JF2182: Data Improving Your Decisions With Jerry Chu #SkillsetSunday

Jerry is the CEO & Founder of Lofty AI, a company that has helped over 200 real estate investors find undervalued neighborhoods to invest in. You will learn why data can be crucial to helping investors decide what areas they should focus on and what areas they may want to avoid. Jerry has been on the show before on episode JF1601, so be sure to check out that episode to learn more about Jerry

 

Jerry Chu Real Estate Background: #SkillsetSunday

  • CEO & Founder of Lofty AI
  • From San Francisco, California
  • 2 years of real estate experience.
  • Lofty has helped over 200 real estate investors find undervalued neighborhoods to invest in since 2019.
  • Say hi to him at: www.lofty.ai

Click here for more info on PropStream

Best Ever Tweet:

We leverage artificial intelligence to make the most accurate real estate predictions in the world” – Jerry Chu


TRANSCRIPTION

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

Jerry Chu: I’m doing well, Joe. How about yourself?

Joe Fairless: Well, I’m glad to hear that. I’m doing well as well and looking forward to our conversation. And first off Best Ever listeners, hope you’re having a best ever weekend. Because today is Sunday, we’ve got a special segment called Skillset Sunday. That’s why we got Jerry back on the show, if you recognize Jerry’s name.

First off, Jerry is the CEO and founder of Lofty AI, based in San Francisco, and Lofti AI has helped over 200 real estate investors find undervalued neighborhoods and properties to invest in since 2019. If you want to learn more about the launch of the business, then you can listen to Episode 1601 and it’s titled, How To Identify The Next Hot Neighborhood. So we’re not going to repeat what our previous discussion was. What we thought would be good for discussion today would be to talk about some new findings that Jerry and his team have uncovered as a result of being in business over a year from the last time we spoke. So first off, Jerry,  do you want to give the Best Ever listeners just a quick overview or refresher of what Lofty AI does for investors? And then you can go right into some interesting findings that you think we should talk about?

Jerry Chu: Yeah, definitely. So essentially, at Lofty AI, we help real estate investors make better decisions using artificial intelligence and unique data, and what we mean by unique data are things like the average wait times for ride sharing services, to weather patterns, to  – believe it or not – the number of French Bulldogs in the neighborhood if you could track that, people’s music preferences, even sewage data, air quality, the growth of Airbnb listings in an area. So all these data points that traditionally might not have been used by real estate investors, but  it turns out not only do they have a strong correlation to price appreciation in single-family market, a lot of times, they tend to be leading indicators as well, which means that if you were paying attention to these data points, you would know ahead of the curve which areas you should be looking at to invest in.

Joe Fairless: So will you dig into that a little bit more, as far as using some of those indicators to then determine, “Okay, here’s some areas that are likely headed on the upswing”, and just talk about your process that you use to do that?

Jerry Chu: Yeah, definitely. The prototyping stage that we do – this is before any of the data is fed into the AI – we have to do a lot of trial and error, and a lot of that just has to do with thinking about data in a different way than the industry has traditionally thought about it, and just being creative with it. So to give you an example, what we’re working on internally right now that hasn’t been deployed yet, was we read from another report and actually another company, also a technology startup – they were talking about how in the future, you could track pandemics and diseases early on based on sewage data; and the rationale for that, they claim, is apparently before people – so take Coronavirus as an example – before people develop symptoms, a lot of times, you can detect traces of the virus or disease within picometers in the sewage data. So that’s something they’re working on. So when we heard about that, we were like, “Hey, that’s pretty interesting. Could we use that for real estate in some way? Would it make sense to tell investors, if we could do this accurately, not to invest right now, because there might be a pandemic breaking out in the city or in this neighborhood? Or maybe if someone worked about to invest, we say, ‘Hey, maybe you should wait three, four months and maybe prices will be cheaper by then because there’s going to be this panic?” So how can we use these weird data and how can we tie that back to important information we can pass on to our customers and real estate investors. So that’s how you have to think about data to do what we do.

But once we get past that stage, it’s a lot of prototyping in getting the data. If it’s online in a public source, can it be scraped? If not, can it be purchased? Can we develop partnerships with whichever vendor generates that type of data? And then from there, do a lot of nerdy data science stuff to test out and see over a historical time period whether that has any correlation to real estate prices or not. Because at the end of the day, no matter how cool something sounds, if it doesn’t really contribute or affect price growth or decline, it’s not really that useful for us or our customers. So that’s, in essence, a step. And if we test this data source for a certain period of time and the result shows that it has a consistent correlation or a consistent ability to help predict which neighborhoods or properties will do well in the future, then that’s when we officially add it as an ingestion data source for our AI and that’s when the users on our platform can actually benefit from that data source.

Joe Fairless: That is incredibly interesting. When you’re talking about the track diseases based on sewage, I didn’t know what direction you were going to go with that… But yeah, I think there’s a less likelihood of don’t buy there because that area might be quite quarantined for decades, but it is interesting if you’re a fix and flipper, to get ahold of that information, because that could kill you on a fix and flip over a three month period of time where there’s, all of a sudden, a bunch of new stories or on the flip– pun intended, I guess… On the flip side, if you’re about to buy something, then yeah, maybe you wait until something happens. That’s fascinating stuff. What are some other data sources and correlations that you have looked at, that you have seen increases the value?

Jerry Chu: This one probably won’t come necessarily as a shock, but the air quality. So the government actually publishes what’s called the AQ ISO, the air quality index, and if you have an iPhone or presumably an Android as well, if you go to your weather app, somewhere on there, it’ll actually show you that value… And it is pretty granular, at least down to neighborhood or zip code levels, and we have seen consistently that areas with more expensive real estate properties tend to be in neighborhoods where over a long period of time the average AQI is very low. So the index works in a way – the higher it is, the more polluted the air is. So essentially, it’s not very shocking, but it’s probably something people don’t talk to their broker and agent and say, “Before I buy this, tell me what the average AQI is for the last five years.” It’s not something they overtly think about, but it turns out has a pretty powerful, I guess, subconscious motivator. You’d think that when people are buying or investing in neighborhoods, when people want to move to an area, if they’re walking around and the area is not very good, there might be something just in the back of their mind like, “I don’t really like this area”; it turns out that’s been true historically for a pretty long time period.

Joe Fairless: See, I would have guessed the opposite, because I think of New York City, I think of Los Angeles, I think of Chicago, and my guess is that the air quality is worse in those areas compared to Fort Worth, or Waco, or Abilene, or Lubbock, Texas. In those areas, the latter, the values are lower. So help me reconcile that.

Jerry Chu: You’re definitely right about that. So if you’re only looking at this indicator, you’re not going to be able to have a pretty good batting average, as you can picture. It’s what we call a powerful additional indicator to use. So you have all your other factors – you’re looking at demographics, job growth in a region. So all else equal, especially when it comes down to job growth and economics of an area, then looking at this additional indicator can help you rank the neighborhoods you’re looking at. If you’re looking at all these metropolitan cities and neighborhoods within these cities, the one with the lower AQI will tend to do better, historically speaking. However, if you just look at that, then obviously places that are underdeveloped like national parks or things like that would have the best AQI, but in reality, you’re not gonna really be able to make a lot of money doing real estate investment there.

Joe Fairless: So we spoke a little over a year ago… What are some things that you’ve come across over the last 12 or so months that you think would be interesting to share?

Jerry Chu: I don’t think I mentioned this the last time, but the wait times for ride sharing services has consistently, over the last year, have been one of the highest quality predictor of neighborhood appreciation, and it has a lot to do with the proliferation of the service. Almost everyone, at some point or another, uses Lyft and Uber, and what’s unique about that is if you actually pay attention to the different ride categories – so you’ll have UberX, and then on the higher end, you’ll have, I don’t know what they call it anymore, UberLux, I think… But essentially, the drivers of the luxury category, they often have those big SUVs that aren’t exactly gas efficient. So for them, the unit economics doesn’t make sense for them to just drive around the city and wait for rides to be routed to them. So a lot of them, they even have these hangout groups on the weekend. They trade information, and they’ll know this area has a lot of high-end restaurants. Celebrities visit that on the weekends very often, so they’ll be parked near or around those neighborhoods, and they’ll just park on the side of the street until they get a call, and that’s when they actually go pick up their customers. So with that said, the shorter the amount of time it takes for you to wait for a luxury ride, the more expensive neighborhood is.

So imagine Beverly Hills, if you wanted to call the most expensive Uber ride, it doesn’t take that long for one to get to you. But on the other end of the spectrum, if a neighborhood isn’t typically the most high-end neighborhood, if you request one of these luxury rides, you could be waiting up to 20 minutes. So we’ve noticed that consistently over a time period, if the average wait times for this neighborhood starts decreasing when it comes to ride sharing services, the luxury category specifically, that’s a really powerful indicator. It’s saying that something is going on in this area where for one reason or another, there’s either a lot of wealthier people moving there or visiting there, and regardless of what the exact reason is, we’ve noticed a very powerful correlation between price growth and neighborhoods that have a rapid decrease in the wait times of these luxury ride services.

Joe Fairless: Bravo! This is fun. I like this stuff.

Jerry Chu: Thank you.

Joe Fairless: Yeah. What’s something that you learned that maybe surprised you over last year with the data that you’ve gotten? That might have been a surprise; it sounds like that’s been something that you’ve been aware of for a little while. So what’s something over the last 12 months that you’re like, “Oh, you know what? For better or worse, that was surprising.”

Jerry Chu: That’s part of the fun aspect of the job that we’re doing, is discovering all these unique interesting insights. So one thing that shocked me personally was prior to starting the company and working all of this, I had assumed that anything you see in a more developed, wealthier neighborhood, if you start seeing the exact same things happen in another neighborhood, it typically would mean a good thing. So something like a wine bar, for example. I would imagine, oh well, if this area didn’t have any wine bars before and one popped up, and it’s very expensive, bougie, then the neighborhood must be doing pretty well. It turns out, it’s actually the opposite. So we discovered something really interesting – the neighborhoods with more beer gardens or beer-centric, like breweries and things like that, those neighborhoods grow faster in terms of median home values, whereas neighborhoods with more wine bars and things like that tend to not grow as quickly. So that was something that was very shocking to me.

Joe Fairless: Yeah, because I picture beer to be not as sophisticated as wine, and beer drinkers belching and wine drinkers sipping and with their pinky stuck out.

Jerry Chu: Yeah.

Joe Fairless: I drink wine for the record, by the way, and beer.

Jerry Chu: Yeah, I do both as well.

Joe Fairless: I don’t want to offend anyone when I just– [unintelligible [00:15:10].21]

Jerry Chu: Exactly. That would be the stereotype, and I think that’s why I was shocked. But I personally dug into it a bit more, and I’m going to preface and say this isn’t scientifically sound per se, but in my opinion, it seems like once you look into it more, there’s a huge resurgence in craft breweries, and it’s now the cool thing to do, and so people with a lot of money are now taking tours of these microbreweries and the brewers are trying out different techniques, and it’s like this whole underground subculture that’s gotten and actually started to become more mainstream, and I think that probably plays into why the data is the way it is.

Joe Fairless: I’ve enjoyed this thoroughly. I just find this stuff incredibly interesting. So Jerry, how can the Best Ever listeners learn more about what you’re doing at your company at Lofty AI?

Jerry Chu: They can just come visit our website; it’s www.lofty.ai. We have a lot of information on our landing page, and in the future, what we actually plan on doing is we want to build a record [unintelligible [00:16:16].17] leader as the most transparent data company as well, and so what we’re actually doing is we’re going to publish our internal results just completely for free and some other unique insights we’ve discovered. So the last time we spoke, we only had a couple. To keep things proprietary, we couldn’t really share and detail a lot of what we had, but now given some time, we’re up to 50 unique leading indicators of neighborhood growth, so we’re happy to share a portion of that with the public. So fairly soon, we’re gonna have a results page to our website where you can see the exact addresses that our AI has picked in the past year and how well they’re doing, and you can track that and they’ll just be up there; it’ll automatically update every single month.

On top of that, you can see some of our unique data sources, what we’re tracking and how those data points have been moving for certain neighborhoods and zip codes over a period of time, and we think that can generate a lot of interesting data points for your listeners, and just people out there who are interested in adding additional insights to their real estate investment strategy.

Joe Fairless: Jerry, thank you so much for being on the show. Again, I enjoyed learning the thought process for how you think about potentially correlating things, like tracking diseases based on sewage data and hey, maybe we might be able to have an application there for maybe probably more short term buyers, if they should wait or if they should jump in… To wait times with ride sharing services, and specifically if the average wait time of a luxury category ride sharing decreases, then it’s an indicator of price growth and neighborhood, and then also beer gardens being better for the neighborhood in terms of property values then wine bars. So great stuff, I enjoyed our conversation. I hope you have a best ever day and talk to you again soon.

Jerry Chu: Thank you, Joe. It’s always a pleasure.

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JF2152: Which US Markets Shine for Rental Homes and Why With Adiel Gorel

Adiel grew up in a family who was involved in real estate and was privileged to dinner conversations where he learned valuable principles. He shares how he went from starting in silicon valley and switching to different markets like Las Vegas, Portland, Phoenix, and Oklahoma sharing all the lessons he learned through being in different markets and why he was so nimble. 

Adiel Gorel Real Estate Background:

  • CEO of ICG, a real estate investment firm
  • ICG has purchased over 10,000 properties 
  • Based in San Francisco, California
  • Say hi to him at: https://icgre.com/ 

Click here for more info on groundbreaker.co

Best Ever Tweet:

“My first area of focus to invest in is sunbelt states, large metropolitan areas, and where the ratio between rent and price works” – Adiel Gorel


TRANSCRIPTION

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

Adiel Gorel: Very well, Joe. It’s a pleasure to be on the line with you.

Joe Fairless: Well, it’s a pleasure to have you on the show, and looking forward to our conversation. A little bit about Adiel – he’s a CEO of ICG, a real estate investment firm. ICG has purchased over 10,000 properties. Based in the San Francisco, Bay Area. With that being said, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Adiel Gorel: Of course, of course. Well, I was born into a family that was in real estate development, so as a little kid, whether I wanted to or not, I was privy to the dinner conversations… And two things that I could hear that my family regretted were the following. One, “Why didn’t we buy these properties ten years ago? We should have.” And the second one is “Why did we sell these properties ten years ago? We should have kept them.” As a little boy, I kind of had the idea that probably homes and apartments do people good.

I was actually a high tech guy. I came to the Bay Area to go to Stanford, I taught at Stanford… Then I got my first job at Hewlett Packard Labs. And when you work in Silicon Valley, you get paid quite well, but when I looked at my colleagues – I was a young guy – who had been there for 20 years, I didn’t see anything impressive on the financial front; usually, they just owned their own home, and a 401K. I said “That’s not gonna be the case with me.” Due to my background I started buying rental homes right there where I was living, in Silicon Valley. That was in the 1980’s. Yes, I started when I was one year old.

Joe Fairless: [laughs]

Adiel Gorel: I’m kidding… So the  only problem is in Silicon Valley the numbers were not friendly, even in the 1980’s. In other words, the rents were too low relative to the crisis. Now, in the 1980’s there was an unwritten rule “Never buy more than 30 minutes drive away from where you live”, and everybody was following it. And I said “You know what – if I follow that rule, I’m not gonna buy very much”, and I wanted to buy on  a sustained basis.

So I went to Vegas and I discovered homes that I could buy for four times less, but they rented for more than half. Now, that was completely different. So I started flying to Vegas — it’s about an hour-and-a-half from the Bay Area. I was flying there every weekend. It took me a few months to get my bearings, but pretty soon I had a management company that I liked. I tried two until I found one that I liked… And then a broker… And I was buying properties.

I was always an aggressive guy. In that first year I bought 22 properties.

Joe Fairless: Wow…

Adiel Gorel: By the way, it’s not as impressive as it may sound. This is the 1980’s in Vegas. The average property I bought cost about $40,000, and Fannie Mae allowed you as an investor to put 10% down only. So if you do the numbers, it’s not that impressive. Maybe it’s mpressive that I did it, instead of going to seminars all the time and  not really doing anything, like my friends… But the end of that year, many of my Silicon Valley friends said “Hey, we wanna do it, too.” I said “Sure, do it.” They said “No, no, no. We want you to help us.” I said “Why?” “Oh, you’re already in Vegas, your managers…” So I led a group of maybe 20 people from Silicon Valley, and we bought over 250 properties over a period of about 3,5 years.

We didn’t buy them as a group. Each person bought their own homes… But the Swedish engineer from Silicon Valley who only bought one home, because he was a little scared, enjoyed the same clout as if he had bought 250 homes, because the service providers, the managers, the brokers knew if he was not happy, he will tell me, and then I won’t be happy, and they could lose 250 homes. It was very simple. And when Vegas went up very sharply in about 1997, we stopped buying there and we moved to our second market, which was in Portland, where the property taxes are very high, but the prices were so low that it worked.

Starting an infrastructure the second time around was much easier, because when I talked to property managers when I was interviewing them, and they saw this young guy saying “Oh, we’re gonna buy a lot of properties”, they say “Of course, of course. You’re not gonna buy anything”, I said “Would you like to get on the phone with Vegas managers?” And once they did, of course, they came back on their hands and knees, “Yes, we wanna work with you.”

So we worked in Portland until the boom. You’re probably familiar with the boom of 2004 through 2006, that preceded the big bust. But the previous boom was from the end of 1988 through the year of 1989. So when that boom came, the prices in Portland really went up, and we moved the whole thing to Phoenix. We moved to Phoenix in 1989, and by that time I started getting a lot of attention. “Who is this crazy  guy from Silicon Valley who’s buying out of state?” and I started getting invited to speak in various clubs and places.

One of the lectures was a reporter for the San Francisco Examiner, which used to exist back then. In the Sunday paper there was a huge article — the whole thing blew up. Finally, I was having so much fun that I left my entire high-tech life – and we’ve been doing this for 35 years now. Phoenix became our biggest market. Over 21 years, me, my investors, my friends bought over 3,000 properties. And nationwide, in the U.S, over the 35 years, my investors and me and my friends have bought more  than 10,000. But the principal is the same.

We have an infrastructure in the market that I considered good – and we can talk about that in  a second, what I consider good… And of course, if we are buying in a market that we bought 1,500 properties in, and you come in, Joe, and I connect  you to the brokers and the managers, you carry the clout of 1,500 homes, even though you’re just buying one home.

Joe Fairless: Yup. That makes sense. So from Vegas, to Portland, to now you’re still focused on Phoenix…

Adiel Gorel: No. Phoenix is not good anymore, because Phoenix —

Joe Fairless: What are you focused on now?

Adiel Gorel: I really should talk about what markets are hot.  We bought in Phoenix from 1989 to about maybe 2012… But Phoenix now has gone up in value, from 2012 until now, by 160%. At the same time, the rents went up only 20%, so Phoenix doesn’t work. Vegas doesn’t work. Dallas doesn’t work. Austin, Houston, Nashville, many good markets do not work.

My criteria of where to buy are pretty simple – I’ve been a student of the demographics in the U.S. for decades, and if you look at the U.S. census, you can easily see the part of the country that the demographic growth is the best is what I like to call the Sun Belt states. The Sun Belt states are states like Nevada, Arizona, Texas, Oklahoma, Louisiana, Florida, Georgia… Where the sun shines, in the South.

Not only are these states the ones with the biggest growth and demographic growth for the future – and we can talk about why, but we may not have the scope here – they also happen to be states where they are pro-business, which also means they are fair to the landlord… Unlike the state of  California, for example, the state of New York, which are very harsh on the landlord. But these states are very good for the landlord, they’re affordable… So my first criteria is Sun Belt states.

The second criteria is pretty self-explanatory – it’s large metropolitan areas. That’s because you have job diversity and industry diversity. If one factory, god forbid, goes out of business, there are many others. So large metropolitan areas in the Sun Belt states.

The third criteria is where the numbers work, meaning the ratio between rent and price makes sense. And as of the month of April 2020, it does not make sense, as I said, in some of our classic markets like Vegas, like Phoenix, like Dallas, like Austin; markets where we bought many thousands of homes do not work. So what does work now?

One market that does work right now is the Oklahoma City market. If you look at the map, it’s not that far from Dallas, and yet the prices are a lot lower than Dallas. The rents are somewhat lower, but not that much. The property tax is 250% lower than in Dallas, and they have the lowest unemployment in the whole United States, out of all the big cities in the U.S. Of course, now we have the crisis, but I still believe their unemployment is quite low relative to many of the other big cities.

In addition, they’ve found enormous reserves of oil and gas no far from Oklahoma City. Of course, oil is super-cheap now… I don’t look for things like this, but it’s just an extra that you get. A strong economy… And we are buying brand new homes. I like to buy brand new homes. It took me a while to realize it. I started off, as all new investors, as a cashflow cowboy, buying old stuff in not-so-great locations, but I learned – you buy in good areas only, and you buy brand new homes, that come under warranty… So we are buying brand new homes in Oklahoma City, from about 150k up to about 190k. And they rent well. Typically, the 170k home would rent for about $1,400/month, with very low property tax. So that’s one market that works.

Another market that still works is what I would call Central Florida. Well, the Orlando market is too high now, for the same reason that the Phoenix market is too high. And the Tampa market is too high. Between Orland and Tampa, we have bought a few thousand properties over the years, but they’re too high. However, between Orland and Tampa there is growth, and it does make sense there. North of Orlando there’s very interesting stuff as well; East of Orlando, including on the shore, and South of Orlando. So the prices there are different. The prices are between 200k and maybe 225k, except there’s one pocket North of Orlando where there are properties to be had for as low as 140k; and we can talk about that.

And then another market that still makes sense – there are parts of Atlanta (it’s a giant market) that do not work anymore, but there are parts that do. So that’s another market.

And our most expensive market right now is the Raleigh-Durham market, the Research Triangle in North Carolina. The prices there would be between 200k and 260k, but they still work, and of course, it’s a very popular market. We also buy in Baton Rouge, Louisiana, where the rents ratio is good… And pretty much, these are the few markets that right now in 2020 make sense.

Joe Fairless: What part of Atlanta works?

Adiel Gorel: Well, again, it’s not a formula. It’s not like you say “Oh, you only buy in the South”, but it is true that parts of the South of Atlanta work. But one thing — this is an important question, Joe, that you just raised… I live in the San Francisco, Bay Area, and I learned a lesson over the 36 years that we’ve been doing it. I like to build trust with my teams in the field, with the people with whom we work, with our brokers and managers, and listen to them. So I listen to what they say; just like you, Joe, would be a super-expert on the area where you live – your street, your city. I listen to them. So when I work in Atlanta, I listen to what they say as to what would be a good area.

Joe Fairless: You clearly have a lot of experience and knowledge about a lot of markets, and you’ve been at this for a while, so I know we’ve got a lot to cover and a lot to learn. So you mentioned some markets that performed really well and then you got out of… Let’s talk about specific deals, and we’ll talk about a couple or 1 or 2 that have done really well… And on the flipside, I would love to learn about a deal that maybe you lost money on. So let’s talk about what deal did you lose the most amount of money on, and what can we learn from that.

Adiel Gorel: Well, I try to keep things very simple… I like single-family  homes – and I hope  you don’t mind, Joe, I’ll give about a minute segue before I answer, because it’s relevant.

Joe Fairless: Sure.

Adiel Gorel: Single-family homes not only are the most liquid real estate, because that’s what all families want, but in many parts of the U.S. they’re still quite affordable. The American dream is a single-family home. But when I began – you can hear that I speak with an accent. So sometimes you  can see things when you speak with an accent, which means you come from another country, that local people can’t see. When I started investing, I could not believe, I thought it must be a mistake that you can get loans in this country… Which, of course, you all know very well, but to me it was mind-blowing. 30 years fixed. That means the monthly payment and the mortgage balance never ever keep up with the cost of living.

When I speak in Europe, people think I’m joking. They say “No, that’s not possible. You have inflation in the U.S. Thirty years ago you bought a postage stamp for 4 cents, now it’s 50-something cents. 30 years ago in San Francisco you went to the movies for $2, now it’s $14. You  have inflation. You wanna tell us that somebody’s gonna be crazy enough to lend you money for as long as 30 years, where the payment and the balance never change? If that were to be true – which we don’t believe it is, because it’s impossible – it would be the biggest gift, because your loan balance and your payment would be eroded by inflation constantly, until you don’t have to wait for 30 years. Until in 14-15 years your loan is gonna look like a joke”, and that’s exactly true. So really, it made a difference in the financial futures of thousands of people so far.

Here’s a typical story – I have a friend here in the East Bay who’s a doctor. He bought properties with us primarily in Phoenix in the beginning of the 2000’s. He was in his ’40s. He calls me up a couple of years ago – when he was 58; he’s now 60 – and he says “Here’s what one of my typical homes in Phoenix looks like.” He bought 19 homes. He started with one, bought 19. Right now it’s worth about 300k, and the mortgage still has 14 years left, and it’s 47k. See, that’s what happens. The mortgage is only 15% of the value of the home. It never kept up with inflation, while everything else did.

So he sold three of his homes, paid the capital gains, paid off the little 16 loans… And he said “I know I’m a doctor, but I’m not working anymore. That’s it. I have 16 homes in Phoenix, free and clear.” That’s the vision. I’ve seen it happen thousands of times. It doesn’t have to be 19 homes. I have people who changed their life with two homes, with  three, with one.

So now, going back  – I try to make it simple; we buy single-family homes. It’s very simple, it’s easy to rent, and you get the magic loan. So I mentioned before, I like to buy brand new homes in a good area. They come under builder’s warranty, manufacturer’s warranty… Also, it’s easier to negotiate with builders, because they can throw in a lot of goodies, because they have all of the work crews in the field, so you can get better deals. So when I began – you asked me about deals that didn’t go so well – I was, as I said, like all new investors,  a cashflow cowboy. I was only going by the cashflow numbers on paper… Because people were like “Oh…!” And clearly, when you buy in a bad area in town, on paper the cashflow looks better. Of course, life doesn’t happen on paper. After the second drug dealer kills the third smuggler, it doesn’t look so good anymore. But on paper, it looks good. So I too, when I started in Vegas, my first homes were little, bad homes in bad areas, that were very old… And luckily, I learned to go to brand new homes, in good areas. And I try to make it very simple.

So those deals, with the older homes in not such good areas, were the worst deals, luckily. When you buy single-family homes and you get a 30-year fixed rate loan, even the bad ones end up working well. I still own about six of those older homes I bought in Vegas back in the day, and as the years went by, they went well. Of course, they don’t have any loans anymore.

Joe Fairless: Right…

Adiel Gorel: Those were the worst deals, because I was, again – and I warn all our listeners here – don’t let the cashflow numbers lead you by the nose. I get people coming to me literally crying with tears; they bought in some market in the North of the country, in a city where the demographic growth is not so good, in  a  bad area, a cheap home… Why? Because the sheet of paper that somebody prepared showed cashflow.

Joe Fairless: So with some of those earlier Vegas homes – about how much did you lose at most, on what property?

Adiel Gorel: I actually didn’t lose. The only way that I lost, if you wanna call it loss – when I began investing, at the beginning of the 1980’s, the interest rates were 14%. Yes, 14%. And I was putting the minimum down, the thing they would let me, which was usually about 10%. You don’t have to be a big mathematician to calculate that when you put only 10% down and your interest rate is 14%, you’re gonna have a negative cashflow. So that was the so-called “loss”. But I was working as a Silicon Valley engineer, well-paid, so I could sustain the loss.

The tax laws were different back then, so I could write off the loss, not like I can do now.

So after taxes it was still a little negative, but I had a very clear idea in my head that as the years go by, the mortgage payment will never change, because it’s fixed. But the rents will change, with the cost of living, and that’s what happened. So within a few years we became breakeven, which for me at that time was cause for celebration, because I knew it was only gonna get better from now on, and then positive.

Of course, the rates didn’t stay at 14%; they went down to 12%, and 11%, and 10%. I remember the happy day when rates went to single-digit. What a celebration that was. We all refinanced everything to 9.95%. What a day that was…

Joe Fairless: Yeah, different perspectives… [laughs]

Adiel Gorel: Different times, yeah.

Joe Fairless: Just so I’m clear, you’ve been investing since  the 1980’s, and you haven’t really lost a large chunk of money, say over 15k-20k, on any deal?

Adiel Gorel: There was one time that I lost when I was a passive investor in somebody else’s syndication. I joined with an expert and we formed a syndication, and he bought apartment complexes. That was a segue from the single-family home that I bought… And some of those apartment complexes went well, and a couple of them ran smack into the recession, so on those two I lost; I don’t know if 15k or 20k, but probably I did. But again, that was an excellent lesson for me that single-family  homes are so powerful, so simple, and the loans are so good. Don’t go out of that realm. That’s been what I’ve been focusing on, not just for me, but for everyone else.

Joe Fairless: Wow, that’s outstanding, to be investing for 3-4 decades and not having a loss of more than 10k-15k on your own portfolio, not factoring in any passive investments that you did with partners.

Adiel Gorel: Yeah. The only loss is where the passive investment, the syndications where an expert joined us; because I’m not an expert in apartment complexes. And to me, that was a clear sign to stick with what I know. This has been working for decades now. A lot of people’s lives have been changed.

Joe Fairless: Based on your experience as a real estate investor who’s focused on single-family homes, what’s your best advice ever for other real estate investors focused on single-family  homes?

Adiel Gorel: Absolutely… I talked about the three criteria of when to buy. But when you buy an investment single-family home, here’s what I advise you do. You put no more than 20% down, you get the 30-year fixed rate loan… Assuming that some of you cannot qualify – I have a lot of foreigners, we can talk about that. You use trusted property management firms. If you want, I’ll be happy to connect you with firms and teams and infrastructure. We don’t charge for that, by the way; it’s not gonna cost you. And then, once the home is rented, that’s the most important part. Now you do the hardest action for a human being to do – nothing. That is so difficult for people to do – just sit there. You have a home, you bought it, you have a loan, the tenant is paying off the rent… Just sit there and do nothing. People read in the newspaper, then they read in this, and then they go to a seminar, and they wanna sell, and refinance etc. Just do the most important action – nothing. It’s also the hardest action.

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

Adiel Gorel: Please.

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

Break: [00:26:23].16] to [00:27:06].16]

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

Adiel Gorel: Well, you know, I’ve been an investor for 36 years, and I own a lot of single-family homes myself. To me, the absolute best way I can give back is doing exactly what I’m doing with you now – letting people know that there’s a simple way; you don’t have to complicate it, you don’t have to take a lot of courses and go to seminars. Just buy a simple single-family  home, rent it out, and do nothing. And to put that word out, like I did in my PBS show, Remote Control Retirement Riches – which, by the way, I could send you a link to it; it was really fun – I’m giving back by helping people do exactly what I did, because I see what a life-changer it can be.

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

Adiel Gorel: People can learn more about our business by going to our website. It’s called ICGRE.com, and they can get in touch with us.

Joe Fairless: I enjoyed learning about your market selection approach. Sun Belt states that are pro-business, large metro areas, looking at the ratio between rent and purchase price, as well as the property types that you purchase – brand new homes – and you mentioned different reasons why, as well as specific markets, based off of the criteria that we discussed. Oklahoma City, Central Florida, parts of Atlanta, Raleigh, Durham, Baton Rouge.

I enjoyed our conversation. I hope you have a best ever day, and talk to you again soon.

Adiel Gorel: Joe, it’s been a pleasure. Thank you so much.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

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JF2104: Financial Samurai With Sam Dogen

Sam Dogen is the founder of Financial Samurai and has been providing content to the world through his free blogs and articles around topics that will help you with your financial literacy and goals. He Has also been in the real estate investing experience for 17 years and shares some of his experiences with this and his personal journey.

