hold longer term. So yes, we may have fewer sellers, but people are getting more and more pushed out of DFW, at least at the moment, so we’re starting to see more competition in those markets where we didn’t see hem before.

Joe Fairless: Okay, it definitely makes sense with Waco, because it’s just in the middle of all the action between the cities. Amarillo – we’ve got some time, I think… But when you say long-term, what is long-term specifically?

Kenny Wolfe: For me – I always tell our investors for our multifamily deals to prepare for a 5-7 year hold. I help them to think that way, because if we’re getting a sweet offer, sure, we’re gonna sell, but to me the better option is — these are cash-out refi or a supplemental loan, hold it long-term, cash-flow, [unintelligible [00:12:18].21] as we hold it. So yeah, usually 5-7 years.

Joe Fairless: And for someone who might not be familiar with the difference between a supplemental and a refinance, will you explain that?

Kenny Wolfe: Sure. A supplemental loan is just a secondary lien. So we go and get a Fannie Mae loan, and we do our business plan… Usually, that’s to upgrade half the units. Then once we do that, we’ll go back to Fannie Mae and say “Our value is up here now, because our NOIs increased by x amount”, so it gets reappraised, and then you get 70%-75%, depending on the market and the timing of the supplemental loan, of the new value minus the existing loan, and that’s the secondary loan that you get at closing, on the proceeds of that. So it’s a way to get your money out without having to take  a tax hit.

Joe Fairless: And then what if someone says “That sounds great, but basically you’re just adding more debt to the current property”, what’s your response?

Kenny Wolfe: In real estate, debt’s your friend. I’d say that that is like having an insurance company and getting flow. We’re getting money out of the property where we created value, but our residents are paying that loan down for us. So we get this money out in a tax-shielded format so we can reinvest it, and it’s a way to really snowball your returns.

Joe Fairless: You started with multifamily, and that was a major focus of yours, and then you said you branched out to hard money lending. What did you have to do from a process or team standpoint to transition the focus?

Kenny Wolfe: What we did is we teamed up with a guy here in DFW. He had been doing maybe 4-5 hard money loans a year, so it was a way for us to learn from him, get the process down, and make sure we were doing everything correctly. We had our lawyer look over it, obviously, things like that… And we’re pretty cautious on how we structure our loans as well.

Joe Fairless: By “teamed up with a guy in DFW”, does that mean that you paid him as a consultant, or what was the arrangement?

Kenny Wolfe: He and I created a new LLC, so we run our hard money through that LLC.

Joe Fairless: Got it. And then the benefit that you brought to him was more deal flow, more loans, or was there some other benefit?

Kenny Wolfe: It was really investors. He was doing this out of his own pocket, and I said “Hey, I bet our investors will like them and will fun them, so we can do a lot more deals”, so that’s what I brought to the table.

Joe Fairless: And now that you’ve got the apartment communities — and how many do you have currently in the portfolio that you’re overseeing?

Kenny Wolfe: Currently we’ve got about 14.

Joe Fairless: 14, got it. So 14 apartment communities… And you’ve got the lending business, some double and triple net lease properties, and now a development project. Which of those areas makes you the most money?

Kenny Wolfe: Today it’s probably gonna be our commercial properties right now, but that’ll change… And really, a big reason to branching out was I also like having four different levers to pull. When it’s hard to find a multifamily deal, we can focus on these other three, and when that changes – because it will – then we can be able to focus more on acquiring more multifamilies. So it’s a way to kind of branch out like that, but right now commercial.

Joe Fairless: What are the commercial properties?

Kenny Wolfe: So far we’ve bought three Family Dollars; we’ve got a fourth one under contract now. The reason why I say that they make us the most money is because right now they’ve got the biggest spread between cap rate and the interest rate.

Joe Fairless: And where are those located?

Kenny Wolfe: They’re in Texas and Oklahoma for now.

Joe Fairless: When you started out, how did you meet your first investors?

Kenny Wolfe: I started out with the Real Estate Investment Group here in DFW. That’s really how I got started, and met investors and like-minded real estate folks.

Joe Fairless: And what are some lessons learned from working with investors?

Kenny Wolfe: It’s easier to work with investors that are already sold on real estate as an investment. When I started out, I’d met a few through that group, but then I tried to bring in some investors that were from my old oil and gas days; I had to really sell them on real estate in general, and then multifamily as an option. So to me it was a little bit more work to get them to come over.

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

Kenny Wolfe: The best advice I’d say is don’t be afraid of new markets, don’t be afraid to get on a plane, or new types of real estate. If there’s a lot of fishermen in one part of the lake, you should probably go to the other side of the lake.

Joe Fairless: And as far as investors who already know they wanna invest in real estate – this is something I’ve come across, too… I always use the example of if I’m at a party and someone asks what do I do, I ask them “Do you want a chicken nugget?” and they say “What’s a chicken nugget?” then me telling them I’m an owner of McDonald’s won’t mean much… Whereas if they already know what chicken nuggets are, then they’re more likely to buy chicken nuggets and know what a McDonald’s is… Or I use some sort of permutation of that example; I think I butchered it a little bit, but it’s basically you’ve gotta fish where the fish already are.

But the flipside of what you just said is in terms of looking for different opportunities to invest in, then it’s going to where other people are not fishing. So in that case, what market indicators do you look for to determine how you’re going to evolve your investment approach?

Kenny Wolfe: When we’re looking for new markets to break into for multifamily, the first box that needs to be checked is it has to be landlord-friendly. We’re not gonna go to a state where it can take 6-9 months to evict, and all that. We wanna make sure the house always wins. So landlord-friendly is number one, and then from there we go to diverse economic drivers; we don’t want one or two economic drivers to be the sole employment in that city. We wanna see diversity.

An example would be — we’ll pick on Columbus, Ohio. They’re the state capital, and they’ve got a pretty big university in town, nationwide insurance is there… There’s multiple employers there, whereas if you’re going to, say, Killeen, Texas – that town is 100% military. So if there’s a deployment, you’re gonna have a rough go with it for the next few months. Or even if it’s a town that’s just focused on, say, just oil and gas. That would be tough, too.

Joe Fairless: What’s a project that hasn’t gone according to plan?

Kenny Wolfe: I was looking at that, and jokingly, one of our properties I was convinced to do crushed concrete instead of crushed granite, and there’s a big difference between the two, because one floats and one doesn’t. Anyway, that’s kind of the joking part… But that was a real mistake, so don’t make that. But really I guess in multifamily a thing I learned was when we got a pretty sized property under contract in Oklahoma City… There was a Starbucks right across the street, there was a medical facility that was just kind of refurbished, and all that… So the location was phenomenal. It was an older building (’70s), but it had an indoor pool and we could really turn it around pretty nice to get it to a much higher asset class. But it came with some baggage, and the seller partially upfront told me [unintelligible [00:19:04].10] across the street back in the ’80s that leaked some really nasty chemicals, about 20 letters long. But anyway, supposedly it leaked onto this apartment complex.

