JF1404: How To Get The Most Out Of Your CPA With Proactive Tax Strategy and Planning with Brandon Hall

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Brandon has clients in every state, and only works with real estate investors. To say he’s experienced saving his clients money on their taxes, would be an understatement. Today we hear about why tax planning is important, and why your CPA should be doing more than just filing your tax returns. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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TRANSCRIPTION

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

First off, I hope you’re having a best ever weekend. Because today is Saturday, we’ve got a special segment for you, like we usually do, called Situation Saturday. Our guest is gonna talk about a situation that you might find yourself in, and how to overcome it. We’re gonna be talking about the sexy topic of taxes today… Yum! Good stuff.

Brandon Hall is with us, and he’s gonna make it entertaining. I’ve met him multiple times; you might recognize his name, and if you do, that’s because you’re a loyal Best Ever listener. Episode 484 – that’s like 1,000 days ago pretty much… Episode 484, the title was “What your tax strategy lacks in the multifamily space.” I interviewed Brandon about 1,000 days ago, and we’re gonna be talking about today how to get the most value out of your CPA with proactive tax strategy and planning, not just the tax returns. How are you doing, Brandon?

Brandon Hall: Good, thanks for having me on, Joe.

Joe Fairless: My pleasure, and nice to have you back. A little bit more about Brandon – he is obviously a CPA and he’s the owner of The Real Estate CPA. He’s an active real estate investor, and he’s principal at Naked Capital. His Big 4 accounting firm and  personal investing experiences allow him to provide unique advice to each of his clients, and his website is TheRealEstateCPA.com. With that being said, will you give the Best Ever Listeners a refresher? It’s been 1,000 days since we last talked on the show, so you can give them a refresher on your background, and then let’s dive right in.

Brandon Hall: You did a pretty good job. I run a virtual CPA firm. We have 12 employees currently that are spread out throughout the United States, no central office location. We have a client in every state, but we only work with real estate investors or business owners in the real estate space.

It’s a lot of fun, especially just the virtual connections that we make. I’m on the East Coast, and we’ve got a lot of clients in the California area, and those conversations go just as well as the local clients. It’s been a lot of fun.

Then I’m in a syndication group called Naked Capital, and we basically just place funds in different deals throughout the United States. We’ve placed deals in two separate multifamily syndicates over the past (I think) six months now.

Joe Fairless: Sweet. That could be a whole other conversation. Today we’ll focus on getting the most out of our CPA from a proactive tax strategy and planning standpoint, not just a tax returns… So how should we approach our conversation?

Brandon Hall: I think that it’s just important to understand that there’s a difference between tax preparation and tax strategy, and that you need to go to your CPA and request the service that you actually want.

A lot of CPA’s aren’t very proactive and they don’t really necessarily understand the difference between tax strategy or tax preparation anyway, so I think that we can just kind of talk about how do you make that approach, what is it gonna look like cost-wise, what is it gonna look like service level-wise, and what are the different options out there for you. We can also talk about when do you need to make that approach, what the 2018 tax change is… There’s a  lot going on, so when do you call your CPA up and have that conversation with them to see what you need to be doing from a strategy perspective, and what do you need to have there available for that conversation.

Joe Fairless: Let’s start with answering a question along those lines, but instead of the what and the when, how about why – why do we need the proactive tax strategy and planning, versus just the tax returns?

Brandon Hall: Yes. The tax return is a compliance service. Very boring, very straightforward… We’re filling out forms, we’re submitting them to the IRS. So still a very valuable service, because you’re getting accurate data into the tax return that’s then being submitted to the state governments, but it’s all after the fact. So once December 31st rolls around, your facts for the prior year are pretty much set in stone… So tax preparation is just looking at those facts and then reporting the outcomes. Tax strategy is saying “Let’s change the facts, which will then change the outcome.”

Joe Fairless: Okay. Do you have maybe a specific example, if you receive the tax returns and that service – what that would do, versus the benefits, getting more into the reason why of being more proactive?

Brandon Hall: Sure. So the tax returns… If you’ve just received the tax returns – again, valuable service, because it’s accurate. Banks like to see CPAs signed off on the tax returns, rather than you preparing it yourself, so there’s value there… But it’s just a report card of the prior year. It’s not gonna be anything where we can say “Oh, well if you can structure it as this entity and do these things…”, because again, December 31st has already rolled around, so your facts are set in stone.

There are some things that we can do – we can look at the tax return and say “Let’s make a contribution to a solo 401k or a self-directed IRA”, but other than that, your facts are pretty much set in stone. What we would do is we would use those tax returns as a benchmark for the tax strategy, the consulting part that we know is the most valuable to real estate investors, and to any business owner out there.

A good example, for instance, with the 2018 tax laws we have this new 20% pass-through deduction, but you only qualify for the 20% pass-through deduction if your taxable income is below certain thresholds. So from a tax strategy perspective, we’re looking at our clients this year and we’re saying “How do we keep our taxable income below these thresholds, so that we can get this 20% pass-through deduction.” It might mean buying a new vehicle, it might mean investing in a land conservation easement, or maxing out a 401k. There’s so many different things that you can do, but you have to do a lot of these things before the end of the year, and a lot of people don’t do anything before the end of the year; they only think about contacting their advisors or working with a CPA in January, February, March of the following year, but by that time, a lot of the strategies that we can implement – it’s too late.

So this year especially, I’ve been telling everybody – if there’s one year that you need to have your records really in line and just up to date as possible, and be having multiple conversations with the CPA to make sure that you’re on track, it’s this year, because that 20% pass-through deduction is gonna be key for every real estate investor, every business owner to benefit from.

Joe Fairless: If we have a CPA right now and for whatever reason we don’t choose to work with you, so we’ll move that variable aside just for the purpose of this question, what do we ask him/her in order to be proactive and help set ourselves up for success?

Brandon Hall: So it depends on what activities you’re involved in, obviously. If you are anybody but a syndicate – so I’m not a general partner in a syndication, closing on these big multifamily homes – then I’m gonna be asking my CPA, “Hey, here are my facts, here’s my income to date (not “Here’s what I think my income has been to date, but here’s actually what my income is, because I keep awesome records”), what should I do to ensure that I maximize that pass-through deduction that is now available to real estate investors and business owners?

That question should lead to a very nice, long, insightful conversation about different strategies that you can utilize to drive your taxable income down, so that you can take full advantage of that pass-through deduction. If you’re a syndicate – now we’re taking the other stance… If you are a syndicate, you’re a 30% in a big multifamily property, or you’re just a GP, or you take a stake in the GP, you need to be asking your CPA or the CPA that’s running the deal “What do we need to be looking out for in order to maximize our investors’ return?” There’s a lot of changes with business interest. Business interest is now limited in what you can deduct, and this syndicate needs to know “Do we make an election to elect out of that, or do we not? What are the facts and circumstances here? Which way do we need to go in order to maximize our investor returns?”

Generally, a syndicate could just kind of buy the multifamily property, you could do a cost segregation study and call it a day, and you’re maximizing investor returns and everybody’s happy… But now it’s gonna be much more strategic because of these business interest limitations that come into play.

Those are conversations that everybody needs to be having with their CPA, from both levels. Basically, just “How do I get my income below whatever threshold?” and then if I’m the syndicate, the bigger level players, “What do I need to be doing with the business interest limitations in order to maximize my investor returns?”

Joe Fairless: How do you know what you should do after you receive advice from a CPA? Because my challenge is sometimes when I ask a CPA a question, I get exactly the answer to the question, which is exactly what they should be doing, but I’m looking for also more of an advice on which direction I should take, because a lot of times it’s very clinical in how they approach their answers.

So once we get that information, how do we know which direction is the best to take?

Brandon Hall: Yeah, you’re gonna find that with attorneys, too. CPAs and attorneys, very clinical – you ask, I answer, that’s it; let’s move on. So I think that that’s where the strategy portion really separates itself from the preparation portion. A lot of our clients are pretty used to just asking their CPAs at tax time or after tax time, “Hey, looking at my prior tax returns, what could I have done differently?” or “I’ve got this particular purchase going on right now… Anything that you see?” and it depends on what type of CPAs you work with. Most CPAs bill hourly. They want to answer your question in 15 minutes, call it a day, move on to the next question, answer that in 15 minutes, and they’ve got 500 clients that they’re working with. We don’t do that. We bill out tax plans, and it’s gonna cost $15,000, but we’re gonna look at every aspect. We’re gonna give you a plan and action items and we’re gonna help you implement it.

So one, it does depend on who you’re working with and how they structure their business, but two, it also depends on the questions that you ask. So if  you ask very black and white, yes/no questions, then you’re gonna get a very black and white, yes/no answer. But if you’re asking more open-ended questions, then you’re going to encourage the CPA to explore those questions.

A lot of our new clients will just say “Hey, I don’t know what to ask. I just need to know how to minimize taxes.” Well, as a CPA, I look at that and I say “Okay, we could explore literally every single aspect, but it’s gonna cost a lot of money to do that, so let’s try to narrow it down into the specific aspects that you want to explore.” Yeah, I agree, a lot of CPAs just want to answer the question…

Joe Fairless: In that example, how do you narrow it down? What questions do you ask that individual?