 

Sam Dogen Real Estate Background:

  • Founder of Financial Samurai
  • Has 17 years of real estate investing experience
  • Owns multiple properties in San Francisco, Honolulu, and Lake Tahoe
  • Commercial real estate portfolio consists of 15 properties
  • Based in San Francisco, CA
  • Say hi to him at: https://www.financialsamurai.com/ 
  • Best Ever Book: Thinking in Bets

 

 

 

 

Click here for more info on groundbreaker.co

 

Best Ever Tweet:

“I love the green marble theory.” – Sam Dogen


TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners. Welcome to the best real estate investing advice ever show. I’m Theo Hicks, and today we’re speaking with Sam Dogen. Sam, how are you doing today?

Sam Dogen: Good. How are you?

Theo Hicks: I’m doing great, and thanks for joining us. A little bit about Sam – he is the founder of Financial Samurai. He has 17 years of real estate investing experience, owns multiple properties in San Francisco, Honolulu and Lake Tahoe; he has a commercial real estate portfolio consisting of 15 properties. He’s based in San Francisco, California, and you can say hi to him at his website, FinancialSamurai.com.

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

Sam Dogen: Sure. I actually grew up overseas, all across Asia and in Africa, because my parents were in the U.S. Foreign Service. I came to high school in the United States, and then I went to college at William & Mary in Virginia. Then I went to work on Wall Street in 1999. So I worked in finance, mainly international equities from 1999 to 2012, and in 2012 I decided to negotiate a severance and get out of there… Because after the global financial crisis in 2008-2009 it just wasn’t fun working in finance anymore. We were always the bad guys, even if we had nothing to do with the housing market.

Again, I was in international equities, specifically Asian equities, and it just didn’t feel good to work in that field anymore. Also, the pay wasn’t commensurate with the performance anymore. You could have done really well with your clients, generate a lot of business, but you wouldn’t have gotten paid commensurately, because Wall Street finance was busy subsidizing a lot of money-losing departments. So I decided “You know what – it’s been a good career.” Originally, I wanted to work until I was 40, but instead I left the industry when I was 34, and I decided to travel, spend more time with my wife, and focus on FinancialSamurai.com, which is a personal finance site I started during the depths of the previous financial crisis, in July 2009.

Theo Hicks: So Financial Samurai is like a blog where you post personal finance advice… Does that tie into real estate? Is your advice for people to go out there and buy real estate, or is it dependent on their personal situation?

Sam Dogen: FinancialSamurai.com is a personal finance site. I talk about everything from investing in stocks, to real estate, to early retirement, to career, to negotiating your layoff, to family finances, insurance and so forth. So I try to cover every aspect of what someone would think about in their lives. And money really touches upon all of us.

Real estate is about 40% of my net worth, and is something that I’ve been doing since 2003, in San Francisco… And real estate is my favorite asset class to build wealth, because it’s a tangible asset, it generates income; it’s pretty sticky on the way down during tough times, and you get to benefit from the upside, and it provides utility.  What an amazing asset class to be able to enjoy it, to provide shelter for your family, experience great memories, and maybe even make some money in real estate. So real estate has been my favorite asset class to build wealth.

Second has been stocks. I was in the stock market, in that business for 13 years. However, I think my favorite after stocks is online real estate, so owning web properties such as FinancialSamurai.com.

Theo Hicks: Nice, I never thought of it like that, online real estate; I like that terminology. Okay, so you have 15 commercial properties… Is that your entire portfolio? Are those the ones that are in San Francisco, Honolulu and Lake Tahoe?

Sam Dogen: No, the property that I owned in San Francisco, Honolulu and Lake Tahoe are physical real estate properties that I’ve bought, and that I enjoy, and I use, and I rent out, and I’m an active landlord there. And regarding my commercial real estate portfolio, it’s essentially through real estate crowdfunding, where after I sold one of my main San Francisco rental properties in 2017, because I wanted to simplify life and diversify out of San Francisco, I basically invested in a fund that had 17 commercial real estate investments, and two have exited, and there’s still 15 left.

So my thesis was to diversify across the heartland of America, because back then I was thinking to myself “Well, the cap rates are so low in San Francisco…” We’re talking 2% – 3% cap rates… And it’s just so expensive here, and I have so many investments already that I needed to diversify.

So with the proceeds that I got from the sale, I decided to diversify across the nation, and the thesis was that work from home would be more and more prevalent, telecommuting, people would be able to go to lower parts of the country to still earn a similar amount of income, but save a lot on costs. And with the lockdowns and the global pandemic I think that trend is definitely accelerating, and I’m excited to see what happens next.

Theo Hicks: How did the returns from that fund you invest in compare to your rental properties?

Sam Dogen: In San Francisco real estate has been going up; at least since 2012 it’s been a bull market. Real estate is about 80% to 100%, and now it’s probably plateauing right now… So San Francisco real estate probably increases by 6% to 7% a year. It has been. And that’s been pretty good. Obviously, let’s say with 20% down, so you have leverage… So a 6% return times five, that’s 30% return on your cash… So that’s great. But it slowed down in 2018, and 2019 was kind of “Meh…” and it started picking back up at the end of 2019. In early 2020 it was pretty good, until everything started getting locked down. So now everything’s in a wait and see mode.

In terms of commercial real estate, since about 2015-2016 when I started investing – because I invested before; I’d sold my main San Francisco rental property in 2017 – the returns have been around anywhere from 12% to 16% a year, which is great, especially if you don’t have to manage the property. And that’s one of the things that I like about investing in these properties – because it’s 100% passive income; you’ve got a professional manager there, you’ve got the lawyers and all those people doing the stuff, and  you just collect income and then you have to file the taxes.

Now, in 2020, things have obviously changed a lot due to lockdowns. So I will have some losses on properties that are in the hospitality space. For example a hotel. Surely, that property’s gonna be going down in value because nobody’s going at the hotel. It’s like an airport hotel, a Sheraton in Dallas. But the portfolio is 15 properties, so I’m assuming there’s gonna be some losses, but overall I think it’s gonna do well. If we can rebound and get out of this lockdown phase sooner rather than later, hopefully third quarter of 2020, I’m optimistic that things will get back on course.

Theo Hicks: Just to confirm – that fund of 15 properties, you’re getting 12% to 16% per year?

Sam Dogen: Yeah.

Theo Hicks: Wow. How did you find that fund?

Sam Dogen: Well, there’s a lot of real estate crowdfunding platforms. Financial Samurai is a relatively large website; it’s got about one million visitors a month organically… So there’s a lot of opportunity; you just have to go wade through a lot of opportunity. But there are many real estate crowdfunding platforms out there. I’ve been able to talk to a lot of the top ones and a lot of the big ones, and some of them don’t make it, frankly… But some of them do. And the assets they allow you to invest in are separate LLCs that continue to go on regardless of what the platform does.

So in the old days you would basically invest in a real estate fund through your network. You have a friend who’s in real estate development, he wants to raise some money, you participate, you’re a limited partner etc. Today you can go online, you can obviously buy REITs, you can buy private REITs, and you can go directly through these platforms that connect you with other sponsors.

Theo Hicks: So you’ve found this deal through your website. Someone came to you with the deal, or someone posted it on your website?

Sam Dogen: Yeah, through my website, for sure.

Theo Hicks: One thing that we stress a lot is about building a brand – our’s is a podcast website – for building a real estate company. You talk about personal finance. Is that something that — you also mentioned owning online real estate, owning websites… So what’s some advice you have for someone — well, I guess then you also have a million organic views per month… So what’s your advice for someone who wants to start getting into what you call the online real estate and owning a website? Should they build their own, should they invest with someone else’s website? What does investing in someone’s website even look like? …things like that.

Sam Dogen: I think one of the key things you have to do is own your brand and build your brand. You don’t want another platform to own your brand, for example Facebook, Twitter, LinkedIn, whatever. They are already huge companies, and they’re getting rich off your content and your brand. So instead of spending all your time tweeting about random stupid things on Twitter, build your own brand and start your own website, and start talking about all the things you care about on your website. It’s the green marble theory that I like to think about and say, and that is if you have a green marble, maybe it’s the ugliest green marble in the world; you put it on eBay and someone will find that green marble and wanna buy it. So if you put yourself out there, based on your own brand and what you care about, you’re going to find your tribe organically eventually. Google obviously has been around for over a decade now. They’ve done their algorithms very well. They’re gonna help people who are looking for stuff that you like, and connect. And that is really key, to build your brand and do it on your own platform.

The other thing is you need to be consistent. You can’t give up before the roses bloom. Too many people I see just work for six months, maybe a year, and then they stop doing it… But they stop right before things start getting good. So I believe the secret to success is to do something very consistently, for 5-10 years. After about three years you should definitely start seeing some results, but too bad people can’t stick with things for more than one or two years, because they just want instant gratification. But this is a long game, and if you plan to be alive for decades, then you have plenty of time to build your brand.

Theo Hicks: That’s really good advice about building your website, but specifically the 5-10 years, thinking in terms of decades rather than days and weeks and months. So you did mention about not going out there and tweeting your thoughts, as opposed to building your own website and then you’ll [unintelligible [00:13:37].23] organically. So do you recommend just posting on the website and that’s it, and then letting people find you on Google organically? Or should I still be sharing the content from my website on social media?

Sam Dogen: Of course, you create the hub. You create your pillar, awesome content, whatever it is you wanna talk about. If you wanna talk about real estate, go ahead. If you wanna be a real estate specialist, go ahead. If you wanna be a personal finance generalist, or just focused on stocks and real estate and family finances… Whatever you wanna do. The world is big enough; there’s billions of people on the internet. Focus on what you care about and you are best at. And then the spokes are social media; make sure what you’re doing on social media is helping you build your brand, not hurt your brand. A lot of people have blown themselves up on social media saying things and then just getting fired, or just crushed.

So think about the spokes after you build your hub, your own brand. So the spokes are maybe doing a podcast, getting on a podcast like this one. Social media. Maybe speaking at conferences, if they ever come back. But focus on the hub.

Theo Hicks: Okay, Sam, what is your best real estate investing advice? You can also apply it to personal investing advice too, but what’s your best ever investing advice?

Sam Dogen: In terms of real estate, I would say be patient. Every time you see an amazing property, it’s just human nature to get all excited and say “I’ve gotta buy this. This is amazing. Please, nobody else bid against me. I’ve gotta buy! Buy, buy, buy, buy!” But the reality is if you miss this one, it’s okay; there’s gonna be another amazing property that’ll come along. So I really stress patience and running the numbers, especially during a turning point where we don’t know what’s gonna happen with the economy, with 40 million-plus people unemployed. Is the government really gonna support us indefinitely? Are we gonna find a vaccine within the next 12-18 months? There’s a lot of uncertainty, so right now patience is a virtue. Don’t rush, don’t go panic-buying, don’t go panic-selling. You’ve really gotta run the numbers and think things through. If you miss out, it’s okay; there’s gonna be other opportunities along the way.

Theo Hicks: Alright, perfect. Are you ready for the Best Ever Lightning Round?

Sam Dogen: Sure.

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

Break: [00:15:53].00] to [00:16:42].07]

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

Sam Dogen: Let’s see… I have been recently reading Annie Duke’s “Thinking in Bets.” I think it’s an excellent book and an excellent way to think about investing. There’s never a 0% probability or a 100% probability. There’s always going to be some kind of grey area, and you’ve gotta think in bets, think in percentages.

So right now, with the S&P 500 at 3,000, for example, it’s rebounding by over 32% from the mid-March lows… What is the expectation or probability that it’s gonna go up back to its record high, another 10% up from here? I would say maybe 30%. But that also means 70% is not gonna get there. So in that regards, I position my portfolio according to the probabilities that I believe in. So thinking in bets.

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

Sam Dogen: Right now I have about 250k-265k in passive income, excluding my website, except for 50k. 50k comes from selling a severance negotiation book… So if my website collapsed today, I would have about 200k to 215k a year in passive retirement income. So that would be a 20% loss to my passive retirement income. Then I would basically look at my budget and make sure I’m spending within my means… Because that’s obviously the bottom line of personal finance – spend within your means.

Now, in terms of the active income I was making from Financial Samurai through advertising and so forth, I would first take a moment to grieve, because I’ve been working on this for 11 years, and then I’d take a moment to be thankful that it’s given me so much back in terms of community, in terms of learning from other people, in terms of doing something that provides me joy… And then I’d think about maybe taking a six-month break, and then I would think about maybe starting something else better or newer, and learn from my mistakes.

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

Sam Dogen: In terms of giving back, I think the best way to give back is to write on Financial Samurai. Every single article is free, there’s no paywall. I talk about highly, highly pertinent things in our lives right now, whether it’s “What should you do after the stock market has rebounded by 32% from the bottom? Should you buy, hold, sell?” I talk about “Should I apply to pre-school and spend $2,000/month? Yes or no. Should I save x amount in my 529 plan so my child can go to college in 18 years, when everything will be free and college will be completely not worth its value?” I talk about these important things for free, and to help people engage and to encourage the audience to share their perspective, so that we can all learn from each other… Because nobody knows everything, and we all only know from our experiences and how we can do things better.

So I think that’s the best gift – to share what you know, consistently, for free, to as many people as possible? Because so many people will just go through and live the same thing that you went through just the past 5, 10, 15, 20, 35 years, and they could avoid all those landmines if the experienced people spend some time sharing what they did wrong and what they did right. That’s my plan.

Theo Hicks: And then lastly, what’s the best ever place to reach you?

Sam Dogen: Oh, just financialsamurai.com. I’m always reading the comments, you can always leave a comment. It doesn’t matter how old the post is, I’ll see it. You can go on Twitter if you want, but Twitter is something that I try not to spend too much time on. Basically, those two places are probably the best.

Theo Hicks: Perfect. Sam, I really appreciate you coming on the show today and providing your best ever advice. I think the biggest takeaway for me was your advice on owning websites and your analogy of the wheel, and how you don’t want to let other larger online platforms own your stuff. So you don’t wanna just be posting on Facebook or LinkedIn or (as you mentioned) Twitter. Instead, you want to be the hub yourself, so have your own website, focus on what you care about and what you’re best at on that website. And then the spokes are the secondary outlets, things like social media, podcasts, getting on a podcast, speaking at conferences. So those things are not the hub. The hub is you and your own website. So start working on your own brand and building your own brand, and make sure you’re the owner of it.

And then how to actually grow that – you talked about the green marble theory; you’ve got a green marble, and even if it’s really ugly, you put it on eBay and someone’s gonna want that green marble. So if you put yourself out there and you talk about what you care about, and you do it consistently, and you don’t give up before the roses bloom — and by consistently you mean 5-10 years… Not giving up after a year or two years or three years – then eventually you’ll find your own tribe organically.

And then obviously you talked about your real estate portfolio, the types of returns you’re getting on it, how real estate is your favorite asset class to build wealth, followed by stocks, followed by owning real estate… So again, Sam, I really appreciate you coming on the show. I look forward to reading through some of your content. I really liked what you said about the college thing; I hadn’t thought about it like that before… But again, thanks for coming on the show.

Best Ever listeners, as always, thank you for listening. Have a best ever day, and we’ll talk to you tomorrow.

Sam Dogen: Great. Thanks a lot.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

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The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

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JF2103: Part-time Out Of State Investing With Nick Giulioni

Nick has 3 years of real estate experience, working full time in e-commerce sales for a large tech company. While working full-time he has acquired a 48 door portfolio consisting of singles, duplexes, and triplexes in Indianapolis, and he is based in San Francisco. He explains how his W-2 has helped him pursue real estate investing because of the insurance of a guaranteed income.

Nick Giulioni Real Estate Background:

  • 3 years of real estate experience 
  • Works full-time in eCommerce sales for large tech companies
  • Has a 48 door portfolio consisting of singles, duplexes, and triplexes in Indianapolis
  • From San Francisco, California 
  • Say hi to him at: https://giulionirealestate.com/
  • Best Ever Book: Never Split the Difference by Chris Voss 

 

 

 

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Best Ever Tweet:

“Trying to make my partner happy and get them across the finish line was my top priority.” – Nick Giulioni


TRANSCRIPTION

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

Nick Giulioni: I am doing so well. I appreciate you having me on.

Joe Fairless: Well, it’s my pleasure, and I’m glad you’re doing well. A little bit about Nick – he’s got three years of real estate experience, but get this, he’s got a 48-door portfolio consisting of single-family duplexes and triplexes in Indianapolis. He’s based in San Francisco though, so we’re gonna talk about that. He works full-time in e-commerce sales for a large tech company.

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

Nick Giulioni: Absolutely. I have been extremely lucky over the last several years. I got into my first investment down in Southern California. Actually, it was a house-hack that my wife and I bought just about two weeks after we got married. If that didn’t prove that we can make it, nothing will. And since then, I’ve really invested myself into learning more and more about out-of-state investing. I’ve built an incredible network out in Indianapolis, and done a variety of different strategies, including portfolio acquisitions and seller financing to balloon my portfolio in that time and really be able to give back a little bit more.

Joe Fairless: Portfolio acquisitions and seller-financing. It sounds like you’ve got a couple tricks up your sleeve for how you’ve gotten to 48 units in three years, versus plodding along doing one deal of a single-family house at a time. So let’s skip to the good stuff – portfolio acquisitions and seller financing. Talk to us about maybe a specific example for each of them.

Nick Giulioni: I’ll tell you a little bit about a combination that I did. It was my most recent large deal I’ve done, and it was actually a 32-unit deal that was on the market for about 2.2 million dollars. I looked at it and really realized there was no way for me to be able to take it down, and went and negotiated with the seller a little bit; I negotiated down to a price that I thought was a little bit more fair, in the 2.15 range. I was able to bring a partner in to come buy six of those doors on their own, through traditional financing, and have the seller actually seller-finance the entire rest of the acquisition just to myself over the course of 20 years.

Joe Fairless: Okay, let’s unpack that… Let me make sure I’m writing that down correctly… A 32-unit, originally listed for 2.2?

Nick Giulioni: 2.2 million, yeah.

Joe Fairless: 2.2. You then said “No, I don’t want 2.2, I want 2.15”, so a decrease of approximately $50,000, because you said it was about that… You said the range…

Nick Giulioni: Yeah.

Joe Fairless: So you now have an interested seller at 2.15… But do you have the money to purchase that?

Nick Giulioni: This is actually an interesting one… I had no money.

Joe Fairless: You had no money. So you did not have any money to purchase anything… [laughs] Let alone a 2.15 million dollar property. So then you brought in a partner, that partner purchased six of those, and then the remaining units were seller-financed over 20 years.

Nick Giulioni: Yeah, that’s correct. So really, what I did is I sat down and I tried to have empathy for everybody involved. I kind of sat down and looked at it from everybody’s shoes… So this seller was in a position where he probably didn’t want to vacate the units, individually sell them, deal with all of the hassle associated with that… So he wanted a single transaction in order to get it all done.

Then I looked at it from my partner’s point of view – they were looking for a great deal. They weren’t looking for as much leverage or as much risk as I necessarily was… He just wanted to buy something below market value and add it to their portfolio… And for me, I wanted as many doors and as much cashflow as I could possibly get. So really, I just kind of had to look at it from all sides, and from the seller’s perspective, my partner coming in with traditional financing – that actually looked like cash to pay off their outstanding notes. So in all of this, I was able to piece something that was pretty darn special together.

Joe Fairless: Got it. So was it two separate transactions, or…?

Nick Giulioni: It was two separate transactions contingent upon one another.

Joe Fairless: Okay. Did the both close on the same day, or the same week?

Nick Giulioni: They did, they closed on the exact same day. It was actually one of the smarter moves I’ve made recently. I actually had it closed on the second of the month, and by doing that, I actually received a check at closing for prorated rents and taxes and all that stuff… So I actually got a check of $30,000 to take down all of these doors. About 1.6 million dollars of property.

Joe Fairless: Right. You say 1.16?

Nick Giulioni: No, 1.6 million.

Joe Fairless: Got it. So it was like 550k for those 6 units?

Nick Giulioni: Yeah, my partner brought in about 550k.

Joe Fairless: And he paid it all cash for those six units?

Nick Giulioni: They did use cash off of a HELOC of an existing property they had.

Joe Fairless: Got it. And when we say “partner”, is this person in the seller finance deal with you as well?

Nick Giulioni: Nope. Completely separate transactions.

Joe Fairless: So when we say “partner”, it’s really he bought his thing, you bought your thing, and then you went about  your separate ways.

Nick Giulioni: That’s correct, yeah.

Joe Fairless: Okay. Wow, props to you on this. The seller financing terms – can you talk to us about that? You mentioned it was over 20 years, but any other details?

Nick Giulioni: Absolutely. It is a 20-year amortization, 20-year term, so I don’t have to worry about it over that period. The rate was actually on the higher side, at 6%, but this was actually about 9-10 months ago. I’ve actually gone to the seller since then and asked if they would be willing to renegotiate those terms, given where current market conditions are. Now, this have gotten a little wonkier here in the last couple days, but generally, rates are in the low-fours to five, and I have actually gone back to them and we are currently negotiating a refinance to change that to over 30 years, and a 5% rate.

Joe Fairless: Okay. And what is their position, where they were amenable to doing this type of structure. You said they wanted the ease of transaction, but can you talk a little bit more about why they would do this?

Nick Giulioni: Yeah – for them, they needed to move out of the Indianapolis area, and they had been self-managing for years, and were really just looking to retire. So from their perspective, this looked like a continued passive income; it meant that they didn’t have to necessarily pay capital gains all at once across their entire portfolio that they had spent decades putting together… And it was an easy transition for them. They knew that at some point there was a decent chance I may end up refinancing and they could get cashed out… Or they may just carry it to term.

Joe Fairless: Okay. And approximately how old are the sellers?

Nick Giulioni: They’re on the older side. This was definitely a retirement play for them.

Joe Fairless: Okay. So 50, 60, 70…?

Nick Giulioni: I would say in the late 60s.

Joe Fairless: Late 60s, okay. And the property – I think I picked up on that based on what you’ve just said, that these units are spread out over Indianapolis… But will you elaborate? I might be misinterpreting it.

Nick Giulioni: No, these were actually all very close to each other; they’re in a neighborhood called Irvington. Definitely one that’s on the upswing quite a bit. It’s been appreciating quite well for me. It’s an area I’ve loved for actually a long time, and this just happened to fall in my lap, so it was pretty convenient, from my perspective… Actually, several of them are on the same block. There’s this one block in Irvington that — basically, I own the entire thing, on both sides.

Joe Fairless: The gentleman who used a HELOC to get the six units for about 550k – how did he choose the six units that he chose?

Nick Giulioni: That was a lot of horse-trading going out throughout the entire situation, and making sure that there was enough equity within the pieces without putting me into a negative equity situation… So it really just came down to “Hey, where do we think these are all worth? Let’s figure out how to build some equity for you on the buy, because I’m getting so much value with the 100% seller financing.”

Joe Fairless: Okay. So during that horse-trading, what are some lessons that you learned or some observations that you had as a result of those conversations? …because a lot of people haven’t been in that type of situation, with this type of structure.

Nick Giulioni: I probably could have been a little bit harder and been a better advocate for myself. I was just feeling so lucky that this whole thing was working out that I wasn’t being too tough, or anything. At the end of the day, I was trying to be fair to everybody involved, and I felt like I was getting one heck of a deal, no matter what happens. So for me, trying to make my partner happy and  get them across the finish line was my top priority… But there were several ways I could have probably improved it for myself, and gotten a property that I would have preferred… But in the grand scheme of things, it’s a small price to pay.

Joe Fairless: Doing some quick math – and correct me if I’m wrong, but $550,000 is $91,000 a door.

Nick Giulioni: Yup.

Joe Fairless: And the difference is 26 units remaining, and that is a 1.6 million dollar all-in price, which is 61.5k/door. So your per-unit cost is significantly less than what his per-unit cost is in a similar area… So what am I missing, where it sounds like you’ve got a really good deal, because you’re paying much less per unit?

Nick Giulioni: That’s a great question. I definitely took on some of the lower-end properties that needed a little more work, and  have thus invested since then to get them up to my expectations. I also took on more of the multifamilies. There were quite a few duplexes and triplexes in this, and the per-unit on those were significantly lower, where my partner was more interested in the single-family space.

Joe Fairless: Okay, got it. Where does the money come from to rehab the ones that need help?

Nick Giulioni: So I was being a little flippant when I said I didn’t have any money to invest. I actually did, and at that point I had 20 doors, give or take… So I was essentially using cashflow to do it. And like you talked about, I am extremely lucky to work in e-commerce sales, and am able to throw that W-2 in there. My wife and I live well below our means, and are trying to accelerate this as quickly as humanly possible.

Joe Fairless: You live in San Francisco. Are you from Indianapolis?

Nick Giulioni: I am not from Indianapolis. I do have family out there… I just listened to way  too many podcasts early  on, and found out that Indianapolis was a pretty strong market, and opted to lean in there.

Joe Fairless: Why did you pick Indianapolis?

Nick Giulioni: A variety of reasons why I like it. Number one, it’s affordable, and when I was starting out, I definitely had less capital to work with… So that was a good starting point. It cash-flows fairly effectively. The 1% rule tends to work on almost every deal there, assuming you’re not in a super A-class neighborhood. And in the grand scheme of things, it’s actually a pretty cool city. I know a lot of people probably that are listening here haven’t actually been there, but it’s a darn cool place to go hang out. And if I get to see family AND I get to make money, it’s a win in my book.

Joe Fairless: How did you find the deal?

Nick Giulioni: This particular deal actually came to me from a seller’s agent who I’d worked with in the past on a different portfolio acquisition, and actually had come to the table with a relatively similar transaction style… So this agent knew “Hey, Nick’s a creative guy. Even if he doesn’t have the money, he’ll figure out a way to get it done and bring some partners into the equation. She actually brought it to me off-market.

Joe Fairless: And how did you initially have that relationship with her again?

Nick Giulioni: We had done a 13-unit deal together about a year earlier, and had come up with a similar type of arrangement… She had found my buyer’s agent at that point, and honestly, it was just luck and happenstance that  that first transaction actually occurred… And then the second one followed just given my reputation at that point.

Joe Fairless: What deal have you lost money on?

Nick Giulioni: Oh, yeah… My second deal in Indianapolis – gosh, that one still hurts! I had done one awesome triplex deal with this new hungry agent, and had done very well with it, trusted him, and he said “Hey, this duplex is a slam dunk. Go for it.” He gave me some estimates… It turns out that he didn’t really inform me that he was representing both sides of that deal. And I remember getting into the house after investing about 50% more than his rehab budget, and just looking around and sitting there in tears.

Joe Fairless: You literally cried?

Nick Giulioni: Yeah, I was literally crying in the place and realizing I could never let somebody live here… So that’s when I called my new buyer’s agent, who I’d had brief interactions with, and I said “Hey, we’re listing this one.” I think I lost about $5,000. And I’ve gotta tell you, best education I possibly could have had was that $5,000, because I learned a variety of things… How to build a  more effective network, how to make sure that you have different parties that are watching your backs that are not related… It was a very cheap education as compared to a lot of it out there.

Joe Fairless: And when to cut your losses.

Nick Giulioni: Absolutely, yeah. We closed on that house the day before Christmas Eve. It was the best Christmas present I possibly could have asked for that year… And definitely, I sent the guy — because the guy was moving in actually on that day… I made sure that he had a Christmas tree delivered on his front porch when he got there.

Joe Fairless: Oh, that’s pretty cool. Okay, so the real estate agent was representing both sides, didn’t disclose it, or wasn’t announcing it very transparently if it was disclosed somewhere… But from a numbers standpoint, regardless of if he was repping both sides, it still boils down to the numbers, and if the deal makes sense… So what about your process have you changed in order to validate the numbers?

Nick Giulioni: I’m no longer trusting agents to give me any estimates of rehab. That certainly has changed. Or at least if I do trust their initial estimates, I’m always making sure that prior to closing and prior to my inspection window closing I always have one of my contractors go through and check it out, and actually give me at least a little bit more detailed scope of work. So that’s definitely an important lesson in that one.

On top of that, I will oftentimes now have my property manager check out the house, check out the area prior to that inspection window closing, making sure that they’re comfortable actually representing in that particular area, and just kind of validating, making sure that there’s a certain amount of accountability. The agent obviously wants to make the sale. That’s how they make their commission. But then you have to make sure everybody else along the chain is holding that individual accountable for what they say.

Joe Fairless: I’d love to learn about your process when you come across a deal, and how you verify the deal is a good one, knowing that you don’t live in that city… So let’s just pretend — or maybe even use an example, the last deal you closed on; you heard about it, then what took place to say “Yup, I’m definitely making XYZ offer.”

Nick Giulioni: My most recent is a condo. I purchased it from a buddy of mine who’s actually a wholesaler. I think he’s an incredible, incredible guy; we’ve been friends now for about a year… But I’ve gotta tell you, I wasn’t gonna trust his numbers without having him validated…

So he’s a wholesaler… I had him actually walk out there with my inspector (that I paid for), and go through this house and put together “Hey, these are the challenges with the house.” I had then my contractor, who wasn’t able to get in there prior to closing – I had him actually look at the inspection report and put together a scope of work based on that. And to be honest, the repairs that I would wanna do were slightly above where my buddy’s estimates were… And that’s okay, because the two of us chatted it through and made sure the numbers made sense… Because this is one that I’m hoping to BRRRR, and then do  short-term rentals on. It’s an incredible condo. But I just had to make sure that he understood that the $5,000 estimate wasn’t where it was probably gonna come in. It was probably gonna come in closer to 10k-11k, in that range, and just make sure the numbers made sense on those new criteria.

Joe Fairless: What’s been a surprise that you’ve come across, that we haven’t talked about, while purchasing these properties?

Nick Giulioni: Yeah, there’s a lot of challenges that I’ve faced that have been surprising. I’ll tell you the most recent of which – and I apologize I’ve gotta be a little more vague than I’d like to… I recently had a property manager go out of business pretty immediately. And unfortunately, there was no warning and there were no funds to get my security deposits back, get my rents, anything like that. Currently, we’re exploring options with insurance, and stuff like that, to get it fixed, but… This happened actually right before this last Christmas, and having to scramble there on the 18th of December to find new property management for not just my properties, which obviously was tough, but trying to protect all the other investors out there who were affected. That was definitely a challenge I hadn’t accounted for. And you don’t build that into your proforma; that’s not something that exists in any of those Bigger Pockets calculators.

Joe Fairless: [laughs] How were you notified that they’re closing the doors?

Nick Giulioni: I was informed by one of the employees, and validated it with a different employee. The funds were no longer there, and the company was shutting down.

Joe Fairless: Oh, wow… And besides insurance options, are there also legal options that are being considered?

Nick Giulioni: They’re definitely being considered. I think at the end of the day nobody wants to end up in court… So I think finding the insurance option is probably everyone’s best bet.

Joe Fairless: What type of insurance would cover a property manager disappearing in the middle of the night?

Nick Giulioni: It would potentially be called errors and omissions insurance. All agents should have that insurance. I’m learning a whole lot more about this currently…

Joe Fairless: [laughs] More than you wanted to…

Nick Giulioni: Way more than I wanted to… So maybe that’s a follow-up call. Once I’ve seen this whole thing through, you and I can talk a little bit more about what it looks like on the other side.

Joe Fairless: What’s the most profitable deal that you’ve got so far?

Nick Giulioni: I’ve gotta tell you, that one I was telling you earlier, about the big seller finance deal, where I was able to get 26 units – that thing’s been absolutely incredible. From a high-level, I actually don’t really cash-flow on it all that effectively, given how highly leveraged I am, and being at 6% interest rate… It cash-flows a couple hundred dollars, but if we really look at the total internal rate of return on that one – I have no money in the deal; I actually got paid, so I have negative money in the deal…

Joe Fairless: What about the renovation though? I thought you were renovating the units…

Nick Giulioni: Yeah, you’re right; I’ve probably invested about 50k.