And he told me that all that was taken care of, it wasn’t a big deal… So I put it under contract, but that was something we were gonna really look at. So we looked at that, did our due diligence, and it turned out that Oklahoma City had okayed it, the state of Oklahoma had as well, but not the EPA. So he was two-thirds right, but he wasn’t all the way right… So from that I learned a whole lot. Because that chemical was there, the EPA was gonna have them drill down (I think it was) eight feet, steam it, see if anything came out; if anything came out of that chemical, which has a really long life in the soil, we were gonna have to put in special fans, and obviously you’d have to let all the residents know as well… So we canceled the contract.

Joe Fairless: Oh, I bet.

Kenny Wolfe: It was just a mess. So that’s something that I learned – do a little bit more upfront. It cost us legal fees, but… We make sure that we’re looking at that environmental stuff pretty seriously.

Joe Fairless: Was it legal fees plus some of the due diligence to get that inspection done, that you also had to pay for?

Kenny Wolfe: We actually hadn’t even gotten to the inspection part, because I wasn’t gonna spend money on that, so we figured this environmental piece out and got that locked down. So it really was just legal fees.

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

Kenny Wolfe: I’m ready.

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

Break: [00:20:36].08] to [00:21:13].00]

Joe Fairless: Best ever book you’ve read?

Kenny Wolfe: Best ever book – I’ve gotta go with Rich Dad, Poor Dad, because that’s the one that started us off.

Joe Fairless: Best ever deal you’ve done that wasn’t your first and wasn’t your last?

Kenny Wolfe: I’d say [unintelligible [00:21:23].02] apartments in Columbus. It was 216 units built in 2000. We doubled the investor’s money in just over two years.

Joe Fairless: What’s a mistake you’ve made in business that we haven’t talked about?

Kenny Wolfe: The biggest mistake was really — we kind of talked about one earlier, but it’s gotta be not getting into real estate sooner.

Joe Fairless: On the 216-unit in Columbus – was that doubled via a sale?

Kenny Wolfe: No… We went in, upgraded half the units, got about $150-$175 rent increases per unit, so we could do the supplemental loan.

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

Kenny Wolfe: As a family, we usually focus on animal welfare.

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

Kenny Wolfe: Our website is www.wolfe-investments.com

Joe Fairless: Kenny, thank you so much for sharing your expertise and your experience and your story of how you’ve evolved your real estate company, lessons learned along the way, from multifamily to lending, to commercial properties, to now development, and where you see that headed. Some lessons learned working with architects on development, and just your overall thought process on the economics.

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

Kenny Wolfe: Thanks, Joe.

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Kimberly Fawcett advice

JF1248: Pivoting From Landlording To Non-Performing Notes with Kimberly Banks Fawcett

Kimberly was a landlord but decided she did not want to deal with tenants anymore. Now she focuses on non-performing 1st mortgages. Being in this space allows her to help people stay in their homes, but sometimes she will have to take ownership of the properties. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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Kimberly Banks Fawcett Real Estate Background:

-Portfolio Manager at Inspired Capital Group, LLC.

-Inspired Capital Group invests in non-performing mortgage notes on residential and commercial properties

-Raised by real estate investors and bought her first rental property 3 months after graduating college.

-Experience in both residential and commercial investments

-Now focuses almost exclusively on the non-performing 1st mortgage space.

-Say hi to her at www.inspiredcapitalgroup.com

-Based in Plano, Texas

-Best Ever Book: The One Thing


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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, Kimberly Banks Fawcett. How are you doing, Kimberly?

Kimberly Banks Fawcett: I’m doing great, Joe. Thanks for having me on the show.

Joe Fairless: I’m glad to hear that, and it’s our pleasure. A little bit about Kimberly – she is a portfolio manager at Inspired Capital Group. Inspired Capital Group invests in non-performing mortgage notes on residential and commercial properties. She was raised by some real estate investors and bought her first rental property three months after graduating college. Based in Plano, Texas… With that being said, Kimberly, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Kimberly Banks Fawcett: Sure. I’m focused on non-performing notes because I spent so many years as a landlord. I did the typical when it was going great went to a REIA, sat in on a meeting where someone told me that I no longer had to deal with tenants, I could actually deal with people that cared about the property as much as I did, and I was hooked. So in 2013 I pretty much stopped being a landlord and became a note investor, and I’ve never really looked back.

Joe Fairless: Pros and cons, as objectively as you can look at it – pros and cons on both sides?

Kimberly Banks Fawcett: Well, I’d say the pros are, again, they’re as interested in the property as you are; that’s always helpful. I also really like the fact that I can make that cliché work, the win/win/win. I make money for myself, I make money for my investors, and I help out the borrowers on the deals that I can actually help them come out on the better side of their bad situation – those are just the home runs for me.

On the con side I would say the regulations that we have to deal with… Not that I have a problem with the idea of taking care of people and doing it the right way, but you hire a servicer to work on your notes, and I can honestly say that you have to be on top of the regulations as well. You can’t count on your servicer always covering you, and I think that’s a bigger burden than most landlords have.

I think also in this current environment there are people that actually train homeowners how to stay in their home without paying their mortgage for longer periods of time. You don’t find that in a rental situation. If you’re not gonna pay your rent, you either leave or you wait to get evicted. There’s no training on how to extend that. So a lender that is doing everything right, a borrower can stall fixing the situation forever nowadays. So I’d say those are pretty much the pros and cons.

Joe Fairless: I’m impressed. I think you did objectively look at that, and I’m grateful that you did that. So let’s talk about the cons first, and then we’ll talk about the pros. Cons – regulations; you mentioned you can’t necessarily count on your servicer staying on top of the regulations. For someone new to investing in notes, what’s a servicer and what are the regulations that you need to stay on top of?

Kimberly Banks Fawcett: Your servicer is the person that has the licenses in the different stakes that you wanna operate in. They have a debt collector’s license, so they are the ones that are gonna stay on top of how things have to be done to treat your borrowers with respect and help them succeed as much as possible, and to keep you compliant. The problem is your servicers don’t care as much about your money as you do, so while they do follow the regulations, they’re not necessarily sharing with you what’s going on, so you’re not necessarily covered.

Let me give you an example. I had a borrower that we were foreclosing on, and finally she got her modification paperwork in and we were gonna look it over. Now, you cannot be foreclosing and actively looking at a loan modification at the same time. That’s called dual tracking, and it’s not fair to the borrower. While they’re doing all the right things, you can’t take their house. But she turned her paperwork in the day before the foreclosure sale, so we immediately stopped the foreclosure sale, started looking over her paperwork, but the servicer did not tell her that we stopped the foreclosure. So she went ahead – she had a little coaching, as I mentioned before… [laughter] She went ahead and got me in trouble with the CFPB. All I had to do was have an attorney write a response and saying “No, no, no, we did stop it. She just wasn’t notified.”