Brandon Hall: Okay, so let’s say that you run a syndicate, you’ve raised multiple millions of dollars and you’re trying to figure out how to maximize investor returns. You first need to understand what variables are out there that you have control of in order to maximize investor returns. So you’re not gonna care about 401k’s, you’re not gonna care about SD IRAs, you’re not gonna care about asset purchases, but you are gonna care about what are the new 2018 tax laws that might affect me. You could just start there. What are the 2018 tax laws that might affect my syndicate? CPAs should be saying something along the lines of “Well, we’ve got the pass-through deduction that we can pass to investors. We also have that business interest limitation that we might need to avoid or work around.”

Then the question should be “Can you explain what that business interest limitation is?” The CPA explains what that is. Then you say “Okay, what are my options along those lines? Which routes can we potentially take, and can we potentially model this out in Excel to see what the impact might be over the next 5-7 years on a net present value basis?”

When you’re asking more sophisticated and intelligent questions — and you might not even know what you’re asking about, but just understanding that at the end of the day you want a scenario, you wanna see side-by-side scenarios, so that you can make a decision… So you have to ask questions that will generate that type of a result.

Our clients that get the best results from us are generally the ones that are saying “Hey, can you build me out a scenario? I need 3-4 scenarios or however many scenarios possible, side by side, so that I can see what the impacts are gonna be if we go this way or that way.” Those are the folks that have the most clarity in their tax strategy.

Joe Fairless: The most challenging client is – fill in the blank.

Brandon Hall: The most challenging client is the one that just says “Give me tax strategies.” [laughs] That’s the type of client that we could literally go from any end of the spectrum; we try to do a pretty good job of asking a lot of questions, so we can narrow it down. We’re not gonna go propose “Oh, well your kids could work in your business” if you don’t have any kids, right? So we try to do a good job there… But knowing kind of what you want out of the CPA relationship helps everybody involved.

Joe Fairless: What are some open-ended questions that an investor can ask a CPA, that would help solidify the direction that they should take the conversation?

Brandon Hall: You can ask open-ended questions on anything, but it’s just kind of, I don’t know, giving some facts and circumstances to help guide that open-ended question. Coming to me and saying “Hey, you saw my tax returns, you saw my goals… What should I do to minimize taxes?” does not help me a lot. But coming to me and saying “You saw my tax returns, you saw my goals, and next month I’m purchasing a 4-unit multifamily home. What can I do within that 4-unit multifamily home, or surrounding that 4-unit multifamily home, to reduce my tax liability, either overall, or just related to the income that that multifamily home spits off?” That’s when we can actually say “Okay, let’s really dig into this, let’s spend some time digging into this”, and producing good results, good strategies that you can utilize. That helps out a lot.

Joe Fairless: Anything else we should talk about as it relates to preparing us to be proactive with our CPAs on planning, that we haven’t discussed?

Brandon Hall: Yeah. I’ve talked a little bit about how the bad clients are the ones that say “Just give me some tax strategy”, and it’s totally okay to not know the questions to ask. I would highly encourage you to read online about your situation. Try to understand where you fall in the tax position world.

You wouldn’t go to a business coach and just say “Help me on everything. I have no idea what I’m doing.” You would go to a business coach and say “Hey, I’ve got these specific problems that I need help solving”, and that’s the way you need to approach your CPA relationship, too. But even if you have no clue, just having up to date information will help us tremendously in solving your problem.

So again, don’t come to me in October and not have your 2018 financials through October ready to rock and roll… Otherwise I can’t help you very much, because there’s no data there to really guide me to recommend any sort of strategies. So that can really help with the proactivity if you just bring accurate and updated data to your CPA to facilitate those strategy sessions.

The other thing is that I would just check in with your CPA every once in a while. You don’t necessarily need to have a phone call, but just send an e-mail update. Don’t wait till the end of the year to update your CPA on everything that happened. We have clients that will update us on a monthly basis with their monthly transactions; even if there were no transactions, they will just say “Hey, no update.”

The cool thing is that we can put all that into their client file, and now all of a sudden strategy becomes a lot easier, because we’ve got up to date information, and the tax preparation also becomes a lot easier because we don’t have to go back and have you rehash everything, because we’ve already got it.

Joe Fairless: I imagine you all do bookkeeping, because the regular updates back and forth would be a headache for some people.

Brandon Hall: Oh yes, we do a lot of bookkeeping, CFO outsource work – absolutely.

Joe Fairless: I can tell you that’s been a life-saver for me, having the group I work with do bookkeeping and then also taking care of the tax stuff, because before that it was just a hot mess with a lot of different things, but then once we got that in place, it added years to my life, that’s for sure.

Brandon Hall: Oh yeah. Our goal with our bookkeeping and accounting services is to remove the business owner as much as possible, and the business owners tend to be a lot happier people once they’re out of the accounting and the bookkeeping. It’s one of those things where you do have to scale to a point where you can afford a CPA firm to offer full services. We’re not nearly as cheap as you going to Upwork and finding somebody, an overseas bookkeeper to run your books for you… But having it all in one place allows us to look at the books and say “Hey, Joe, you’ve got this issue that you didn’t realize, but since we’re doing the books for you and we’re doing the tax strategy and we’re doing the tax prep and we’re watching your account pretty closely, we found this. Let’s have a conversation about it and figure out how to mitigate it.”

So that’s the benefit that you get when you do it all in one place… But even if you don’t, I highly recommend that you do [unintelligible [00:18:38].23] I outsource my books, and I’m an accountant; I don’t do my own books, so… [laughs] Get rid of them.

Joe Fairless: Absolutely. Well, Brandon, how can the Best Ever listeners learn more about what you’re doing and get in touch with you and your company?

Brandon Hall: You can connect with me on LinkedIn. You can just search Brandon Hall CPA, and I should be that first result there. You can connect with me on Bigger Pockets… I am relatively active these days. Or you can go to TheRealEstateCPA.com and sign up for our newsletter, become a client, or whatever you’d like.

Joe Fairless: Brandon, thanks again for being on the show, giving us some very practical tips for how to approach the conversation with our CPAs. It really is quality in, quality out, trash in, trash out… So the advice is going to be as good as the inputs that we bring to the conversation; as you said, bring accurate data points and provide regular updates… But then also be intentional about what we want to solve for.

I love your analogy of a business coach. I certainly would not hire a business coach if I didn’t know what the outcome for that engagement would be, and same with this… So for my own selfish purposes, thanks for coming up with that analogy, because that really resonated with me… And learning more by having this conversation and listening to this conversation will help us be prepared for our CPA conversations, and then ultimately, it’s a money-saver. This conversation likely saved a lot of money for the Best Ever listeners, because now the conversation will be of higher quality when we speak to our CPAs, and that will be less time, which equals more money saved.

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

 

 

JF1353: How To Win Over An Apartment Broker (From An Apartment Broker) with Thomas T Furlow

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Thomas has been a commercial broker who specializes in multifamily for years now. One of the first things we dive into is how a newbie investor can win over an apartment broker. From offering to pay for your broker’s time to knowing the market like the back of your hand, and more secrets revealed in this episode. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Thomas “T” Furlow Real Estate Background:

  • Commercial Real Estate Broker – ‎Deaton Investment Real Estate, Inc.
  • Has a diversified real estate background and has been a multi-family broker for more than 10 years
  • Handles operations and general brokerage duties, working with sellers to market their properties for sale
  • Consults investors on buying decisions
  • Based in Raleigh, North Carolina
  • Say hi to him at https://www.deaton.com
  • Best Ever Book:The Bible and Halftime by Bob Buford

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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, T Furlow. How are you doing, T?

T Furlow: I’m doing great, Joe. Great to be on!

Joe Fairless: Yeah, nice to have you on the show. A little bit about T – he is a commercial real estate broker with Deaton Investment Real Estate. He has a diversified real estate background. He’s been a multifamily broker for more than ten years; he handles the operations and general brokerage duties, as well as working with sellers to market their properties for sale. He consults investors as well on buying decisions. Based in Raleigh, North Carolina. With that being said, T, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

T Furlow: Yeah, Joe, and thank you for the introduction again. I’ve been a commercial broker, really specializing in multifamily for the last 10 years. I work in a small private shop here in Raleigh that sells properties all across North Carolina, anything from 2 to 200+ units. So we work with beginning investors, on up to institutional investors… And really, it is a lot of fun. We get to interact with a lot of different types of people, and obviously have many great relationships across the market. It’s fun, we’ve been able to see a lot of folks kind of grow up from buying duplexes to controlling 1,000 units, kind of like your story… So it’s a neat mix of folks that we get to work with.

Joe Fairless: The beginning to institutional investors, from 2 to 200 units – a question that is asked frequently is… It’s more of a complaint from beginning investors, so it’s not really a question; I’d love to hear your thoughts on this. The complaint from beginning investors who are looking to get into larger apartment buildings is that the brokers just won’t give them the time of day because relatively across everywhere it’s pretty hot for multifamily. So first off, what are your thoughts on that?