Joe Fairless: Well, that’s a lot of money…

Nick Giulioni: That’s a lot of money, but I got a check for 30k at closing, so let’s consider that 20k invested, which again, is real money… But then my monthly paydown, just all my loan by itself, is in the range of $5,000 at this point… And I’m still getting a couple hundred dollars of cashflow. On top of that, the houses have actually appreciated, and I believe will continue to appreciate even in these kinds of crazy times. So I would say that for $20,000 locked in a  deal, I’m certainly making out like a bandit in that one. Heck, I think I’ve paid for it just in the loan paydown in the last couple months.

Joe Fairless: Props to you for putting that deal together, and having the creativity and the resourcefulness to get it done by bringing in the partner to buy cash, and then doing seller financing.

Based on your experience, for someone who is wanting to educate themselves about portfolio acquisitions and seller financing, what’s your best advice ever to that person?

Nick Giulioni: I think I said it earlier, but you’ve gotta have empathy, and really sit down and try and understanding it from everyone’s point of view. One of the books that really resonates with me – I actually read it after this particular deal, but I’ve found it very helpful in understanding the mechanisms by which I was working – was actually “Never Split the Difference”, by Chris Voss. It’s one of the best books I’ve read. I probably re-read it every quarter or so, just to remind myself… There are so many tactics that are just absolutely incredible. And it’s not necessarily just about portfolio acquisitions, it’s about negotiating in general and having empathy for those you’re working with.

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

Nick Giulioni: I’m so ready!

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

Break: [00:22:49].13] to [00:23:24].08]

Joe Fairless: What’s the best ever book you’ve recently read, besides “Never Split the Difference” by Chris Voss?

Nick Giulioni: Man, a tough one… I definitely love to read; I try and read at least a book every single week, and write up a book report… So I’ve gotta say the most recent one that I’ve really enjoyed was “The Infinite Game” by Simon Sinek.

Joe Fairless: Well, you can’t just slip in there you write a book report about books that you read and then me not ask a follow-up question… [laughter] What is the outline for the book report that you write?

Nick Giulioni: I actually just kind of free-form it as I go, and try and find what the most important points are, and just [unintelligible [00:23:52].05] for myself. I read so much, and I’m trying to learn so much that it’s easy to forget things. So if I’m able to just kind of go back and quickly reference the key points… I actually send this out to a couple of friends that hold me accountable, but… The general approach is to just get a couple of key points so that I can remember what was actually important in everything I read.

Joe Fairless: Do they send you their notes on books they read?

Nick Giulioni: Not as many as I should be getting. I should be giving them a much harder time.

Joe Fairless: [laughs] But it’s understood that this group of friends or this group of people exchange reports on books that are read…

Nick Giulioni: No, I’m just the weird one that actually sends out an email blast.

Joe Fairless: You’re the one, okay. Got it. Alright. [laughs]

Nick Giulioni: I’m just the weirdo over-achiever.

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

Nick Giulioni: In my infinite wisdom once, in a portfolio acquisition that I did – it was four units. I was trying to think ahead and realized that if I got them all on individual notes from the same seller, then it would be easier to refinance, versus having to refinance all of them simultaneously. What I didn’t realize is that by doing that, I was actually taking up one of those 10 golden slots that you talk about when doing conventional financing… So in my infinite wisdom of trying to make it easier to refinance, I basically screwed myself up for conventional loans moving forward.

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

Nick Giulioni: I love reaching out to people and helping people get started in real estate. My wife has started helping me with a blog, but I hop on calls with people, 5-10 different investors every single week, trying to help them get started… So that would be my way of giving back.

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

Nick Giulioni: You can reach out to me on Bigger Pockets, you can find my website at giulioni.com; I hope it’s in the show notes, because it’s got a lot of vowels… And I would love to help anybody who would like to reach out.

Joe Fairless: Is giulionirealestate.com also your website?

Nick Giulioni: That’s correct, yeah. They both go to the same place.

Joe Fairless: Good stuff. Nick, thanks for being on the show, talking about your portfolio acquisitions and seller-financing deals, how you structured it… One key thing that you do for any deal, and that’s have empathy for all; one resource for practicing that – Never Split the Difference, by Chris Voss… And getting into the numbers of the deals, which we all love.

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

Nick Giulioni: Thanks so much.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

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JF2076: Selling Million Dollar Real Estate With Cynthia Cummins

TRANSCynthia is the owner of Kindred SF Homes and she has 33 years of real estate experience. The houses she deals with have an average price point of $1.5 million which can create high emotions and interfere with your decision making. She shares what has helped her sell multiple million-dollar homes through a process of creating, nurturing, and continually finding new ways to build strong relationships which in return create valuable referrals.

Cynthia Cummins Real Estate Background:

  • Owner, Kindred SF Homes. 
  • From San Francisco, California.
  • With 33 years of experience in Real Estate. 
  • In the last 3 years, she’s sold $80M in San Francisco Real Estate
  • She has a popular blog called Real Estate Therapy where she writes about her passion, Secrets about how transaction and transformation meet in real estate.
  • Say hi to her at www.realestatetherapy.org  
  • Best Ever Book: Lincoln and the Bardoe

Click here for more info on groundbreaker.co

Best Ever Tweet:

“Having a bigger vision for people and a longer-term view is what makes all the difference” – Cynthia Cummins


TRANSCRIPTION

Theo Hicks: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m your host, Theo Hicks, and today we’ll be talking with Cynthia  Cummins. Cynthia, how are you doing today?

Cynthia  Cummins: I’m doing really well, Theo. Thanks for having me on today.

Theo Hicks: Oh, absolutely. Thank you for joining us, I’m looking forward to our conversation. Before that, let’s give a little bit of background on Cynthia. She’s the owner of Kindred SF Homes and is based in San Francisco, California. She has 33 years of real estate experience, and in the last three years she sold 80 million dollars in San Francisco real estate. She also has a popular blog called Real Estate Therapy, where she writes about her passions and secrets about how transaction and transformation meets in real estate. You can check out her blog at RealEstateTherapy.org.

Cynthia, before we begin, can you tell us a little bit more about your background and what you’re focused on now?

Cynthia  Cummins: I have been selling residential real estate in San Francisco for more than 30 years, which is kind of shocking to me as I say that out loud. I went into the business thinking “Oh, I’ll give this a try”, and now here I am, three decades later, still doing it.

I woke up this morning, I have a significant listing that just debuted this week. It’s a 4,5 million dollar Victorian, here in one of the nicest neighborhoods in San Francisco, and it is what I’m waking up with every morning – thinking about it, worrying about it, strategizing about it. So this was on my list for today.

And what I’m trying to do is follow my own advice about thinking about that listing and the work I have to do around it in a more holistic way, so that I can give myself a break from all the worrying and the craziness that can go along with it.

Theo Hicks: So let’s talk about that. It’s not every day that people have a multi-million-dollar listing and I definitely wanna talk about more the tactics stuff. We can take a step back and  talk about this advice that you have, about approaching real estate in general or specific projects in a more holistic way… So do you wanna walk us through what that means, how that looks in your day-to-day life?

Cynthia  Cummins: Okay… So I’ll kind of think about the listings that I have on my plate right now. There always seems to be a theme around the listings that I have at any one time, and the theme right now is people who are in the middle of huge transitions, moving from one stage in their life to another after owning a home for many years… And it is like lightning has struck their whole being. Everybody who’s doing this is kind of in bits and pieces, and trying to move forward in a very courageous way. The stakes here in San Francisco are so high… I don’t even know what the median house  price is right now, but I think it’s around 1,5 million. So just to show up, we’re talking about big numbers… And with big numbers come big emotions, and I have to figure out always how to manage my own as I stand and hold space for my clients to go through what they’re going through. I don’t know — did that make sense?

Theo Hicks: Totally. And actually, I can completely relate to what you’re talking about right now, because me and my wife were actually going through the same process from moving across the country for a new job. So yes, it’s definitely very stressful, but I would imagine the stakes are a lot higher when we’re talking about price values that are 4-5 times higher than we’re looking at…

So what’s been the conversations like? For example, you’ve got a person who’s going through this huge transition… Maybe talk specifically about the one you’re having right now; you’re listing it for 4,5 million dollars; I’m sure it takes a long time to prepare and sell a house that large, and that comes with extra stress on their part as well… So what are some of the things that you are doing with them, saying to them, to help them try their best to alleviate this emotional stress from, as you said, having their whole entire being struck by lightning?

Cynthia  Cummins: The “struck by lightning” phrase came to me because every now and then I will pull out a deck of Tarot cards and look at them, just for fun, to see what they might say… And there’s a card in the Tarot deck called “The Tower.” The Tower is actually an image of a tower being struck by lightning, and people sort of falling off the ramparts, and the thing is aflame… And it’s a really scary card. If you get that card, it can make you feel really nervous. But it is such a  great metaphor, because really, when you’re struck by lightning, all kinds of possibilities open up, and it maybe means that yes, this is really uncomfortable right now, but you’re heading for something new and something that’s really gonna serve you better.

So when I’m talking with my clients who are in the middle of having their tower dismantled, leaving one home for another, or leaving one part of the country for another, retiring, getting a divorce, whatever the situation is, I try to help them keep their eye on the fact that yes, this is really uncomfortable; it takes a lot of work, it takes a lot of focus, but you’re moving towards something that is going to improve your situation, usually.  You’re heading for something that’s going to be better.

Theo Hicks: Yeah, I really like that metaphor. Moving to more specifics on this deal – or you could talk about a different large deal like this, because I was browsing through your website and saw that you do deal with these multi-million-dollar deals… From your perspective, besides the more emotional side of the deal, what else is different between these larger deals and the smaller deals?

Cynthia  Cummins: Well, I must say that everybody, whether they’re selling a million-dollar condo or a six-million-dollar house in Hayes Valley here in San Francisco, their house is big to them. So it doesn’t matter what the price point is, everybody’s concerns are really similar. So I repeat it again and again. But I think that for everybody, but especially in this higher price range, when you are a wealthy person and one’s idea of luxury begins to change… Luxury becomes meaning. When you get to a certain point in your life, everything’s Jake, you’ve got a good job, you’ve got good income, the family is fine, you aren’t thinking so much about survival as you are thinking about the quality of your life, and is there meaning in your life. So that’s going on with these multi-million-dollar sales.

At the same time, that person is also concerned with really nitty-gritty stuff, like “Is there a powder room on the main level, and if there isn’t, how am I going to get one?”

Theo Hicks: Okay, that’s something else I wanted to talk to you about… So let’s say  I’ve been an agent for a few years, and I want to eventually build up to the point where I’m representing clients in higher and higher price ranges. What are some of the things  I should start doing today, so that in 5-10 years from now I am where you are?

Cynthia  Cummins: I think that there are all sorts of resources and coaches and guides for how to build one’s business, how to try and aim for a higher price point, and that sort of thing. There’s all sorts of different approaches to marketing. But the thing that I keep coming back to is that pretty much 95% of my business comes directly from sphere, from word of mouth, from referrals by past clients. From the beginning and still, my whole focus is on serving that client, doing my best to build a relationship with whoever I’m working with, so that they feel completely seen, held, and like I’m looking out for them. And I am looking out for them.

Then I go out of my way to continue to nurture that relationship after the closing, after the transaction. And I’m also always looking to tell them the truth; for example, just in the last two weeks I have talked four different sets of buyers out of writing offers on properties. They were gung-ho to proceed with writing an offer on a property, and I made a point of telling them why they shouldn’t do it. So I think having this bigger vision for people, and a longer-term view is what makes all the difference.

If you do a great job for someone and they feel like you really got them and you listened to them and you spoke the truth to them, then they will tell everyone they know about you, the agent… And especially whenever somebody sends me a referral; whether that referral transacts or not, I immediately send a gift to the person who referred them. That might take the form of a gift certificate for food delivery service, or I’ll drop off a couple of bottles of wine, whatever it is. I acknowledge that in a physical way immediately, and that helps keep me top of mind.

Theo Hicks: Could  you give us a few examples on some of the things that you do once the transaction is over to continue to nurture that relationship?

Cynthia  Cummins: Well, I always circle back immediately to be sure that all the logistics have been handled. For example, if somebody’s moving into a condo complex, I wanna make sure that they’ve connected with the homeowners association to get all the information that they need to reserve the elevator for their move-in date, and stuff like that… So it begins right then. And then afterward I make a point of circling back every few months with a phone call. I also send out newsletters, I send a link to my blog to people if I think there’s a topic that might  interest them… And then I’ll have little client events every now and then… So just continually finding a way to touch base with people.

One form it takes is touching base with my clients not to talk about real estate necessarily. Just to connect as a human being, and then the real estate just comes along with that.

Theo Hicks: Alright. Now for the money question – you can apply this to investors, or agents, or just in general… What is your best ever advice?

Cynthia  Cummins: I actually have two answers for you. The first one goes like this – real estate is a lot like sex; you want to get lots while you’re young.

Theo Hicks: I think that’s the title of the episode there, so thank you for that. [laughter]

Cynthia  Cummins: But [unintelligible [00:15:00].01] I think it’s to always remember that it’s a home. This is for residential real estate, and residential real estate happens to be one of the best investment vehicles for the ordinary person, because there’s so much value that comes with owner occupancy… But it’s a home, not a house, primarily. First of all, it’s shelter, it’s where you live, it’s where you die… It’s the sanctuary, it’s the place where you raise your family, where you rest, it’s where you’re at home… So first and foremost, a piece of real estate that you’re gonna live in is a home, and then it’s a house. It’s important not to let the details of the transaction get in the way of making it a home.

Theo Hicks: Alrighty. Are you ready for the Best Ever Lightning Round?

Cynthia  Cummins: I am. I’m kind of excited. We’ll see how I do.

Theo Hicks: You’ve talked about lightning in the beginning of the episode, so it’s only happened we have a Best Ever Lightning Round.

Cynthia  Cummins: Okay…

Theo Hicks: But first, a quick word from our sponsor.

Break: [00:16:15].10] to [00:16:55].06]

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

Cynthia  Cummins: This has nothing to do with anything, but the best thing I’ve read recently is Lincoln and the Bardoe by George Sanders. That is a novel. I love to read for pleasure, so that was a real pleasure.

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

Cynthia  Cummins: [laughs] Oh, I think I would go to move somewhere where it’s really quiet and beautiful, and I’d get a job working the counter at a diner.

Theo Hicks: Besides your first deal and your last deal, what’s the best ever deal you’ve done?

Cynthia  Cummins: Well, the first thing that popped into my mind was not necessarily the best deal, but it was the most lucrative, and that was selling a 17-million-dollar este in Atherton, CA.

Theo Hicks: The next question is what deal did you lose the most money on, but I’m gonna change it up a little bit and say “What deal you did had the greatest difference between what the property was listed for and what it actually sold for?”

Cynthia  Cummins: Ha-ha! Well, things in San Francisco tend to sell at or over their asking prices, but I had a condo for sale that I personally had developed with my then husband, and we had a buyer for it who was willing to pay — I forget what the price was. Like 1.7 million, or something like that… And there was some negotiating that went on… This buyer got a close look at the neighbor in the building, who was not the nicest person ever, and after a couple of months the buyer withdrew from the contract. So we put the place back on the market, asking 1.5, and the morning of our debut, Tuesday’s broker’s tour, was 9/11. We eventually sold the property for (I think) 1.2. But that was just some bad timing… But it’s okay, we survived.

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

Cynthia  Cummins: I like to listen and hold people in positive regard, and where I can, I like to tell them the things that are going to help them feel supported, and courageous, and happy, and I also wanna tell them, if I can, what’s getting in their way; trying to help them see that.

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

Cynthia  Cummins: You can get in contact with me via email, cynthia [at] cynthiacummins.com. And then there’s my realestatetherapy.org blog site, or at my retail real estate website, which is kindredsfhomes.com.

Theo Hicks: That’s actually funny, when I read that, for some reason I thought it was single-family; I didn’t connect it to San Francisco. So thank you for sharing that for me.

Cynthia  Cummins: [laughs] Yeah, I meant to do that… I’m kidding.

Theo Hicks: Exactly, it’s got dual meanings. Alright, Cynthia, I really enjoyed this conversation. We started off deep, talking about your holistic way of thinking. You said that you identified themes around your listings in certain periods of time, and right now people are in the middle of huge transitions in their lives, and you used the metaphor of the Tarot card of the tower being struck by lightning, and the clients that you’re representing, the theme is that they’re being struck by lightning… And some of the things that you do to help with this emotional burden that they’re going through is to let them know just like strike by lightning is that it opens up a lot of possibilities. Sure, it’s gonna be uncomfortable, it’s gonna take a lot of work, and focus, but it can open up something new, and you reinforce that they are moving towards something that is going to improve their situation.  I really liked that approach.

Then we moved into talking about the differences between small and larger deals. You did mention that regardless of how low or high the prices, it’s still a home. The concerns are generally gonna be similar, but when you’re dealing with these larger deals and wealthier people, the idea of luxury changes, because it’s less about survival and more about finding meaning and quality in their home… And that there’s obviously still a concern with the nitty-gritty; you gave the example of the powder room on the first floor.

We also talked about what agents can do; agents who are just starting out, or have been doing it for a long time and want to increase the price ranges that they’re dealing in… And you said that 95% of your business comes from word of mouth referrals. Then some of the tactical things that you do is you will send someone a gift if they’ve referred you to someone, even if that doesn’t result in a deal or anything.

You said that your whole focus is on serving the client and building relationships so they feel like and actually are being looked out for. Then you talked about some of the things that you do after the transaction is closed to continue to nurture and grow that relationship, make sure all the logistics are handled… You gave the HOA example.

Circling back, the phone call – it’s not just talking about real estate, but trying to connect on a human connection basis. Sending out a newsletter, your blog, client events, and then just telling the truth; your example was you’ve recently talked four clients out of writing offers on deals, for reasons why it probably was not going to work for them… You told the truth, rather than just making something up, so you can get the deal done.

And then my favorite part of the episode, the best ever advice, which is gonna be the title, the quote of the episode: real estate is a lot like sex – you want to get lots while you’re young. Obviously, saying that the earlier you get it, the more time you’ll have to grow that portfolio and the value of the property.

And then also, to always remember that the property is a home first, and then it is a  house or an investment or something else. Ultimately, what it comes down to is it’s a shelter, it’s where you live, it’s where you raise your family, it’s where you sleep, it’s where you ultimately die.

Cynthia, again, I really appreciate you coming on the show. I really did enjoy this conversation. Make sure you check out her blog at realestatetherapy.org. Pick her up on her offer to send an email to ask her questions, especially if you’re an agent and want to  learn how she does what she does. That was Cynthia, at CynthiaCummins.com.

Cynthia, again, thanks for joining us. Best Ever listeners, thank you as always for listening. Have a best ever day, and we will talk to you tomorrow.

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JF1985 Christopher Stafford

JF1985: How to Overcome Your Fear of Investing Out of State and Internationally with Chris Stafford #SituationSaturday

Investors in large metropolitan areas know it’s very difficult to invest in real estate with high prices and expect a good cap rate. In this #SituationSaturday episode, Chris Stafford explains how he finds “second-tier” cities around the country to invest in through his research and exploration. He also describes the process for finding and screening a good property management company to give you peace of mind.

Christopher Stafford Real Estate Background:

 

Best Ever Tweet:

“The more information that you get in your arsenal, the more comfortable and confident you’re going to be in investing in other places.” – Chris Stafford


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Our fourth annual conference will be taking place February 20-22 in Keystone, CO. We’ll be covering the higher level topics that our audience has requested to hear.

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JF1925: Investing In Legally Compliant Cannabis & Hemp Properties with Dana Wallace

This is either a first or possibly the second time we’ve had an investor on to talk to us about real estate investing, in the legal cannabis space. Dana will walk us through how she finds and vets properties, and the obstacles she has to work around in this space. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“You may have a license that you can move to a different location” – Dana Wallace

 

Dana Wallace Real Estate Background:

  • Owner of 420Estates.net, a firm that specializes in legally compliant Cannabis properties
  • she has over sixteen years of experience in the typical aspects of investment real estate sales
  • Based in San Francisco, CA
  • Say hi to her at https://www.420estates.net/
  • Best Ever Book: Code Of The Extraordinary Mind

 


The Best Ever Conference is approaching quickly and you could earn your ticket for free.

Simply visit https://www.bec20.com/affiliates/ and sign up to be an affiliate to start earning 15% of every ticket you sell.

Our fourth annual conference will be taking place February 20-22 in Keystone, CO. We’ll be covering the higher level topics that our audience has requested to hear.


TRANSCRIPTION

Theo Hicks: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m your host today, Theo Hicks, and today we will be speaking with Dana Wallace. Dana, how are you doing today?

Dana Wallace: Great, how are you?

Theo Hicks: I’m doing fantastic, thanks for asking. I’m looking forward to our conversation. It’s gonna be a fun one, I can already tell. Before we get started though, a little bit about Dana. She is the owner of 420Estates.net, which is a firm that specializes in legally-compliant cannabis properties. She has over 16 years of experience in the typical aspects of investment real estate sales. Based in San Francisco. You can say hi to her to 420Estates.net.

Dana, before we get started, could you tell us a little bit more about your background and what you’re focused on now?

Dana Wallace: Absolutely, and thanks so much for letting me be a part of your podcast today. I really appreciate it. My company is just a boutique real estate company which basically specializes in legally-compliant cannabis and hemp properties. I am solely focused on the cannabis industry and hemp industry. We voted to bring recreational cannabis in in 2016, and I started my company in late 2015 when I saw that California was more than likely gonna vote this through… And it’s been a really interesting journey, anywhere from cultivation properties, to warehouse, industrial, commercial properties for distribution, extraction, which is considered manufacturing, dispensary, delivery… Lots of different things going on in the real estate portion of it. And I just have become very involved with a lot of the companies and small craft farmers that are working in the industry as well.

Theo Hicks: Okay, so I personally don’t know anything about these types of properties, so I’m gonna ask you just a bunch of questions, and if they seem like dumb questions, I apologize.

Dana Wallace: No, they’re never dumb. It’s a complex industry, and there’s a lot going on, and no municipality is the same, so… Yeah, fire away.

Theo Hicks: Okay. How many properties do you own? Either number, or just dollar amounts… What’s the volume we’re talking about here?

Dana Wallace: So I don’t specifically own any of the properties. What happens is an owner of the property will call me and they would like me to sell their property along with the business entity that obtained the cannabis licensing permits, or they have bought a property that they want to lease. And more than likely, that’s usually a warehouse; however, there are some landowners who are leasing to cultivators as well.

These owners have either gone through the process of becoming a permitted, licensed operation, or their actual property is zoned or approved to be able to operate a cannabis business, whether that’s cultivation, manufacturing, distribution… It just depends on what licensing they’ve gone through and what their property is approved or zoned for.

Theo Hicks: Okay, so you deal with owners of properties that are in the beginning  phases, all the way up to the shops that someone can go into and buy cannabis?

Dana Wallace: Yes. They can either be in the licensing process, they’ve already finished the licensing process, and so now they’re wanting to sell not only their real estate, but also the business entity that obtained the permits. That way, someone can come in and start operating and doing buildout, or they’ve got an already-established business and they’re looking to sell that as well, maybe for expansion, or they have obtained multiple permitting in multiple businesses.

Theo Hicks: Okay, so I’ve gone through the beginning phases, I’ve got my license and I want to buy a property, and I come to you. What would you say to me when I first sought you out?

Dana Wallace: In most cases you’re going to have a property, because in most municipalities you need to identify the location of where you’re gonna be operating your cannabis business. So they want you to have that property in place, whether you have purchased the real estate or you’re in a long-term lease on that real estate and the landlord has given full consent… Otherwise you would not have licensing in hand. Because with the lease, that landlord is going to have to be cannabis-friendly and have to submit an approval letter in order for you to be licensed. So you will have already identified a location.

Theo Hicks: Okay.

Dana Wallace: Sometimes different zoning has happened, especially for example in Los Angeles, and maybe you had a location and it’s no longer zoned correctly, so they’re allowing you to find a different location. In that circumstance you may have a license that you can move to a different location.

Theo Hicks: Is there a particular type of property I have to buy? Can I just buy a single family home in the middle of a neighborhood, or does it have to be in a specific location?

Dana Wallace: If you were going to grow out of your home, which some people choose to do, you’re gonna be allowed, in most cases, six plants per adult in the home. And again, the municipalities may vary, so your city or county may say “If you’re gonna grow six plants per adult, that’s fine, but you need to only grow in an enclosed space. Or you can only grow outdoor. And if you grow outdoor, then you need to put it in a small greenhouse.” And then they might have smell mitigation rules in place.

So most people that just wanna grow for personal use will not be utilizing me, because you can do that out of most homes. You just have to check your local ordinances. But if you’re coming to me because you want to grow commercially on a recreational level to sell to dispensaries, then you’re gonna be coming to me and saying “Okay, we have to find out what the proper zonage is in my particular area, whether they even allow it or not.” So there’s a bunch of research to be done, because each municipality does things differently.

Theo Hicks: I think you said this already, but do these people own a property that’s already zoned, or do you help them have their property rezoned to allow them to grow cannabis?

Dana Wallace: I have not gone through a rezoning process. I imagine that in most cases that would take quite a while. It’s just a matter of figuring out “Are you correctly zoned with your particular property?” And a lot of times they’ll have already gone to their planning department, spoke with their cannabis staffing, the building and planning permit department, and they’ll find out if they’re zoned. Like I said, each municipality is very different.

For example, in Oakland you’ve got a green zone. So you plug in your address and you look to see “Hey, does my industrial warehouse fall in the correct zone? And if it does, what am I allowed in my zone? Maybe I’m only allowed to do non-volatile manufacturing”, which is extracting cannabis plant oils. Or maybe I’m only allowed to do cultivation and distribution, moving my product out of this location. In that case, you look and see where you fall on their zoning map.

Other municipalities don’t have a zoning map, so you really need to go down to the municipality’s planning department, find out who to speak with, and find out where your property falls as far as zoning. If you’re looking at land, a lot of times if you’re zoned ag and you wanna do cultivation, that municipality is saying “If your property is zoned ag and you can meet these setbacks from your neighbors, and you’re not pulling from a creek or a natural water source, or basically harming the environment with what your plants are, with your cultivation business”, then yes, you can move forward and get your property permitted, because you’re zoned ag.

Theo Hicks: Okay. So you mentioned that someone would call you, and they either already have the business and they wanna sell it, or they want to lease it. The amount of money I can sell my property for, or the amount of money I can lease my property for – is it a lot higher than using it for just standard industrial use?

Dana Wallace: Yeah, there is more than likely always a cannabis premium on those properties. For example, if in your city a regular industrial warehouse is usually being leased for 75 cents to a dollar, to a dollar fifty a square foot, it can be as high as two to two fifty a square foot. So there’s definitely a cannabis premium. Same thing with selling… Because now you’ve added value to that property – and also leasing – because that property is actually permitted to conduct whatever cannabis business you’re looking to get into, which means you’re that much farther ahead of the game, so there’s more value in that property. You’re able to step into a business and purchase it, along with the real estate, whether you’re leasing and purchasing the real estate.

Theo Hicks: Do you know the types of returns these owners are getting once they actually start to operate their business? Let’s just use a landlord, for example; let’s say I’m a real estate investor, I’ve got one of these properties that’s leased and permitted to conduct a cannabis business… What types of cash-on-cash returns should I expect to see?

Dana Wallace: So you’re looking at 12% to 14% cap rate. A lot of investors have that business model in mind. I’m going to buy an industrial warehouse in the correct zone, get it permitted for cannabis business use, and then I’m gonna lease to cannabis tenants with that lease premium, for being able to operate a cannabis business.

So it can vary, again, from municipality to municipality. There are some small towns which are having economic hardships. Maybe they have a bunch of industrial properties that have been sitting abandoned, and they’re looking so forward to the tax revenue, and the jobs, and the things that it’s gonna bring to their communities, so they may have better lease pricing, or better purchase price points on their buildings. But in a lot of the bigger cities – yes, there’s a definite return margin. And it does vary, because a lot of the state permitting just became permanent at the beginning of this year, and there’s a lot of businesses still going through the process…

So it’ll remain to be seen where everything kind of settles and ways that we can mark in the fluctuations in the market. But we are starting to be able to point to different figures in the business and say “Okay, well this is kind of what this market is getting on returns and what they can commend. Okay, let’s go over here; this is kind of what we’re seeing in this particular municipality.” But it’s very new, so there’s not a lot of hardcore, solid points… But you’re definitely getting a premium on any purchase or lease figures that you do with cannabis clients or tenants; you’re definitely getting a higher return, because of the risk and the complications with this market right now.

Theo Hicks: That’s a perfect [unintelligible [00:12:52].20] my next question, which is besides the obvious regular risks associated with investing in real estate, what are some additional risks associated with this specific investment strategy?

Dana Wallace: The risks are that it is still federally illegal, although we are making huge progress. There’s bills in front of Congress now to push for federal legalization. One of our main hurdles in the cannabis industry is that the banks are federally regulated. Cannabis operators do not have a banking system that they can walk in and bank with, so it remains very much an all-cash business, which causes security problems for the operators. This is something that we’re in desperate need of – banking for our cannabis operators.

There are private groups that put together banking for Colorado, and that’s starting to happen here in California. You’re gonna have private groups that are able to put together banking, so that they can safely go in and bank. So instead of showing up to the state capital to pay your taxes with (unfortunately)  a briefcase or duffel bag with your tax payment in it, you’re actually gonna be able to safely bank. There’s also things that are set up – secure vaults; companies have started those as well, so that it is becoming more and more secure… But that’s one of the main hurdles – the banking for our cannabis operators.

Theo Hicks: Alright, Dana, what is your best real estate investing advice ever?

Dana Wallace: My best real estate investing advice for people who would like to dip their toes into the cannabis industry is basically when you’re being presented with ideas or real estate that has a cannabis entity that’s going to be operating out of it, is basically really find out who your cannabis company or operator is. You should know the full story on them, the full background story; who are they, how long have they been in the industry? Is there a brand that they can point to? Is there products that they can point to that they have on the market? What is their business history?

I say this with also the point that because of the banking industry, everybody had to do business in cash before, so you’re not gonna be able to look at somebody and go “Where’s your tax records? Where’s your bank statements?” So it’s very important to sit down and find out who it is you’re dealing with, what their experience is in the industry, and do they have a team made up of people who are also savvy with just regular business and corporate structures?

The other thing is you’re gonna wanna look at their growth plan for their company, whether it’s expansion capital, whether it’s buildout capital now, the guy has received the licenses and he wants to build out… You’re gonna wanna look at “Okay, well how has he planned out his growth?” Because for some of these businesses it’s much better to see them going through phases of growth – “Here’s phase one, and we’re  gonna start seeing profit before we move on to phase two, and phase three…”

Or you can get some guys who come in and go “We’re doing it all. We’re buying millions of dollars’ worth of real estate, we’re buying millions of dollars’ worth of licensing, and we’re going so big because we wanna dominate the market.” That can be very dangerous, because you need to really take baby steps… Unless you are getting involved with an absolute huge company and they have a record of being able to sustain themselves in the business so far. Again, we’re still a very new industry. But it can be very lucrative, you just need to do your due diligence and basically do the research it takes regarding who it is and where you’re gonna be located.

Theo Hicks: Alrighty. Are you ready for the Best Ever Lightning Round?

Dana Wallace: Sure.

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

Break: [00:17:05].08] to [00:18:03].07]

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

Dana Wallace: Code of the Extraordinary Mind, by Vishen Lakhani. I may be pronouncing his last name wrong… But it’s basically — the whole book is premised on the way we grow, the values we are taught based on our culture, religion, or whatever it is, in our families, and maybe how our parents and grandparents grew up… And just taking a hard look at what do you wanna do, what are your passions, stepping outside of that box and following your own heart, instead of just the regular structures of maybe what you grew up with and the rules that you grew up with.