When I went back to the servicer, their comment was “Well, we can’t call her on that, we can’t e-mail her on that. We had to put it in writing.” What?! How long is it gonna take to mail a letter? The sale is tomorrow. So what would have made sense is either to tell me that and I would have called her or had the attorney call her, or go ahead and send her an e-mail and follow up with the official legal documents. So their process, while following probably all the rules, got me in trouble. It only cost me $250 for a letter to explain the situation and it all went away, not a big deal, but that’s just an example of how even hiring someone to take care of this can still be an issue.

Joe Fairless: If you were presented that circumstance again – which you might be – it’s tough because you don’t know if the servicer is actually doing some common sense things. By the book perhaps, but common sense – come on. So how would you approach that differently (if at all) on the next go-around?

Kimberly Banks Fawcett: I would quiz them mercilessly on how they do it? That actually applies to everything you do with a servicer. Don’t assume that they’re doing it logically. I would say “Okay, fine, you’ve stopped it. How does this person find out that we’ve stopped it? What’s the best way of doing it?” If they had said, “Well, we’d have to put it in writing”, I would immediately have had my attorney make a phone call. It would have been a lot cheaper to have my attorney make a phone call, than have to write a letter to the CFPB.

So it’s one of those situations you don’t know what you don’t know, so this is a great example why I think note investors really do a good job for themselves when they listen to different interviews, talk to different investors… Because we all experience different problems, and if you can hear the problem that I had, you’ll avoid it. If I hear about what you had, then I can avoid it. So in that way, it’s a great way to build a collective intelligence in the community.

Joe Fairless: Oh yeah, thank you for sharing that and adding to that collective intelligence. You mentioned CFPB – what’s that stand for?

Kimberly Banks Fawcett: Consumer Finance Protection Board. They’re basically the people that — the organization was put together by the government to deal with some of that robo-signing signing and unjust practices that people were doing to take advantage of some of the lower price point borrowers, some borrowers that might not natively speak English, and were doing all of these loans that nobody could afford and got everybody in trouble. So it was one of their efforts to try and keep that from happening again.

Joe Fairless: What’s another question that you would ask the servicer?

Kimberly Banks Fawcett: A specific question, or just in general how their processes work?

Joe Fairless: Either one. Whatever’s top of mind for you when I ask you that.

Kimberly Banks Fawcett: Well, the one that I am currently struggling with – because I have a few servicers that I use. What I like to do is I have a couple that I like, and then if I buy a couple of new assets and they’re at another servicer, I’ll leave them there and see how it goes, see if maybe I wanna add them or never deal with them again.

A problem that I’ve been having is with force-placed insurance. To explain what that is – if your borrower is not paying for insurance, there has to be insurance on that asset; that’s your collateral. So you force-place insurance upon them as the lender. It ends up being much more expensive, and it ends up not covering as much as the borrower would like it, but my collateral is at least protected.

So for me to be able to charge back that expense to my borrower, I have to do a bunch of disclosures to give them the opportunity to get their own insurance, to prove they have insurance, or all of that. I have found over time that every servicer does it differently. So you have to quiz them on how that’s happening, because ultimately, if I pay $1,000 for this insurance, if I can’t charge it back to them, that hits my ROI pretty hard. Again, I need to look out for my money, I can’t just rely on the servicer making sure they’re doing it in a way that protects me. So that’s a huge question that I ask every servicer.

Joe Fairless: When you ask the question or questions to them about their force-placed insurance, what response is your ideal response?

Kimberly Banks Fawcett: My ideal response would be — there are three letters that need to go out to give them the opportunity to take care of this. We send the first one out as soon as we board; we send the second one out if we haven’t heard from them in a month and a half, and then we send the final one out saying “Hey, you have not done this. You will be charged for this insurance.” That would be the perfect response.

A lot of times I’ve gotten “No, we don’t do that. You’ll have to send your own letters.” Well, that’s the reason why I have a servicer, because I don’t have the license to get that close to my borrower.

Joe Fairless: [laughs] You’ve had this conversation before with someone, haven’t you? [laughs] That’s funny. Okay, and then the other con – and then we’re gonna get into the pros that you mentioned – this actually bleeds into what you were talking about before… There’s actually people out there training homeowners how to stay in their home longer without paying the mortgage, so you’re just having to fight against that.

Kimberly Banks Fawcett: Yes. And some of the things they do raise are legitimate, like you don’t have proof of the payment history. Sometimes when you buy a note, the payment history that you’ve gotten from the previous lender is a little fuzzy, there’s some holes… As an aside, that’s pretty easy to deal with, because you just waive the payments that [unintelligible [00:11:42].05] Okay, sure, you made those. I’m still ahead, because I bought the loan so cheaply. But you have to address that in court. It doesn’t work to just send them an e-mail saying, “Okay, sure, whatever.” And anything that goes to court takes more time, so that’s two, three, six more months they’re living free.

Joe Fairless: Got it. Let’s talk about the pros. You mentioned you used to be a landlord, and then you realized you didn’t wanna mess with the tenants and all that stuff. You said two pros is you have people interested in the property, number one, and you can make it a win/win/win for you, investors and homeowners. Can you elaborate on that?

Kimberly Banks Fawcett: Sure. If someone’s living in a home, they care about it. If the roof is leaking, they’re generally going to get it fixed… If they have the money, obviously. If you have a tenant in your single-family house — I actually had a friend that had this problem; she was tired of calling her landlord, and the upstairs bathroom was leaking. There was like a waterfall coming down from the upstairs when we were at this party, and she’s like “Yeah, it does that sometimes.” [laughter]

When you have someone that cares about the house, they’re gonna fix that. Chances are you won’t have a borrower set off fireworks inside the house, where that can happen with a renter. You’re just dealing with a different group of people, and since you’re not there, peeking in the windows all the time, you just have a better level of comfort that that asset is being taken care of. It’s not a guarantee, it’s just a higher probability.

Joe Fairless: Does it set you up for long-term wealth, buying and holding a single-family home one?

Kimberly Banks Fawcett: Not typically. If you like modifications, which I tend to, they’re a wasting asset. With every payment it’s worth less, because — I mean, obviously, in the beginning it’s mostly interest… But when they’re paying off their principal, there’s less and less value in that note, so you have to be careful how you structure that. You can’t just have a portfolio of modifications and not manage it to make sure it’s not losing value. So it is different in that respect, and I don’t know that all note investors really focus on that.