T Furlow: Well, unfortunately there’s a little bit of truth to it, and I’d be lying to you if I said that certain days I have to make a decision – am I gonna work with client A, that’s bought multiple properties before, or client B, that I’ve never worked with. So I guess some of that is just the uncertainty with a beginning investor. The question that goes through a broker’s mind is “Are they really gonna pull the trigger on something?”

So I guess what I would counter that with is as a beginning investor it helps to take steps to prove to your broker that you are serious, and I can tell you that some of the people that I’ve had success with, kind of graduating those steps from beginner to a more seasoned investor, have walked into my office and said “Your time is valuable and I want to pay you for it, even if I don’t buy anything.” And often times I’ve declined that payment, but what it’s done is  it’s proven to me these folks are actually gonna do something about what they say.

Joe Fairless: I had not heard that approach. I love it. Thank you for giving that dialog, back-and-forth… And how much do they offer to pay?

T Furlow: Great question. I think that the buyers or investors that are in that position look at a seasoned broker, and whether that’s me or somebody in California or some other state that’s in a similar situation – they’re gonna look at that broker really as a consultant… So it seems the rates offered in that sort of consulting range between $150-$200/hour.

And again, in the grand scheme of things, if somebody says “I wanna come in and pay you $150”, $150 is great, but what I’m hoping is I wanna turn this person into somebody that’s gonna go from that to buying ten properties with me throughout my career, and it’s just kind of that initial step that kicks things off and tells us that they’re serious.

Joe Fairless: I love that. I’m going to make a note of referencing this interview for anyone who asks me about how to really establish credibility with the broker. And that’s not the only way; that is one way. Ultimately, it is addressing (it sounds like) the uncertainty of the question that is in (your mind, or) a broker’s mind, “Are they really gonna pull the trigger on something?”

So what are some other things? You said that you have people who have taken steps to prove that they are serious, or that’s the approach to take… So tactically, what are some other things an investor can do to prove that they will pull the trigger?

T Furlow: Another great question… I give people a handful of suggestions, and really from our side of the table it’s almost like marching orders… And the people that come back and say “Okay, I’ve done this”, again, move to the top of the list. And I think the first thing that a buyer really has to do for themselves is acclimate themselves to the market. As you will know, real estate is a local and even hyper-local business, and I can sit here and tell you “This area of Raleigh is great, and this area of Raleigh or Durham is one you should stay away from”, but I really would be doing you a disservice, because as fast as the market is changing and as fast as our market in particular is growing – and I know it’s happening in other cities across the country – you drive block by block and those generalizations change.

So a buyer that’s willing to get in the car and go drive by properties – not just ones that are on the market, but ones that have sold… “Hey T, I went to your website and I saw these ten properties that you sold, and I went and drove by all of them, and I can tell you right now, I’d have no interest in these six… But these four are still interesting to me.” Immediately, I’ve got a better feel for “Oh, I know what this buyer likes, and more importantly, what they don’t like, so I’m not gonna waste time with him.” So the next time they call me about a property, or I’ve got a property that I wanna present to them, I go back to those notes, and “They didn’t like that part of town”, or “They did like that part of town because of reasons 1, 2 and 3.”

So acclimating themselves to the market, taking the initiative to drive by properties and provide that feedback.

Number two is how you’re gonna pay for it.

Joe Fairless: Yeah… Details. Those are details, come on! We’ll brush over those. [laughter]

T Furlow: So somebody that’s willing to share financial information – “Here’s the amount of cash I have on hand, here are the lenders I’ve talked to”, or “Hey T, who do you recommend I talk to?” And then a simple follow-up of “Hey, I reached out to lender A, B, C. I appreciate that referral. Here’s the information I provided them, and they say I’m good to go.” That’s obviously a great sign, again, that they’re serious about actually making something happen.

And then I think buyers that are willing to also maybe even start taking the steps of putting together the whole team. “I’ve engaged this contractor, I’ve engaged this inspector, I’ve engaged this property manager to be part of my team. Here’s the attorney that I’m gonna use.” Because all those are steps that have to be taken, and the buyer that has that formula put together on the front-end is one that we know is serious.

Joe Fairless: As far as someone on the “How you’re gonna pay for it” part, who plans on bringing in other investors, what would sound good to you that that person can say while they’re still being transparent and truthful?

T Furlow: Absolutely. Great question, and the reality is in the market we’re in right now in 2018, a buyer that is putting together equity partners really has to have the money committed and the LLC or the joint venture documents drafted. If you’re waiting for a property to then pitch back to your investors, and “Okay, now it’s time to finalize these LLC documents”, the property is gonna be sold by the time you get there.

You really need to go ahead and formalize those partnerships… And that’s really not even so much for the broker that I say that; it’s for the seller. When a seller in this environment is looking at multiple offers, those are the questions they’re going to be asking, and it’s gonna make the buyer’s offer that much stronger if they have those details in place.

Joe Fairless: And then just to ask a follow-up on that, because when we do syndications, we don’t have the new entity formed for the property we’re about to buy until after we actually have it working through the contract, and we don’t have the money committed for that particular property because we haven’t shared it out… But when we do get it under contract, then we fund it, and all is good, and we close within 60 days, or whenever we need to. So in what you’ve just described, my group wouldn’t qualify, but help me understand that a little bit.

T Furlow: Sure, I appreciate the chance to clarify. I guess I was still answering within the context of a newer buyer or a beginning investor.

Joe Fairless: Fair enough.

T Furlow: Within the context of somebody with a track record, certainly you have the ability to point back to that track record and get the seller and the brokers and anybody else involved to a level of comfort.

Joe Fairless: As far as a newer buyer, beginning investor – they’ve got some real estate experience, but they haven’t closed on, let’s say a 100-unit, for example. You’ve got a 100-unit, and the newer investor has some real estate experience (not a lot), they do have the team together, and they’re from out of state, but they’ve got a team bio sheet with some of their lead investors on there. What would that do, if anything? Would that qualify them?

T Furlow: In my mind, absolutely. I think without a doubt somebody that — again, it’s as much about communicating efforts and thoughtfulness and planning as anything. In my mind, the spirit of those actions speaks for itself.

Joe Fairless: Okay, interesting. Good stuff. You dashed hope, and now you’re giving back hope… Giving back hope to some beginning real estate investors who are looking to do larger deals.

T Furlow: There’s always fallback positions.

Joe Fairless: [laughs] Well, with how you work with your clients, there are some situations I imagine that aren’t cookie-cutter in terms of the broker fees that are charged. For example, if you have an off-market deal and you send it to a qualified buyer that you’ve got a good relationship with, what would that fee be, compared to if you were to market a deal for a seller, and that seller paid you to do the whole song and dance, create an offer memorandum, do the tours, all that stuff? How do those two fees compare, if they are different at all?

T Furlow: They are different. I think last year we did — when I say “we”, Deaton Investment Real Estate is a three-man brokerage shop that works as a team… And we were fortunate enough to actually be recognized just this week by CoStar as one of the power brokers in our market, which is great…

Joe Fairless: Congrats!

T Furlow: Thank you. But of course, we’re always like “Alright, where is the next deal?”, it doesn’t matter what we’ve done in the past… But we almost hit the 100-million-dollar mark in volume last year, and I think — I should have known this coming into the conversation, but I wanna say about 50% of those were off-market transactions, and a very high percentage of those were the efforts of cold-calling and scratching, and “We’ve gotta buyer”, and we’ve gotta find something for them to buy, because there’s just not enough on the open market.

In those situations, we are negotiating those commissions on a deal-by-deal basis. Obviously, the larger deals, and I would say in our world anything over 8, 9, certainly 10 million dollars qualifies as a “large deal.” It’s not uncommon that we just get a flat fee of maybe $150,000, or something, on a deal like that, as a finder’s fee… And depending on how thin the deal may get, our clients sometimes have to come back to us and say “Hey, can you help me out here?” And obviously, we wanna get deals done, so we’re open to have those conversations… Whereas a listing agreement is gonna be more percentage-based, and we see them get capped from time to time, but we certainly try to get a healthy enough commission that we can get paid… And we really are proponents of co-brokerage splits, that in the multifamily world is not very commonplace anymore.

Our advice to sellers is that the market will speak for itself. If you truly expose the property to the maximum amount of qualified buyers, they will tell you what it’s worth, and through competition you will drive the price… And you generate that competition by incentivizing other brokers. So in a world where it is not uncommon for multifamily brokers to list properties with their own commissions taken care of, but with no co-brokerage payout, we try our best to advice sellers that that is not in their best interest. It doesn’t mean we always get to that end result, but that is certainly some of our Best Ever advice.

Joe Fairless: It’s really interesting… What would the numbers look like (in terms of the split) on either a deal you’ve done in the past, or hypothetical, when you sell a deal and you do that split?

T Furlow: Yeah, it’s uncommon that you’re gonna get paid more than a 6% commission, and in that scenario we’d split as high as 50/50, with 3% and 3%. Everything can be deal-specific, with the level of complexity on either side of the table, exactly how that gets split, but we try our best, again, to incentivize the other brokers out there running around with qualified buyers to come our way, because we hope folks will do the same for us when we’re in their shoes.

Joe Fairless: Yeah, it’s a win/win… A win/win/win. I think a lot of people are winning there.