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

Dana Wallace: Being in real estate, I am very used to pivoting and making sure that I’m always keeping one step ahead of my thought process as far as being able to build a sustainable real estate business… And it’s all about following niches.

So if the cannabis business or industry were to fall apart, I would stay in the investment realm of real estate, but I would pivot over to the hemp and CBD market, which is less regulated, less taxed, and is also going to be a huge industry. So I’m kind of always on the lookout for “Okay, what are the offshoots of what I’m currently doing? Keep your eye on that and stay involved in that as well”, and definitely pursuing niche real estate, or niche businesses, because it really sets you apart from what everybody else is doing, and helps you kind of stay at the forefront of people’s minds.

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

Dana Wallace: The way that I like to give back is you can spend a lot of time having conversations with people that may not end up monetizing anything for you. But the fact that you can share your knowledge and maybe help them in some way that’s not related to at all is really valuable to me. I appreciated when I first got into this industry being able to just pick people’s brains, find out what they were doing; they invited me to their properties, they invited me to lunches and conversations so I could learn everything I could about the industry and soak it all up. So I try to be very mindful of sharing that knowledge.

A lot of people like to label themselves as consultants and charge fees, and in my mind if I’m sharing the knowledge of what I know, it will come back to me, because I’ll have given someone else an opportunity that maybe there’s an idea or a  thought process they hadn’t thought of before I shared what I knew about the industry with them… So I just remain very mindful of sharing my knowledge.

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

Dana Wallace: Well, you can reach me at my website, which is 420Estates.net. I’m also on Instagram, which is @420estates4you. I have a pretty good presence on LinkedIn as well, under Dana Wallace. You’ll see the 420Estates there also.

Theo Hicks: Alright, Dana, I really appreciate you coming on the show today and sharing your insight on the cannabis industry. Again, I didn’t know anything about this going in, so I really appreciate you giving us a rundown on the entire process. Just to summarize some of the key takeaways… So you mentioned that you need to buy a property in the right location, in the right zoning in order to operate a cannabis industry. If you’re a landlord or if you’re looking to sell that property, you need to keep that in mind.

We talked about the leasing and purchase prices of these types of properties, so there’s always gonna be what you call the cannabis premium. So if you’re looking at leasing your industrial warehouse, where you could get 75 cents to $1,50 for just regular use, the premium would be as high as $2 to $2,50 per square foot. And then similarly for selling that property – just like any other value-add strategy, if you’ve got the zoning and the permitting to allow you to conduct a cannabis business, you’re further ahead in the game and you can get a premium for that property. More specifically, you said that the returns are around 12% to 14% cap rate. Obviously, it’s new and there’s no hard data on this, and it could go up in the future.

You talked about the risks associated with this industry, and the fact that cannabis is still illegal federally. Because of that fact, the main hurdle is banking, so a lot of this investment strategy is all cash… But you mentioned that there’s some private groups out there that are starting to put together banking, and there’s some legislation that might pass that allows it to be legal federally, which would obviously change and reduce these risks.

And then lastly, you gave your best ever advice, which was to make sure you’re doing due diligence on any company who’s going to lease your industrial warehouse. You’re not gonna be able to find the typical tax records and bank statements like you would for a regular property, so instead you need to do due diligence on the companies, to get their background, how long they’ve been in this industry for, is there a brand or product that they can point to, what’s their business history, what does their team look like, are people on their team savvy businesspeople who have done businesses in the past?

And then lastly, look at their growth plan… And you mentioned that it’s better to see a growth plan that is in phases, as opposed to someone who is trying to just go all-in at once, unless of course it’s a well-established company who has a track record of being able to do that.

Again, I really appreciate it. Lots of great information. I know Best Ever listeners are gonna learn a lot from this episode and might have an idea for a new investment strategy if they are in one of these states where it is legal recreationally. I appreciate you stopping by, again. Best Ever listeners, thanks for listening. Have a best ever day, and we will talk to you tomorrow.

Dana Wallace: Thank you so much.

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JF1911: Gaining A Leg Up In A Changing And Competitive Marketplace with Gary Boomershine

Gary is returning to the show to bring some more value for us. We’ll be focusing a lot of the conversation on mindset. In today’s market, it’s important to expand your skill sets, knowledge, and mentality, in order to get ahead of any competition. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“If there is no vision or plan, you end up in the same cycles” – Gary Boomershine

 

Gary Boomershine Real Estate Background:

 


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Our fourth annual conference will be taking place February 20-22 in Keystone, CO. We’ll be covering the higher level topics that our audience has requested to hear.


TRANSCRIPTION

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

Gary Boomershine: Joe, a pleasure being on here again. I love what you do, and I’ve been following you forever, so it’s just a blast… And I’m really excited to deliver some great value to all of your loyal listeners.

Joe Fairless: Yeah, I’m looking forward to it as well. Gary founded RealEstateInvestor.com in 2005, out of the need to scale and grow his real estate investing business and home buying business. He noticed an opportunity to leverage people, process and technology to gain a leg up in changing the competitive marketplace. He actually just got back from a mastermind in Mexico with some real estate entrepreneurs and has some things he wants to share with us that would add value if we implement them to our business. Based in San Francisco, California. With that being said, Gary, do you wanna just give a refresher on your background and then let’s talk about the latest and greatest stuff that’s going on?

Gary Boomershine: Yeah, for sure. I love this niche. I grew up in an entrepreneurial family. I was a licensed agent, we had a real estate brokerage, and my parents were buying rental houses in San Francisco back in the ’70s and ’80s. Literally, two weeks after turning 18 I was a licensed agent.

Joe Fairless: Wow.

Gary Boomershine: 1987… I’m kind of dating myself. I’ve just turned 50. I did that, paid for college by cold-calling and door-knocking, and open houses, and all that stuff. But I got a computer engineering degree… I really was not thinking about technology, I was thinking about Silicon Valley and the whole startup world. So I did computer engineering, got a degree, and then I went to actually the largest consulting firm in the world (technology consulting), called Accenture. I did that, and then a bunch of super well-funded startups on the sales side, where I moved and I was selling 500 to 5 million dollar software packages…

But it was really 2004 my wife and I decided “Hey, let’s go back to what we know”, and got really passionate… So 2004 I went full-time real estate, and I never looked back. I bought and sold hundreds and hundreds of houses. I do a lot of private lending today, and taking advantage of the current market, doing some wholesale flips and some creative deals…

I live brick and mortar. I know you do too, Joe. You look around — I was in San Diego a couple weeks ago, presenting, and I told everybody, I’m like “Look around… There’s more product right in front of us than any other industry, and there’s more money to be made if it’s done right…” But it is a real business, and you really do need to do it right. Once you do it, it’s a lifetime of wealth and generational wealth… So I love this industry, and I love the people in it. There’s a lot of good people.

So my wife and I decided to do full-time real estate on the investing side, and I bought north of 500 houses. I’ve done apartments, I do a ton of lending today… With this current cycle I’m most passionate around wholesaling, because if you can control the deal flow, there’s a lot of money to be made. And I’m not huge on tenants — I live in California, so it’s hard to actually hold property long-term, so I don’t do it here in California… But it’s awesome.

And then on the side, as you mentioned, I built a company… Most people know us as REIvault. We do a massive, massive amount of direct mail, and outbound cold-calling. I have an agency or a service for other investors, where we’re managing all their marketing, their lead generation, their cold-calling for them, so that all they have to do is go on appointments that we pre-schedule for them. I’ve been doing that — I think we’ve sent out over 30 million pieces of direct mail.

Joe Fairless: Holy cow.

Gary Boomershine: Yeah, ain’t’ that crazy?

Joe Fairless: That is crazy. I wonder if you put them all in a room, how big that room would be…

Gary Boomershine: Yeah… [laughs] It’s pretty funny, we have about 250 top-producing investors and agents using our service today… And it’s interesting, because I’ve moved into the real estate agency world as well, because a lot of them are buying properties, and they’re competing with Opendoor and Offerpad. So I have the number one team for Berkshire Hathaway… They’re in Omaha; they did over 700 transactions the last year just on the agency side… So they’re using us as their off market direct-response team and cold-calling. That’s Jeff Cohen, and number 43 top-producer for Keller Williams.

So it’s really cool, because being able to bring on people that are really doing this business in large scale, we’re able to find out what works, and change with the market. The market is different today than it was two years ago.

Joe Fairless: You mentioned prior to us recording that you just got back from a mastermind in Mexico with, I believe, some of these individuals you’ve mentioned. One, how did you get involved in the mastermind, and two, what value do you get out of it?

Gary Boomershine: Great question. I’m actually involved in nine masterminds, believe it or not.

Joe Fairless: Wow! You pay for all nine?

Gary Boomershine: Actually, I do.

Joe Fairless: How much do you invest per year on masterminds?

Gary Boomershine: Whatever I invest, it’s a massive ROI. The masterminds are anywhere from $5,000 to – I’ve got one that I’m involved in that’s $50,000/year. It is the easiest check for me to write. I’ll give you a couple of examples. If anybody follows my podcast, I’m  a huge believer, as business entrepreneurs, in being with like-minded people; people that are smarter than you. So I try to go to places and hang out with people that know more than me and inspire me… And that’s had a huge ROI.

And then number two is really good CEO coaching. One-on-one CEO coaching. There’s not a professional in this world – sports, musician, weightlifter – that doesn’t have a personal coach. So that’s a huge one.

The one that I love the most – it’s called The Multipliers Mastermind. It’s all A+ players, all seven and eight-figure people in the real estate niche… But it’s so much more than business. We talk real stuff, we bring our wives… It’s actually on the beach. So there’s 40 or 50 of us sitting on the beach, we work out  in the morning… And then we’re talking about real stuff [unintelligible [00:07:28].10] Because real estate I think is actually pretty easy when you’ve been doing it for a while, but it’s how do you balance that and life? How do we keep our marriages intact, how do we be leaders in our family?

I’ll  tell you man, I was a workaholic, Joe… I could go off on this topic alone… I think having balance and learning… A real estate investor – Warren Buffet said this – is somebody that has money, and they buy and they hold. They’re a passive investor. So most people that are wholesaling, fix and flip, rehabbing, where it’s a single transaction – that’s a business; that’s not a real estate investor… And all businesses need CEOs. So if you’re sitting there, doing $10/work, I always say you’re gonna have a $10 bank account. And I think it’s really easy for many of us to get trapped into the rabbit wheel when we really got into real estate for the freedom, the time and the money, the family, being able to contribute in a bigger way. So that’s why I do masterminds…

My wife came, and it was incredible for our marriage. We are coming  up on 25 years, and…

Joe Fairless: Congratulations.

Gary Boomershine: Yeah, thanks. So yeah, I’m involved in that, I’m involved in Kent Clothier… He has Boardroom. I was part of Collective Genius for years, Jason Medley… Those are all seven-figure guys and gals. Brad Chandler was in there, and Billy Alvaro… So just being with people that are real, that can help us with our blind spots… Because there’s a lot of — I call it the 8 or 12 trapped doors in real estate. You go through the wrong door; it could be a massive rabbit hole. So I hang out with those people that say “Hey, what’s working, and who do I talk to, and how can I shorten my time to market?”

Joe Fairless: How do you allocate your time to nine masterminds?

Gary Boomershine: Well, this was not something I created, but I have the rule – it came from a CEO coach – of 5/10/3. So I wake up at five – I used to have massive time issues; I was late for meetings, I never felt like I could keep up… I was a workaholic; I’d work weekends, nights, holidays, traveling, vacations… I was always working, at the cost of my kids and my wife. So I have a coach that said “Gary, how did people that have massive businesses… Like the head of General Electric, Jack Welch – they have the same 24-hour day. You’ve gotta think like a CEO.” So the first one was 5/10/3.

I wake up at 5 in the morning, I don’t start my business day until 10. That gives me five personal hours. I journal, I read scripture, I don’t look at email, I don’t look at Facebook… It’s all personal time. I clean the kitchen and do my acts of service for my wife; I make her coffee, I leave the coffee, I go and I work out… And then, during those five hours, I come up with my One Thing – it’s not my three things; this came from Gary Keller…

Joe Fairless: Yeah.

Gary Boomershine: I started with one thing, and over the last two years I’ve been able to do [unintelligible [00:10:15].22] my one thing that’s gonna move the marker today in the business. And then my three hours – the 5/10/3… The three are the three hours that I’m truly gonna put my horsepower into this business to move the marker… And then I’ll look at email and do other things. So I’m able to do everything that I need to do in three hours. So that was number one, that was a life-changer.

Number two is we’ve implemented Traction. We’re a huge — Gino Wickman has a book called Traction. I know you’ve heard of it, and your listeners…

Joe Fairless: Of course.

Gary Boomershine: Yeah, all of us. But we are a huge Traction — I have Andy Taussig, he’s a coach out of Virginia; I hired him, he’s been with us for four years… And he literally flies in almost like our board, and he runs our meetings. So I’ve got almost 90 people now working for me, for RealEstateInvestor.com and on the real estate side… And we’re distributed, we have no office. So what I do is once a quarter we rent a big, fat house, I fly in the management team… We’ve been to Hawaii, we do it in cool places.. And then we basically follow EOS of putting together — looking at how we did on our rocks… And we do a hotseat… We just follow the process and preset of exactly what we need to do for the next three months, and then we execute to that. That’s been a game-changer.

I’ve got a lot of people in REIvault that have come in and we’ve kind of gotten them on that track as well, which has really been fantastic.

Joe Fairless: What are the three things for today that you came up with?

Gary Boomershine: My three things today were working on closing an office building right here in my town… It actually has a gym. I’ve found it because I actually have a new personal trainer, and he used to own the gym in this building, so we’re in the process of working to make a creative offer. A deal just fell out — the seller is super-motivated and a deal just went sideways, so we’re gonna see if we can get owner financing on it… So that was number one.

And number two is to reach out to Chris Arnold, who runs Multipliers, and get on the phone with him. We recorded a video for everybody in the mastermind… I’ll give a little giveaway; the best leads, we’re seeing the absolute best — like, the crappiest leads that all of us have, that we’ve passed on, that were deals that we passed on, were sellers that said they’re not interested – we are crushing it off of working those old leads. I just did it with Chris Arnold. In one week, our team ended up connecting with 1,200 sellers. We’ve got 62 real opportunities, and they already put one deal under contract and they’ve got three more right behind it, off of one week, just working the worst, crappy leads.

So for all your listeners that do direct mail and cold-calling, some of the absolute best leads, or the people that you’ve already talked to, that you’ve probably missed, and they’re sitting in — maybe you have a phone system like CallRail, or Podio, or FreedomVoice, or whatever it might be, those leads are gold. So we’ve just walked through those numbers…

The other thing that we’re finding – the market is changing, it’s more competitive around direct mail… So what we’re finding is you’ve gotta tighten up your sales skills. This is not an order taker market anymore; it’s really being able to make multiple offers to sellers and be a lot more relentless on fine-tuning the sales process… And people that do that are crushing it right now, and others are actually finding that their businesses are not doing as well as they were two years ago. Anyway, that was the second thing on my top three…

And the third was a family issue. I’m taking them for Labor Day – we’re gonna do fly fishing in Montana, so it was a personal thing.

Joe Fairless: Oh, cool. Good stuff.

Gary Boomershine: Yeah.

Joe Fairless: So you’re very intentional about what you focus on… And I’m still trying to reconcile how I would spend from 5 AM to 10 AM… Because this is 5 AM to 10 AM – no business, right?

Gary Boomershine: No business.

Joe Fairless: I don’t know what I would do from 5 AM to 10 AM. I heard what you said; you said you journal, read Scripture, clean the kitchen…

Gary Boomershine: I work out…

Joe Fairless: And you work out. Okay, so there’s one hour… But still, that’s a whole lot of time. Can you break down those five hours in terms of what percentage time goes where?

Gary Boomershine: I would probably say I’m two hours in the gym.

Joe Fairless: Okay.

Gary Boomershine: I’m a fitness nut, primarily because I hit 50 — my wife calls it my mid-life crisis, but I’m definitely into health and wellness… So I just find I’m a better human being, I’m better with my team if I’ve gotten cardio in. So there’s two hours.

Then probably a good hour-and-a-half of journaling and scripture… And my journal is really interesting. What I find is that when I’m actually writing my thoughts down on paper I don’t even have to go back and look. It’s the mental kind of focus on what I’m thinking and where I need to go.

A week ago I redid my perfect day. I went and I looked at a couple years ago — well, actually in 2009 I started this; it was Frank Kern… You remember, but I put together — I was very unhappy, I was about 45 pounds heavier… I wrote my perfect day, and it was night and day. So I’m definitely very much closer… So I went a week ago in that time, and  I said “You know what, I’m actually gonna look at that and refine it, and just make sure that it’s still congruent to where I’m heading…”

Let’s see, what else do I do… My wife and I have our own — we took Traction and we actually implemented it ourselves for our family. There were some things on there that I was kind of working — we are working on a family calendar, and being more intentional on that… Anyway, just interesting things.

Also, I’m about ready to record a video; I think as leaders in our family and our businesses, one of the things I’ve found is that being an initiator is a characteristic… And what I’ve found is I’m an initiator in my business, but I’m not in my personal life. I’m not the one that reaches out to friends, saying “Hey, let’s get us together.” I’m usually the one waiting for somebody…

So those are the types of things that I’m able to do. And I’ve found that doing that, the businesses are healthy, and I’m healthier, and I’ve got happy people on the team.

And then for the listeners that are solopreneurs, Joe, I would just say be really intentional with where you’re heading… Because if you don’t really know where you’re heading… Because I did this for years. I wish I’d had this information years ago… But just knowing where you’re heading and what you want life to look like will give you a trajectory. If there is no vision or plan, you really end up in the same cycle that you’re in today. This really is the Albert Einstein insanity definition, of repeating the same thing and expecting a different result.

So that’s really helped, and  I journal around that. I journal around “Where do I wanna go? What do I wanna be doing?” I’m not a big, high-volume real estate guy, as an example. I have no interest in doing hundreds of deals a year, or hundreds of deals  a month. I’m more around the time, around having the time… And then it’s all about more of my time. I’m deal-splitting with some people around the country, where I’m playing like their VP of sales… And I’m doing it really because I love it. I’ll get on the phone for 15 minutes and renegotiate a deal. I have Tyler and Jennifer in Dallas, and I might take a small percentage of their profits for deals that I make money for them, but… If they lost a deal, the deal went sideways, then I get on the phone with the seller and I revive it. I spend 15-20 minutes doing what I’m good at, on a $40,000 deal that went sideways, and then they win, I win, and it’s a good ROI on my time.

Joe Fairless: Sure.

Gary Boomershine: That’s the type of stuff that I’m enjoying, if that makes sense. I’m also very ADD, so I do have to be involved in lots of things… [laughs]

Joe Fairless: Well, but I would say the focus of the five hours in the morning though – in my mind that’s almost like anti-ADD, because you’re doing one thing for an extended period of time, like journaling… When you journal, what is the process, and is it in a Word document, or…?

Gary Boomershine: It’s a physical piece of paper… First off, I write like a doctor. It’s so illegible that I usually can’t even read it. So I write down thoughts. REIvault — I bought like hundreds and hundreds of journals… You know, the little booklets that I can give out to our members, and stuff… So I have probably like 7-8 of those. And I just pull one up, and I open up a page, and I just write. I’ve been trying to do it on an iPad… I got a new pen-based iPad, but it’s not working for me as well just to journal.

So I’m writing down thoughts… I really don’t go back to it, but I do find that I have action items, things that are actionable that will come onto that piece of paper. Then usually I’ll highlight and say “Okay, these are the things that I definitely wanna put into action.”

Joe Fairless: For anyone who does not journal, what would you say – if you can say – is the ROI from a  business standpoint you receive as a result of journaling?

Gary Boomershine: It’s so high… It’s not even measurable. It’s actually a life-changing — I was a workaholic, probably like a lot of us in this business; it’s easy to get a little lost… So I have found that journaling… It’s also — you think about it, it’s like “You’ve gotta read it, you’ve gotta hear it, and you’ve gotta write it.” So that’s one of the reasons why I journal… And kind of getting clarity of thought.

I think the journaling for me has grounded me, it’s given me more clarity… Our business — we have no fire drills; if you talk to our team in the Philippines, in India, in Mexico, here in the States – there’s no fire drills. I used to always — the whole team would be running on fire drills; a lot of us. I have lots of skills from my business background, but when I started  my own business it was very chaotic. And what I’ve found is as a leader — there’s a guy, his name is Ed Thomson; he said “You’ve gotta fix yourself before you can fix your business or your people.” And I’m like “Gosh, that’s so valid.”

So  if we’re chaotic, and we’re scramble-brained, and we’re running  on fumes, and going left, going right, and then changing direction every hour, your team is gonna be like that as well. So I’ve found that journaling helps round me, it allows me to give clarity of vision to the  people that I lead. And I think nurturing the people, especially if we’re active real estate business owners, either with a team or planning to have a team, being able to leverage people is just as important as leveraging money.

We all think about leveraging money for real estate… Well, leveraging people is as important, if not more. Being able to have somebody working for $10-$20/hour, and you’re maybe able to make $200/hour off of them. Instead of you doing it, if you run the math, that saves probably — it could be 500 hours a year, ten weeks, for some people, just having somebody do that work.

So I find that journaling allows me to come into those perspectives… Again, I just write it down. Sometimes I do it where I’ll draw triangles, or circles… It’s crazy. So I do that, and I try to spend at least an hour, an hour-and-a-half doing that, of the day. Some days I’m off. I find that every single day you kind of have to restart… But I do those things — that 5/10/3 rule has made a big impact.

And I’ll tell you another thing… I hung out with Intuit; it has Quickbooks… Massive company. I talked to the senior vice-president; I actually skied with him. A friend of a friend. He’s the senior vice-president and does all the recruiting for Intuit. Hires over 10,000 people a year, and all their executives. And he told me — because I was telling him about this, and he said that most CEOs or executives in Intuit in Silicon Valley do the same thing. He said it’s all about balance. Because the CEO is really like the captain of a plane; they have to be healthy. And if you’re working 100-hour weeks, it’s not a best practice. It’s working and being very intentional. So hopefully that helps…

Joe Fairless: Very helpful.

Gary Boomershine: Maybe I went off on a little bit of a tangent when talking about real estate…

Joe Fairless: Well, it’s all connected, right?

Gary Boomershine: Yeah.

Joe Fairless: That’s the thing that I had a challenging time understanding when I was starting out, and the more I got into real estate and being an entrepreneur, the more I realized that it starts with the mindset, and then everything else filters from there. You’ve gotta have a strong body, you’ve gotta have a strong mind, and then you have a strong business… So thank you for that.

Taking a giant step back, what’s your best real estate investing advice ever? It can certainly be along the lines that we were talking about; it doesn’t have to be transactional-based.

Gary Boomershine: I would say number one remember Robert Kiyosaki defined the definition of wealthy. Most of us got in this business by reading Rich Dad, Poor Dad. I know I did, I know most of the people that  I’ve come across did… Robert Kiyosaki said the definition of wealthy is when your passive income – meaning mailbox money – you can be anywhere in the world, but your passive income is greater than your expenses. That’s the definition of wealthy, that’s what gives you the freedom. And most people that I know got lost. They’ve created a job and they’re very focused on having ten million dollars, or 100 million dollars in their bank account. It’s a constant moving target.

In reality, it’s a fairly small number. Most of us, if you had all the toys and vacations, covering your mortgage and stuff, it’s probably like $15,000-$20,000 a month is really what most of us need. So you really only need a certain monthly number… So really focusing on that as the end game financially, as opposed to “I do 200 deals/wholesale flips a year…” Because at the end of the day it’s the money in your bank account, not about your top-line revenue… And your lifestyle. If somebody is basically dead, but they’re able to do 120 deals a year – you’re not gonna be remembered. And especially by your family.

Number two is — I was at that shareholder event for Warren Buffet a month ago in Omaha. It was awesome… But he said “We just Keep It Simple, Stupid.” It was KISS. Keep It Simple, Stupid. And I think  a lot of us over-architect the business. It’s  really just a marketing and a sales business; it’s finding deals, buying them right, and then selling them right. Or if you’re holding for the long haul…

He also said “Buy low, sell high, don’t lose investor money, and don’t break the laws. Follow the local laws.” He goes “That’s what we do.” And Berkshire Hathaway is hundreds of billions of dollars in assets. And I think there’s so much wisdom to that…

So those are the three things that I would share, that I think are very real for everyone of us in this business.

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

Gary Boomershine: Absolutely.

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

Break: [00:25:28].23] to [00:26:06].16]

Joe Fairless: What’s the most challenging business experience you’ve come across to date?

Gary Boomershine: Partnerships. Actually partnering with other people in a partnership, especially when we’re not equally yoked. That’s been the biggest challenge. Not even on the real estate side… It’s just making decisions in a partnership where we’re not in unity.

Joe Fairless: What’s a question you would ask someone, knowing what you know now, in order to mitigate the risk of a bad partnership, or one where you’re not aligned?

Gary Boomershine: Well, equally yoked…

Joe Fairless: I don’t even know what that means, equally yoked.

Gary Boomershine: Yeah, do we have the same set of core values?

Joe Fairless: Okay.

Gary Boomershine: And core values to me – if you have the same core values, there’s the chance of partnership. The other one is what specific single roles are we gonna play? “You’re gonna do this and I’m gonna do this…”, and you get that right. Alignment of core values.

Joe Fairless: What’s the deal that you lost the most money on?

Gary Boomershine: It was a retail office building in California that I had under contract for 1.2 million, with owner financing… And it had a value of about 8.5 million, and all I needed to do was an HVAC and get it rented. It was a smoking, smoking deal. Totally creative, zero interest financing… I brought somebody in who ended up actually being investigated by the FBI… And I found out 11th hour – my attorney said “You should walk from the deal.” He gave me some reasons why — I didn’t do the background on my partner. That’s the other one – do background research.

Joe Fairless: So was that opportunity cost, or you lost dollars?

Gary Boomershine: Oh no, I put a couple thousand bucks into it. It was definitely opportunity cost. That was the biggest error. And I’ll tell you one other one… It was an apartment that I picked up, but I didn’t bring the right property manager in soon enough, so it turned  into a meth lab. It was another bad deal…

Joe Fairless: That’s bad for business.

Gary Boomershine: [laughs]

Joe Fairless: And their surrounding neighbors, should it go up in flames… On the FBI thing, what research would you do now, knowing what you know, for future deals?

Gary Boomershine: Well, I could have just typed into the internet the guy’s name.

Joe Fairless: Oh, okay. It was already public.

Gary Boomershine: It was already public. There was actually an indictment for the guy. He ended up doing four years in jail.

Joe Fairless: Got it. Well, if he’s out now, maybe you can partner up with him again. [laughs]

Gary Boomershine: Yeah.

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

Gary Boomershine: I constantly think about that… I do this thing, it’s called Work is Worship. We’re bringing this into REIvault, with all of our members. It’s almost like Amazon, for leaders, but more of a faith-based message of really how to be great leaders. So that’s one.

We do Angel Tree every year, which is something I’m really passionate about… Serving is a big deal. Actually, my wife and I have that on the list of things we’re not doing enough of. As a core value, our fifth core value is a heart for giving and a heart for growing, and we’re actually realizing “You know what, we’re not spending enough time on that. On the giving.” So that’s the one area — and I’ve got multiple [unintelligible [00:29:04].29] fix-it situations… But I’m not involved in doing enough of that, and it’s definitely — not even on my bucket list, it’s on my action plan that needs to get done.

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

Gary Boomershine: REIvault is probably the best. We’re at RealEstateInvestor.com, but REIvault.com – there’s a lot of tools on there… I also have a podcast called Real Estate Investor Huddle. I’m on Instagram… And everything that we have is free. I don’t have any courses, or coaching. We have a service for a very specific, more experienced investor, but I love interacting with people and helping them. I get people hitting me up on messenger all the time, and I’m open to that.

Joe Fairless: A lot of life lessons, Gary, and I’m incredibly grateful that we had our conversation. The 5/10/3 rule – wake up at five, start working at ten, don’t do any work between five and ten in terms of business stuff, with the exception of that one thing that will move the marker today; I think that kind of is a business thing, or it could be… But then three hours of really hitting it hard and doing it…

You mentioned some things, almost in passing, that I wrote down, that I need to do. Have a family calendar – I think that is something that I will do. And then rewriting  your perfect day. Well, first off, if we have not written our perfect day – I have mine laminated ten years from now, and my wife did the same; we did that a year and a half ago… And it’s laminated next to our nightstand, so each of us have our perfect day for ten years from when we wrote it… But revisiting that, and seeing if there’s some updates that need to be made.

And then being so intentional about designing your life, and being surrounded by the right people, joining the masterminds… I’m glad we took the conversation that direction, to learn more about your thought process with why you joined the masterminds, how you qualify them, and then what you do to maximize your time with them.

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

Gary Boomershine: Thanks, Joe. I love what you do, man, for the niche. Thank you for what you do.

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JF1890: From Military Life To Civilian Work & Real Estate Investing with Eric Upchurch

Eric is a veteran who is now living the civilian life, and read Rich Dad Poor Dad years ago. Like many real estate investors, reading Rich Dad Poor Dad sparked a fire for real estate investing. He started with the seminars that other investors have paid for as well. Unlike many people, who complain about the price of the seminars and getting no value from them, Eric was able to leverage the relationships and network within the program to more than make his money back. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“Learn, network, add value, and take action. If you do that everyday, success will find you” – Eric Upchurch

 

Eric Upchurch Real Estate Background:

 


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TRANSCRIPTION

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

Eric Upchurch: I’m doing really well, how are you doing?

Joe Fairless: I am doing well, and looking forward to our conversation. A little bit about Erich – he’s the COO and co-founder of Active Duty Passive Income, and is a senior managing partner at API Capital. He’s been investing in real estate throughout the country for 13 years. Based in Northern California. With that being said, Eric, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Eric Upchurch: Sure. I joined the military after college. I chose to be enlisted because I like to influence people and I like to do good things for junior enlisted soldiers. I got a lot out of that as well. I transitioned from the military in early 2011…

Joe Fairless: What branch?

Eric Upchurch: Army Special Operations.

Joe Fairless: Nice. Well, thank you sir for what you did.

Eric Upchurch: Absolutely, a pleasure. The Army  used me, but I used the Army right back. I was able to have all my college debt paid for through the loan repayment program, and then they paid for all of my master’s degree as well while I was in, so… I definitely got my money’s worth there.

Joe Fairless: I’m going to my brother’s promotional ceremony later this month. He’s gonna be promoted to a colonel in the army.

Eric Upchurch: Wow, that’s pretty incredible.

Joe Fairless: He loves it.

Eric Upchurch: Congratulations, that’s really cool. Tell him I said hi.

Joe Fairless: I will.

Eric Upchurch: And thanks for his service. My wife and I moved back to the Bay Area where she is from. We met in college in Santa Barbara, and after I got out, we transitioned to Northern California, where we still reside. So we’ve been here about eight years, and I still have that W-2 that I care for as well, so… We could talk about that if you wanted to… And balancing both the real estate and W-2 job on the side as well.

I got started in real estate very similarly to many people in the military; we use the VA loan and get in on a property that we’re going to be living in. At the time, when I transitioned out of the service, I could not sell the property, so I moved back to the Bay Area and rented it out, and I eventually said “You know, I’m making money on that property…” Not much, because I didn’t buy it with the intention for it to be an investment property, so margins were slim, our profits were slim… But I thought maybe I could do a little bit better.