When you’re buying them, you don’t know what your exit strategy is. You know what you want it to be and you know from looking at your ROI calculator which one looks prettiest, but it’s what the borrower wants, what the borrower is willing to do, what you can make happen. So if you end up with a bunch of mods and then a bunch of REOs, and some of those you rent and some of those you fix and flip, you can blend your business so that it’s not a wasting asset pool. But if you don’t realize that your asset is getting less and less valuable, I think you can end up kind of sunk after a while.

Joe Fairless: Can you elaborate on that last part that you mentioned?

Kimberly Banks Fawcett: Which part?

Joe Fairless: The very last part.

Kimberly Banks Fawcett: Say you have a portfolio of (I don’t know, I’ll just throw out) 75 notes; they’re all modified, they’re all paying. Well, every single month they’re paying off a little bit of the principle, so at the end of the month, your assets are worth less. There’s less that’s gonna be coming in at a certain time. And if you just stayed in that portfolio, eventually they would all be paid off and you would have nothing.

Now, did you take the money and reinvest it? Well, if you’re smart, you did. So you probably bought other assets. But if you’re not paying attention, eventually there’s nothing left. It’s not a “purchase with your servicer and just let sit” and expect it to be worth something after ten years, whatever. Because remember, the average person also only stays in their home for seven years, so then your loan is completely gone then. I mean, you get a nice payoff and all of that, but if you don’t wisely invest it in more assets, you’re not gonna keep your portfolio valuable… Or substantial maybe is a better word.

Joe Fairless: I’m glad you mentioned that. I haven’t heard anyone talk about that as it relates to note buying, and it’s something I should have picked up on but I haven’t, so thank you for mentioning that. So you’re actively managing your portfolio and actively optimizing it as you’re going along, right?

Kimberly Banks Fawcett: Yes. I started out wanting to do mostly mods, and now I have changed it up a bit where there are certain markets in the country that I have a great team, and I really like to — obviously, I wanna work with the borrower; don’t get me wrong, my first choice is to help them out. But if I have to take back the property there, I don’t mind, so I’ll buy some more vacant ones in that area, just in the hopes of taking back the property and going that route.

Joe Fairless: What’s the most profitable approach or exit for you?

Kimberly Banks Fawcett: For me it’s more work, but it’s usually taking it back and doing a really nice renovation and selling it retail. Again, I only do that in certain markets; not because I have problems with other markets, I’ve just built better teams in certain areas. So I love taking a house that’s okay and making it great, and then helping out another borrower. I love to do owner-financing if I can. Some markets don’t support that, or it’s an affluent-enough area that they don’t need to buy it on terms, they can just go ahead and get a regular mortgage… But I think the fix and flips, in my most favorite markets, are probably one of the most profitable.

Joe Fairless: Could you estimate for us in your portfolio now which ones are modifications versus fix and flips versus whatever else, just so we can get a rough percentage?

Kimberly Banks Fawcett: Let’s say over 10 deals, 4 of them are mods, 5 of them I foreclose, and then I’ll have one that I can do like a short sale or a deed in lieu on. More short sales than deed in lieus. I find that people have been dealing with this stress of “What am I going to do about my house? What am I going to do about my house?” It’s hard to really talk to them about, “Well, you know, if you just sign this document, I’ll give you a little money to go away.” I find that a harder sell, it just sounds almost too good to be true to them, kind of thing. So I’d say most of mine are probably foreclosures.

Joe Fairless: Okay. Based on your experience in this industry, what’s something that you see people starting out doing or reading about or thinking about and spending time on, that is a waste of time as it relates to note-buying?

Kimberly Banks Fawcett: Note buying has a lot of rabbit holes. We very often find a new note investor going, “Okay, what if?” then “What if this happens?” Well, I don’t think those are bad questions, and it does depend on your mind – I’m a what-if kind of person – but you have to find out if that’s logical.

For example, I bought this one deal in Pittsburgh, Pennsylvania, and the seller had me — when you’re in that transition of when you’ve closed, your assignments are recorded and all of that… I was getting ready to go to tax sale… So my seller had me pay the taxes to their law firm, so their law firm could pay that.

Well, in the process of doing that, the law firm went bankrupt. They closed their doors, they wouldn’t respond to my e-mails, they wouldn’t respond to the seller’s e-mails and I ended up losing $18,000. Now, okay. That happened. That’s not great. But how often is that gonna happen?

Sometimes if I’m presenting on deals, I don’t wanna talk about that, because I don’t wanna spend that time in that rabbit hole. Yes, it happened. It sucks, it was awful; you don’t want that to happen to you, I get it. But I’ve done close to 200 deals, it’s happened once.

I’ve also had a deal where the house was actually gone by the time I closed on the deal. It had gotten destroyed in a tornado. I still made money on that deal, but now people could be afraid of a tornado, could be afraid of bankrupt attorneys… If you’re getting all caught up in the afraid things, you’re gonna stop yourself. If you wanna listen to these stories and go “Okay, let’s see… Okay, so you can actually get out of that situation and be alright.” “Okay, maybe I don’t have as many things to worry about as I thought I did”, then that’s a useful exercise.

Joe Fairless: What’s something that on the flipside you would make sure you teach any beginning note investors?

Kimberly Banks Fawcett: I think to double-check your vendors. For example, when you’re doing your due diligence and you’re trying to get a value on a property, I will talk to a local realtor or I will order a BPO, but I also use a service called We Go Look, and they go to the property and they take at least ten pictures of the property, they get all four sides of the house, and they’ll make some kind of indication of what they think the condition of the house is based on the neighborhood. Now, they’re not realtors, so they’re not giving me a value estimation, but I now have independent pictures and an independent comparison to put together with my BPO… Because some BPO agents, they don’t wanna get out of the car, they don’t really care, they don’t have attention to detail; they just want their $75 and move on. So I can compare these two and I get a much more accurate picture of the real condition of that house.

So you have to double-check your vendors, and I think the other thing for new investors, especially in this current market, prices are going up and you have to make sure your ROI is going to work on these higher prices… Because everybody wants to get in their first deal. They’re so excited to suddenly be a note investor. But if you overpay going in, you’re never gonna make that money back up. So you have to be careful, you can’t be so ignorant that you end up ruining the deal before you’re ever really in it.

Joe Fairless: Now I’m gonna ask you a question I ask everyone, and you might say “Well, Joe, I’ve just said it…” Well, if that’s the case, then we’ll roll with it. But if you’ve got something in addition to share with the listeners, then please do so. What is your best real estate investing advice ever?

Kimberly Banks Fawcett: I would say focus, but not the focus that most people say. Most people say “Pick one thing, do it and become fantastic at it.” I disagree. I think you need to focus on what your end goal is; what you want to be great at, and then take all of your activities and draw them there.