T Furlow: And one of the objections we have to overcome with our sellers is, well, this actually gives us more incentive to wanna sell it ourselves, because then we don’t have to share it… But if we do, there’s meat on the bone for everybody.

Joe Fairless: And why wouldn’t a seller say “Absolutely!”, if they’re saying “If you wanna split your fee, fine with me, as long as you just sell it for the best price”? Why wouldn’t 100% of the sellers say that?

T Furlow: I think especially in the market we’re in right now there is a perception that there are enough buyers out there that it doesn’t matter… And “I’m gonna pay you your fee, and I’ve got plenty of other brokers chasing me right now, so I can negotiate your fee down to a pretty  thin margin, but then if you wanna share that, that’s up to you”, but generally in those scenarios there’s not enough meat on the bone, so it makes it pretty difficult to do that. That’s one of the downsides of a good market for a broker; we do more transactions, but often times we’re taking a haircut.

Joe Fairless: Yup. Pros and cons in every market.

T Furlow: I just want to circle back to something, Joe… On the buy side, I guess part of my advice would be a broker really can’t be a buyer’s best resource. We obviously feed our families by doing deals, and the folks that make it easy for us to do deals with them are the ones that we call first, because we feel like we’re gonna be protected, they’ve proven themselves, either through closings or through other actions, that they’re serious and willing to compensate us for finding them something to buy. So if it’s an off-market deal — and look, there can be various levels on the off-market deal; there can be a simple finder’s fee… That might be a thinner commission than, say, “Okay, this is a finder’s fee, plus I want you to help me walk through my due diligence process.”

Joe Fairless: So if a beginning investor were to layer that in, what we talked about, and then you said “Yeah, that sounds good”, and then were to layer the finder’s fee in, and proactively offer that up – what are your thoughts there?

T Furlow: Well, I think they’d be ahead of their competition, and more likely to see more deals. I think where you have to be careful or what I would caution folks about is real estate can be a small world, and there are a lot of brokers out there chasing deals and running with buyers, so you’ve gotta be a little careful about talking to too many folks, because then you do kind of revert back to “There’s somebody else out there in the marketplace that’s gonna cut me out or not protect me if I bring them something.” There’s a level of trust there that still has to be created.

Joe Fairless: I’m glad you brought that up, because that’s a tricky part of the process, especially when you’re starting out and you don’t have the track record, the credibility… Or maybe you don’t have any contacts and you’re just looking at LoopNet – “Hey, they’re listing some properties. Maybe they’re an active broker. I’m gonna reach out to them… I’m gonna listen to this podcast with Joe and T, and T said that I’m gonna set myself up really successfully with this broker if I do the things we talked about earlier, plus offer a finder’s fee. Well, I do that, and then I don’t really see too many deals… I do that with three or four people, don’t see too many deals, and now all of a sudden I’ve got — maybe one or two of them eventually pick up, but then they bump into each other… Is that a negative for me as an investor?”

T Furlow: The reality is in the real estate world those situations are gonna present themselves. They’re almost unavoidable. My advice is always be truthful. I think if you’re above board with people and tell them “Here’s who I’m talking to, here’s who I’ve talked with”, or even simply asking the questions, “Why haven’t I see deals?”, often times brokers are gonna give you feedback… “Well, you’ve told me you wanted this, you’ve told me you wanted that. Your parameters are too narrow; or they’re too broad, we’ve gotta narrow it down some.”

But when those situations arise where maybe brokers are bumping into one another, you just have to bring everybody to the table and say “Here’s how this played out”, and often times those situations can be resolved with a very honest and candid conversation. It’s not always gonna be the case, but in our world that’s proven to be the case more times than not.

Joe Fairless: This is great stuff. One last follow-up question on something that I had in my notes, but I didn’t fill in yet during our conversation… You said larger deals, over 8 million or so, and we talked about maybe a flat fee… What about less than 8 million? What’s the range? You said perhaps up to 6%, but what’s the typical range for the fee?

T Furlow: I really wish I could answer that question. There’s a level of complexity with every deal that varies. Again, I would say 6% is probably the max, and once you get over 5 or 6 million dollars, that gets a  little harder. $300,000 commissions are rare. We’re seeing them, but they’re rare. It starts to work its way down into the 4%, even 3% range.

Then you get in the portfolio deals, where you’re selling multiple properties, and obviously commissions get cut even more from there, if there’s gonna be multiple hit with one entity. I’m never gonna fault a seller or a buyer for wanting to make the deal favorable to them, as long as they keep in mind that as a broker this is how we bring value to a transaction, and what we do. Obviously, it’s gotta be worth our while, too. And most of the folks that we work with see it both ways, and hopefully that speaks to why we’ve had some success.

Joe Fairless: This is gonna be a tremendously helpful conversation for investor who are looking to get into larger deals, so I really appreciate that. What is your best real estate investing advice ever?

T Furlow: I like to tell people to make small mistakes. I think a lot of people out there are always looking for the perfect deal, or are so scared to make a mistake that they get to the point of the paralysis of analysis. I like to tell people “Don’t avoid mistakes, just make small ones.”

Joe Fairless: Yeah, I like that.

T Furlow: You can always come back from a small mistake. Unfortunately, a lot of people didn’t follow that advice in 2008 and 2009. Those results spoke for themselves, with the amount of leverage that was in the market. That was not a fun time to live through… But that would be my Best Ever advice.

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

T Furlow: I am. Fire away!

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

Break: [[00:22:07].29] to [[00:22:45].08]

Joe Fairless: Best ever book you’ve read?

T Furlow: Man, there’s so many… I’m gonna answer it with two. The first is gonna be the Bible, because that’s where I get my roots and my values from. I’m actually reading a book right now called Halftime, by Bob Buford. It talks about going from a life of success to a life of significance. I would highly recommend that.

Joe Fairless: Best ever deal you’ve done?

T Furlow: Just last year, an off-market deal that we entered into in a position as the buyer, and assigned to the eventual buyer as our way of collecting our commission. It was 100+ units here in Raleigh, and probably the one that we took the most risk on too, but it worked out.

Joe Fairless: Is that typical, to go under contract and then assign it?

T Furlow: Not for us, that’s not our typical model… But we had a seller that was very nervous about giving people information, and that was the only way we could get information. And we had a hunch that once we saw that information, we would see an opportunity, and our hunch proved to be right.

Joe Fairless: Wow, that’s pretty cool. I hadn’t heard of anything like that before.

T Furlow: It was not our intention going it. There was a full intention to close it, and then we realized actually after seeing the opportunity that it perfectly matched a client that we’ve done a lot of deals with, and we decided to let them have the fun.

Joe Fairless: [laughs] What was the total commission on that one?

T Furlow: I can’t tell you that, I wish I could…

Joe Fairless: Well, but you still had fun, too.

T Furlow: Yeah, we had fun too, and I will say I think it’s our biggest one ever.

Joe Fairless: There you go, good. And what’s a mistake you’ve made on a transaction?

T Furlow: A very minor clerical error in a contract, that I assumed everybody knew it was a clerical error, and did not communicate thoroughly, and boy, did that come back and bite me.

Joe Fairless: What was the error?

T Furlow: It basically came down to whether or not a box was checked… And I should have just called everybody back to the table and say “Hey, let’s clear this up”, and made an assumption and it turned out my assumption was not other people’s understanding… So that kind of goes back to the rule that I shared earlier – just always be truthful and above board; it was not intentional in any way to mislead or misrepresent, but I should have just gone ahead and had the conversation, rather than letting it play out otherwise. But we worked through it, fortunately.

Joe Fairless: Good, good. Best ever way you like to give back?

T Furlow: That’s gonna be my favorite question. So for me, my story – I did not always have the greatest father presence in my life, and sports coaches, teachers and a lot of great men entered my life and filled that role, so I really enjoy being a coach for U-sports. My son is playing baseball and I coach his team; I help in many other capacities, in sort of a similar way. I’m involved with a group called “Purpose-driven Baseball”, which is a [unintelligible [00:25:45].02] baseball ministry that uses the game as a way to share the Gospel, but really try to do it the right way and teach kids more than just baseball, but teach them about life and about a life of character. So I really enjoy giving my time and giving back that way.

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

T Furlow: They can find me on our company’s website, which is deaton.com. My e-mail, link to the LinkedIn profile, phone numbers are all right there.

Joe Fairless: We learned so many things that will be helpful for investors who are looking to scale up, looking to establish more credibility with brokers… I’m just gonna list some of the things you mentioned.

1) consulting payment

2) acclimate themselves to the market

3) how you’re gonna pay for it – have a plan for that

4) for the referrals that you are provided from the broker (if any), follow up with the broker about what transpired after that conversation and what was the result of it.

Another is putting a team together, making sure you have that… And then lastly, offering a finder’s fee for finding off-market, or just deals, and the transaction. So lots of great tactical things…

Also talking to us about the fee structure and what we can expect. Many variables in play, but some frame of reference you certainly gave us, on different scenarios. Thanks for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

T Furlow: Thank you, Joe.