So I started learning and getting educated, I read Rich Dad, Poor Dad, which I guess is the accelerant… It just kind of poured fuel on the fire for me as well, and I said “Man, if he’s doing it and all these other people can do it, this seems like something that I can pursue.” Then I just started reading books, all the Rich Dad advisor books/courses out there, podcasts, I even did seminars, and anything I could do to learn about various aspects of real estate. So that’s kind of how I got into it.

Joe Fairless: What was the priciest thing you purchased to educate yourself?

Eric Upchurch: I paid 30k. I actually had no idea what the seminars were. You hear of the typical guru seminars, and I’ll just be out there and honest – I went to the free 90-minute thing and I got upsold to the three-day bootcamp for $997, and then I got upsold to the advanced training at the bootcamp, which ended up costing maybe roughly 30k all-in. And this is learning to flip houses in the San Francisco Bay Area in 2014, FYI.

So I’m a nobody, essentially, with basically no cash to my name, and I’m trying to inject myself into a market that people are paying $700,000 over the asking price for a burnt-out relic of a property in the Bay Area, right?

Joe Fairless: Yeah… Was that a Rich Dad, Poor Dad program?

Eric Upchurch: No, it was a different company, but the same thing. HGTV type of stuff. And I don’t wanna dog that either, because what I got out of that, even though I couldn’t apply all of the principles, I got a great education out of it, a good foundation, but I also got an amazing network of people that eventually – and actually within two years – made much more than my money back on the money I spent at that seminar.

Joe Fairless: And how did you do that with a network of people that you met over [unintelligible [00:05:14].28]

Eric Upchurch: Yeah, great question. One of the guys that I’ve met there, who I’m still friends with today – he’s a custom home builder/contractor in the Bay Area. He was just there to reinvent himself. He was in his fifties at the time, and he was just there to see what’s new and what’s going on and how he could scale up his business. He and I started talking, and we saw a lot of synergy between ourselves, and we just said “Let’s try and figure out a way to do this together.”

Long story short, I was living-and-flipping – which we can talk about separately – in the Bay Area, which was very lucrative, and he ended up helping me force appreciation on one of my properties near the ocean that I was living in at the time. So we ended up putting a chunk of money in, but he didn’t charge me what normally would have been a $180,000 renovation. I ended up putting about 50k into it, and it increased the value by a quarter million in nine months. Through that relationship that I built I definitely got my money back.

Joe Fairless: Yes, you did. That $180,000 retail renovation cost – what was done?

Eric Upchurch: We went into that property with the idea obviously to live in it. It was in a great location, and I had two little kids as well, so we thought “Well, two blocks from the beach… This is pretty neat.” But we were looking at the area and just going “Well, all our neighbors seem to be retirees, kind of”, and there weren’t new, young families moving into this area. So we started thinking about exit strategies.

We looked at this property, it was a four-bedroom/two-bath, oddly positioned fourth bedroom in the middle of the house; tiny bathroom, tiny living area. So we said “Why don’t we just knock out that fourth bedroom?” Normally, you wouldn’t do this, right? Take a four-bedroom and convert it to a three. We just had our eyes wide open and said “Let’s add six feet to the master bathroom, add four feet to the living space and the kitchen, and open it all up by collapsing that bedroom.” And if the people who are moving in here are retirees, they don’t need four bedrooms. They need maybe three. So we were able to capitalize on just kind of going in with eyes wide open.

It was a pretty major renovation. It took about eight weeks altogether. The guys who were working on it were actually living in the property as they were working, because we knew them, obviously… So that was kind of cool.

Joe Fairless: What research did you do besides the first-hand experience that you had with seeing who was living there, and where the neighborhood was going? What research did you do prior to having someone swing a hammer at the wall?

Eric Upchurch: I didn’t do a lot. I had neighbors that I was talking to… Our neighbor had just bought the property across the street, and they were a 60-year-old couple who moved down from Grass Valley, from Northern California… They finally could afford the beach life that they always wanted to retire to, so I said “Well, how many other people in this neighborhood are like that?” It was either people who had lived there for years/decades, or people who were just coming in as retirees.

Then I talked to the agent – it was actually the seller’s agent, who became a good contact of mine – and he just said “Yeah, that’s a pretty common trend. So my wife and I just said “Alright, let’s check this out. Let’s figure it out.”

Joe Fairless: Were your neighbors, the older people who were moving in, buying four-bedroom places?

Eric Upchurch: They were actually renovating the property as well, and I think ultimately they ended up selling it to somebody else… But we had this conversation with them, and they said “All we need is for our grandkids and our kids to come through, and we just need one extra bedroom for somebody to crash in.”

Joe Fairless: Huh. Alright, so let’s talk about the deals that you’ve done. You’ve done a live-and-flip, we’ve talked about that… But what are some other deals that you’ve done?

Eric Upchurch: I’m gonna say, first of all, the power of the VA loan, which is the only reason I was able to buy up property at all in San Francisco Bay Area. Coming out of the military, I was an E6 at my ETS, and I was making 40k, or something like that. I’d gone through the Dave Ramsey “Get out of debt” type of stuff, but I didn’t have cash to put down. Thankfully, I had the VA loan, so I ended up doing three live-in flips. And the only way were  able to do that – the first time especially – was no money down. I could afford the payment because I had a good W-2 job, but I could barely afford that payment. Then the equity over two years was crazy, value going up, so I was able to do that.

Other than that, at the same time I was learning [unintelligible [00:09:10].28] I was learning about tax liens, and invested in it through my self-directed IRA, I did some private money lending, some flipping out of state, buy and hold portfolio out of state, a limited partnership deal, which was great… I’m still in that one on a 439-unit mobile home park portfolio, and then now multifamily properties syndication.

Joe Fairless: You don’t need any money down for a VA loan?

Eric Upchurch: Oh man, I’m glad you brought that up. No, and that is part of the incredible thing about the VA loan. If you qualify for the VA loan, which is anyone who has served 90 days active during wartime, or 181 days active during peacetime, and actually six years cumulatively of reserves and guard also qualify, and there are some other things as well, other people who qualify, like widows as well… Anyway, the huge value is you can buy up to a fourplex as owner-occupy. So you have to live in it for a year and a day.

Say you buy a fourplex, zero down, zero PMI, great rates, and you can roll in your VA loan funding fee, you can roll in the closing costs, and you can do a VA rehab loan as well, which I’m not an expert on that one; I haven’t done that myself.

So you can literally go into a fourplex, threeplex, duplex or single, and house-hack, which is why I wrote the book “Military House-hacking”, kind of talking about this strategy. So it’s an amazing asset to anyone who served in our military. I have a meetup here in Northern California, and a lot of guys who served in the ’80s have still never used their VA loan. Now, maybe they don’t need to. At some point maybe you don’t need that benefit. But for the young soldiers and airmen and sailors out there that are just getting started… I wish I had this information 20 years ago, but there’s nobody out there teaching it. So that’s what active duty passive income is doing.

Now we’re able to use our community as outreach to military installations and colonels, and people in the military who have broader influence over battalions of soldiers. Otherwise, the financial education – and no fault to the militaries – there’s a mission. You have to focus on what’s important, and the task at hand is protecting our country, and protecting our interest, and mission-first, mission-focused. So that financial education is limited by how much time – and we say this kind of tongue-in-cheek… But you line up everybody on a Friday or on a Thursday before a four-day weekend, all your soldiers, and you give a safety brief. “Don’t do drugs. Don’t go to jail. Don’t hurt anybody. Don’t have a DUI.” And then at the back end of that they’ll say “Oh, and by the way, invest your extra cash into your thrift savings plan”, which is the military’s equivalent to a retirement plan. That’s pretty much it. I mean, there’s a little bit more to it than that, but barely. And that’s for good reason, so I’m not dogging  the military for that, but it’s time for that to change.

So we’re able to go out there, and now we have a podcast obviously, and a lot of people come into this idea, this mindset that you can be financially free and do some really cool things with what you’ve got going on while you serve, and after.

Joe Fairless: As you mentioned, San Francisco is pretty pricey… How high of a loan amount can you get with a VA loan?

Eric Upchurch: It just went up… It was $769,000, give or take. And some change. The typical loan right now I believe is 484k for the rest of the country, but there’s like 60-something counties across the country that have a higher cost of living, so they allow what they call a Jumbo VA loan. So you can qualify for up to like $769,000; I think that’s what it was last year. And then anything above that — even in the Bay Area,  you can’t buy something for $769,000, so anything above that… Say you buy a house for a million dollars, which – anyone who’s listening to this, don’t worry about the numbers; they’re just extra zeroes. People in the Bay Area are doing what they can, and… [laughter] So anyway, you just have to pay 25% of the difference between the maximum loan amount and the purchase price. And you also have to qualify, your debt-to-income has to be correct, and all that stuff, too.

Joe Fairless: Yeah.

Eric Upchurch: So that’s kind of nice… You can get into a property even for lower money down with the VA loan as well.

Joe Fairless: Yeah, that’s something I hadn’t heard of. I’ve obviously heard of the VA loan, but that part of it, the 25% of whatever the difference is between the max and your subject property… The meetup that you’ve got in California – when did you start it and what’s the format?

Eric Upchurch: That is something that we probably don’t even need to discuss, because I just moved up to this new location, and it’s really just a few people. I just called it like a military real estate social networking thing, and it’s just getting off the ground…

Joe Fairless: When did you start it?

Eric Upchurch: October, but it’s once a month, and I don’t put any advertising into it, or anything.

Joe Fairless: October, you do it once a month… And it’s just meet at a bar, or what?

Eric Upchurch: Yeah, right now it’s just at a restaurant.

Joe Fairless: At a restaurant. And do you have a speaker?

Eric Upchurch: No, not yet. I’ve got so many other things going on, and it’s not a focus of mine.

Joe Fairless: But you have done it once a month since you’ve been at the location that you’re at…

Eric Upchurch: I’ve had to cancel a couple, just because I’m traveling a lot now, and stuff…

Joe Fairless: Okay. I mention it because it’s not about the actual meetup itself, it’s about the mindset that you have for creating it. That is something that I did when I moved to Cincinnati. I started a meetup immediately, and been doing it once a month. I missed maybe two months or so, for four years… And it’s grown and it’s grown, and it’s been very beneficial for myself, and also those who have attended, I believe.

Eric Upchurch: I wanna give a shout-out to Adam “Triple A” Adams, actually. He’s becoming a very good friend of mine now, and he’s obviously very good with the whole meetup community, and that all works; a great resource for anybody who wants to start a meetup.

Joe Fairless: Yes, absolutely. I think I interviewed him on — I know I interviewed him, but I think I interviewed him regarding meetups.

Eric Upchurch: Yeah, I’m sure. He’s pretty much the man with starting meetups, if somebody wants to learn how to do it.

Joe Fairless: So let’s talk about another specific deal that you’ve done. What’s the most recent deal that you’ve closed on?

Eric Upchurch: I got my first GP spot in a 212-unit syndication, which was neat… And that really was not my deal as far as sourcing goes. I got brought in  to raise capital, which was all new to me, but I’m plugged in with some really great people, who are supportive, and I’ve networked enough now to build a team around me of people who are smarter and better than me… But I’m constantly present, I’m constantly active – I’m taking action, I recognize that – so I got provided the opportunity to raise capital for this deal. I didn’t know how I was gonna do that exactly, I didn’t know that I could talk intelligently about the asset, about the investment… I also had experience as a limited partner passively.

For the last couple of years I’ve been talking to a good friend of mine that I invested with, and his company has syndicated almost a billion and a half dollars of real estate. So I invested with him the first time, and he agreed to just kind of walk me through the numbers, and what it looks like… So I knew the process, and I got this opportunity, and I said yes immediately. I don’t know how I’m gonna do it, but I just crunched and made it happen.

So that’s the first one, really. I’m really just at my infancy of multifamily real estate investing. Now we’re looking at a 71-pad mobile home park…

Joe Fairless: Before we get into what you’re looking at, how much money did you bring to that deal?

Eric Upchurch: I brought 425k on that deal.

Joe Fairless: $425,000.

Eric Upchurch: Yeah. Which I feel like in the grand scheme of things–

Joe Fairless: It’s a lot of money.

Eric Upchurch: Well, it is. It is. And I feel like that was a small amount of money on the grand scale, a smaller amount of money for probably what people are raising out there… But it was enough to get me in.

Joe Fairless: For your first raise, it’s a lot of money. The person who brought the most – how much was that?

Eric Upchurch: The person who brought the most – it was a six million dollar raise total…

Joe Fairless: No, on your 425k.

Eric Upchurch: Oh, on the 425k the person who brought the most was 100k.

Joe Fairless: 100k. And how did you meet that person?

Eric Upchurch: That was actually a family member.

Joe Fairless: Okay. What about the next person, the next highest?

Eric Upchurch: The next person was a person that I knew through the military.

Joe Fairless: Okay.

Eric Upchurch: Actually, that sourced several contacts. Previously I had all those relationships, and I knew that obviously for a project like this I need to have pre-existing relationships, so I just kind of dug through my brain. I didn’t have a Rolodex at this time; I wasn’t even thinking about how I’m gonna raise money for a multifamily deal. I just said “Who do I know?” So my Rolodex I guess was my phone and my thought process of who might have money stashed away somewhere.

Joe Fairless: And did those military friends know you as a real estate investor already?

Eric Upchurch: Yeah, absolutely. I am very intentional with telling everyone that I know, including people — literally, I’ll find a way to tell somebody in an elevator, if they’re in there for two floors. At the gym, wherever it is. I love talking about it, and I try and figure out a way to work it in a conversation.

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

Eric Upchurch: Best advice ever – two things. One is use the VA loan. If you have access to the VA loan – and we just interviewed Grant Cardone on our podcast recently… And I didn’t wanna bring this up, because I think he probably would have said “No, man! Don’t go with a four-unit. You need to go 40-unit!”, whatever.

Joe Fairless: Yeah.

Eric Upchurch: So I didn’t wanna bring this up with him, but I love the idea of zero money out of pocket on something that can cashflow, like a fourplex. You live in one unit for a year and a day at least. You’re living for free(ish) and/or making cashflow from the other units that you’re renting out. So in my opinion, that’s the best advice ever. Otherwise, if you don’t mind, I have what I feel like is the real formula to success, which I love saying, and people who know me know that I say this often in our community, which is “Learn, network, add value, take action. If you do those things over and over again, success will haunt you down.” I really  believe that. That’s what I try to do every day, and every conversation I have, and that’s worked for me so far.

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

Eric Upchurch: I think so. Let’s do it!

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

Break: [00:19:13].09] to [00:19:52].12]

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

Eric Upchurch: Best ever book I have recently read – Never Split the Difference, by Chris Voss. And Can’t Hurt Me, David Goggins.

Joe Fairless: And we interviewed Chris Voss. You can google “Chris Voss Joe Fairless” and you can listen to that interview. What’s a mistake you’ve made on a transaction?

Eric Upchurch: Getting into one that I shouldn’t have, which is tax liens. I hate them.

Joe Fairless: Why?

Eric Upchurch: Too boring. I know the strategy. It’s just too long and slow and boring, and to me not active enough.

Joe Fairless: What’s something you’ve lost money on?

Eric Upchurch: I lost money on a first trust deed through my self-directed IRA. The builder who I lent money to – or my IRA lent money to – actually passed away. That was unfortunate, obviously, and something that none of us could control, but… I lost some money there.

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

Eric Upchurch: Best ever deal I’ve done were the three live-in flips in the Bay Area. Living and flipping is awesome, especially with the VA loan. And then I’ve also done a few BRRRR deals as well.

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

Eric Upchurch: This is an important one, and I’m very intentional in putting this out there… It’s brand new to active duty passive income – it’s called ADPI Helps, and we are now partnering with several people to give back to the PTSD and addiction issues that we have in the military. I’ve lost several friends to suicide, and obviously some other serious issues in the military as well. So folks with PTSD and addiction – we are now just starting to reach out, and we’re gonna create a support group, and who know where that’s gonna go, but we’re really excited about it.

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

Eric Upchurch: Please contact us. You can contact me directly at eric@activedutypassiveincome.com. Our website is activedutypassiveincome.com. I am also @realericupchurch on Instagram.

Joe Fairless: Eric, thanks for being on the show, talking about the VA loan. Certainly relevant to anyone in the military, or who would qualify for the VA loan… And also talking about your role in the 212-unit and how you make sure that you’re intentional about what you talk about when you’re speaking to people. And then your formula for success,  “Learn, network, add value, and take action.”

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

Eric Upchurch: You’re the man. Thanks, Joe.

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JF1876: Creating A Diversified Portfolio Across Asset Classes & Markets with Matt Shamus

Matt was a Facebook employee before getting into real estate investing. Now Matt is doing deals across multiple markets and asset classes. One deal we will hear about is an office to multifamily conversion, which is not something we hear a lot about. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“Trust has to be there first with your partnerships” – Matt Shamus

 

Matt Shamus Real Estate Background:

  • Founder of Driven Capital Partners
  • They are a private equity group with a diversified portfolio, including nearly 700 units of multifamily, 105,000 square feet of office and industrial space and a mixed use opportunity zone development project.
  • Based in San Francisco, CA
  • Say hi to him at https://www.drivencap.com/
  • Best Ever Book: Principles by Ray Dalio

 


The Best Ever Conference is approaching quickly and you could earn your ticket for free.

Simply visit https://www.bec20.com/affiliates/ and sign up to be an affiliate to start earning 15% of every ticket you sell.

Our fourth annual conference will be taking place February 20-22 in Keystone, CO. We’ll be covering the higher level topics that our audience has requested to hear.


TRANSCRIPTION

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

Matt Shamus: I’m doing great, thank you so much for having me, Joe.

Joe Fairless: Well, I am glad to hear that, and it’s my pleasure. A little bit about Matt – he’s the founder of Driven Capital Partners. They are a private equity group with a diversified portfolio, including nearly 700 units of multifamily, 105,000 square feet of office and industrial space and mixed-used opportunity zone development project. Based in San Francisco, California. With that being said, Matt, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Matt Shamus: Absolutely. I am in the Bay Area in California. I have a background in the technology space, as a lot of people do based here in the Bay Area. I was most recently at Facebook, where I worked for six years, and I kind of throughout my time there, and even before working there, I was investing in real estate on the side. And I’m pretty entrepreneurial… Facebook was really only my second ever real job. Everything else that I’ve done has been kind of self-directed, entrepreneurial… And I’ve always been interested in real estate, or I always was, even from a young age. I got my real estate license when I was 19 or 20, and ended up selling my mom’s home, the house that I grew up in. She made a really good profit, and I just kind of had this light bulb moment where I realized “Wait a minute… There’s something here.”

I went off to college, I studied Economics and took whatever real estate courses I could. That was when I read Rich Dad, Poor Dad, which kind of set the foundation for the right mindset. Once I started making a little money in my career, I started investing in single-family homes… And I was basically doing the BRRRR strategy before the term was coined, or at least before I knew about it.

I had a chance to do several projects where we were buying kind of the worst house, or the worst duplex in a decent neighborhood, and significantly renovating it, and then holding it as a long-term rental. I’ve started taking money from other friends and co-workers and people that knew what I was doing and wanted to be involved in real estate, but they just didn’t really have any means to get started on their own, with their own two hands.

So I did that several times over… And I just realized “You know what – I’m doing everything right, but I need to add a zero or two to everything I’m doing in order to achieve the scale that I want to. So that’s when I started looking into apartments as an investment option, and then from there I started looking into other commercial real estate.

So now what we do is we pool money from individual investors and we sponsor real estate deals. In Driven Capital Partners, our theme is we want to create a diversified portfolio across asset classes, and across markets. So that’s what we do today.

Joe Fairless: Let’s  talk about the approach of a diversified portfolio across asset classes and markets. First, are you doing this full-time, Driven Capital Partners?

Matt Shamus: Yes.

Joe Fairless: Okay. So when you were at Facebook, what was your role?

Matt Shamus: As an employee of Facebook?

Joe Fairless: Yes.

Matt Shamus: Well, I did a bunch of different things, as you do at a company like that. I moved around a bit. I went originally in 2012 to work on Facebook’s very first iPhone app, and then I moved. Most of my time there was in business development, working on an initiative called Internet.org, which is basically Facebook’s initiative to bring free internet and introduce the internet to the poorest countries in the world.

Joe Fairless: Okay. Your skillset that they hired you for was — what was your primary thing that you were really good at?

Matt Shamus: That’s a good question. I guess I’m not sure what they hired me for in particular, but I think general adaptability, strategic thinking and planning, definitely a marketing emphasis… Those are some of the things that I focused on at Facebook.

Joe Fairless: Okay, cool. I just wanted to put you in a category in my mind – software developer, or… But you’ve answered that question.

Matt Shamus: The teams that I worked on at Facebook were generally made up of management consultants. I didn’t have that background, but that’s the kind of work that we were doing.

Joe Fairless: Okay, cool. Alright. That helps give some context for what you’re doing now… Because now that you’re a private equity group, you’re pooling capital – what aspects of your previous career are you applying now towards what you’re doing?

Matt Shamus: That’s an interesting question. I haven’t particularly put those two dots together. I think taking a strategic and analytical approach to investing definitely, and having a long-term mindset, I think, as opposed to having a quick, short-term “I need to accomplish something in a short period of time” mindset. I think those are two things definitely that I’ve translated from my former work to what we’re doing at Driven Capital Partners.

Joe Fairless: Okay. And how are you defining long-term, when you’re talking about that mindset?

Matt Shamus: Well, I’m gonna turn 35 this year, so I am planning on being here for quite a long time. What I mean is just that I wanna build a portfolio for myself, that’s gonna withstand the test of time and get me into and through my retirement years. So I’m always gonna make the decision that I think is the better decision long-term, even if it’s a little bit more painful in the next few months, or even a year. So that’s all I mean. I think it’s more of a mindset. I’m not looking to make a quick buck on a deal. I’m looking to make sure that I feel like we have a good approach in place, and that even if there are some external factors that give us some bumps in the road in the near-term, we still feel really good about what we’re doing long-term.

Joe Fairless: Your focus is having a diversified portfolio across markets and asset classes… How do you mitigate risk when you’re looking at multiple markets and multiple asset classes?

Matt Shamus: This is a good question. The more common model is to find a niche and exploit it, and rinse and repeat – which I think is tremendously valuable. What we’ve decided to do is since Dan, my partner, who’s based in L.A. – Dan and I are first investors, for our own account… So what we are doing is find investments that we wanna put our own money into. And then we are letting our passive investors ride along and benefit from the research and due diligence and operational expertise that we bring to any deal. But first and foremost, we’re investing our money. So we are very conservative in what we do, and what it translates to is we tend to say no to almost every deal. And when we find a deal that we’re excited about, we’re really excited about it.

So in terms of mitigating risk, what we wanna do is if we are investing as the lead sponsor and we don’t have anyone else on  the team in a new market, we wanna make sure that we have a very strong team in place in terms of property management, in terms of any consultants that are required, and all the professional services that you would want in a market, so that you can lean on their expertise.

If we are partnering with another operator, which we do, then we lean on their track record and their expertise. So we may, for instance, partner with an operator in North Carolina, and although North Carolina is not our market of expertise, it is this particular operator’s market of expertise. So we’re gonna use their knowledge and background and track record to accelerate our opportunity in that market. So that’s what we lean on and that’s where we see the value in actually — not exploiting a particular niche on our own, but finding really good investment opportunities and being open to the fact that I myself am not gonna find all the best opportunities. There’s a good chance that there’s someone else in a different market that may have an opportunity that I may never see otherwise, and I still want the chance to invest in it.

Joe Fairless: I would love to talk more about that and risk mitigation, and we will, but just a quick clarifying question… So you’re the lead general partner on some deals, and then other deals – you find a deal you wanna passively invest in, and then you bring in your investors after you have qualified the deal. Is that correct?

Matt Shamus: Generally, yes. There’s a little bit more nuance to it, but yeah, generally that’s right.

Joe Fairless: Okay. So you’ve got 700 units of multifamily and 105,000 sqft. of office and industrial and mixed use… How much of that is you being the lead general partner?

Matt Shamus: It’s about 50/50 to date… And I think that’s probably the mix that we’ll look to continue to do, keep it 50/50. What we like to do is Dan and I are out, looking for opportunities, but we wanna be able to weigh and compare them against opportunities from partners… And if our deal wins, we wanna invest in our deal. But if our deal doesn’t win, then we don’t wanna be putting our own money into a deal of ours just because it’s ours. So this method or this strategy gives us a lot more deal flow, and gives us a chance to have better returns over the long term.

Joe Fairless: What’s the largest deal that you’re a lead general partner on?

Matt Shamus: Well, we have — probably our 4 million dollar project. Our markets of emphasis or the places that we like the most are generally in the South-East. We happen to have one deal in Santa Barbara, California, and that’s the deal that I’m referring to here. It just happened to be an opportunity that fell in our lap, so we had to take advantage of it… But it’s about a four-million-dollar deal that is an office to multifamily conversion project in a really great location.

Joe Fairless: Office to multifamily… And of the 105,000 sqft. approximately how much of this project is the 105,000?

Matt Shamus: I don’t know the square footage… It’s under 20,000 feet.

Joe Fairless: That’s quite the undertaking… Office to multifamily conversion. How have you taught yourself how to do that?

Matt Shamus: [laughs] Well, okay, so we just got off an hour-long phone call this morning, which we do weekly, on this particular project…

Joe Fairless: Who’s on the call? What team members are on the call?

Matt Shamus: Just me and Dan and any other potential partners that are relevant for the week. We have permitting consultants, architects that are all working on the project. This property was actually built in the ’60s and it was originally built as multifamily. So the footprint is kind of there. It was converted to office space in the ’80s. If you’re familiar with Santa Barbara, this is right off of State Street, which is the main drive downtown.

In the ’80s, apparently, office space was more desirable for this location, and the property was held in a trust and it was recently inherited, and it was poorly managed. Santa Barbara has about a 2% multifamily vacancy rate; there’s a pretty big housing crisis… So the city really wants to see more relatively affordable housing options, especially in a downtown location like this… So all those characteristics or components kind of aligned here. If it was strictly truly an office that we were trying to convert into multifamily, that would probably not meet our risk tolerance.

Joe Fairless: Got it, okay. So not a heavy conversion. What do you have to do to convert it?

Matt Shamus: Honestly, mostly this is a political process.

Joe Fairless: Zoning?

Matt Shamus: It’s not zoning… It’s already zoned for the use. It’s changing the permitted use and coming up to code on certain items, and making sure that the city is on board with the project. So it’s mostly political, and kind of permitting and planning. The actual construction and the conversion is gonna be I think pretty straightforward.

Joe Fairless: Okay. And have you already purchased the project?

Matt Shamus: Yes.

Joe Fairless: And how much equity did you raise for that deal?

Matt Shamus: I don’t have it in front of me, but on the order of a million and a half dollars, somewhere around there.

Joe Fairless: And approximately how many people did it come from?

Matt Shamus: Well, our average investment over the course of all of our deals has been somewhere close to $75,000 per passive investor. Probably a little less than that. So if I had to guess, this is probably close to 20 passive investors that put money into this deal. It might have been a little bit more. On some of our deals we allow investors to come in — typically, we have a 50k minimum, but sometimes we allow investors to come in at less than 50k, and I think we had a few of those on this deal… So I would say maybe 20-25 people potentially.

Joe Fairless: And I imagine there were a lot of questions about “Have you done this before? You’re trying to change permitting use… It’s California… It sounds like a really uphill, tough sleddin’…” How did you give the 20 or so investors the comfort level that “Hey, we’ve got this. We’re gonna mitigate risk, and it’s a conservative investment”?

Matt Shamus: Well, first of all, we made sure that — in any deal that we offer our investors, we wanna be really clear about what we consider the risks to be. We’re not ever gonna sugarcoat and say that there aren’t risks. There always are, in any deal. And in this particular deal, from our research and discussing with the city, and with our planning consultants and other developers that have done similar projects, the risk seemed to be in the permitting process and the amount of time that it would take to get the permitting from the city.

So all of the signs pointed to “It’s a matter of when this is approved, it’s not a matter of if.” The city needs more housing… This was originally built as multifamily; this is really just changing the use back to its original use. We don’t know all of the little detail that the city is gonna ask us for, so there is risk in terms of “Did you budget enough?” So what we tried to do to mitigate risk is we tried to pad our budget very significantly. We raised more money than we needed to. We’re working with a lender who understands the project and is flexible in terms of LTV, and is flexible in terms of what we get back from the city can dictate how we go about the actual renovation… So we really just tried to be honest and upfront, and know – this is the first project that we’ve done in this city, this is the first project that we’ve done of this capacity, but we’re dedicated, we’re semi-intelligent, and we’re gonna do the best that we can… And our own money is in the deal, so we think we have a very good opportunity here.

Santa Barbara multifamily trades at 4 or 4,5 cap, so there’s a big, big value-add opportunity here if we can get it right… And we felt like we understood the risks and downsides, and we presented them to our investors, and they understood what they were as well.

Joe Fairless: So every now and then I ask the Best Ever listeners “Hey, what additional questions aren’t I asking, that I should be asking?” and a lot of them are like “Well, ask investors how much money are they actually making, or could they make?” So here’s the question – how much money is the general partnership projected to make approximately on a deal like this, should it come to fruition like you envision?

Matt Shamus: The general partnership… Well, I don’t have the deal in front of me to know exactly, but first of all, we put our money into every deal. I think we’ve probably put close to 10% of the total equity that we raised was from principals… So we’re making money alongside the investors in the same way that they are. In this particular deal we have 70/30 profit share, anything above an 8% pref, and then profit at the sale will go 70% to the investor and 30% to the general partner.

On this particular deal we’re gonna be all-in for a little over 5 million. Let’s just say it’s 5.5 million, and let’s say we can sell it for 7.5 million. So we have a 2 million dollar potential profit in this deal, 70% of which is gonna go to our investors, and 30% of which ($600,000) could potentially go to the general partnership. These are really round, ballpark numbers, but that at least gives you a feel for what you could expect.

Joe Fairless: That’s actually more valuable than answering just with a number, because you went through the thought process, and how it’s structured… Thank you for that, I appreciate it, and so do they. What is the best real estate investing advice ever?

Matt Shamus: Make your money on the buy, and look for ways to add value before you close the deal.

Joe Fairless: Going back to what I said we would go back to, the mitigating risk when you’re investing in multiple asset classes, and multiple markets… I get  you really hung your hat on having a strong team, that has a track record and expertise whenever you’re investing in those deals as an LP, and then you’re bringing your investors as well… My challenge – I’ll just speak plainly, with my challenge; my challenge is if I’m presented  an industrial deal, a self-storage deal, a  mobile home park, a retail deal, an office deal, I don’t have an expertise in that, so I don’t really know without having a team of advisors, who — I certainly could reach out to some people who are experts in those areas who I’m friends with… But I personally don’t have an expertise in that area, so how do you determine the validity of the projections that the general partnership has if you’re not focused on one particular asset class?

Matt Shamus: Yeah, this is the crux of it… So one thing we decided early on is we wanted to be knowledgeable enough across asset classes that we could at least be asking the right questions, and understand when we get an answer whether we believe it or trust it, or not.

I think though, Joe, a lot of this, honestly, like in any other partnership, comes down to some level of trust. That has to be there first. And I actually think that your choice of partner is actually more important than the market or the asset itself. I think that’s something at least that we believe, and a track that we follow.

So we ask a lot of questions, we try and vet answers independently, we try and do as much research as we can on our own, and we try and get collaboration from other people in the market that are third parties that don’t have any horse in the race. That’s really what we try to do.

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

Matt Shamus: Yeah, absolutely.

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

Break: [00:20:49].24] to [00:21:25].07]

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

Matt Shamus: Principles, by Ray Dalio.

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

Matt Shamus: It all comes back to not understanding exactly what you’re buying. Not checking off all the boxes, or not realizing that you missed this in the budget, or not realizing that something was gonna take two months longer than you expected… So I think it’s really just not doing the full, complete level of due diligence that you should have before you purchased.