For example, I wanna be a great note investor, so the fact that I have residential real estate experience, I also have commercial real estate experience, I have experience in firsts, I’ve done some seconds, I’ve done some  contract for deeds, and all that together makes me a better note investor. I am more accustomed to different outcomes, accustomed to different headaches, I’ve taken the nuances and how to do each one of those things and put them together, so that I have a better picture.

So now that I have been doing residential notes for so long, I can build up my commercial portfolio because I have experience in that investing, and I’m gonna be able to bring it together, and the fund that we’re getting ready to put together, at a much higher level.
Some might look back and go “Okay, wait, you can’t do commercial and residential, and first, and second…” I think you can, as long as you’re using them as a tool to learn how to be better at the end.

Joe Fairless: That’s powerful. I’m enjoying that, because it is more of the end goal that we’re focused on, and ultimately what you wanna be great at, and then leveraging that to then get you there, there might be iterations of it along the way… But ultimately, you’ve gotta focus on what the end game is. I love that.

What’s one challenge that you’ve come across that we haven’t talked about already, as an investor, whether it was pre-note buying or no?

Kimberly Banks Fawcett: I think actually a love of real estate is a problem, because you want to do everything. This sounds cool, and that sounds cool, and “Oh, I can make money with that…” And you have the squirrel syndrome that everybody talks about.

Joe Fairless: What’s the squirrel syndrome? I haven’t heard of that one.

Kimberly Banks Fawcett: Well, “I’m on this track — oh, squirrel, there’s a new idea! Oh, squirrel…! I can find properties that way!” You’re all over the place. But that ties into what I was just talking about, focusing on your end goal. It’s okay to do different things as long as they’re gonna take you to one place.

Joe Fairless: You said you’re putting together a fund… What’s the amount that you’re looking to bring equity-wise?

Kimberly Banks Fawcett: Well, we’re gonna start at five million. Everybody tells me that a fund for less than that would be not worth the cost. I’m one of those, I don’t wanna bite off more than I can chew, so we’re gonna start at five million. That will allow us to do some residential, and a nice, sizeable commercial one all in the same place, and I think it’s gonna be great?

Joe Fairless: Where are you at in that process?

Kimberly Banks Fawcett: We have our attorney picked out, and we have brainstormed all of our ideas about how we’ll want it to operate and who we want to be business partners, and all of that… But we haven’t put it on paper yet. That’s for 2018.

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

Kimberly Banks Fawcett: I am!

Joe Fairless: Alright. If you’re ready, we’re gonna do it. First, a quick word from our Best Ever partners.

Break: [00:24:44].17] to [00:25:32].25]

Joe Fairless: Best ever book you’ve read?

Kimberly Banks Fawcett: The One Thing by Gary Keller.

Joe Fairless: Best ever deal you’ve done?

Kimberly Banks Fawcett: I bought a note in Florida that I was hoping to take back as an REO, and within 36 days they gave me a full payoff. I almost didn’t have to bother boarding. I did, as I was supposed to do, but I got a full payoff, which was twice what I paid for it. So in 36 days I made a little over 100% on my money.

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

Kimberly Banks Fawcett: I enjoy working with the homeless. There’s two different organizations that I work with. One focuses on feeding dinner every night, so that they at least have one really good meal during the day, and then the other one is part of a shelter that offers job training and daycare for the kids while you’re doing your job training. That one gives you more of a hand up rather than a hand out. I like working with a population and I like the comparison of the two organizations.

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

Kimberly Banks Fawcett: My company’s name is Inspired Capital Group. Our website is InspiredCapitalGroup.com, and then I’m on Facebook too, so I’m pretty easy to find.

Joe Fairless: Well, thank you for being on the show and spending some time with us and sharing your knowledge of note buying and the pros and cons, as I’m gonna say you really did objectively, so bravo on that. It would be tough for me to say that on multifamily, so I appreciate you being objective there. Then also giving us a 2.0 lesson on some things that you’re working through, and that is the force-placed insurance, and some questions that you ask and ultimately what you want to hear from the servicer.

Then the modification process… If you have all of the loans that have been modified and they’re paying like clockwork, then congratulations, but eventually your portfolio is gonna be zero. [laughs] I’ve never thought about that, that’s very interesting. That’s something to keep in mind.

Then lastly, it’s okay to do different things, but you’ve gotta know your end game and what you’re good at… So thanks for being on the show, great stuff. I hope you have a best ever day, and we’ll talk to you soon.

Kimberly Banks Fawcett: You too, take care.

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Joseph Gozlan and Joe Fairless

JF1239: How Better Management Increased The Value Of His Apartment Building By $600k with Joseph Gozlan

Joseph came to the US in 2007 and started buying single family homes. He didn’t like the idea of scaling single family homes so he decided to start buying multifamily. Starting with a 22 unit, eventually buying a 102 unit property in Texas. According to Joseph, the 22 unit property was in great shape but had poor management. Now that they have fixed the management issues, the property’s valuation is worth over $600k more than it was with the previous management. In this episode we get to hear how to find your first bigger deal, and how to increase the valuation of large properties. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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Joseph Gozlan Real Estate Background:

-Multifamily investments specialist, leading group acquisitions of over $11MM in real estate at EBG Acquisitions

-Provides asset management services to a portfolio of 156 units and growing.

-In 2017 he led the successful acquisition of a 102 units multifamily property in Lubbock Texas

-Goal is more multifamily communities in Texas secondary markets and managing an asset base of 3000 units

-Began real estate in 2005, when he purchased with his wife Rita their first investment property in Israel

-Say hi to him at http://ebgacquisitions.com/

-Based in Plano, Texas

-Best Ever Book: The One Thing by Gary Keller


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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, Joseph Gozlan. How are you doing, Joseph?

Joseph Gozlan: Doing great, thank you for having me.

Joe Fairless: My pleasure, nice to have you on the show. A little bit about Joseph – he is a multifamily investor, and in fact, in 2017 led the successful acquisition of a 102-unit multifamily property in Lubbock, Texas; I’m actually going there tomorrow. He is a multifamily investor, as I’ve mentioned, and his company is called EBG Acquisitions. He’s led a group of acquisitions of over 11 million dollars in real estate. With that being said, Joseph, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Joseph Gozlan: Yeah, absolutely. Like I said, thank you for having me, I appreciate the opportunity to talk to your listeners. I’m a long time listener and I love everything you guys do on the show. I came to the States back in 2007 from Israel, and as you can imagine, we landed at the most horrible and most wonderful time in the real estate cycle. We were lucky enough to kind of recognize that this is the bottom, it’s as worse as it gets, and we were able to make some purchases of single-families. It was right after reading Rich Dad, Poor Dad, and some other things that were going on in my life, so we made a few investments. My wife and I both got licensed so we can get more familiar with the real estate system in Texas.