JF1335: How To Wholesale Apartment Communities #SkillSetSunday with Luis Carrera

Listen to the Episode Below (25:45)
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Luis has been on the show and has shared his Best Ever Advice in the past (link below). After the 2008 crash, he turned into a real estate investor. Now Luis is wholesaling apartments and has a very interesting strategy and tips to share with us today. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

 

Listen to his Best Ever Advice:

https://joefairless.com/podcast/jf1024-the-2008-crash-turned-him-into-a-real-estate-investor/

 

Luis Carrera Real Estate Background:

  • Commercial wholesaler & real estate investor – ‎Innovative Property Group
  • Currently writing a book on a step by step guide to commercial wholesaling
  • Currently raises capital for larger apartment complex purchases
  • Started real estate in lease options to eventually doing wholesaling, and flipping
  • Based in Raleigh, North Carolina
  • Say hi to him at 973.902.7203

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TRANSCRIPTION

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

First off, I hope you’re having a Best Ever weekend. Because today is Sunday, we have a special segment for you, and the segment is Skillset Sunday. The skill we’re gonna be talking about is how to wholesale apartments. Interesting, right? We have a guest who wholesales seven apartments last year, and he’s gonna talk us through how to do it, and he’s also writing a book about it… How are you doing, Luis Carrera?

Luis Carrera: Hey, Joe. How’s everything? Thank you for having me again.

Joe Fairless: My pleasure, nice to have you back on the show. Luis said “again” because he was on episode #1024, titled “The 2008 crash turned him into a real estate investor.” You can learn more about him and his background and his best ever advice by listening to episode #1024… So we’re not gonna talk about that. We’re gonna talk about the nuts and bolts of how to wholesale apartments, but just a little bit more context about him, so you can be caught up to speed if you didn’t memorize what we talked about last time.

He is a commercial wholesaler and real estate investor. His company is Innovative Property Group. He’s based in Raleigh, North Carolina, and he is writing a book on how to wholesale apartments. He did seven last year. With that being said, well, how do we wholesale apartments?

Luis Carrera: Well, Joe, once you know the nuts and bolts about it, it’s not that hard, just because you have to target different properties, basically mainly under 80 units, but… Could I give you a quick back-story in regards to how I got to wholesaling apartments?

Joe Fairless: Please.

Luis Carrera: Perfect. Basically, I used to obviously do flips and wholesaling in my market in New Jersey, and now in North Carolina in the Raleigh market. I ran into different opportunities, and I always wanted to invest in apartment complexes, so much so that I did join a few groups and I actually did training with Dave Lindahl – I’m not sure if you know Dave Lindahl, Joe…?

Joe Fairless: Yup, yup.

Luis Carrera: So basically, I was in his program, studying, making offers, going back and forth with brokers and with private sellers… His program is basically — let’s just call it there’s a holy trinity; you have to hit certain markets in regards for it to be a home run deal. But the Dave Lindahl program, he makes you partner up with other investors. So… Great! I would love to partner up with other investors if it provides potential cashflow, but then working on his holy trinity, there was a lot of offers I made. I think I made about 60-65 offers, and I was laughed at all the time, just because they were so low, so they never had me in the run-in for each offer… So then I’m like, “Okay, let me change this up a bit…” Let me start getting more competitive on my offers.

Once I started doing that, I started getting more properties, at least with an accepted LOI (letter of intent). So with that letter of intent and essentially the contract down the road, I would take these offers to my investors. But then I would tell them, “Hey, I wanna jump in with you, and we could split the deal. You’re giving me 25, or 50, and you keep the rest.” Well, for most of these deals, all these investors said “Hey, Luis, this doesn’t work for us together.” I’m like, “What do you mean?” “Well, the margins are too tight. I could find this on my own, without you”, and I’m like “Oh, great.” So I’m scratching my head, I don’t know how to find a solution; I just keep on pounding the pavement and continue to figure out a way around it.

Joe Fairless: Just to pause there, so I’m making sure I’m tracking properly… You initially were making offers based on predetermined criteria that wasn’t competitive with the market, so you were getting laughed at. You then switched your approach, became a little bit more aggressive, then you started getting accepted LOI’s (letters of intent), and then you went to other investors to partner with them, so they brought the money and experience, I imagine, and they said “I don’t think so. Margins are too small. We could have found this on our own.”

Luis Carrera: Exactly. And it wasn’t only me. Every time I went to these multifamily events – it could be Dave Lindahl, it could be somebody else – everybody was having very similar issues, and I’m like “How could I bridge that gap between what we’re looking for and a home run? There has to be singles and doubles.” So it didn’t really quite occur to me until I found another deal which I brought to an investor… It was only a 26-unit deal. I’m like, “Alright, it’s first year returns of 7%, and then it goes up to 12% year five.” I provide it to the investor, and the investor again said “It doesn’t work for us, but it works for me”, and I’m like “What do you mean?” I’m like, “Look, you see this deal? I want it, because it’s a small complex, I could buy it cash, but I can’t split any profits with you [unintelligible [00:06:19].07] How about this – you see that assignment fee that’s written in there of 20k? I’ll give you that assignment fee, you just give me the deal.”

And that’s how I guess the light bulb went off, and I started saying to myself “Wow, so I don’t even have to jump on the deal, I have to just find good deals for investors to come in, and I’ll just assign them the deals to them, and they do most of the work when it comes to the due diligence. Bull’s eye.” So that was just groundbreaking for me. Then I started sharing this information, and there’s a lot of people that really wish they had, because then they would have gone after more deals, more singles and doubles. So that’s why I’m writing this book.

Joe Fairless: How do you decide what that assignment fee is?2

Luis Carrera: Well, typically it’s a percentage of the overall sale price. It’s kind of like a broker fee, so to speak, but you can’t really call it that, so we call it an assignment fee, and it’s anywhere from 1% to 5% of the overall sale price. So let’s just call it a five million dollar deal, 1% is what – 50k? So if we do 2%, that’s 100k. So if you find a good deal and you’re willing to work with other people, and willing to give it up just for some cash, then great. Move on to the next one that you could partner on with somebody else that has better margins.

That’s what I like about wholesaling apartment complexes, because yes, you might find less deals than typical wholesale deals, but there are more zeroes on the back of the assignment fee.

Joe Fairless: What’s the largest assignment fee you’ve gotten with an apartment deal.

Luis Carrera: 126k.

Joe Fairless: And what percent was that of the deal?

Luis Carrera: 3,5%.

Joe Fairless: Got it. And how did you approach the negotiation of getting 3,5%?

Luis Carrera: Well, I assumed it. [laughter] Yeah, exactly. So instead of offering my investors “Here’s the sale price, plus these fees for closing” and whatnot, I already figured it into my price and did the five-year analysis based on that. So they were happy with their returns… Yes, it was a large complex – over 180 units – and they moved forward. These were Chinese investors, obviously, but they had a 90-day due diligence period, which everything turned out pretty good, with not a lot of bumps in the road… Then the final [unintelligible [00:08:48].20] Actually, it wasn’t assigned; they bought the shares of the LLC off of me. That’s how we figured it into the deal.

So that was the biggest one, but on average it’s anywhere — because now I’ve decided to target under 100 units, because you could move them a lot quicker… So the assignments are anywhere from 20 to let’s just call it 50k each.

Joe Fairless: Under 100 units — you said 100, right?

Luis Carrera: Correct. Under 100 units are the best ones to move, because there’s just more investors with some cash that could actually purchase that alone. If you have to start doing syndications, then it becomes a little bit harder. If you wanna move a lot quicker, target from 20 to 100, and get them sold quickly. That’s what I try to do.

Joe Fairless: Have you assigned it to a group that syndicated it?

Luis Carrera: No, I haven’t assigned anything to a group that syndicated just because after that large deal I just focused on the smaller ones, because they’re a lot simpler to handle.

Joe Fairless: And that large deal – I did some math, and that’s 3.6 million dollars purchase price…?

Luis Carrera: Yes, it was around there. But they paid cash.

Joe Fairless: Okay, yeah. 3.5% of 3.6 million is 126k… So you did a 180-unit and it got you your biggest payday; I heard you, what you said – you move a lot quicker, and that sort of thing, but why not stick to the larger ones, because they got you your biggest payday?

Luis Carrera: I agree with you, but like I said, that’s a home run; there’s not many home runs. In the meantime, why don’t you start building your cash reserves, or making some deals with some smaller ones?

Joe Fairless: It makes sense.

Luis Carrera: So you make the smaller ones, you find the big one that you can jump in, and you put what you’ve made before into a larger one and you’re already a step ahead of the game.

Joe Fairless: How did you find that 180-unit?

Luis Carrera: It was on the market, through a broker… Marcus & Millichap.

Joe Fairless: It was on the market, you reached out to the broker, and then what do you tell the broker to get agreed upon LOI?

Luis Carrera: Well, basically for the most part, the brokers that you speak to, you just have to build some type of relationship with them. It doesn’t have to be much, but especially in certain areas, if you wanna do — like, in our area we have the triangle… From Raleigh, all the way down to Spartanburg, and Charleston; that’s the area I focus in. So I always reach out to these brokers to ask for — not deals, but “Hey, what do you have listed that I could go after?” and then they’ll start sending you things, and you just start submitting offers through an LOI. Eventually, one or the other gets approved. I would say before doing any of that, you should have at least a few investors that could purchase these properties, because if you go in without any help, then that’s where problems start, just because you can’t close.