Joe Fairless: Any one of those things in particular that you can share with the listeners, that tripped you up one time, and then it’s something that might trip up others, that you just wanna mention?

Matt Shamus: Yeah, I would go back to my single-family and duplex/triplex investing days… One of my first projects, I bought a really nice little house, and it was built in the ’60s. And in California, in the ’60s, they were putting down cast iron pipe. So going through my first few transactions, I didn’t fully appreciate the need or the benefit to really digging into all of the critical components of the foundation and the infrastructure, including the plumbing… And those particular projects literally – two weeks after we bought the house – I was in Mexico, on vacation, getting a phone call from the tenant, saying that the toilet was backed up, the tub was backed up, and the house was in danger of starting to flood… And I just kind of thought “Man, what have I gotten myself into here?”

It was a simple fix. All these problems can be fixed with a check. But if you don’t have that check budgeted, then it’s painful. So I think from some of these painful mistakes you learn, and I haven’t made that mistake since, and I don’t intend to make it again.

Joe Fairless: Best ever deal you’ve done?

Matt Shamus: I’m really excited about an opportunity zone development deal that we’re working on, just because we’ve found a great property, that was fundamentally undervalued, and we got it at a really good price. We’re close to determining what is actually gonna be built there, and I just see tremendous value long-term in it.

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

Matt Shamus: Right now it’s really about educating people about investing in real estate, about the benefits… And over time I hope for that answer to be able to change, but right now I think it’s really about that.

Joe Fairless: How can the best ever listeners learn more about what you’re doing and connect with you?

Matt Shamus: Well, our website is drivencap.com, Driven Capital Partners. They can email me, Matt@DrivenCap.com. Those are probably the two best ways to reach out.

Joe Fairless: Matt, I really enjoyed our conversation. You got into the specifics of the four million dollar project in Santa Barbara, how you structured it, the potential earnings on the project for general partners, as well as limited partners, talking about why you got into the commercial space, and then how you look to mitigate risk, since you are focused on a diversified portfolio across markets and asset classes. Theoretically, that’s great, but then how do you bring that to life while doing it in a conservative way when you’re investing, and you talked about that.

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

Matt Shamus: Hey, thank you so much for having me, Joe.

 

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JF1855: Marketing Expert Gives Us Strategies For Real Estate Investing Growth with Lael Sturm

As most of us know, in this business we need to be great at many different things, or have people on our team that have different skills. Marketing is one necessary aspect of real estate investing. Whether you are buying or selling, you need effective ways to get in front of people. That’s what Lael will get into with us today. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“The more I know, the more I can serve my clients” – Lael Sturm

 

Lael Sturm Real Estate Background:

  • Founded LPSS Digital Marketing to deliver effective growth strategies and tactics to real estate professionals and other profitable businesses
  • Has been in online marketing for 25 years, worked with small and large companies including MTV, Nokia, Microsoft, and CNET/CBS Interactive
  • Based in San Francisco, CA
  • Say hi to him at https://www.lpss.co/?r_done=1
  • Best Ever Book: The Big Leap

 


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TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners. Welcome to the best real estate investing advice ever show. I’m Theo Hicks, and today I’ll be speaking with Lael Sturm, who is joining us from San Francisco, California. Lael, how are you doing today?

Lael Sturm: I’m doing great. Thanks so much for having me.

Theo Hicks: Thanks for joining us. I’m looking forward to diving into your expertise, which is marketing. Lael is the founder of LPSS Digital Marketing, which delivers effective growth strategies and tactics to real estate professionals and other profitable businesses. He has been in online marketing for 25 years, and has worked with companies large and small, including MTV, Nokia, Microsoft and CNET – CBS Interactive. As I mentioned, Lael is based in San Francisco, California, and you can say hi to him at his website, which is LPSS.co.

Lael, before we dive into the conversation, can you tell us a little bit more about your background and what you’re focused on now?

Lael Sturm: Absolutely. My career started right at the genesis of the internet. The web was just starting to happen, and I knew a guy who built something and sold it very quickly; sometimes that’s all it takes – somebody nearby to be successful in order to catch the bug. So I jumped right in… It was the mid-nineties. I taught myself about the technology and quickly got a job in the industry. I was able to grow my knowledge, grow my perspective, grow my network to a point where I could actually help other people be successful.

As you’ve mentioned, I did some work in the media space for some major brands like MTV, and ultimately wound up at Columbia Business School, getting an MBA.

At the time I was at Columbia, there were not a lot of internet-qualified people that were going through business school. It was a lot of bankers and consultants. Consequently, people were coming to me for advice on startup ideas, and online strategies, and even investments in online properties… And sort of over beer and pizza I became an online strategy consultant, and grew my practice from there. Over the years, the landscape has changed significantly. Google was a brand new thing at the time I was consulting in business school, and since then social media has happened, and now we’re all carrying phones in our pockets, and things like virtual reality and artificial intelligence are on the horizon, and people are preparing for that…

So I work with businesses to try to make sure that they’re prepared to take advantage of these new technologies in order to grow and be successful, and not be left behind. As you mentioned, most of my practice is around helping real estate professionals and other profitable businesses. Day-to-day we serve them in a variety of capacities, including helping them with their social media efforts, ads across Google and Facebook and LinkedIn, content creation, blogging, email newsletters, and all of the things that they need to be doing to establish themselves as thought leaders and really take advantage of these new channels.

Theo Hicks: Before we dive into some specific strategies and tactics, I think it would be good to talk about — because as you mentioned, you started at the beginning of the internet, and since then technology has evolved quite a lot. We went from just basic computers and floppy disks to now (as you mentioned) everyone’s got cell phones, everyone’s essentially on the internet all the time; there’s video, there’s audio… So from your perspective, since you’ve been at this game for so long and you’ve gone through all those ups and downs and changes, how did you make sure that you were always staying on top of the newest thing that’s out there, instead of — like, some people can’t necessarily stay up with the changes, they can’t stay up with technology, and maybe their business was doing really well 20 years ago, but now it kind of doesn’t even exist anymore.

Lael Sturm: Fair question. I think first it starts with kind of a self-realization that maybe I don’t have all the answers. Maybe there’s still more to learn. And every day I show up with that perspective. Maybe somebody on my team has a different perspective that I could learn from. I try to consume content through podcasts, and books, and various blogs on a variety of subjects. The goal always is enrichment and growth. So the more I know, the better I can serve my clients… And frankly, I learn from clients as well. Sometimes a client will come to me and say “Hey, something has come up that we need to deal with. How should we deal with it?” and I’ll say “That’s an area that my team doesn’t have expertise on. Why don’t we go out and learn, and we’ll come back to you and report back on what we’ve found?”

So we’re constantly looking for new ways to enhance our knowledge base, to grow our perspective and to increase our value as trusted advisors to our clients.

Theo Hicks: I could not agree more. It’s always about continuously staying educated. Let’s move into the tactics. The opening question I wanted to ask you was out of all the marketing strategies that are out there, if someone’s just starting building their brand right now, or they’re just beginning to think about implementing some marketing strategies, what’s the one thing that every single real estate investor should be doing from a marketing perspective?

Lael Sturm: So we’re gonna start at the strategy level, not so much at the tactical level, although we can trail into that… What they need to do is establish their thought leadership using channels – and this is where it gets into tactics – like LinkedIn, like blogging platforms like Medium, like their email database… So they are theoretically an expertise in something; whatever it is that they’re an expert in, they need to communicate that to their potential audience… And whether that’s people that they’re trying to syndicate an investment with, or whether it’s a larger investment operation that they would like to have a role in, or whether they’re just trying to convince a property manager or a property owner to trust them, versus the variety of other resources…

The more they can demonstrate their expertise through creating content, through having a voice, through sharing their knowledge, the more likely they are to win those deals, and the more likely they are to stand out against the competition, because it’s a crowded field. And frankly, real estate investors are commoditized. One person’s money is as good as the next, from one perspective, and if you can distinguish yourself from the other investors as being smarter, being better, being more creative, having a different knowledge base, you’re more likely to win deals and grow in your career.

Theo Hicks: So can you either just high-level, or through a specific example, can you give us the story of how someone who obviously is an expert in apartment syndication, for example, and they want to start (let’s say) a newsletter, what are some things that they can do in order to build that loyal audience and stand out? I know obviously expertise is important, but what are the methods for communicating that expertise?

Lael Sturm: Fundamentally, regardless of channel or expertise or ultimate goal, fundamentally in all things marketing you wanna provide value to the end user or the end consumer. So if you’re somebody who’s putting together a syndicate, you need to be able to speak in an informed manner about this, in a way that’s additive to the conversation. So you’re just not just repeating what everybody already knows, you’re actually giving some insight, or some tips and tools that people can put to work to be successful themselves, for no clear benefit to yourself.

You’re essentially giving away your knowledge, and by doing that, you’re demonstrating both your expertise, but also your generosity, which speaks to the kind of person that you are, and makes people more inclined to wanna do business with you. That’s a strategy that you can bring to social media, that you can bring to email marketing, that you can bring to content creation, blogging, and that sort of thing… You should frankly do speaking engagements and even one-on-one meetings. “How can I provide value for you?”

Theo Hicks: When you were explaining the one thing every investor should do, you mentioned thought leadership and you mentioned LinkedIn, blogging, email database… What have you found to be the ideal or the best channel?

Lael Sturm: That’s just so hard, because it’s really subjective… But I would say – and this is tough for a real estate investor to do effectively right off the bat, but the most compelling platform currently is Instagram. Instagram – their algorithm and their engagement levels are so, so good, that if you can find a way to use Instagram to promote your brand, to promote your thought leadership, to promote a deal that you’re putting forward, that’s probably the best thing that you can do.

Now, that said, Instagram isn’t great for everybody equally. It’s a hard thing to use if your product isn’t beautiful. It’s easy if you’re in the fashion business, or even if you’re a realtor and you can showcase beautiful properties… But if you’re in finance or in the advice business, it’s a hard thing to distinguish yourself on… In which case I would say the next best choice is a platform like LinkedIn, where you can very easily reach the people that need to do business with you using text-based content, where you can write content that demonstrates your expertise.

Theo Hicks: On the opposite end of the spectrum, what is a common marketing practice/strategy/tactic that you see real estate investors in particular implementing, that you know for a fact is not effective and is kind of a waste of time?

Lael Sturm: Good question. The short answer is not everybody needs a full website. The era when everybody needed a robust website is over; with all of the current tools available to people, it’s possible to even not have a website at all. I’m not saying go that far, but what I find is a lot of real estate investors – certainly those that are trying to put together a REIT, or syndicate a deal – they will often build out a robust website to indicate that they’re the real deal, they’re professional and they can afford to invest in a big, comprehensive website… When actually a smaller website would do, with fewer bells and whistles, and you can supplement using tools like Facebook and Instagram and LinkedIn and other services… Or you can post all of the same content, but do it yourself, without having to have the robust site.

Theo Hicks: That’s a very interesting perspective. I thought of the same thing as well, and it kind of reminds me — it’s like, the three things in real estate: “I need to create an LLC right away, I need to get a business card right away, and I need to create a website right away.” So I’m glad that you mentioned that.

Take this however you want, but what would you say is one of the most unique marketing strategies you’ve seen a real estate investor do?

Lael Sturm: That’s a tough question… There’s certainly no shortage of unique practices. There is however a shortage of unique marketing that works. We’ve all seen crazy things; we’ve gone to a conference and somebody covers all of the city buses in their logo, or something… So we’ve seen stuff like that. As far as unique that works, and specific unique that works on digital – it’s not that exciting, it’s not that sexy really… It’s building community; it’s creating a profile that is going to have an engagement level that people can rely on, that they can come to this community, learn from other experts within the community, and actually enhance their own career without even engaging with the investment or the investor.

So it’s building a brand that people can rely on, and that they can turn to to grow, and be empowered by. Using a platform like Facebook or LinkedIn to do that is very unique, very unusual in the real estate investment space, but very effective, which is ultimately what you want.

Theo Hicks: For the money question, besides all of the amazing advice you’ve given so far, what is your best ever advice for real estate investors?

Lael Sturm: Well, look, since I’m a marketer, not an active investor – my real estate investment was my home. I invested in a home in San Francisco, which was not a small undertaking. It’s appreciated significantly, and there have been many opportunities for me to sell at what felt like the top, and I’ve resisted selling and moving somewhere less expensive… And because I’ve been able to hold on to it, I’m not in a position where I’ve got a tremendous pile of equity that I can tap into and use to make other investments or to take on other strategies.

So I would say my advice is buy and hold… To the extent that you can hang on, you should hang on.

Theo Hicks: Alrighty. Are you ready for the best ever lightning round?

Lael Sturm: I certainly am.

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

Break: [00:15:52].28] to [00:16:53].14]

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

Lael Sturm: I’m reading a great book actually for the second time through  called “The Big Leap.” It’s by Gay Hendricks, and it is just a phenomenal business book, but it also has some great lessons in there about how to break through the barriers that you might be  experiencing in your personal life. But it’s all about growth.

Theo Hicks: Alrighty. And if your business were to collapse today, what would you do next?

Lael Sturm: Well, I guess it depends. If I’m in a position to not need income, I would just focus on playing tennis and skiing and hanging out with my kids. If you’re asking me what would I do professionally next, I would probably dedicate myself to writing and content creation, and trying to create value around education and online professional development.

Theo Hicks: Alright. And then typically we ask a question about a deal that you’ve done, so instead I’m going to change it up a little bit and ask you “What is the worst marketing strategy that you’ve given to a client, and how did you overcome and resolve that issue?”

Lael Sturm: [laughs] It’s a good question. I would love to tell you that everything we do is amazing and very effective… But sometimes we come into organizations where they face challenges that we just weren’t prepared to deal with, and it’s  a bit of a trial by fire. However, we as an agency distinguish ourselves by offering our clients total transparency, both in pricing and in expectations… So if we fail to live up to your expectations, we’re the first to tell you “It’s time to stop doing this.”

One example is we were hired by a networking group in California that wanted to grow its base of attorneys that were participating in these networking events. We thought “Well, there’s no shortage of attorneys in the area. We could certainly find them using social media.” But what we’ve found was although we were able to reach the attorneys, we were not able to compel them to attend this networking event, and the problem was that time is money when you’re an attorney. So the value proposition was not high enough to justify the lost billable hours. If you’re billing at $600+/hour and it’s gonna take you 30 minutes each way to get to this event, and then you’re gonna spend an hour there – well, that’s $1,200+. It’s hard to justify that in a Facebook ad. So we were not successful.

I don’t know if it was a spectacular flame-out, but I certainly was surprised by that, and very quickly it became clear we were not gonna be able to help this organization… So we politely said “Look, this is not a good use of your money. Let’s not do this”, and we pointed them in a different direction.

Theo Hicks: Thank you for sharing that with us. What is the best ever way you like to give back?

Lael Sturm: Well, volunteering is always good, and I do a decent amount of that, and make time for my team to do that as well… But I would say – circling back to my earlier point – I really hold myself to a standard where I provide value in every conversation. It’s really important to me that if you’re gonna take the time to sit down with me, whether you’re a client, whether you’re a prospect, whether you’re somebody that I meet in line at the coffee place, I want you to leave that conversation richer than when you arrived at it.

I wanna be able to provide value for you every single day, whether you’re a client of mine, whether you’re a friend of mine, or whether you’re somebody that I just happened to meet on the street.

Theo Hicks: Well, I’m sure the Best Ever listeners will agree with me when I say this – I do feel like I will walk away from this conversation a lot richer. The last question before I summarize what we discussed – what’s the best ever place to reach you?

Lael Sturm: The best ever place to reach me is on my website, which is lpss.co. There’s a number of different options there for getting in touch with me. You can contact me directly using email, you can set an appointment with my assistant… But there’s actually a button right there on the website where you can schedule 15 minutes to chat with me about anything. So if you wanna talk about marketing, that’s fine; that’s my expertise. But if you wanna talk about baseball, or an interesting book that you’ve read, or literally whatever is on your mind, I’m happy to spend 15 minutes with you. Again, my goal is for this to be a valuable 15 minutes.

Theo Hicks: Well, Lael, I really appreciate you coming on the show today. As I mentioned, I am definitely walking away with a lot more knowledge than I came into this conversation with. Lots of great content. Just a few things that stood out to me… One – in the beginning we discussed essentially how to stay relevant in an industry that’s changing so quickly, which is essentially every industry right now… It’s all about cutting into that self-realization that you don’t know everything, you don’t have all the answers, and because of that you need to constantly, every day, learn something new, and continue focusing on enrichment and growth.

And then something else interesting that you said is that you also learn from your clients, your customers as well. I thought that was an interesting point. You also mentioned — we discussed how to build that audience, how to build that loyal following, and one of the things that you mentioned was to obviously speak in an informed manner, that is adding to the conversation; you’re not just repeating general information or well-understood knowledge already. Do it when there’s really no clear benefit for yourself. So not only are you displaying your expertise, but you’re also displaying your generosity, because you’re giving away valuable knowledge for free.

You mentioned that right now you believe that one of the best channels for marketing is Instagram… And for those listening, we actually have a blog post; google “Joe Fairless how to grow Instagram.” [unintelligible [00:22:40].02] shared with us for how to build a following on Instagram, using real estate as the example.

Something else that I really liked that you said was – when I asked you about something that everyone does that they don’t necessarily need to be doing, and that was the website. Don’t go out there and spend thousands and thousands of dollars on a professionally-designed website if you don’t need to, especially with all those tools out there… You can just create a landing page, you can just use Facebook, or your social media page, your LinkedIn.

And then your best ever advice for real estate investors, which was the importance of the buy and hold strategy, because of the ability to build up equity, whether you’re forcing value or you’re getting natural appreciation… Because you’ll be able to get a pretty decent chunk of equity that you can then leverage to use to invest in really whatever you want.

Again, Lael, I really appreciate you coming on. Very powerful stuff today. Thank you to everyone who is listening. Have a best ever day, and I’ll talk to you soon.

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JF1853: How Can Apartment Owners Leverage Smart Technology? With Mike Rovito

Mike is on the show today to tell us how he’s helping apartment owners save money in the long run by investing in smart technology. He’s also been around real estate for the majority of his career so he understands how owners and managers think about their investments. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“You need a partner” – Mike Rovito

 

Mike Rovito Real Estate Background:

  • CEO of Dwelo (dwell-oh)
  • Dwelo provides smart apartments to the owners and managers of multifamily communities
  • They have about 40,000 units on their platform
  • Based in San Francisco, CA
  • Say hi to him at https://www.dwelo.com

 


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TRANSCRIPTION

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

Mike Rovito: Good, how are you doing?

Joe Fairless: I am doing good as well, and looking forward to our conversation. A little bit about Mike – he is the CEO of Dwelo. Dwelo provides smart apartments to the owners and managers of multifamily communities. They’ve got about 40,000 units on their platform. His company is based in San Francisco, California. With that being said, Mike, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Mike Rovito: Sure. The current focus at Dwelo is to help the owners and managers of mid to large-sized apartments leverage the benefits of smart technology. We’re thinking smart thermostats, smart locks, smart light switches etc. Both so that they can provide it as an amenity to the residents, increasing the quality of their assets, but also to help them operate their properties more efficiently. We are a technology provider and a service provider to support that.

My background in real estate actually begins in the energy efficiency space, which is my entre to real estate at large. I was working in a consulting company called ERS, helping large real estate owners in New York City save money by reducing their energy spend… Working on projects like code generation, battery storage, smart thermostats, and even working with large industrial process. That kind of opened up my eyes to the world of real estate, understanding how owners and managers think about cap ex and op ex, and where they direct that spend, and how they’re trying to optimize the NOI of their assets.

That experience showed me what enormous opportunities there were in real estate, and also got me into the smart technology realm. While I was there, we launched a platform called InfiSense, which was a measurement platform leveraging IoT devices. Previously something that had been done manually, slapping some  monitors on these huge – we’re talking massive mechanical rooms in high rises and industrial process plants… Slapping some monitors on those, making that automated, and to the cloud. It taught me a lot about technology, and that was sort of how I ended up getting into Dwelo.

Joe Fairless: I’d love to – and we will – dig into Dwelo… You mentioned the energy efficiency space, and then you mentioned four or so things for reducing energy costs. Will you just mention those again? The first one was code generation, but what were the other things you mentioned?

Mike Rovito: Battery storage, smart thermostats, industrial process efficiency… We kind of ran the gamut there. There’s obviously more standard things, like improving your lighting efficiency… It really depended on who the client was. What makes sense for a commercial office owner, versus an apartment owner, versus Steinway Piano Manufacturing in Queens, New York is gonna be different.

Joe Fairless: Let’s just talk about that for a little bit… Office versus apartment owner. What are the different directions you would typically go with those owners?

Mike Rovito: In the office realm the people who are actually occupying that space often don’t have control, and the operating hours are fairly fixed, and they’re fairly long. If you look up at the New York Skyline into the evening on a winter night, the lights are on, and the heat is running, all these sorts of things. So mostly you’re working to improve the fundamental operating efficiency of that equipment – changing out old fluorescent lights to be LEDs; some of these aging boiler plants or chiller plants that are running the HVAC systems, the heating and cooling – getting them up to modern standards. Those can just run more efficiently, and it has nothing to do with scheduling or reducing waste in the sense of “We’re not gonna heat it when nobody’s there”, because those patterns are too fixed and it’s difficult.

In apartments you have much more of an opportunity to do demand-based stuff. Obviously, you wanna have efficient equipment, but then using smart technology with sensors, or just basic automation and scheduling, you can reduce that use. And I think there’s a split in terms of who the benefit flows to in apartments. You have your residents, your managers or the operators of the assets… And in most apartments your residents are paying for their own bills, so they don’t really care what happens when it’s occupied, except in so much as a resident perceives that they will save money and therefore they will pay more for that apartment… Which is a real thing, and there’s supporting documentation from Nest and folks like that, that you can save energy, that you can provide to your prospective residents, to help them see that benefit and value that in the asset.

But then for the operators it’s really about vacant unit settings… And there’s actually a pretty big opportunity for energy savings in vacant units at apartments, bigger than you might think. The average community – professionally-managed community – we’re talking like 200 units, it spends about $100,000/year on the energy in those units and common areas, just in the vacants… And by turning those off when nobody is there – we did an analysis in cooperation with Conservice, the multifamily utility billing provider, that there’s a long tail of just a subset of units that are using about half, and it’s all waste. The long tail is called by a vendor or a maintenance worker who goes in — think of a painter… They go in, they paint the room, they open up the windows, they turn the A/C on, and then it just runs and nobody checks on it for days and days… So the typical pattern that an operator will see in vacant units is a $20 bill, $20 bill, $20 bill… And a $180 bill automation can cut that out.

Joe Fairless: That’s wonderful information. Now segueing into Dwelo – how does Dwelo help with that part of the process? I know it’s much more than that, but how are you involved with that part of the process specifically?

Mike Rovito: Zooming out briefly to help answer that question… So we’re a technology and service provider that enables owners to take advantage of smart technology, which includes smart thermostats, smart light switches… And we provide the infrastructure that enables owners to take advantage of that particular value proposition that I’ve just described.

We will help them put in smart thermostats, smart light switches, and the [unintelligible [00:08:42].15] connectivity to get that in a place where it can be automated, so that you basically at the end of the day can just have that stuff turned off every day, if it’s vacant. We know if it’s vacant, and we can turn it off when it’s vacant. It’s pretty simple in theory; anything that can run on a schedule can be automated, can know when the unit is occupied and vacant… It’s not all that complicated. But actually getting that stuff to work at scale is sort of where we come in, and the value that we provide.

Also – not to maybe segue into a new topic, but also tying that in… Because that’s not the only value proposition. Building a technology platform that doubles that same piece of hardware as a resident amenity as well; not just a commercial solution, but also a consumer solution as well.

Joe Fairless: How is it a resident amenity?

Mike Rovito: A smart home is a really fast-growing category. For the residents, especially younger residents, but you’d be surprised – the demographic interest is pretty broad… The first commercial at the last Super Bowl was for Google Home. So this stuff is really coming. I think voice controllers like Amazon Echo and Google Home have really accelerated the interest in this.

The residents – we’ve shown empirically – are willing to pay more for tech-enabled apartments. Now, that can mean a lot of different things, but as a core, it’s a smart lock, a smart thermostat, a set of smart light switches. Maybe some outlets. But mostly just those things, that get you the core value proposition. What that is gonna enable the resident to do – we speak first to the thermostat – they’re gonna be able to control their comfort settings. There’s a convenience factor and a comfort factor that comes with that. If they’re coming home from work on a hot summer’s day, they can cool that apartment without having wasted energy all day by running the air conditioning while they’re gone. They can save energy in the same ways that the owners do by configuring automations that go to their schedule, or to their occupancy pattern as well.

For the locks it’s maybe a slightly different set of value propositions. It’s the convenience of being able to let a friend in to walk your dog while you’re on vacation, or somebody who’s coming to visit, giving them digital access to that lock. You don’t need to make a copy of the key or hand off a key. You might be at work that first day when they’re coming to visit, and you wanna let them in – you can either remotely open it, or you can actually give them a digital credential in the form of a thing on the phone that they can swipe, or a PIN code that works on that lock. So it gives them the freedom to control access remotely, while at the same time giving them comfort that they know “Did I lock my door or not?” They can see all those things.

As a bundle, those things add up to — at least on a perception basis… Different people are gonna use it different amounts. The value people get from that is gonna be subject to how they use it, but there’s definitely 100% perception in the marketing benefit for the owner of that asset, who can then position that asset in a different way, as a more progressive, forward-looking, technologically-enabled asset, as part of community aesthetic, and so forth.

Joe Fairless: And what’s the value proposition for the light switches?

Mike Rovito: There’s an energy component, for sure. It’s actually the most used component, I think. The value of the lock and the thermostat is clear and more obvious when you actually get into the apartment and you are able to control lights with your voice… You become extremely lazy. It’s actually a lot of fun; it’s the most magical component. You push a button and the lights just turn on and off. So it’s somewhat novelty, but there’s also a genuine convenience. I personally turn my lights off from bed every single night, using my voice. I haven’t touched a light switch in days.

Joe Fairless: So walk us through, please, the user experience for Dwelo. Is it apartment owners of 100+ units the user, or are the residents of those apartments the user, or is it both?

Mike Rovito: Both. I actually sort of divide it — it’s obviously a little bit grey, owner versus manager, and so forth… But I usually divide it stakeholder-wise. The owner is the buyer, and both the manager and the residents are users. There’s a web app for the managers, that enables them to sort of run the whole building. They’re blocked out from seeing what’s happening in occupied units for privacy reasons, but that’s gonna be their switchboard where they’re getting access to units, to vendors, and maintenance, and so forth; if it’s a vacant unit, that’s how they’re controlling the energy spend in those units, or preparing a model unit or a vacant unit for a showing by “Let’s get the lights on and the heat on before we show up, so it’s at the right level.” They’re not having to walk — especially at some of these large communities, there’s material time-savings that come from that.

Our managers self-purported about – for an average 200-unit community – 200 man-hours of time-savings from not having to deal with physical keys as they’re moving up at the property. So if you go out to show the one-bedroom and you’re no now on the third floor in the West Wing, and the resident says “Actually, I would be interested in seeing that second one”, they’re running through the halls, going back to the key track machine… They’re not doing that anymore with Dwelo. They have digital credentials and they can just [unintelligible [00:13:48].28] to that new unit. So there is a web portal that enables them to manage all of that, for the managers.

For the residents, it’s actually the most seamless experience you can have with home automation in general, because it’s pre-installed. When you move in, your account is already set up because the manager either manually added your email to the system, and it kicks off an invitation in your email inbox, and 30 seconds from there you’re able to have an account and control your unit… Or we have integrations with Yardi and RealPage that help with that, if you have those systems on-site for that property.

So the residents moves in, the stuff is already installed, and they get an account from the management system, and within 30 seconds they can be in the app, controlling all of it just as they would any other type of smart home system.

On top of that, we’re not trying to compete with Google and Amazon, we’re partners with them. We’re selling Google and Amazon hardware. Many of our apartments have Nest in them. We don’t make the hardware, we’re just reselling it and piecing it together on this platform… So they can take their account and attach it to their Amazon or Google account and have it show up in their preferred interface. So if they’re a Google family and they love the Google Home and they wanna connect it to their calendar and this and that, you can connect the Dwelo account there, and then the resident would never have to even use the Dwelo app if they don’t want to. That’s their choice.

Joe Fairless: What’s the cost?

Mike Rovito: It’s about $600 upfront to get started with a lock, a thermostat and two light switches. That’s gonna cover you for your average configuration. You can go up and down – we have a variety of locks and different aesthetics, different types of locks and thermostats and so forth. We’ve seen people push that to a thousand or more. We’ve seen people really scrimp and cut it to $400, but you’re probably in that $500 to $750 range for most units upfront. And then there’s the subscription, and this is gonna be subject to scale, and payment terms, and all other sorts of things… But to give a rough ballpark, think of it as starting at around $10 per the more typical [unintelligible [00:15:52].08] terms and configurations.

Joe Fairless: $10/unit?

Mike Rovito: Yeah.

Joe Fairless: Cool. When you think about the number one objection an owner gives you for not doing this after you speak to him or her, what is that objection?

Mike Rovito: I think they see this coming, they’re just not sure if now’s the exact moment to do it. I think there’s a fear factor, and [unintelligible [00:16:12].10] number one objection started to go away… The objection being “Is this truly gonna work? Am I really gonna see the benefits, or am I gonna introduce headaches for my management team?” And I think on the benefits side of it — so it’s just sort of a general skepticism.

On the benefit side of it we’ve empirically been able to show 1% to 3% rent premiums. We’ve been able to show time savings for the team, we’ve been able to show energy savings that dropped to the bottom line… So we’re building a pretty good — I mean, we’ve had tens of thousands of units at this point, we’ve been at this for four years, or actually longer… So we’ve got pretty good evidence at this point. The best evidence is when the competing product down the street puts us in.

And in terms of “Is it gonna work?”, I think we’ve got good customer references to support that. And it is a legitimate challenge, and that’s why we exist as a business; you need a partner, you need some help.

Joe Fairless: Anything else that we haven’t talked about as it relates to Dwelo and smart apartments that you think we should?

Mike Rovito: No, we’ve covered a lot of ground.

Joe Fairless: Cool. Well, that’s because of you, and I appreciate it. Mike, thank you for talking about Dwelo, the services that your company provides, as well as getting into the specifics of energy savings, as well as what generally is referred to as a smart home – having a lock, thermostat, light switches… And the value proposition for each of those, as well as the costs associated to it.

We should have mentioned at the beginning of our conversations – Best Ever listeners, this is a Skillset Sunday episode, so I hope you’re having a best ever weekend, and Mike thank you for being on the show. I hope you have a best ever day, and we’ll talk to you again soon.

Mike Rovito: Thanks, Joe. I appreciate it.

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JF1819: He Just Quit His Full Time Job To Be A Full Time Real Estate Investor with Sean Pan

Sean is joining us today to share his real estate investing story. We’ll hear how he acquired his first deal, how he evaluates his flips, and ultimately how he was able to scale his own real estate investing business to a level that sustains his lifestyle and he was able to quit his full time job! If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“I lost so much money on a deal that I ended up in Bloomberg magazine” – Sean Pan

 

Sean Pan Real Estate Background:

  • Real estate investor located in the Bay Area
  • Started his real estate investing career by buying a small portfolio of cash flowing rentals in Jacksonville, Florida and has since completed 5 flips in the Bay Area
  • Based in San Francisco, CA
  • Say hi to him at seanpanrealtyATgmail.com or www.everythingrei.com
  • Best Ever Book: Best Ever Apartment Syndication Book by Joe Fairless

 


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TRANSCRIPTION

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

With us today, Sean Pan. How are you doing, Sean?