We did that for a few years, and then at some point you realize that single-family is just not scalable. In my eyes, there’s a lot more risk in single-families, so that really was the point in time when I decided to graduate to something better, and after all the research I did, multifamily was the thing that I wanted to go. It was a lot of work and a lot of grind, but long story short, I got to the point where I was able to purchase my first multifamily property, which was a 22-unit, and then we went to something bigger, which came in a lot faster, and that’s the 102-unit you described earlier, in Lubbock. From that point on, it’s kind of like a snowball; more things come your way, more opportunities, more investors that you talk to, and that’s we do today – we’re looking for great opportunities for our investors in Texas’ secondary markets.

Joe Fairless: Well, let’s talk about this. Fortunately, we have the opportunity to dig into this story a little bit… First, you said that you bought some single-family homes but it wasn’t scalable, and you said something interesting to me, and that was you think that single-families have more risk than multi. What risk are you referring to?

Joseph Gozlan: This is a little bit counter-intuitive, so I’ll try to make it simple. When I have a single-family house as an investment, if I don’t have a tenant in the property, then I pay the mortgage, I pay the insurance, I pay the bills, and I take 100% of the risk. Also, most chances are that as an investor you bought it on your personal name, so it’s a full recourse loan.

I had a situation with one of my rentals that I ended up paying about $40,000 in a very short period of time for just life that happens; we had foundation issues, we had plumbing issues, we had a garage door go… All kinds of things. That’s a risk. How many first-time investors, how many investors that have one or two properties can afford paying $40,000 out of the pocket? So for me, that’s a risk.

When you transition to multifamily, if you have 100 units, you can have 10 units vacant, and you still have 90 other residents that basically pay for your mortgage, pay for the salaries, pay for the maintenance… So for me, it’s a lot less risk. And then it goes around to the  mortgage side of things, usually of this size, now you’re looking at non-recourse loans. It’s no longer on my personal name, it’s no longer on my personal credit. So it’s a combination, and this is  more about my investors than myself, because for passive investors in a syndication, we keep three degrees of separation from anything that happens on the property. It starts with the property being owned by an LLC, so you get the protection of an LLC, and then all of our investors are limited partners, which means they have even less responsibility within the LLC, and then third is what I said is the non-recourse mortgages, so the exposure for those investors is significantly lower and less risky.

When we’re looking at accredited investors, these are high net worth individuals; usually we have professionals, engineers, lawyers, doctors, people that on a regular basis walk around with a bull’s eye on their back for lawsuits. If they can invest their money without adding to the size of that bull’s eye, it’s a win for everyone.

Joe Fairless: I hadn’t thought of it exactly how you were describing, and that’s really interesting; I’m glad you talked through that. You said after the single-families you bought a 22-unit. Was that all with your own money?

Joseph Gozlan: Yes. We bought, like I said, in ’08, ’09, ’10, when everything was at the bottom. We were able to refinance some of our singles, and take the cash out and use it to buy that first one.

Joe Fairless: And where is that located? You’re in Dallas-Fort Worth, right? Plano, specifically.

Joseph Gozlan: It’s in Celina, just a few miles North of Plano.

Joe Fairless: Okay. And you bought a 22-unit… Tell us about that in terms of purchase price, business plan and management.

Joseph Gozlan: It was really hard to find my first one, and I know this is a struggle a lot of the first-time multifamily investors are having, is to find the first opportunity. This one actually came in — we did marketing ourselves, after I got frustrated waiting on brokers to send me decent deals… And I spoke to the owners, we agreed on seller-financing terms, and what was wonderful about this thing is the previous owner was an 80-year-old guy that literally built the building; he was a custom home builder for year. He was never a multifamily operator. So he was kind of half of it maintaining himself, some usage of real estate agents in the area that were helping him loosen it up… So there was a lot of value-add play just in management.

The property is pretty new, it’s well built, it’s in great condition, but when you get to a point where you don’t respond fast enough to your residents’ requests and you let them pay on the 15th or the 20th, whenever they want, really, there’s a lot of value-add over there.

I believe that within about six months from buying the property, just by bringing a third-party property management and putting the right processes in place, we were able to increase the property value with about $600,000.

Joe Fairless: How much did you buy it for?

Joseph Gozlan: 1.6.

Joe Fairless: Okay.

Joseph Gozlan: And valuation right now is about 2.2, 2.3, and that’s just by getting the right processes in place. And we believe in treating our residents well, build a community… So we’re not using sticks, we’re using carrots. We came in, and in order to solve the late payment situation, what we did is we told them, “Okay, let’s have a contest, and everybody that pays on or before the first get into a drawing for a 40-inch LED TV.” Well, guess what? We had most of the tenants pay on time for the first time in years, and it cost us about $200 for an LED TV.

Joe Fairless: Was that the main management issue that you had that really pushed it up 600k?

Joseph Gozlan: No, that wouldn’t be enough, just getting them to pay on time. What we did was every apartment was individually metered, but it was never charged back. So we implemented RUBS; water and sewer up in Celina cost a lot of money, so that’s about $14,000-$15,000/year that we could recover just by telling people “You’re gonna have to pay for your own water bill.”

Joe Fairless: What’s that communication like to them? Because before they were not paying it, now “Congratulations, now you have to pay your own water bill.”

Joseph Gozlan: Well, you can’t really do that. It has to happen with the renewal of the leases. I can’t go to someone that is in the middle of the lease and tell them “Surprise, you have extra fees to pay”, legally-wise. So what we’re doing is as we’re renewing the leases, we add in a clause in the contract that says “Starting now, you’re gonna have to pay your water bill.” It helps us with either new residents that come in – this is the fact, that’s what’s going on on the property, and the residents that are renewing their leases have a choice between this or leaving the property really, but we try to be fair and honest with our residents; we did not double tap them. Even though a lot of them were way below market rents, we didn’t increase the market rents AND implement RUBS at the same time.

We kind of decided to go with RUBS first, and then we’ll do the rents later with the existing residents. But new leases that come in – they are at market rent, and have the water bill built into the contract, so we see a lot of increase in our gross revenue just by turning units around.

Joe Fairless: And I didn’t mean to cut you off, you were going into another thing that you did to increase the value.

Joseph Gozlan: Yeah, I’m sorry, that was the other thing.

Joe Fairless: That was the RUBS program…

Joseph Gozlan: The water and increasing the rents for everything that comes into the market.

Joe Fairless: Okay, got it. I’m with you.

Joseph Gozlan: Now, there are still residents on the property that haven’t had their rent increased since ’07, because that’s how the old guy was running the place. So as we renew the leases, we’re gonna work with them to slowly increment it. Again, for me, a key thing for multifamily is operation efficiency and retention. For me to take a resident out and rehab the unit and then find a new resident, even though we already have a waiting list, it’s a period of time that I’m not gonna have that income. So I’m gonna try to increase my retention as much as possible, so that it will be more efficient.