So that’s another reason why I like targeting smaller units, because then I know I could move them a lot quicker than with the larger units.

Joe Fairless: Let’s say you reach out to me about another 180-unit deal. I am going to assume that I’m gonna sign an NDA (non-disclosure agreement), number one, before seeing the deal, and then number two, that you don’t have it under contract yet, but you just have an agreed-upon LOI with the terms. Is that accurate?

Luis Carrera: That is correct. I don’t market anything or shoot it out to any of my buyers without it having some firm footing, like an approved LOI. Once I have an approved LOI, I’ll start making phone calls or sending out a few emails just to get the ball rolling.

Joe Fairless: How do you know what terms to agree upon with the seller on the LOI? Because that could be a deal-breaker for a lot of investors, if you agree to certain things that they wouldn’t agree to in due diligence, or earnest money, or whatever else.

Luis Carrera: Well, I try to keep it as typical as possible. So let’s just say for example the LOI period would be 5-10 business days for the contract to be written up and approved, a 1% earnest money deposit, and then typically if I have the funds and I’m very confident in the deal, I’ll put it in escrow, and then I’ll find a buyer. But then typically what the buyer has to do is they’ll have to replace those funds, so to speak.

Joe Fairless: Then what do the broker and seller do once you assign it? Because they used to be working with one buyer, and now they’re working with another one.

Luis Carrera: Well, their interest is also like my interest, to get it moved… So as long as it closes, I haven’t had any issues, except for the 180 – the guy complained a bit. However, he got it sold, he got his commission…

Joe Fairless: [laughs] What guy, the broker?

Luis Carrera: Yes. They’re gonna scoff at it, but it is what it is. At the end of the day, if they move it, they’re happy. If you move it, you’re happy. And the terms are typical. Let’s just say the LOI will say “Look, 30 to 90 days due diligence period in order to review all the financials and inspect the property…” It just depends on the size. Typically, 60 to 90-day turnaround for a close. Two months for financing contingencies, typically. So I try to write everything in with some outs, so that the investor that’s coming in is satisfied with that.

Joe Fairless: Take us back to when the Marcus & Millichap broker called you up the first time, after you had made him aware of another group buying it. How did that conversation go?

Luis Carrera: Ar first he was upset, but then I told him “Look, I was gonna be on the deal with them… However, they noticed that their margins are gonna be too tight, and they just want me to walk. I’d be glad to take on another property from you.” So at the end of the day, he still sends me favorable deals before anybody else.

Joe Fairless: How did you meet that group of investors who ended up buying at 3.6 million in cash?

Luis Carrera: Well, they actually used to do flips with me. They provided funds for flipping properties, I did a pretty good job for them, and then eventually I convinced them to think bigger, and they had the finances to do a larger deal. Actually, they asked me “Hey, do you have any multifamilies available? Because we wanna jump in on the multifamily.” At first I said “No”, but then once I found what they were needing, then I actually targeted a few properties, made a few offers, got a couple accepted – one of them they didn’t like, the other one they did, and we moved forward.” But for the most part, it’s people I’ve worked with in the past, or that they know me from previous flips or other investments… Just because they need that peace of mind to know who they’re working with.

The beautiful thing about this is let’s just say you have a buyers list and you’ve sold a few properties, maybe you could do like a stepping stone of 20-40 units to one of these investors… And if you’ve worked with them in the past, they’re more agreeable to working with you in the future.

Joe Fairless: As far as the compensation goes, when you get to a certain level of property, say a 15 million dollar property, 1% would be 150k – would you cap out at, say, 50k or 75k or 100k if you were to find a larger property, or would you push for still 1% of the property purchase price?

Luis Carrera: I would actually push for that 1%, as long as the numbers make sense. If you see that the numbers don’t make sense, then yeah, maybe you could cut down your fee a bit… But if the numbers make sense, I would totally go for it. At 15 million dollars, you’re already talking to a price range of investors that could only purchase between 10 and 25 million, and then above that it’s typically institutional, so your pool of investors is a lot smaller.

Right now I’m not targeting those deals yet, because I know based on experience that anybody that goes in on that is typically a syndicated deal, or it’s just an institutional investor parking their money somewhere.

Joe Fairless: I would think the challenging part for you – well, one of the main challenging parts; I’m sure there’s many – is the timing… Because you’ve got to time it just right, where you have an agreed upon LOI, and then you assign it to another group before your contract period ends… So how do you approach that?

Luis Carrera: Well, for the most part I always put it under contract under my name — well, the company name, that I’ll use. Typically, when you do buy a property of this size, you’re gonna create an LLC for that property. Typically, most multifamily deals are under a separate LLC, so during the contract, yes, it’ll say my name, and then this contract is assignable based on an agreement, and once we create the LLC, before closing, we’ll just assign everything towards that LLC. I’ll have a fee written in the assignment sheet, or I’ll assign it to the corporation and through the operating agreement they already have saved and used, it’ll say that I have to sell my shares at the time of closing, as another separate transaction. So that’s typically what I do when it comes to assigning or purchasing the shares to a new LLC.

Joe Fairless: And what about the timing standpoint, where you have to find someone to then assign your shares to? When do you start talking to potential buyers of the property for you to assign?

Luis Carrera: Well, basically I’m always having a conversation with them beforehand, and I’ll keep them posted at several deals that I’m in the running for… But not until I get that LOI will I call them all, saying “Hey, I have this under LOI. Are you ready to move forward? Because you’ve been asking me for a couple months now that you’re looking for a 30-unit, or a 40-unit.” I keep everybody up to date on what I’m doing, and my progress. The more I do it, the more investors I have, which obviously I’ve been blessed because of that… But when you continue to speak to people, more and more people show up, that they have the need for a 20-unit, they have a need for a 50, or 60… Then you just ask them to write a proof of funds or any other projects you worked on, and they will certainly be glad to provide that, just because half of them or most of them don’t have the time to look for a deal.

I already have a group of investors – maybe up to 40 – that I have them targeted… “Okay, these five are between 20 and 30 units. These seven are between 30 and 40”, and I continuously speak to them in regards to these deals that I’m making offers on, just to get them excited so that when something does come out, they already know about it.

Joe Fairless: Of the seven that you assigned last year, how many were not broker-represented?

Luis Carrera: One. For the most part, the best deals are usually broker-represented.

Joe Fairless: How did you find that one deal that didn’t have a broker?

Luis Carrera: Oh, while doing the — because I still do a lot of wholesaling and flips on the side… It came through my yellow letters. I sent it to an owner of a tax default list. The property that I targeted was their primary residence, and they said “Look, I’m trying to sell my assets.” I think he lost his job… And one of the units was a 42-unit property, and he just needed to move it, and I was glad to offer him a solution. That was the only one, and that just happened through yellow letters.

Joe Fairless: Do you still do yellow letters, even though you’re focused on apartments now?

Luis Carrera: Yes.

Joe Fairless: Is that the primary way that you market your services to owners?

Luis Carrera: Yes, yellow letters, and from time to time postcards… But I prefer yellow letters.

Joe Fairless: Anything else that we should be aware of as it relates to wholesaling apartments?

Luis Carrera: Right now I think it’s the best time for wholesaling apartment complexes. Just because we’re at a good market, it’s tougher to find deals where anybody could jump in, just because the margins are tighter, and there’s a lot more people out in the market now… So as long as you find the buyers, you could find the deals. But continue to keep a list of buyers, just because everybody’s getting anxious out there. Margins are tighter… What you could get for 8% last year, this year is 6% or less. More people are jumping into deals, and the quickest way to sell a deal is through wholesaling. The tighter the property, your best bet is just to move it, and continue gaining those singles, so that once you find a good deal that you could jump on, and do it either yourself or with a couple other investors, then just take advantage of that.

Joe Fairless: On one of the large deals – say the $126,000 that you got for the 180-unit deal, did you consider taking, say, maybe 100k of that and then put 26k of that towards equity?

Luis Carrera: Well, no, because the investors didn’t want me in on it. Some of them are gonna be particular, some of them want you in or they want your experience… I would say if you wanna jump in on board, you could say “Look, just pay me a monthly fee, or give me 5%-10% and I’ll manage it for you.” You can jump in that way, with minimum risk. I like preaching that – the less risk, the better, because you never know what’s gonna happen around the corner.

Joe Fairless: Really interesting, I’m grateful that we caught up again and you talked about wholesaling apartments and gave us all these details… How can the Best Ever listeners get in touch with you?

Luis Carrera: They can get in touch with me at my page book on Facebook at www.facebook.com/ipgroupnc, or they could contact me personally – my phone number is 973-902-7203. It’s either through those two avenues, or through email. I could send you my email so you could put it on the notes.

Joe Fairless: You can either say it right now, or forever hold your peace.

Luis Carrera: Okay, well my email is innovativeholding@gmail.com.

Joe Fairless: Sweet. Well, thank you for being on the show again. Some interesting things – one of the things was that you target 80 units or lower, because you can get an assignment fee and you get more volume that way, versus working with people who are syndicating… The one that you did have an exception, with the largest one, where they bought all cash, the 3.6 million dollars… Also, the terms that you do and just the overall approach and the inner workings of it. I’m glad that you talked to us about it, and for anyone who wants to wholesale apartments, you’ve got a book coming out too, right?