Sean Pan: How’s it going, Joe? Thanks a lot for having me on your show today.

Joe Fairless: Well, it’s going well, and you’re welcome. I’m looking forward to our conversation. A little bit about Sean – he’s a real estate investor located in the Bay Area. He started his real estate investing career by buying a small portfolio of cash-flowing rentals in Jacksonville, Florida, all across the country. And since he has completed five flips in his backyard, in the Bay Area. With that being said, Sean, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Sean Pan: Absolutely. Thanks again. My name is Sean Pan, I started as an engineer over in Los Angeles, making satellites for the government. I just realized over some time that this isn’t where I wanted to be 30 years down the road, and I wanted to find a way to get that financial freedom and be able to do things that I wanted to do. And that’s how I stumbled into real estate investing, and that’s how I stumbled into purchasing cash-flowing properties over in Jacksonville, Florida, and then later on I moved over up to the Bay Area. The Bay Area is a little bit different. People here are more interested in flipping homes. And just by hanging around so many flippers, I became a flipper myself.

Joe Fairless: Did you have a full-time job when you bought that portfolio in Jacksonville?

Sean Pan: Exactly right. I had a full-time job, I was saving money…

Joe Fairless: Do you still have it, or are you doing this full-time now?

Sean Pan: Actually, I just put my two weeks in…

Joe Fairless: Alright, congratulations!

Sean Pan: Yeah, thank you so much.

Joe Fairless: Wow! Alright, so you had your full-time job when you found the cash-flowing properties in Jacksonville, and then I interrupted you. Sorry, I just wanted to ask you… So please, continue.

Sean Pan: So then  I started hanging out with a lot of flippers in the Bay Area, going to a lot of the meetup groups in the area, and learning how to flip properties, and that’s just how I got into flipping houses.

Joe Fairless: Okay. Let’s rewind a little bit to the Jacksonville portfolio. When I say portfolio, I’m just repeating what I see in the show notes. What exactly did you purchase?

Sean Pan: Right now I have two single-family homes and one fourplex.

Joe Fairless: Okay, so two singles, one fourplex – six  total units. What was the total purchase price?

Sean Pan: Oh, geez. First one was about $80,000, the second one was an auction home, so $40,000 on that one; we’ve put another 15k to rehab that one. And then the last one was a fourplex we bought for about 250k.

Joe Fairless: Okay, so 250k fourplex, and 80k, and what was the other one?

Sean Pan: 40k.

Joe Fairless: 80k and 40k. One was from an auction?

Sean Pan: Yeah.

Joe Fairless: So you bought them separate times then.

Sean Pan: Exactly. It’s a portfolio that I bought over time.

Joe Fairless: Okay, cool. Auction – that was your second purchase?

Sean Pan: You know how it goes, when you buy the first one, you just want another deal…

Joe Fairless: Right, of course.

Sean Pan: So I bought my first one and I was like “Alright, this is pretty good.”

Joe Fairless: The $80,000 one?

Sean Pan: Exactly. I was like “It’s pretty good.” I bought it for 80k and it rents for $900. About the 1% rule, so… Good enough. My friend said he had a connect who actually worked on Auction.com, and he has a list of what the banks actually want for a property… So even though something says $60,000 as the estimate, they know that banks only want 40k, so I was like “Alright.” I put in a bid at 40k and we got it.

Joe Fairless: Okay. What did you do with the property once you purchased it, in terms of renovations and renting it out, or costs, the rent price, all that stuff?

Sean Pan: My property manager – he’s a god-sent. He took care of everything, basically. He went in there, it was a wreck. There was someone living there, a squatter. Luckily, we were able to do cash for keys. He just got six crisp $50 and just kind of wafted it in her face, like “You want these? Get out.” So she did, she got out for only $300, so we got pretty lucky there.

A $15,000 remodel in Jacksonville goes a very long way. We rehabbed it and we were able to rent it for $850.

Joe Fairless: Good for you. So all-in 55k, and… Six $50 bills? Did I hear that right? So $300. So all-in $55,300. And you are renting it for $800?

Sean Pan: Yeah, $850.

Joe Fairless: $850, sorry. I didn’t mean to short-change you on that. Okay. And then you bought a fourplex.

Sean Pan: Then I bought a fourplex.

Joe Fairless: How long ago was this?

Sean Pan: This was about two years ago.

Joe Fairless: Only two years ago? Alright. What were the numbers on the fourplex? You said you bought it for 250k. What about rehab and income that it generates?

Sean Pan: That one was pretty stable already. When I bought it, it was going for about $650/door. After we turned the units, now it’s about $750/door. Again, my property manager is the one that is doing all the work. Of course, we do repairs here and there, but nothing too major on the fourplex.

Joe Fairless: Okay, so you haven’t put substantial money into it for cap ex, or anything. You just bought it for 250k and you’ve been making any improvements from the cashflow of the property.

Sean Pan: Right.

Joe Fairless: Okay. What type of financing did you get on each of the three?

Sean Pan: The first one I wanted to get the deal. It was actually listed for 100k and I said “How can we negotiate down?” So I actually bought it with cash, and then we did delayed financing. So after we closed with cash, then I did a loan to get paid back.

Joe Fairless: Okay.

Sean Pan: The second one was a pure cash play.

Joe Fairless: Sure, yeah.

Sean Pan: The third one was traditional financing. For multifamily it was 25% down.

Joe Fairless: Okay. Have you since put a loan on that $40,000 auction house?

Sean Pan: I was going to, but then I got too lazy. And it cash-flows good enough, so it’s just there.

Joe Fairless: Yeah, I hear ya. So you’re in San Francisco, these properties are in Jacksonville. How did you end up in Jacksonville?

Sean Pan: I’ve been going to all these real estate meetup groups, and consistently Jacksonville hit those top ten “Best markets to invest in”. All of the other ten, I was like “I’m not sure about the weather here, I don’t know about snow, I don’t know about tornados…” And I thought, “Oh, Florida. It’s sunny, hurricanes aren’t that common”, and of course, after I bought them, Irma hits, and the other one recently hit as well… But luckily, none of my stuff got affected.

Joe Fairless: What type of expenses do you have on the properties, in terms of anything that is higher than what would be in other areas, to the best of your knowledge? For example insurance, or property management fees. You said your manager is really good. Can you just talk  a little bit about that?

Sean Pan: Sure. I’m not gonna lie, I’m pretty sure I’m paying more for my property manager. I’m paying him 10% a month. But it’s worth it. Property management is a  hard job, and at the end of the day, what’s 10% of a couple thousand dollars, right? Versus 8% that some people get.

Insurance is definitely higher because of the hurricane risk. It’s about $1,000 per door.

Joe Fairless: Okay. When you take a look at your portfolio in Jacksonville, you are cash-flowing, and it’s making you some money. Why did you decide not to continue to build that out in Jacksonville, and instead focus your efforts on San Francisco flips?

Sean Pan: I’m sure everyone has the same story, where they love buying rentals, but after a certain point they run out of capital. So what do you do after that?

Joe Fairless: Yeah, details… Right.

Sean Pan: You could raise the money, which I had no capability of doing that at the time, because I didn’t know anything about it… So I thought “How can I get more capital?” By hanging around investors here, there are a lot of people that I know personally that are making over seven figures a year flipping homes here in the Bay Area. And just talking to them, learning the strategies, it seemed “Okay, not too bad.” That’s why I focused on that.

Joe Fairless: Let’s talk about the first flip. What are the numbers, and – will you tell us about the project?

Sean Pan: Oh, yeah. The first flip was so interesting, because I spent maybe two years spinning my tires, sending out letters, cold-calling people, and nothing was happening. But it just so happened that I used to volunteer at a meetup group, and my co-meetup volunteer, my friend who sat next to me every time, she had a deal that she couldn’t handle because she had too much on her plate already… And she actually sent it to the other investors who didn’t want it, because I guess the numbers looked tight for them. For me, I knew the area pretty well, I thought it was pretty good, so I jumped in with her. We partnered on the deal.

We bought that one for 865k. 865k for a rehab, which might surprise a lot of your listeners, because to us that’s really cheap, for you guys it’s super-expensive.

We’ve put about 75k into it – complete rehab, changed everything; kitchen, bathrooms… And when we sold it, we sold it for 1.4 million dollars.

Joe Fairless: That’s a big profit.

Sean Pan: Yeah. So we got a huge profit on our very first deal. So here I am, sitting pretty, thinking “Oh, making money is easy.”

Joe Fairless: Well, let’s talk about it. You bought it for 865k, right?

Sean Pan: Yup.

Joe Fairless: And how much did you put into it?

Sean Pan: 75k.

Joe Fairless: 75k. So you’re all-in for less than 950k, and you sold it for 1.4. What were your carrying costs?

Sean Pan: We paid 2.5 points upfront, and I believe it was 9% annualized interest.

Joe Fairless: Do you know what roughly that amount totals up to be?

Sean Pan: I don’t remember the exact details on that one.

Joe Fairless: 50k, 20k, 100k?

Sean Pan: Probably about 30k… Because we held it for only three months.

Joe Fairless: Yeah, so you all killed it on this one.

Sean Pan: Oh yeah.

Joe Fairless: What do you think the difference was between what people at your meetup were seeing and what you saw?

Sean Pan: First of all, the other investors – they get tons of deals that come on their table, so they’re able to cherry-pick the very best ones. And of course, when you’re at the high level, everyone’s super risk-averse, so if they don’t need to take on a deal, they won’t take it. This one I guess just didn’t fit their criteria, and at the time maybe the [unintelligible [00:11:34].28] was a little bit smaller.

We definitely got even luckier, because when we bought it, and to the point where we sold it, the market actually increased about $100,000 in that neighborhood, just because it was so crazy at that time.

Joe Fairless: How did you line up the financing for this one on your very first flip?

Sean Pan: I reached out to my network on Facebook, asking if anyone knew a hard money lender. When you’re brand new and you have no connections, it’s pretty hard to get stuff done. But I was able to connect with a hard money lender down in South California, who worked with me even though it was my first deal.

Joe Fairless: Cool. Alright, so that was the first one. Then out of the five that you’ve done, which one was the least profitable or not profitable?

Sean Pan: You wanna hear some horror stories?

Joe Fairless: Yes, please.

Sean Pan: Alright, here’s some horror stories. Actually, my latest claim to fame is that I lost so much money on a deal that I ended up on Bloomberg Magazine. You may know me as that guy that lost a bunch of money on a  flip.

Joe Fairless: Okay, I haven’t read it, so please elaborate.

Sean Pan: I’ll send you the link later on.

Joe Fairless: Okay.

Sean Pan: Alright, long story short – for people who wanna skip to the end…

Joe Fairless: We don’t need to skip to the end. [unintelligible [00:12:44].15]

Sean Pan: Alright, we’re not gonna skip to the end; I’ll tell you the story. I bought this house in May of 2018. This is the peak of the market last year. This property was two blocks away from Apple’s brand new campus. Beautiful location.

Joe Fairless: Seems like a home run so far.

Sean Pan: Seems like a home run so far. The property was at first listed on the MLS for two million dollars; they contacted us because that house was sitting on the market and no one was buying it. So we went over and we thought “MLS property? There’s no way this is gonna be worthwhile.” But we dug deeper. We saw “Oh, the listing agent is from Turlock”, which is like two and a half hours away from where the property is located, so he wasn’t gonna come over to do open houses. He said “No open houses. If you wanna go inside the house, contact the seller directly.” No one’s gonna do that for a two million dollar house.

Second of all, he took pictures with a very old camera, and they didn’t even stage the property. They were still living there. So all that combined, we thought – okay, this is the reason why it’s not moving. It’s just unattractive because it’s marketed incorrectly.

Down the street there was a home that was being listed for 2.5 million dollars. Our house is a little bit smaller. We thought our ARV could be 2.2-2.3 million dollars. So based on our numbers, we thought “Okay, if we can get it for 1.8 million or lower, that’s a slam dunk right there.

Joe Fairless: Yup.

Sean Pan: So we actually put an offer for 1.7, kind of low-balling for a little bit, and they straight up rejected us. I was reading this book by Chris Voss called Never Split the Difference. Have you heard of that one before?

Joe Fairless: I have, I interviewed him.

Sean Pan: Yeah, great book. So he says that if you wanna negotiate and you want a lower number, use actual numbers. So you don’t end your bid with 000 in the thousands, because that just seems like you pulled that number out of nowhere. So instead we bid 1,747,923. I remember that number because it’s so weird…

Joe Fairless: [laughs]

Sean Pan: And when they got that offer, they looked at it like “What is this number? How did they settle on this number?” And they accepted it. Then the listing agent said “Alright, they accepted it. Write up the offer.” And so right there I was shocked. I was like “Oh my goodness, this guy doesn’t realize that we intended to use him as the buyer’s agent to represent us.” He told me to write the offer, and I have a license but I don’t really practice, so I learned on the spot how to write a contract. And just by doing that, we gained an extra $45,000, because we got 2.5% of that sales price.

Joe Fairless: Okay.

Sean Pan: So we thought we were sitting pretty. We basically got this house that we wanted for 1.8, for about 1.705 all-in.

Joe Fairless: Alright.

Sean Pan: So we thought we were good. There was a house across the street that someone was trying to wholesale for 1.825, that was in a worse condition, and on a smaller lot. Long story short, we thought we were great.

But then we started getting creative; we thought “What if we take down this wall here? What if we make an open kitchen layout?” That involves getting architects, and structural engineers, and more inspectors. All that stuff takes time. So after being delayed and working on this project for months, finally we were ready to go on the market.

Joe Fairless: What did you do that you hadn’t done in previous projects, that took a little bit longer, besides knocking down a wall?

Sean Pan: That’s basically it. We’d never worked with architects before, we didn’t realize that structural engineers could hold you back so long… Just all these serial tasks make it so that you project goes longer that you need it to be.

Joe Fairless: So how long did it take from when you had it under contract to when you were listing it?

Sean Pan: We bought it in  middle of May, and we listed it in the first week of November.

Joe Fairless: Okay.

Sean Pan: We thought we’d be in and out within two months, and here we are 4-5 months later…

Joe Fairless: So a total of 4-5 months…

Sean Pan: Yeah. But the thing about that is that’s when the market turned. See, peak to trough in our area was a 25% drop… From the hot of June 2018 to the low of November 2018. 25% delta. And when we listed the property, that same weekend we had these fires up in Paradise, California.

Joe Fairless: Oh, yeah…

Sean Pan: No one was walking around, or wanna go to open houses. I laughed that I was going to a restaurant with my friend and I was like “How come we don’t have to get a reservation today? It’s great.” So after a while — this house just sat on the market, no one was looking at it…

Joe Fairless: What’s a while?

Sean Pan: Surprisingly, a while was only two weeks.

Joe Fairless: Okay… [laughs]

Sean Pan: In the Bay Area if your property isn’t sold within ten days, then there must be something wrong with it. There’s a stigma to this property now.

Joe Fairless: Alright…

Sean Pan: So people started finding excuses why no one else was bidding on it, and they said “Oh. I noticed this two million dollar property has no garage.” In the Bay Area garages aren’t necessary, and for the most part, people don’t park their cars in the garage. They park their stuff. So that became a big anti-selling point for most people. They said “Oh, I love that house. It’s beautiful, the location is great… Oh, but no garage? Deal-breaker.”

Joe Fairless: Did the one that was — I think you said 2.5… Did that have a garage?

Sean Pan: That one did have a garage. And that  one ended up selling for only 2.3. Again, the market shifted, as well.

Joe Fairless: Okay.

Sean Pan: And don’t get me wrong, this property has parking. This property has a lot of parking, it has a carport, and it has a giant shed in the back. But because of setback laws, we weren’t even able to add a garage if you wanted to.

Joe Fairless: Okay.

Sean Pan: So we were basically stuck.

Joe Fairless: You said it has a carport?

Sean Pan: It has a carport.

Joe Fairless: Can you not enclose that?

Sean Pan: Unfortunately not, because of the setback laws.

Joe Fairless: Oh, alright…

Sean Pan: Yup. So basically it’s an overhang, but there’s no way I can add a wall in there because of setback laws.

Joe Fairless: Okay.

Sean Pan: So we went over the winter break, we just kind of had it on the MLS… We decided to take it down for a whole month, so that we could reset the days on market, to make it seem like it’s a brand new listing…

Joe Fairless: Is that what it takes? You’ve gotta take it down for 30 days in order to do the reset?

Sean Pan: That’s correct.

Joe Fairless: Okay.

Sean Pan: And we put it back on the market and it was still not moving. And this whole time I’m paying holding costs on a 1.7 million dollar hard money loan.

Joe Fairless: Yeah… That’s rough.

Sean Pan: And I was laughing.

Joe Fairless: Especially due to the time of year, too. Because it’s not just a little downturn in San Fran, but I believe you’re in November, December, January at this point in time, which – that’s not exactly peak buying time.

Sean Pan: Yup. Seasonality affected us as well. It just wasn’t moving.

Joe Fairless: What were the holding costs every month?

Sean Pan: For that one property I was paying $11,500, not including staging costs, or utilities, or those beautiful green envelopes called “Supplemental taxes.”

Joe Fairless: So all-in what were you paying a month, would you say?

Sean Pan: I leased 12,5k because of staging, and then supplemental taxes are these beautiful, green envelopes that say “Hey, you owe these extra taxes based on what you’ve bought, and what the previous owner had to pay in taxes.” Those were like $15,000 checks as well.

Joe Fairless: How often?

Sean Pan: Those only happen once or twice. It’s not recurring.

Joe Fairless: Once or twice over 5-6 months?

Sean Pan: Like the year.

Joe Fairless: Oh, wow. Okay.

Sean Pan: Do you know what supplemental taxes are?

Joe Fairless: Educate me.

Sean Pan: Basically, when the previous owner bought the property, he probably bought it 20 years ago for $300,000, so he property tax is based on that $300,000, and based on a [unintelligible [00:19:57].11] that property tax can only increase by about 1% a year. So he was paying a couple thousand a year for his property. But now here I come, new buyer. I buy it for 1.7 million dollars, so now I owe property taxes on that 1.7 number, versus $300,000. So that delta of property taxes – they send you an envelope saying “We need you to pay that difference.” That comes in these green envelopes, and that’s called supplemental taxes.

So I got that one the day of my Thanksgiving party, and I was very unhappy. [laughter] It’s like, “Alright, Sean, another $15,000.” I was like “Damn it…!” [laughter] And don’t get me wrong, I did very well my first flip, I did well in my career and investing in other things, but at this time I was invested in multiple projects at the same time and they were all going south. So it wasn’t just this 11.5k. I was paying 30k total a month, all my holding costs.

I was joking, because I went to Asia and I was hanging out with a friend in Taiwan, and I was asking her about her base salary. And I was like “Oh my god, I’m paying your base salary in holding costs alone every single month… I kind of feel like a boss, it’s pretty cool.”

Joe Fairless: Right. [laughs] So then what happened with the deal.

Sean Pan: It did not move.

Joe Fairless: [laughs]

Sean Pan: We basically held it on the market for five months, from beginning of November until March. It didn’t move, so we had to drop the price significantly, get off the books, and fire-sale it. We eventually got someone who came in and offered us — the best offer we got was $100,000 less than what we even bought it for.

Joe Fairless: Okay… So 1.6…

Sean Pan: We got 1.675.

Joe Fairless: 1.675.

Sean Pan: Yeah. So imagine, a whole year’s worth of holding costs on hard money. All the repair costs that we did, and the purchase price. We basically lost $400,000 on this one project.

Joe Fairless: Was it someone who was moving in, or were they also a real estate investor?

Sean Pan: Oh no, it’s a family.

Joe Fairless: Okay. So it’s their primary residence.

Sean Pan: This is a primary residence. And when we checked up on it a couple weeks later, we saw that they were making even more renovations, so… We were like “Great! Good for them.”

Joe Fairless: [laughs] Well, they had a two million dollar budget, and they were able to get a really good deal, so they had some money invest back into the property.

Sean Pan: If you’re willing to sacrifice a garage – yeah, you can get a great deal in the Bay Area, apparently. And it’s funny, too – so I told my story on Bloomberg Magazine, I got published, it became the number one read article, I got a bunch of people listening to me… A lot of [unintelligible [00:22:32].06] obviously. Like, “Oh, this guy’s stupid.” But whatever, it was fun.

The agent who helped buy that house actually contacted me and now I’m gonna get lunch with him next week. So you might as well get a connection while you’re at it.

Joe Fairless: Right, exactly. What’s done is done. You’ve done five flips; what number was that?

Sean Pan: Number three. Basically, number three and four are losers. Number five – I’m still in it, and it’s probably gonna be a big L as well.

Joe Fairless: Okay. Well, taking a step back now, this is the perfect time for this question, “What’s your best real estate investing advice ever?”

Sean Pan: My best real estate investing advice ever is that real estate investing is a business. I think this is being said very often, but it needs to be taken more seriously. Think about creating Facebook or LinkedIn – you probably don’t do this on the side, or just part-time. If you’re gonna do this seriously, you do this with determination, and you do it with extreme focus. My biggest mistake was that I outsourced too much responsibility. I thought that it was easy based on the experiences on my first flip, where you can rely on the other party to take care of everything. But your money is at risk, so you should be the one making sure that you have everything in line, and make sure everything runs smoothly.

Joe Fairless: And on that deal number three, the main thing was the delay, where instead of two months you’re in and out, it was four to five months, and then you finally listed it. That wasn’t outsourcing the process, but it was incorporating a new part of a process… So was that your idea, to knock down the wall and then try and do a different layout, or was that someone that you spoke to and they were like “Yeah, we should do this” and you’re like “Yeah, sure, let’s roll with it”, and then you just kind of sat back and watched it unfold.

Sean Pan: I take full responsibility for everything that happened. I don’t remember if it was my idea per se to knock down that wall, but once we all agreed on it, we did it. But what I should have done is I should have followed up… Because we had some issues in the middle. Basically, in the plans there was a specific choice that needs to be put down for the foundation, and I guess the foundation width was different than planned… So the inspector said “Get the structural engineer to write this document.” It took that structural engineer about a whole month to do it, because he had his own personal issues going on, he had too much work… That ended up being only three sentences, but that delayed us by a whole month.

Joe Fairless: Oh, my…

Sean Pan: So if I knew about it, if I was there, I could have 1) talked to the structural engineer and say “Hey man, it’s three sentences. I’ll write it for you, you just sign it.” Or 2) I could have found another structural engineer.

Another thing is that I thought I knew a lot, because I was successful, but I didn’t. I thought that not having a garage was no big deal, because I grew up in the Bay Area, in a different city, but we don’t care about garages. But if it’s like a two million dollar home, now they have their nice-looking cars – they probably want a garage. I didn’t know about that. I was just learning as I was going.

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

Sean Pan: Let’s do it! I know you’re ready. First, a quick word from our Best Ever partners.

Break: [00:25:40].29] to [00:26:42].21]

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

Sean Pan: The best ever book is the Best Ever Apartment Syndication Book by Joe Fairless!

Joe Fairless: Alright! You like that one, huh?

Sean Pan: I do, I do.

Joe Fairless: I’m glad to hear it. What’s the best ever deal you’ve done?

Sean Pan: The best ever deal is that first one I did in Sunnyville, where I made around $300,000 in profit.

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

Sean Pan: Right now I am also a podcast host for the Best Ever Real Estate Investing Show. I’m also a meetup group leader, where I bring people together to talk about events and different strategies… And I love just giving back, and writing blog posts, and giving out free notes. When I go to conferences, I just give away free notes for everybody, because I know they’re too busy to take their own.

Joe Fairless: That’s cool. And what is the best way the Best Ever listeners can get in touch with you?

Sean Pan: The best way to get in touch with me is by sending me an email at seanpanrealty@gmail.com, or check out my website, everythingrei.com.

Joe Fairless: Thank you so much for sharing your story. I know you’ve shared it already; I wasn’t aware of your story, but clearly you’ve shared it already in other channels… But thanks for talking about it, and then talking about the lessons learned… And boy, that structural engineer comment really resonates with me, because it’s about being educated on the process, and then also being tenacious and following up with certain team members who are holding up the process and offering up some solutions to them.

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

Sean Pan: Thank you, Joe. Take care.

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JF1705: Making The BRRRR Method Simple & Easy To Understand #SituationSaturday with David Greene

David is now co-host of the BiggerPockets podcast, and author of a book focused on teaching the BRRRR method. He has a lot of experience as an investor, agent, and educator, now he’s finding new ways to share his knowledge with his book. We’ll cover what you can expect to learn by reading his new book, and cover the BRRRR method a little more in-depth than we ever have. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“If more people did that, they just wouldn’t suck at life” – David Greene

 

David Greene Real Estate Background:

 


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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 situation for you – it’s Situation Saturday. The purpose of Situation Saturday is should you come across a particular situation like we’re gonna talk about today, well, you’ll know how to handle it, because our Best Ever guest will talk us through it.

Today we’re gonna be talking about the BRRRR rental property investment strategy, and it’s gonna be made really simple, which happens to be the title of today’s Best Ever guest book, David Green. How are you doing, my friend?

David Green: Good, Joe. How are you doing, man?

Joe Fairless: I am doing well, and welcome to the show. A little bit about David — and Best Ever listeners, you know David; you have listened to his episode before on this show… And then also, he is the co-host of the Bigger Pockets Podcast; he’s also a Keller Williams Rookie of the Year, or he has achieved that, and he is a real estate agent, obviously, and real estate investor.

He started investing in ’09, as a refresher, and he’s got a portfolio of over 30 single-family homes. He’s also got shares in apartments, he’s got mortgage notes, note funds etc. Based in San Fran.

First, David, how about you give a little bit of quick background of yourself, and then let’s roll right into some lessons we can take away from the book that’s come out recently.

David Green: I’ve been a police officer for about ten years. I started buying rental properties with money I made working overtime. I was on your show number #806, and we kind of talked about ways that I go buy fixer-upper properties, add value to them and then refinance them, which eventually became the BRRRR strategy, which is the book that I just wrote, kind of detailing how other people can do that, too.

When I wrote my first book, “Long-distance real estate investing” about buying houses in other markets, because California and the San Francisco Bay Area is just stupid expensive – you can’t buy anything here – I started getting interviewed on other podcasts to talk about it, and then that eventually led to me getting to take over as a co-host of the Bigger Pockets Podcast. So now I do the same thing as you – we teach people how to build wealth through real estate, and get into this awesome thing that we figured out.

About two years ago I stepped away from being a police officer, I went full-time into being a real estate agent, as well as an investor, just because I got the bug for real estate. I really liked it. I started doing good, sold a lot of houses… It turns out that really most real estate agents kind of suck, if we’re being honest, and it wasn’t too hard to start doing well with that… So now I’m building a real estate team and I’m helping people to buy real estate, and I just love to talk about real estate all the time.

Joe Fairless: Yeah, I have noticed a lot of agents are terrible… What did you to see “Okay, here’s what they don’t do, and here’s what I’m gonna do”? What are some specific points? I wanna get into the BRRRR stuff, but I’m curious about what you did, that you saw they weren’t doing.

David Green: I think that’s such a good question, because what I did was I looked at everything that frustrated me, and I said “How can I solve that problem, rather than just letting the frustration take over and make me a negative person?” And I’ve found that’s actually become a super-power of mine. When I get really frustrated with “Man, I can’t just get this piece to work in my life…!”, I work really hard to solving that problem, and then I go teach other people what I did, and people really like it.

My problem with real estate agents was I knew more about real estate than they did. I’m hiring them to help me either buy a house or sell a house, or figure out how to solve this problem of how do I take a junk house and turn it into something nice, and they don’t know what to do to help me. They really just know how to fill out forms and be friendly and nice. Most of them are trained in sales skills, but they’re not really trained in real estate skills… So I was always frustrated by that, and when I got my license, I basically kind of branded myself as “I’m okay to not be the nicest guy in the room.”

If I don’t have the coolest-looking Instagram or I don’t have the most inspiring quotes all over my Facebook, that’s alright… But I’m gonna know what happens in a transaction. I’m gonna have the best home inspectors, I’m gonna get you accurate rehab bids, I’m gonna help run numbers for you… I’m gonna paint that picture as clear as I can for my clients, the same way that I would if I was the one buying or selling that house. And there’s not many other people doing that, because frankly, most real estate agents don’t know real estate. It’s kind of a tricky genre, where you’re in charge of finding your own business and then serving your own business, so what happens is agents focus way more on how to find business than how to serve it.

And because there’s not many people that were doing well, we did really good, so now one of my goals is to be the top agent in the San Francisco Bay Area and in the Sacramento market, and give people an option when they wanna buy or sell a house from someone who actually knows how real estate works, as well.

A side benefit of that has been all the business skills that I’ve learned having to build a business, like I’m sure you’ve learned, too. They really do help in the investing stuff, as well.

Joe Fairless: Now that you’re an agent and you’ve got the process, certain things that are identified now, you are the solution to those challenges, with things that frustrated you – which is exactly what I do, by the way, whenever I’m writing a book; I read the books that are out there on my topic or similar topics, I read the reviews on Amazon, and I read the negative ones and the positive ones, and especially focused on the negative ones, I make sure I address the negative ones proactively in my book. [laughs]

David Green: It’s so genius, Joe. I mean, if more people did that, they just wouldn’t suck at life. People are giving you the answers to the test when they criticize you. They’re telling you “Here’s what you got wrong.” And when you’re thin-skinned or you’re afraid to hear that, and you avoid it, and you only go to people that tell you what you wanna hear and you just stay the same all the time… But if you can embrace that… “Okay, let me address where I did better”, eventually you just won’t make any mistakes and you’ll be the best at whatever you do.

Joe Fairless: So let’s talk about your book, “The BRRRR rental property investment strategy made simple.” First off, for anyone who is from Pluto, what is BRRRR, and then roll right into how do you structure your book.

David Green: Alright, so BRRRR is an acronym for “Buy, Rehab, Rent, Refinance, Repeat.” It’s just the order of how I buy rental property, and the book  – I basically split it into five parts. There’s a Buy part, a Rehab part, a Rent part, all the way through… And I say “This is how you become really good at each of these things. This is how you buy deals, this is how you rehab a house. This is how you analyze and rent it out. Here’s how you refinance it. This is what you need to know about loans”, and then the final chapter, the Repeat, is how you build systems to do that for you over and over.

My philosophy is if you master the BRRRR strategy, you will then inherently master real estate investing, because you’ve done every part of it that makes you a good investor. And the whole beauty of the BRRRR strategy is that you don’t leave equity in a deal. You get your equity back out, which you can then go to use to buy another property.

It’s my belief that the only time in a real estate deal that we actually make money is when we buy that deal under market value, or when we add value to it through the rehab process. That’s the only two parts, right? And you need capital to do both of those things. You need capital to buy something, and you need capital to fix something up. So if you’re leaving all your capital in the deals that you’re doing, it looks great on your spreadsheet, but you can’t go buy new deals, unless you get capital from somewhere else.

So that’s basically why the BRRRR strategy works so well – I can go in there and I can buy a property, fix it up, pull all of my money out, or maybe a little bit less than all of it (sometimes more than all of it) and go buy the next house. And the more I do this, the better I get; the more practice and repetitions I get, the better investor I’ll become.

Joe Fairless: And if you take all the equity out, or even more equity than you put into it initially, do you have a requirement that the property still needs to cashflow, because obviously if you take more out, then you might have some higher expenses on the debt side…?

David Green: That was my first concern when I started doing this at a higher volume… And what I’ve found is interest rates are so low and the price points of homes I’m buying at is so low, it very rarely affected my cashflow. I mean, it can be a difference of like $75/month, to pull out a lot of money. So I stopped being as concerned about that as I was.