Joe Fairless: You mentioned that you got tired of waiting on brokers to send you deals, so you started marketing yourself. What specifically did you do?

Joseph Gozlan: I did yellow letters, I did postcards, I did cold-calling… Whatever I could in order to find the owners and try to have a conversation with them directly. And I talked to quite a few owners before I found my first one, because multifamily owners are not unsophisticated investors; usually they’re more sophisticated, so they know the market is hot, and some of them were just asking unrealistic prices. So for these guys we couldn’t make a deal, but I was glad to find someone that was just ready to sell and he was very honest and reasonable with his asking price. For what I was getting, I thought it was a great deal.

Joe Fairless: I’d like to learn a little bit more about that, because as you mentioned, it’s challenging for people to get their first deal, and even after you get your first one, it can be challenging to get good deals consistently, and we have to keep on digging, and I’m sure you’ve come across this, too. So you said you did yellow letters, cold-calling, direct mail… Which one of those actually delivered this deal to you, do you remember?

Joseph Gozlan: No one in specific. It’s not like I got all of them responding to the same thing. I spoke with multiple owners and they each responded to something else. That one specific was a postcard.

Joe Fairless: Postcard, okay. So on the postcard – what was on the postcard?

Joseph Gozlan: That specific postcard was about “It’s time to sell. The market is hot, there are a lot of opportunities going on around… Let me make you a fair offer, which will let you retire and move on.” I think it was an 80 years old guy, it kind of fell in place at the right time.

Joe Fairless: And he just saw that and called you up?

Joseph Gozlan: Yeah, and that’s the thing about direct marketing – it can never generate an opportunity; it just puts you in the right spot at the right time, when that opportunity happens to the seller.

Joe Fairless: That’s a great point.

Joseph Gozlan: When they’re ready, when they had to deal with one last thing that they didn’t like to deal with, or they had a fight with the wife in the morning about the property, or whatever life event happened to them right prior for you sending that postcard, that’s the opportunity of direct mail, which is why everybody tells you “Repeat. Do it again and again and again”, because it’s about being there at the right time, and you cannot time that thing.

Joe Fairless: How did you get the address?

Joseph Gozlan: My wife and I are still licensed real estate agents, so we have access to the tax system.

Joe Fairless: Okay. And you looked up the certain apartment communities that had certain characteristics, and then got the addresses, put in a spreadsheet and then mailed it out?

Joseph Gozlan: Exactly. Our mailing list is a constant refinement job. We wanted to find properties that didn’t have any transactions in the last few years, that had a certain size, that were in certain areas, cities or counties that we wanted… So we continuously refine our mailing lists.

Joe Fairless: And you refine it by manually doing it, or some other process?

Joseph Gozlan: I have a virtual assistant that helps me with this, but a lot of it is myself. We go sometimes down to the point where we actually look on Google Earth and take a look at the pictures of the property, because different counties have a different level of record-keeping. Some of them will call a multifamily a commercial building, and some of them will call it apartment, and some of them will call a commercial building a multifamily… So we have to constantly refine the list.

Joe Fairless: What type of seller financing did you get on that property?

Joseph Gozlan: That one was a great opportunity. We got in at about 15% down.

Joe Fairless: And how was it structured?

Joseph Gozlan: We have a 10-year term, 30 years amortization. Because of the low down, we have scheduled some equity payments over the next three years to kind of increase into the principal. I think it’s capped at about 6%. It’s tied to the prime, but it’s capped at 6%.

Joe Fairless: Okay. And the balloon payment or equity payment – that happens over the course of those 10 years… Is that because you proactively wanna do it, or was that negotiated in advance?

Joseph Gozlan: It was just negotiated, because I didn’t wanna put the whole 25% down ahead of time… So we negotiated 15% at the closing and another 10% in the first three years.

Joe Fairless: Okay. That’s great. This is inspiring for sure, for me and for other listeners. Let’s talk about the 102-unit in Lubbock. But before we transition to that, is there anything we haven’t talked about as it relates to the 22-unit that you think we should mention?

Joseph Gozlan: No, I think we’re ready to move to the 102.

Joe Fairless: Okay, 102. Tell us about that.

Joseph Gozlan: So part of this business is that the commercial real estate brokers – and I am one, so I can speak from the other side as well – it’s a probability business. If they have two buyers bringing offers and one of them is a first-time buyer and the other one has closed on thousands of units, there is a higher probability for you to close the transaction than the first-time buyer. Commercial brokers have mailing lists, they have shorter lists, they have short lists, and they have really short lists, right? And as they get to know you more and as they do more business with you, you advance through the ranks of those lists. So when a commercial broker gets a listing, first he calls his really short list; then if he can’t sell it there, he goes to the short list, and then he increases the circle of people that gets access to the property.

Once I closed on the 22, I started getting the “Oh, so you’re a closer… Come take a look at this, come take a look at that.” I was still not getting the best deals, but I was getting better deals.

The Lubbock property kind of came in through my property management company, because again, now they know I’m a closer, they’ve been working with me for a while; they had a property up in Lubbock, and the one that we bought was really bordering that one. They saw one of the brokers they’ve worked with in the past walking the property, and they called him in, said “Hey, what’s going on?” They said, “Yeah, the sellers are thinking about selling it.” They told him, “We’ve got the best buyer for you”, and we were able to kind of put it under contract before it ever went on the market.

Joe Fairless: And what did you buy it for?

Joseph Gozlan: That one was a 4.2 purchase price, with about $800,000 worth of rehab project, and that was the purchase. We had to raise 1.4 million dollars. We got Fannie Mae debt, which also included quite a large sum from the rehab budget into it, and it’s 102-unit. We’re still working on it. We closed at the end of May, and we’re still in the rehab process. It’s slower than we thought it will take, but within the margins of our expectations.

Joe Fairless: When you close on a deal of that size, after going from a 22-unit, what are some things that surprised you, or you weren’t necessarily prepared for, based on your previous experience with the 22-unit?

Joseph Gozlan: Property-related or process-related?

Joe Fairless: Both.

Joseph Gozlan: Okay, so I’ll start with the process-related… I did that as the syndication lead all by myself. I didn’t have partners or groups behind me, I just went out – friends, family, accredited investors, and I talked to a little over 150 people in order to get that equity raised. Two main insights… One – the equity raise piece was a lot harder than I anticipated. The other conclusion that derives directly from that is I’m not doing that again without a partner. Since then I’ve found a really great partner that is gonna come with us on our next transactions, and we’re geared up for the next one to make it a lot smoother.

Joe Fairless: And with the 102 units, what was the overall business model? Was it just renovations, putting in that $800,000 and then increase rents, and then refinance? Or was there something else?