Luis Carrera: Yes, that’s correct.

Joe Fairless: Sweet.

Luis Carrera: We’re currently editing it.

Joe Fairless: Do you know the title of it?

Luis Carrera: It’s Apartments – How To Make Millions Off Wholesaling Apartments.

Joe Fairless: Cool, easy enough. Well, thank you again for being on the show. I hope you have a best ever weekend, and we’ll talk to you soon.

Luis Carrera: Thank you for having me, Joe.

Best Real Estate Investing Advice Ever Show Podcast

JF1107: How a Good Agent can Help you Find Deals with Jennifer Spencer

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Her intro to real estate came when the family farm was being used for a new interstate. Rather than pay capital gains tax, she suggested that her grandparents use a 1031 exchange to buy investment properties. Shortly after, she went and got her license, and was buying investments for herself. Now she helps other investors find properties and has good tips for investors looking to find value in this low inventory market.

Best Ever Tweet:

Jennifer Spencer Real Estate Background:
-Owner and Broker of Spencer Properties
-Began career in real estate as an investor buying and managing her own rental properties in 1997
-After five years, she left her corporate job in commercial insurance and became a full time Realtor
-Based in Raleigh, North Carolina
-Say hi to her at http://spencerprop.com/ or 919.602.7411
-Best Ever Book: Millionaire Real Estate Agent


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TRANSCRIPTION

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

With us today, Jennifer Spencer. How are you doing, Jennifer?

Jennifer Spencer: Doing great, how are you?

Joe Fairless: I’m doing great as well, nice to have you on the show, nice to meet you, and looking forward to diving in. A little bit about Jennifer – she is the owner and broker for Spencer Properties. She began her career in real estate as an investor, buying and managing her own rental properties in ’97, and after five years she left her corporate job in commercial insurance and became full-time.

She is based in Raleigh, North Carolina. With that being said, Jennifer, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Jennifer Spencer: Yes. As you said, I got started in real estate as an investor myself, and my husband and I started buying rental properties and fixing them up and renting them out. Then where I grew, my family home, my grandparents had inherited the farm. [unintelligible [00:02:13].06] was going to be put through the family farm, and I said “You know, instead of paying capital gains tax on that entire inheritance, why don’t you roll it over, do a 1031 tax exchange and put it in investment properties?” They said “That’s a great idea.” I said “I’ll help you with that, but in order to do that I need to get a license”, so I got my real estate license at that point and helped them buy a few properties.

I then started helping other friends or neighbors get into buying investment properties, and before I knew it, I had a real estate company. That was 20 years ago.

Now I do all types of residential real estate resales, working with investors, and I kind of cover the full spectrum. My love was and always has been working with investors and invest in real estate.

Joe Fairless: When you have a farm and they are now going to put an interstate through it, do you have any way of that not happening?

Jennifer Spencer: Well, they [unintelligible [00:03:13].21] and you can; there’s a process you can go through to appeal that decision. Very rarely have I seen people succeed in stopping the process, but you can also negotiate. They offer a formulaic value to the property, and it’s usually pretty low. You can go in and appeal that as well. With that we’ve seen more success.

Joe Fairless: Okay. 1031 right out of the gate… You’ve just received your real estate license and you’re already involved in a 1031 exchange – what was that like?

Jennifer Spencer: It was actually a good process. I think a lot of it is having a good intermediary, having a good attorney. In the very first round we had great experiences and from that I learned a great deal about the process.

Joe Fairless: How did you find your intermediary and your attorney?

Jennifer Spencer: Both were referred to us from other investors who had been through the process and had a good experience. Then we did a little bit of our own due diligence, kind of checking into it. [unintelligible [00:04:09].27] and then they were to shut down – bankrupt, or what have you – that’s a little bit of a scary thought, so that’s why we did a fair amount of vetting. Things went well.

Joe Fairless: I’ve seen an episode of American Greed about that. [laughs]

Jennifer Spencer: Yeah.

Joe Fairless: Well, Spencer Properties – you mentioned earlier you work with investors… What is a challenging part of working with investors?

Jennifer Spencer: I think there’s always challenges in any particular market. Right now the challenge for investors is the low inventory, and it’s very difficult to buy homes below market value, which is what investors often wanna do, and get the kind of returns that they wanna get when you’re competing with first-time home buyers and competing with down-sizing buyers for all the properties in our market under about $400,000. The inventory is low, and you’re paying above a price/value in many cases.

Joe Fairless: So hypothetically an investor reaches out to you and says “Jennifer, I’d love to buy some investment properties that I can put in my own portfolio.” What do you tell them?

Jennifer Spencer: I tell them that there’s opportunities out there, but we’re gonna have to be creative in how we approach it. First of all, right now if you pay market value for a property, as long as you’re getting a good cashflow on it, I’m okay with that, and I think that that’s one option to look at.
But if you are looking to buy a property below market value, I think there are some opportunities out there, but they’re fairly limited, and it’s gonna take some creativity. For example, even in this low inventory market, we’re seeing that buyers want move-in ready, cosmetically updated houses, and they just don’t have a lot of tolerance. Even after they may have lost three or four houses in bidding wars, they still don’t have a lot of tolerance for houses that aren’t updated.

A great opportunity for an investor is to go buy a house that has ugly carpets, dated appliances, dated finish work, needs paint, and has an overgrowing yard… And put $3,000-$4,000 into it to get it cleaned up and somewhat updated, and rent it out. Those tend to cash-flow really well, and we are getting a little bit of an opportunity on the purchase with those.

There’s still some short-sales and some foreclosures out there; people wanna mess with the long timeframe of a short-sale in particular. I think there’s opportunities there, there’s just not many of them. Also, another place that’s good for investors to consider is houses that are on challenging lots. Houses that [unintelligible [00:06:44].18] to a water tower, or that have a [unintelligible [00:06:48].11] driveway, or one of those types of lots that a lot of people are gonna pass. They tend to rent really well. You can generally get market rent, but you pay below market for the house because of the challenging lot. Now, we know going in that when you get ready to sell it, you have it to sell below market, but if it cash-flows during the years you hold it, that can be an opportunity.

I think there’s opportunities out there, not only with cosmetic updates. Houses that have kind of the scary stuff — we just worked with an investor who got a great historical home, and it had some structural issues. It scared everybody else away; it needed five [unintelligible [00:07:25].23] under the house… About $16,000 worth of work, but it scared everybody else off. We were able to get the house under contract below market, we were able to get the seller to pay for the structural repairs, had a structural engineer sign up on it, and now we’ve got a really good house because we were willing to really understand what the issues were and not be scared off because we heard “structural.”

Joe Fairless: Was there some education involved with your client, or did he/she already know “Hey, this is an opportunity”?

Jennifer Spencer: No, there was education. When they heard “structural issues” their first reaction was “Move on to the next one.” We said “But let’s look into it a little more. That very well may be what we need to do, but let’s look into this and investigate a  little more, because I think there might be some opportunities here.”

They knew that there were structural issues before they made an offer on the house, so that helped… So we were able to really negotiate good terms on their behalf, and they made a good purchase.

Joe Fairless: What would have been some red flags where you would have suggested moving on?

Jennifer Spencer: Well, I think you just have to look at if the seller, for example, still wants market price for a house with those kinds of issues – I’d say “Let’s move on.” But this seller understood that they had a house that’s gonna be tough to sell as is, and they were willing to work with us on the price and getting the repairs done.

Joe Fairless: How have you seen clients – or maybe yourself, just how you do it – calculate the cashflow when looking at investment properties?

Jennifer Spencer: Well, we have a spreadsheet that we put together, and we look at what our mortgage payment will be, we look at what the tax is in homeowners’ association and insurance, and we project rent based on comparable rental properties.

What I’ve done is I went back and looked at the properties that we have managed over the long term, and just as a rough number we use 5% for repairs in vacancies right now… And vacancies are very low. If you look at the long-term – air conditioning repairs and what not – we’re averaging about 5% of the rental income in repairs and vacancies. So that’s what we’re using in that number.

Depending on the investor, we sometimes — well, this is getting into return, not cashflow…

Joe Fairless: That’s alright.

Jennifer Spencer: Sometimes we include appreciation, sometimes we don’t, when we’re looking at returns. Some investors say “I wanna make my decision entirely on cashflow”, others say “Let’s look at appreciation and put a number in for that.” In this area, the long-term appreciation has been — whether you look at 20 years or you look at 30, you come up with the same number. And also, if we look at it for the last 10 years – which I find very interesting – the number is the same, it’s 4%. So that’s what we use for appreciation for our market… Or less. Some people wanna use half [unintelligible [00:10:24].13]

Joe Fairless: So you also manage properties?

Jennifer Spencer: We do. I have managed properties for the last 20 years. Last year I partnered with a property management company who now manages all of our properties for us… So we’re outsourcing that part at this point.

Joe Fairless: And why would you ever not wanna be on the management side? I don’t understand… [laughs]

Jennifer Spencer: Well, you know what? This may or may not surprise you – the tenants are fine. It was not the tenants; it was, in many cases, the landlords. I felt like a lot of times they were making decisions that were not in their own best interest, and certainly not in the interest of the tenants, and I just got frustrated with that.

Joe Fairless: What would be an example or two?

Jennifer Spencer: Well, for example I had one last year that the landlord was taking their time and making the repairs; there had been a series of water leaks in this very nice, high-end townhouse, and it made one of the bathrooms unusable and it made the kitchen unusable, and they delayed in hiring a contractor to do the work, and then they decided to hire a different contractor and started the whole process all over again. So what should have been a few weeks of inconvenience for the tenant  ended up being several months of inconvenience for the tenant. So the tenant said “We feel like we shouldn’t pay the full rent for those months that so much of the house was unusable. We have a small child and it really was difficult”, and the landlord said “I’m not gonna refund any of your rent”, so the tenant ended up suing the landlord.

Joe Fairless: Do you get caught in between with the legal aspect of that if the tenant is suing the landlord? Wouldn’t they name you as —

Jennifer Spencer: They did, yeah.

Joe Fairless: Yeah, and that’s why you don’t wanna be involved.

Jennifer Spencer: Yeah, that was kind of the final straw [unintelligible [00:12:14].01] “You know what? I’m done with this.”

Joe Fairless: It’s all fun and games until someone gets sued.

Jennifer Spencer: Yes. [unintelligible [00:12:20].10] with the tenants. I thought the tenants were being reasonable in what they’ve expected, and [unintelligible [00:12:27].28] It ended up costing the landlord a lot more money because they didn’t try to get it resolved.

Joe Fairless: Oh, yeah… Anytime an attorney gets involved, everyone’s gonna lose.

Jennifer Spencer: That’s exactly right.

Joe Fairless: And just to clarify, for my attorney friends, I mean for litigation purposes, not to review contracts and to advise on other aspects.

Jennifer Spencer: The attorneys are the first ones to tell you that.

Joe Fairless: Yeah, exactly. Well, what is your best real estate investing advice ever?

Jennifer Spencer: Well, I think my best real estate investing advice ever is to do it sooner rather than later. I think a lot of times I talk to people who say “I’d like to invest in real estate someday”, and there’s always a reason that they put it off. When they finally do it, almost every single one of them say “I wish I would have done this a lot sooner.” There’s not really any other investment that compares to the benefits and the risk/reward to real estate investing, and I think the earlier we get into it, the better.

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

Jennifer Spencer: Yes, I am.

Joe Fairless: Alright, great. First, a word from our Best Ever sponsors.

Break: [[00:13:45].29] to [[00:14:43].20]

Joe Fairless: Okay, Jennifer, what’s the best ever book you’ve read?

Jennifer Spencer: Millionaire Real Estate Agent by Gary Keller.

Joe Fairless: I love that book. That book inspired me to hire an administrative assistant.

Jennifer Spencer: Right, exactly.

Joe Fairless: Best ever deal that you’ve done?

Jennifer Spencer: I’m doing it right now – I’m developing a piece of land, rezoning it from residential to commercial.

Joe Fairless: What is the intended use for the commercial once it’s rezoned?

Jennifer Spencer: It will be a mixed use. It will have high-end single-level condos, it will have a high-end grocery store, several restaurants with patio dining and little shops. We’ll have some office and gym and that kind of thing upstairs… It’s gonna have parks and walking trails, so it will be a really neat development.

Joe Fairless: That sounds like a big ol’ piece of land.

Jennifer Spencer: It’s 17 acres.

Joe Fairless: What’s your role in it? Did you buy this piece of land and now you’re the one leading the charge to rezone it?

Jennifer Spencer: I bought the piece of land, I’ve got it under contract with the developer, and the developer is leading the charge, and I’m certainly involved.

Joe Fairless: Okay. And how do you structure, when you buy a piece of land — did you already know what your plan was gonna be and who the developer you were gonna partner with would be?

Jennifer Spencer: No, I bought the land just knowing it was a great location to potentially rezone into commercial, but I did not have the developer identified. I’ve met with several, and heard different ideas and plans and proposals, and then chose the one that made the most sense.

Joe Fairless: How do you structure an arrangement with the developer if you own land?

Jennifer Spencer: The way we structured it is the sale is contingent upon the rezoning, and he is responsible for all expenses and all communication and managing the process of going through the rezoning. In the mean time, he is knowing that this could take a few years – and it has; we’re two years into the process now – and he’s just been paying us a monthly non-refundable fee for having the contract in place. If the land gets rezoned and we close on it, that fee will be applied to the purchase price. If it doesn’t, then it’s non-refundable. That takes the urgency off of him and us in terms of either one of us feeling like we need to move faster than we should.

Joe Fairless: I like that. That’s a really good structure for both of you, assuming that the rezoning takes place. Does that mean he’s buying it outright, or are you gonna maintain a partnership?

Jennifer Spencer: He’s buying it outright because I do wanna do a 1031, and if I maintain the partnership I wouldn’t be able to do that.

Joe Fairless: Right, right. Interesting stuff. That’s exciting. You’ve found a way to speculate while still receiving monthly cashflow somehow. I didn’t think that was possible.

Jennifer Spencer: Yeah, it’s actually worked out to be a good arrangement for everybody.

Joe Fairless: You said you bought it knowing it was a great location… What were some specific things that you had identified? And I ask this more to call out things for Best Ever listeners who are in their markets and they would look for the similar things.

Jennifer Spencer: Well, it’s on one of the primary arteries coming from downtown into the suburb, and it’s in the most affluent zip code in the state of North Carolina. It’s surrounded by high-density housing, there’s very little commercial in this area, so high need for the commercial, and a lot of demand and very little supply.

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

Jennifer Spencer: Oh my gosh, there’s so many… How will I even know where to start? I would say looking at patterns. Probably some of the biggest mistakes we’ve made is missing things that we should have known, should have seen, and failed to disclose. I guess those are the ones that upset me the most.

Joe Fairless: For example…?

Jennifer Spencer: Well, we’ve had one just recently… There was an underground storage tank and we didn’t disclose that; we knew it, we just missed checking a box. We had one last year where the previous seller had said the HVAC was four years old, and it was actually eight years old. Should we have known, should we have relied on the previous disclosures or not – that’s questionable… But it’s things like that. Those are the things that really make me lose sleep at night.

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

Jennifer Spencer: Well, I am very involved with the [unintelligible [00:19:21].21] My family, my children — I’ve got four teenagers in an exchange student. We go down and cook at the homeless shelter, prepare meals and buy the groceries, and we also do fundraisers to make contributions to the rescue mission, and that’s just a place where — I’m in the business of homes, and to think about people who because of life circumstances don’t have one, that kind of tugs at my heart.

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

Jennifer Spencer: They can call me at 919 602 7411, or they can e-mail me, jennifer@spencerprops.com.

Joe Fairless: Jennifer, thank you for being on the show. Thanks for talking about your experience with both management and how you’re contracting it out, but then also opportunities for how to be creative in a hot market to still find deals, and you talked about houses with challenging lots; there are still some short-sales and foreclosures… But then also knowing “What does the majority of buyers want?” They want move-in ready homes, so you buy an ugly house, ugly carpet, dated work or dated kitchen (whatever), and then make some improvements and then you can get an opportunity that cash-flows.

Then also – holy cow – this speculative purchase that you made, and you’ve turned it into a monthly cashflow opportunity with the developer partnership, and the monthly distributions that you’re receiving (or payments) will then be credited towards him at closing should he actually get it rezoned in close, and if he doesn’t, then you just keep the non-refundable monthly fees that you’re charging.

Thanks for sharing these deals… Really interesting stuff. I hope you have a best ever day, and we’ll talk to you soon.

Jennifer Spencer: Thank you, I enjoyed it. I appreciate the opportunity to be on the show.

JF581: He’s 22 and Has Completed Over 40 Flips!

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Our guest is a young one, 22 years old and he began when he was 19. He’s a very mature investor for his age and has had experience with over 40 fix and flips. Listen to his advice and see if you can begin your fix and flip adventure, the way he raises money is awesome!

Best Ever Tweet:

Kevin Ramirez real estate background:

  • Moved to the United States from Caracas, Venezuela and is based in Raleigh, North Carolina
  • Rehabbing and wholesaling properties and has done 42 of them between 2014 to today
  • Did first 4 deals when he was 19 years old (currently 22 years old)
  • Say hi to him at nchomebuyers.com
  • His Best Ever book: Traction by Gina

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Click to learn more or, better yet, reach out to Cortney Newmans at Lima One Capital. His cell is 404.824.6121.

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Best Ever Show Real Estate Advice

JF133: How to Go from Agent to Investor to Owning a Property Management Company

Are you a real estate agent but want to grow from representing buyers to actually being a buyer? Today’s Best Ever guest shares how she went from a real estate agent then investor then owing her own property management company. Plus, she gives you a bonus tip on how she screens tenants.

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Dawn Brenengen’s real estate background:

–        Owner of Trailwood Realty based in Raleigh, North Carolina and her focus is on property management and real estate sales

–        Been in the industry for over 10 years

–        Say hi to Dawn at http://www.trailwoodrealty.com/

–        Owner of five rental properties in North Carolina

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