Joseph Gozlan: We are geared toward a long-term buy and hold on that one. It’s in a great location in Lubbock. Lubbock is a fantastic market that is on a path of growth right now. The main driver over there is the university; I’m sure you know all about it if you’re gonna be there tomorrow. I’m gonna be there Friday, so we’re just gonna miss each other.

Joe Fairless: Oh, wow!

Joseph Gozlan: So the university alone brings about 1.2 billion dollars a year to the city. 300k people, so everybody thinks secondary market, but this is Texas-size secondary market. With the location of this property – it was great, it was one of the main streets that have a lot of traffic exposure… But a really unfair advantage with this entire purchase was our property management company. The company I work with, aside from the fact that they manage over 5,000 units and they’re 35 years in the business, they also manage five other properties in Lubbock, including one (like I said) that was literally bordering with that one. This really helped us tighten up our underwriting to the point where we knew exactly how much we’re gonna pay salary, we knew exactly what the maintenance costs, we know what the clientele is, what the demographic, what they’re willing to pay, what they’re not willing to pay. So it took a lot of the guesswork or the estimation work out of the equation for us in this purchase.

This property had great bones, it was just neglected on the outside. I’ll give you an example – we were doing the inspections, and all the exterior lights were out. At night, this property was pitch black. Now, when we were doing inspection around noon time, I see a nurse leave the property and go to work, so you know that nurse is coming back around midnight, 1 AM. Do you feel she feels safe coming in?

Joe Fairless: Not at all. I wouldn’t.

Joseph Gozlan: Exactly. Even just the risk of tripping down and falling. And do you think she walks around in the hospital saying, “Hey everybody, come live in my community”? No, she tells everybody to stay away. So that’s really where we like to pick distressed properties and transition them into a community, into a place where people want to come in. We’ve got specials for law enforcement, firefighters, EMTs and medical professionals and teachers – the kind of residents we want in the property. We’ll do events, parties, we’ll do — right now we have an ongoing contest going October, November, December… If you paid on time, five residents get drawn for movie tickets. It doesn’t cost us a lot to give that, but the residents enjoy the opportunity to get these things, and they feel there’s a community going on.

That nurse walks around the hospital and really says, “Come live in my community”, and not warning people about our community.

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

Joseph Gozlan: That’s a good one. I stick to three basic rules for real estate, and it doesn’t matter if it’s a $20,000 house or a five million dollar apartment community. Those rules are, you make your money when you buy. That’s rule number one. I know everybody says rule number one is location, but for me rule number one is you make your money when you buy. Buy right, so you won’t get hurt. Real estate is cyclic; none of us has a crystal ball to know when it’s gonna turn, so make your money when you buy.

Rule number two for us is location, because that’s the one thing you cannot change about a property. And rule number three is buy for cashflow, because hope is not a strategy. For everything I’ve done in real estate, I stuck to those three rules. And yes, it’s frustrating, we have to let go a lot of opportunities that come across our desk, but if you stick to those, you won’t go wrong.

Joe Fairless: Are you ready for the Best Ever Lightning Round?

Joseph Gozlan: Yes, sir.

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

Break: [00:25:27].26] to [00:26:17].12]

Joe Fairless: Best ever book you’ve read?

Joseph Gozlan: Best ever book… I have a love/hate relationship with Rich Dad, Poor Dad. [laughter] It’s a great book, but it doesn’t warn everything that’s gonna happen in your way, so I’m gonna go with The One Thing by Gary Keller.

Joe Fairless: Yes.

Joseph Gozlan: Strong book.

Joe Fairless: Best ever deal you’ve done?

Joseph Gozlan: The Lubbock deal, no doubt.

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

Joseph Gozlan: That’s a good one. Putting it on the wrong corporate entity. Putting real estate on an S-corp is not really advisable, let’s just say that.

Joe Fairless: And obviously, you’re not a legal person, but what do you do for your other deals, instead of S-corp?

Joseph Gozlan: That really depends on the person and their personal situation. For us, it was wrong to put it on an S-corp. It might be right for somebody else. We use a series LLC right now, and of course, when you go to a syndication, each one of them is an LLC by its own.

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

Joseph Gozlan: Children’s Hospital. There is a medical Children’s Hospital in Dallas and in Plano, and that’s our favorite target for our charitable actions. One of the things that we do, for example, is every time I see great deals on Amazon, or decent deals, something like that, for just stuffies, toys, I will just buy hundreds of dollars worth of toys and I will just go over there and hand it over to the kids, and they love it.

Joe Fairless: Oh, that’s great. That’s good long-term benefit, and then also short-term as well, for everyone involved, yourself included. How can the Best Ever listeners get in touch with you?

Joseph Gozlan: Our website, EBGAcquisitions.com, is probably the best way. I’m also very visible on the multifamily forum on Bigger Pockets. E-mail, phone – I’m very easy to find, just google my name.

Joe Fairless: Well, you were very insightful, I’m incredibly grateful that you were on the show and talked about a couple things… One is just what you’re doing in the multifamily real, but two, how you’re doing it, and how you found your first deal, the 22-unit, and I love the quote – I hadn’t heard this phrase this way before, where it’s “Direct mail does not generate an opportunity, it puts you top of mind for when the seller wants to sell”, and that’s why you have to do it consistently. You didn’t say it exactly like that, I’m paraphrasing, but that’s the gist of it, and it really, really resonates with me, and I’m sure a lot of Best Ever listeners who might be doing some direct mail and might feel let down because they haven’t generated something, but you have to be consistent with it. And then just you getting on the phone and calling people and doing it time after time, that’s what generates deals.

Then coming across the seller financing structure, which allowed you to bring 15% instead of 25% down, and then structuring accordingly. And also with the 102 units, congrats on that, and best of luck as you implement that business plan.

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

Joseph Gozlan: Thank you so much, it was an honor.

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JF:677 The Struggle from Online Poker Losses to $60k Debt and How He Came Out on Top

Today’s guest was very successful in the online poker field. After the government shutdown the online operations, he dropped $30,000 into a real estate investing education program that did not hold up it’s value. He eventually found a way to break through the darkness and win in real estate, hear how he did it!

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Connor Steinbrook Real Estate Background:

– Closed over 40 homes last year
– Lost $60,000 in his first 6 months
– Based in Plano, TX

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JF142: How to Become a Lead Generation Machine, Baby…MACHINE!!

Want more leads for your business? I thought so. Today’s Best Ever guest shares his secrets for how you can generate a massive amount of leads. Plus, much, much more!

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Hoss Pratt’s real estate background:

–        Founder of Hoss Pratt Success Systems based in Plano, Texas

–        After 3 years as a real estate agent he accumulated over $20,000,000 in sales

–        Recently nominated as Marketer of the Year for his Listing Boss product – lead generation tool for real estate agents

–        His expertise is in lead generation and conversion techniques – simply put, he’s an expert at getting a “yes” from difficult prospects

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