I used to have a requirement that every house I bought needed to cash-flow, and as my real estate agent business did better, and some other businesses that I bought did better, the actual cashflow from rental property became less important to me… And what I cared about more was the equity that I had in that deal, how much value I added to the home, and what neighborhood it was in; how well it was gonna do over a long period of time.

So I stopped looking at “In the next six months, what is this house gonna make me?” and I started looking at “30 years from now, am I gonna be glad I bought this house?” So now I’m playing  a different game, where I’m saying “30 years from now…” — God, if you look back at what home prices were 30 years ago, it’s sickening. How many people do we know that wouldn’t wanna go back in time and buy all the real estate they could? I’m trying to operate from that perspective, and I’m doing it in a way that’s responsible, so that I don’t get so over-leveraged that I literally can’t afford my payments. That’s where you’re gonna get in trouble.

Joe Fairless: And let’s talk about not getting over-leveraged… What’s your approach?

David Green: I personally believe that cashflow itself is nice, but it’s not an offensive metric. Cashflow is not really designed to build you wealth. Equity is designed to build you wealth; running your property efficiently and effectively will end up building you wealth, and holding it for a long period of time will build you wealth. Paying down that loan and letting it appreciate in time.

So I am a bigger proponent of cashflow as a defensive metric. This is what you need so that you don’t lose the property. And having a very healthy amount in reserves. I look at people that lost their homes in 2008-2013 when the market was rough – all of them did not have enough reserves to weather that storm. They didn’t know if it was gonna cashflow or not. They literally didn’t even understand what cashflow was when they bought their house, and they didn’t have any money in reserves. That’s a recipe for disaster. I make sure that I leave a ton of money in reserves, so that any storm that hits, me I can weather. All my properties either cash-flow, or if they’re losing $100 or $200/month, I don’t really care if that goes on for a couple years and then the rents increase and I’m in the positive again.

Joe Fairless: Specifically what’s your reserve requirement for your properties, and then do you have a loan-to-value approach or guideline that you use?

David Green: Well, most banks will only let me borrow 75% of the appraised value, which is what I go for. So you’re buying a house in really bad shape, and then you’re pumping up its ARV (after repair value) as high as you can get it, because that’s what you’re gonna be able to draw against when you go to take your loan out. But you’re always gonna be leaving 25% equity in that house, just because the banks are gonna make you in the majority of the time.

So what matters is is the house in such a high price point that to pull out 75% of its value will now make it cash-flow negatively? And most rental properties – they’re not.

This isn’t a problem that comes up very often if you’re buying in areas that are close to the 1% rule, because they’re gonna cashflow so strong, they just cash-flow a bit less. I like to have six months of reserves for every house, put aside in an account, as well as probably $30,000-$40,000 at any given time to cover unexpected capital expenditures. A hurricane blowing a tree onto one of my houses and the roof getting broken, or something like that.

And then the other thing I take into consideration is let’s say I was retired, Joe – those reserves would be even more than that. But I’m still working, and I live way beneath my means, and I have lots of money coming in. I don’t need to be as conservative, because I’m replacing money every single month that I’m sticking in an account.

I’m at a point in my life now where 100% of the money I make, I invest back into real estate… So maybe I just take 10% of that that I would have invested and I put it back into my reserve account, and I invest 90% of what I make.

Joe Fairless: And when you say six months of reserves for every house, what are those reserves covering for those six months?

David Green: If you take your mortgage, your property tax, your insurance, your property management, your capital expenditures, your maintenance and your vacancy – which on most of these houses that are $100,000 or $120,000 it’s really not that much.

Joe Fairless: It sounds like a lot…

David Green: Well, maybe $600-$700/month is what I might have to spend. I’ll just take that times six. So if it’s $700/month, I’ll put $4,200 aside for each one that I do. But when you’re first buying a house, and then you rehab it, you’re renting it out, I don’t always go get a loan immediately and pull the money out. Sometimes I let it sit there for 3-4 months without a mortgage on it at all, so my cashflow is really high. That might be 60%-70% of my reserves that I’ve built up, just the house paid for itself. I didn’t even have to take my own capital. So there’s only a little bit of money of my own that I have to put aside in that reserve account, and then boom, I’m on to the next one.

Joe Fairless: Okay, alright… So you delay the refi a little bit, build up the cash reserve; there’s your cash reserve, you keep it in the account, and then you move on.

David Green: Yeah, I let the real estate pay for itself. It puts its own money aside in that reserve.

Joe Fairless: Do you have separate bank accounts for each of the homes?

David Green: Oh, brother, that is such a mess, honestly… [laughs] I’ve got like 8-9 different bank accounts all throughout the country. The problem is financing becomes very hard once you start to get a lot of homes. So you’ll have a bank that will say “Yeah, I’ll let you refinance this one, but you have to do the loan through our bank. It’s a portfolio bank, so we’re not gonna sell it. And you have to pay the mortgage from a checking account that you have with us.” So now I have to open a checking account with them, and I have the mortgage getting paid from them.

I have to move money from a mother account into that account every month, so that they can pay the mortgage, and I have to see if I can get my property manager to deposit my rental checks into that account, for that house. Sometimes they won’t, because it’s a small known bank in another area, so they put it into the mother account… It’s kind of a complicated spider web moving around, and that’s one of the reasons that I would say to people who wanna expand really big – single-family is not a very efficient way if you’re looking to expand a portfolio really big. You start running into problems like this that you don’t have with other asset classes.

Joe Fairless: So why would you do that, versus buying 40-unit apartments?

David Green: So the first reason is it’s really hard to get into that space right now, because everybody’s there. Money is kind of cheap, and there’s a ton of people getting into multifamily investing. So for the guys that have been doing it and know what they’re doing, they can do well. To try to break into that space brand new, you’re already at a bit of a disadvantage, and you don’t know what you don’t know.

Even that though, I know that I could get into and I could do it. I have a lot of buddies that are doing it. But the timing it would take me to learn that asset class would literally lose me money that I could be making working on my real estate business, or buying single-family homes. So single-family works for me because it takes very little time. I’ve got systems put in place that I talk about in the BRRRR book, so that when a deal crosses my desk, I don’t really do anything. I just forward it to the right people, they have criteria and standards that they’re held to, they start the process, they end up putting the house under contract, managing the rehab, getting it rented out, finding a bank to refinance it… I don’t really have to do anything.

My overall goal is to continue buying houses under value, adding value to them, renting them out and refinancing that money short-term to go buy more, and every time I do that, I’m adding a good chunk of equity, like $30,000-$50,000 to each house.

At a certain point, when I feel like the economy is reaching a peak, maybe like a 2005 or so, I’m gonna sell them and 1031 that money into something that I feel is really solid, that will kind of weather any storm. Maybe like a multifamily property in Indiana, or Kansas, or one of those bomb shelter states that is rarely affected by the overall economy… And leave it in a big multifamily property there until I see another crash. Then I’ll be like that little gopher that comes out of its hole, or the groundhog, and looks around, and is like “Oh, it’s safe!”, and go out there and buy a bunch more single-family again.

Joe Fairless: Okay, I get that. I was gonna play devil’s advocate on why single versus multi– again, whatever a listener wants to do, I don’t care; I’m just wanting to play devil’s advocate on two things you mentioned, and I’d like to hear your thoughts… So less competition – usually that’s what commercial real estate investors say about single-family. That’s why they go into commercial real estate, because — I would say there’s certainly a lot more single-family home investors that commercial, but there are less commercial properties than single-family, so I guess it depends on your market…

But as far as the other one, time to learn the asset class – basically, you’re talking about the opportunity cost, where the time you’re learning, you could be closing on more deals… But I think you could buy a 30-unit and spend significantly less time on that one 30-unit transaction than 30 single-family transactions…

David Green: Well, I think you’re right about that. Factually speaking, you’re accurate. I think that is the case. What I’m probably gonna end up doing is adding equity to all of these properties that I’m buying individually, and then converting that equity into the 30-unit, or into the 50-unit.

Joe Fairless: And that’s where you sold me… Because I was gonna ask you — you said cashflow is playing defense, and you’re using equity as your offensive strategy, and now I completely understand your approach… Because if you’re not focused on cashflow, cashflow does pay for you to go on trips, and do all the other things – well, what’s the end game here…? And then you proactively answered my question – you’re planning on taking these 30 or so properties and then when the time is right, packaging them up, selling, doing a 1031, and then getting something that is cash-flowing heavy, plus also has some scalability for you and your time.

David Green: Yeah, and I should have qualified that – cashflow is a defensive metric in the single-family rental space. Single-family homes were not built with the intention of building cashflow for their owner. They were built with the intention of somebody living in it and raising a family, or holding all their stuff. Multifamily properties were built with the intention of being run like a business. That’s why we value them differently. Multifamily properties – their value is based on their NOI. Single-family properties are built based on a comparable sale. It’s just the single-family space is not a business-oriented space, so you’re not gonna really get a lot of cashflow that way; or at least you’re gonna have to work a lot harder to make it work… Whereas what you’re doing in the multifamily space – it was designed for exactly what you’re talking about, and that’s a very fair point to make. If you want cashflow, that’s the space you should be in.

I’ve found this little hack where I can build equity really quick in this space, and then convert it into the space later where the cashflow is bigger, and I think that when I get there, my cashflow will be a lot more than if I’d just started trying to do my first deal a 30 or 40-unit property.

Joe Fairless: A huge part of this is finding a property that you can buy that is under-valued, or you can rehab it and then get some equity built into it… So how are you finding those properties?

David Green: The first thing I do is I target a house that nobody wants. I look for distress. There’s three kinds of distress. You’ve got market distress, which is the whole market is for sale  – 2010. You’ve got property distress – that’s where the house itself is in really bad shape and no one wants it; or personal distress, which is where the person is in some kind of distress – medical bills, you lost your job, foreclosure, bankruptcy, those kinds of things.

It’s easiest for me to target property distress. Personal distress is kind of what wholesalers would be targeting, or people who are out there beating the bushes, looking for a good deal. I look for junk houses. I look for the houses somebody else started the rehab on and couldn’t finish. Or in a market where to spend 50k on a rehab is like three years of their salary. That’s a lot of money in some of these Southern states, or Midwest states. But for somebody with California or New York money, that’s not hard for us. We can go raise that pretty quickly from other people that need somewhere to put their capital.

Once I find a house that I know is in bad shape, I look at what it would be worth when it was done, and I work backwards. We call that the ARV. Okay, if this house was fixed up like that, it would be worth $120,000. And I figure out what  it would cost to get us there.

Let’s say it would take $30,000 to fix it up. Well, I know that I wanna be all-in for 75% of the ARV when I’m finished. So I know that if it’s gonna be worth 120k and it’s gonna take 30k to fix it up, I can spend up to $60,000 to buy that house, which puts me all-in for 90k, which is 75% of the 120k that it’ll be worth… And those are the houses I write offers on. I’m not the guy who writes 100 offers a week. I find that to be really time-intensive, not very efficient.

I target houses that have been on the market for a long time. Then my agents are like, “Hey, I think we’ve got a good shot. We can get this house.” I go buy it, I have my rehab crew get out there, they fix it up; once it’s done, I talk to the bank, they get an appraisal, they let me borrow 75% of what it appraised for, I take my money out and I go buy the next one.

Joe Fairless: Anything else real quick that you think we should talk about as it relates to the BRRRR approach that we haven’t discussed already?

David Green: Yeah, the biggest reason I think the BRRRR approach is the best approach to take is that I used to do it the old way, the traditional approach – I would save up 30k, I’d go buy a house, I’d spend 15k to fix it up. $45,000 later, I’ve managed the rental property and I’ve gotta work for another year to save up more money. It was extremely slow, and I did not get very good at being a real estate investor because it’s hard to get good at anything that you do once a year.

Once I got into the BRRRR strategy, I could buy two houses a month instead of two houses a year. I started getting the wholesalers bringing deals to me first. I started getting contractors giving me better bids. I started going through contractors and finding the good ones a lot faster. I found better property managers. The whole thing just became a lot more efficient when I was doing something at a higher scale. And that’s what I want people to understand – you’re never gonna get good at anything if you just do it very rarely. The people who are good at stuff just get thousands and thousands of repetitions in doing the same thing… BRRRR enables you to do that, and you can build your business around it, as opposed to the traditional method, which really has a lot of natural things that will hold you back.

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

David Green: You can get it on Amazon, it’s “Buy, Rehab, Rent, Refinance, Repeat – The BRRRR Rental Property Investment Strategy Made Simple.” You can follow me on Bigger Pockets, or your best bet is probably to follow me on Instagram – I’m @DavidGreene24. That’s the easiest way to get a hold of me.

Joe Fairless: Cashflow is a defensive mechanism in the single-family space. Perhaps that is mind-blowing for some people, and I hadn’t heard it talked about that way, so perhaps it blew my mind as well… But it makes a lot of sense, at least for my own portfolio of my three single-family homes that I’m looking to sell right now, because there’s 350k in equity in total in them, and I make about $300/month from those…

David Green: And Joe, I hear this all the time. I looked at mine and I saw the same thing. If you looked at your ROI, it’s not bad, but if you looked at the return on your equity, you’re like “Man, I’m making like 1% on my equity on these deals.” But what happened is now you’ve got 350k that you can go put into an asset class that does make cashflow, and you’ll make so much more money with that 350k than if you had tried to just buy that multifamily place right away, and had to save up that $350,000 to do it.

Joe Fairless: True. It’s a great point. It’s very true. The first house – I had $20,000. That would be challenging, to buy a multifamily property for 20k in [unintelligible [00:23:54].27]

David Green: [laughs] That’s what’s awesome about real estate investing – we’ve got all these different strategies and mechanisms and synergy that we can kind of combine together to make this really cool finished product… Like this Voltron of wealth-building when you add it all up.

Joe Fairless: And thank you for using the word Voltron. That’s one I’ll have to look up afterwards. Thank you for being on the show. I hope you have a best ever weekend, and we’ll talk to you soon.

David Green: Thanks, Joe.

 

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JF1689: Learning From Mistakes, Assembling Superpowers, Buying 740 Units In 6 Months with Anna Myers

Anna and her team have been on fire in the past six months! We get a lot of insight from her today; not only on the success and lessons learned from the past six months, Anna also shares her story of getting to where she is now over the past decade or so. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“If your rent comps are not correct, your whole deal falls apart” – Anna Myers

 

Anna Myers Real Estate Background:

  • Vice President at Grocapitus, a commercial real estate investment company
  • Applies her 20+ years of experience in technology and business to the finding, analyzing and acquiring of Commercial properties in key markets across the U.S.
  • Based in San Francisco, CA
  • Say hi to her at https://multifamilyu.com/
  • Best Ever Book: Best Ever Apartment Syndication Book

 


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

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


TRANSCRIPTION

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

Anna Myers: I’m great, Joe. Thank you for having me.

Joe Fairless: I’m glad to hear it, and you’re welcome. A little bit about Anna – she is a Vice-President at Grocapitus, which is a commercial real estate investment company. She applies her 20+ years experience in technology and business to finding, analyzing and acquiring commercial properties across the U.S. Based in San Francisco, California.

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

Anna Myers: Sure. I grew up in L.A, Southern California. My grandfather was basically a Maverick of commercial real estate in the Southern California area, so that was the kind of the fabric of my upbringing, was this guy that started out flipping houses, and then started buying orange groves and walnut groves, and building shopping malls. I was the youngest grandchild, so I grew up around this, all kinds of shopping malls etc. so it just was something very normal for me. My father was an architect, so a very entrepreneurial background. However, I went into programming, because the IT industry was really taking off, and I was just a great problem solver, and there were so many real estate people in my family… My dad was happy to have me go into IT, as an emerging field.

So I did that for about ten years, became a systems architect and was very successful in that career… But then that industry kind of crashed in 2000, the IT industry had a hard time. I went on as an entrepreneur, but realized I need to be careful about my future, because any industry has its volatility. So I started investing in real estate as an investor, and learned a lot of things along the way, had some bumps in the road. I started investing in single-family and small multis…

I live in California still, and I’ve used my technology background to do what I thought I could do to analyze markets at the time, but I wasn’t very good at it. I had all these massive spreadsheets, and trying to figure out the best market to be in, and analyzing houses, and it just took me a long time to learn. We didn’t have as many resources back in the early 2000’s as we do now. We never had Joe Fairless shows and the various opportunities that are online as we have now.

So along the way I’ve made a lot of mistakes, and then I started really getting my groove, in 2014. I had a short sale in the early 2000’s, so that set me back for a while. Then once I got back in the groove and educated myself, I landed in multifamily, I started volunteering to underwrite projects for a person that I was working with and learning from. That developed into a full-time gig, and then over six months we have acquired 750 units and five apartment buildings across the United States, and… I’m very happy to be where I am now, but it’s been a long road.

Joe Fairless: Well, thank you for sharing that. It’s nice to hear the ups and the downs, because sometimes we don’t get to learn from the downs from people, so I appreciate you offering that up. Let’s talk about the mistakes first, and then we’ll talk about the good stuff, just so we can learn from both. So you said you made a lot of mistakes… What are some specific ones, just so we can learn from those?

Anna Myers: Well, being that I was investing remotely, it was much harder to do in the early 2000’s. We still had fax machines, we just didn’t have as much information on the internet as we do now… So it was not as easy to do. So I ended up investing in Diamond Head, Mississippi. It was post-Katrina. I thought that it was a good market, because the houses were kind of expensive there, with like a golf, leisurely-type environment, and the rent was really good because construction people were staying there post-Katrina that were doing all of this work.

My brother, who’s a forensic architect, was in the area a lot, and he found a house for me… So I felt really good about it. Well, those elements alone aren’t enough to buy on; that market changed very quickly, because 1) there weren’t enough jobs there, and 2) a lot of people had second homes there. Most of them were second homes… So when the economy turned there, a lot of people just abandoned their houses, and the whole community just went into like a spiral. So I could not get the rents that I wanted; the rents turned into half of what they used to be, and I ended up having to do a short sale in order to save my primary house. I kind of had to make a decision, am I gonna be out of pocket $1,000 a month on this place, and only be taking a little bit of rent, or I’m risking losing my primary house.

Joe Fairless: For people who aren’t familiar with a short sale, will you just briefly describe what that is?

Anna Myers: Sure. It’s when you are in a situation where you decide not to continue owning a property, and the property is valued under the amount that your mortgage is set for. So you owe the bank more than what the property is now worth… And in order to get out of that, you can either foreclose and just walk away from it, which has a much more severe impact on your credit scores, or you can do a short sale, where you’re basically kind of working with the bank to find the best possible scenario where yes, you’re not paying them the full money back, but you’re getting market value, and hopefully it’s not a lot in-between.

Back in those times, they kind of forgave the difference, because so many people were doing short sales… So other than a seven-year hit on my credit score, I didn’t have any additional repercussions from that short sale.

Joe Fairless: Thanks for describing… I was gonna ask you what are the repercussions whenever you do one… So what does show up on the credit score during those seven years?

Anna Myers: Well, like I said, it’s not as bad as a foreclosure; I think it probably brought me down about 150 to 175 points. I was used to being 850, really high 800 scores, and so I was in the 600’s. It takes seven years to come off; anytime you’re going to apply for anything, you have to explain it, you have to produce all this paperwork… And I thought during that time – and I was not correct, because now I know differently, that I really couldn’t invest in real estate during that timeframe. And that really held back my investment career.

Joe Fairless: And knowing what you know now, if something like that were to happen to someone and they were to say “Well, Anna, I have to wait seven years before I invest in real estate”, how would you navigate that conversation to say “Yeah, actually, blah-blah-blah”?

Anna Myers: I would say “Absolutely you do not”, because I have learned the power of teaming up and the power of partnerships. In addition to that, by doing partnerships I’m able to get into larger deals, and those larger deals that are in this case apartment buildings – they’re not necessarily looking at my credit score. That is one factor if I’m being underwritten for the loan… But what they’re looking at is the value of the asset, and my liquidity, and various other aspects.

So my credit score really doesn’t matter that much, especially if I’m partnered with people who have strong credit scores. So I needed to become a team player and stop being an island as a real estate investor, and that was a big turning point in my investing career.

Joe Fairless: And I imagine – but let me know your thoughts – if people are team players going into their career in real estate investing, there will be a less likelihood of going through a big financial hit, because you’re bringing the right people along with you right out of the  gate. What are your thoughts on that?

Anna Myers: I think that’s absolutely correct. I think we all have superpowers that we excel at, and we have things that we’re quite mortal when it comes down to it; skillsets that we don’t have superpowers at. And I think that when we team up with other people who have different superpowers than us, it makes us an unstoppable team, and it also just feels great.

Joe Fairless: What are your superpowers?

Anna Myers: My superpowers are that I am a great underwriter; I can see the big picture, as well as the small picture. If there is a detail in that underwriting that’s off, I’m usually the person that will find it, a mistake in a formula… Because my background is a financial programmer, I actually understand the model. So when I’m looking at underwriting, I look at a lot of underwriting for different projects, for coming in on different Excel spreadsheets. So of course I’m gonna look at the returns, but then I’m also gonna look at the underlying model to try and understand the philosophy of what this model is trying to do. I wanna understand what is the structure of the deal, what’s the structure of the partnership, how much money is going to different parties, and what is the underlying premise of the financial model, which is different for different models. Everybody’s got their own 70/30, pref/no-pref, and we capitalize back, don’t recapitalize back… There’s a lot of variables.

I love getting into the details, and I love solving problems. I think that I excel on the underwriting aspect… And I’m a people person. I’m good at talking with investors as well.

Joe Fairless: I’d love to talk more in detail about what you just mentioned, and that is looking at the underwriting and understanding — not intention, but just how they have the underwriting model set up. And you’ve just mentioned a couple examples – the structure, the recapitalization, the money to certain parties… Let’s pick one of them. The recapitalization – will you just talk a little bit about that?

Anna Myers: Sure. So assuming that a project is going to have a refinance, and that refinance is going to produce additional money because you’ve stabilized the property, you’ve increased the NOI and thus you’ve increased the value of the property, so assuming you’re refinancing and taking money back – that money is supposed to go to the investors, unless you’re using it to add on an additional block, or do something like that. My understanding is that refinance is supposed to go to the investors.

Now, what does that do to the investor that put in $100,000 and you’re recapitalizing back $40,000 of their money at that point? Do they continue with $100,000 in the project? Is their returns going forward based on $100,000, or is it based on $60,000? That’s a big difference.

Joe Fairless: That is a big difference. So you’re reviewing underwriting from potential partners where you all would bring your underwriting and the equity from relationships that you all have to partner with those operators. Is that the dynamic we were talking about before we jumped into–

Anna Myers: Yes, that is correct.

Joe Fairless: Okay, [unintelligible [00:12:13].07] So is there something that you look for in particular with recapitalization when you partner with an operator?

Anna Myers: Well, it’s definitely a good thing for the general partners to have the recapitalization occur, because then more money is going into the partner’s pocket for the remainder of the project. There’s less of the equity investment that’s out with the investors; so more of the high is for the GP. So from a GP’s perspective, it’s a good thing. But I’ll tell you a new scenario that I’ve started thinking about, and I’m not sure how it’s all gonna pan out, where it may be something not good for the investor, and that’s with opportunity zones. With opportunity zones, there is a timeframe that’s at 2027, where the people that brought in capital gains – they need to pay those capital gains. Either they’re paying it at 100%, or they’ve been stepped down to 90% or 85% of their basis… But some amount of capital gain they will be paying at that time.

Now, many of these funds are talking about doing a refinance to give money back to the investors, so that they have money readily available to pay those taxes. Well, are we recapitalizing back their money? Do they now have less money in, and how does that affect the amount of money that’s going forward? …that we’ll hold it for ten years, and then the capital gains on that opportunity zone project are tax-free to them.

I think a lot about opportunity zones these days, because we’re very invested in it. This is a very specific refinancing situation, because you’re trying to solve a problem in the structure of the deal, and [unintelligible [00:13:52].25] is very specific.

Joe Fairless: When you take a look at underwriting from operators, and you mentioned if there’s a mistake or an issue with some aspect or detail of it, then you’ll likely find it because of your financial programming background… What are a couple mistakes that you’ve seen in the past?

Anna Myers: Well, this is the most common thing, where there is a formula that has been left over from some previous thing that was removed, and a hardcoded number was put in in its place, and then that hardcoded number is just copied across, so somewhere you lose the formula. I’m always looking for that, and it happens quite often.

Joe Fairless: Will you repeat that, so I make sure I understand?

Anna Myers: So often in a spreadsheet – it’s usually in the proforma area, where you have a lot of rows and columns. And in there, somebody has laid this little landmine, where they did something to a formula, took out a hardcoded element to it, or they removed the formula altogether, and put something hardcoded in its place. So instead of pulling from a different tab that was supposed to pull in the insurance amount, they hardcoded in the insurance amount… And then what happens in the column next to it – the column next to it is looking at the column to the left of it and applying some additional feature to it, like x1.5, depending on what the growth is; maybe it’s 2.5%, and then it’s going into the proforma.

Well, then the person later correctly changes the insurance amount on the other tab, but it doesn’t get changed in the proforma, because it was hardcoded in… So you start getting these places where you’re changing things and it’s not changing in the proforma, so your numbers aren’t correct.

That’s a very common mistake, because it’s such a rookie way to do Excel spreadsheets, and not understand that you never touch the formulas, you only touch the input areas.

Joe Fairless: What else?

Anna Myers: Let’s see… There can just be formulas that are just incorrect. I’m always having to dig into the formula. It’s usually, again, just somebody changed a formula in a previous thing to make it correct for the specific project that they were doing… And then the next project they forgot that they did that. So what I always do to avoid that is I have a clean version of my spreadsheet and I always start with the clean version. With that one, all of the formulas are pristine. So… Most of them have to do with that.

But I’ll tell you one of the things that I see that varies probably the most between. It’s not necessarily an error, but it varies the most in between the different Excel spreadsheets I see, which is how the partnership structure is handled, and the returns to the general partners.

We all are familiar with the different ratios – 70/30, 75/25, 85/15; those all work great. But what is really different is what happens when a pref is introduced.

In the case where you have, let’s call it a 70/30, 8% pref, we’re giving the investor the 8% – they get the first 8%. Then the general partner and the limited partner are supposed to split afterwards the additional money. But what happens for the life of the project? Is there a catch-up term where the general partner is caught up so that they’re making their full 30%? Even though they gave pref to the investor, there’s a catch-up at the end or as they’re going along. Now, that is our favorite type, because then the general partners are certainly making their fair share of the pie. If you are doing a 70/30 with an 8% pref, if you’re not getting a catch-up, instead of making 30%, you’re more making 18% of the project… And it’s a huge difference. A lot of syndicators that I talk to don’t understand that; they’re like “Catch-up? What are you talking about?”

Of course, not all projects can support catch-up, because you have to have a lot more available returns in the deal. Once you put a catch-up in, that could kill the whole deal, because there’s not enough in there.

Joe Fairless: Based on your experience underwriting deals, what’s the most challenging aspect of the underwriting prospect?

Anna Myers: I think the thing that I struggle with the most is the market benchmarks. Because I invest in so many different markets, and I really wanna be correct, and it’s so hard to be correct 100% of the time when you’re looking at market benchmarks… But understanding – you’ve gotta plug in the right data. You have to go through a lot of due diligence to make sure that your rent comps are correct.

If your rent comps are not correct, your whole deal falls apart. Once you buy the place, and you can’t get the rent — you thought you could get those rents, and it turns out you can’t, that’s a terrible situation to be in. Then just the various expenses; you don’t get those expenses right. I think that’s a really critical part of underwriting, and it’s not easy. It sounds like it should be easy; “Oh, I’ll just get it from my property manager.” But you need to get it from multiple sources, and then you need to keep verifying that they are correct over time. And if things are happening at your property, you need to be an instigator in terms of asset management. You need to watch the underwriting after you’ve purchased the property, to see “Are the trends going the way that you thought it would go?”, and if they aren’t, you need to get in there and address that issue by bringing in more leads, by lowering the expenses, by making sure that you’re accomplishing what you’ve set out to do.

Joe Fairless: You mentioned just a bit ago you need to get the comps from multiple sources… What are those sources?

Anna Myers: Well, the three online sources are Apartments.com, and Rentometer, Craigslist, so various sources like that. Then multiple property managers, not just one. And then the last one, which is very critical, is actually calling the competition, and walking the competition, and understanding what the rents are at those places, and then experiencing what that means. When you actually walk that unit, and you’re like “Okay, this is what $800/month is, for this market.” So you have to get personal about it, and you have to actually make the phone calls and do the shopping to your competition in the area.

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

Anna Myers: Don’t skip out on a full demographic analysis of your market and neighborhood. We believe the cashflow may be king, but the market fundamentals are really the emperor. If you have strong market fundamentals – the jobs, population, median household income – then you’re gonna weather the ups and downs of the market, your asset will weather those ups and downs much better. So don’t just look for cash; try and find good deals in markets that have strong fundamentals.

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

Anna Myers: I am.

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

Break: [00:20:53].18] to [00:22:14].24]

Joe Fairless: Best market fundamentals that you look for?

Anna Myers: Population growth, reduction in crime level, median household income… These are all things we look at from 2000 to 2017; we’re looking for specific numbers of growth for each of those. Job growth and median house or condo value growth. Then we get down to the neighborhood level once we have the actual asset and we’re looking for a median household income that’s between 40k and 70k, we’re looking for a diversity that’s about 75% with lots of different types of slices making up those 75%. Median rent – we are happy with $700 to $1,000 in median rent. And unemployment should be no more than 2% higher than the city’s unemployment rate. So whatever the unemployment rate is for the city, you don’t want your neighborhood unemployment to be more than 2% higher than that. Poverty level – a poverty level under 20%, but preferred under 15%.

Joe Fairless: What’s the diversity of 75%? Diversity of what?

Anna Myers: The pie. A diversity that looks at the make-up of all the potential pool in that neighborhood that could be rents for you – we like to see a lot of diversity, versus just one type of person.

Joe Fairless: In terms of ethnicity?

Anna Myers: Yes, ethnicity.

Joe Fairless: Got it. So no one ethnicity makes up more than 75%.

Anna Myers: Yeah, and we like to see a lot of different slices within that pie. That way you’re able to have a broader tenant base; it’s gonna be appealing to more types of people, versus if you just have a majority of one slice of pie – then that is going to be your tenant base, and you are reducing your attractiveness to other types of people.

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

Anna Myers: I have to say The Best Ever Syndication Book. It is still one of my favorites.

Joe Fairless: Well, that means a lot coming from you and your underwriting background, that’s for sure, so I appreciate that.

Anna Myers: I am a big fan of Joe and Theo’s book.

Joe Fairless: Best ever deal you’ve done?

Anna Myers: I turned an investment that was generating $620/month into $500,000 in tax-free money, plus a replacement investment of $6,000/month.

Joe Fairless: Okay, say that  again, please? It was generating $600/month, to $500,000 in —

Anna Myers: $500,000 in tax-free money.

Joe Fairless: Tax-free money, so you did a 1031…

Anna Myers: Yes, a 1031, but it was a 121 exclusion, so the balance above the 500k was invested into a historic duplex in downtown Charlestown; it’s a legal Airbnb, and that generates $6,000/month after expenses.

Joe Fairless: Huh! What is a 121 exclusion?

Anna Myers: So I sold my primary house… What we did is we had our primary house in the Bay Area for 16 years. We moved out of it because all of our kids had gone to college and we didn’t need such a big house. We rented a house and we rented out the big house for two years. At that point – that is the key moment when you need to tell the tenant “Thank you for staying, your lease is up”, and then you sell what was your primary home; it has been converted into a hybrid, where it is still your primary house, but it is now also considered an investment vehicle by the IRS… So you’re doing a 1031 on the amount of equity over $500,000. I’m married, so that’s why it’s $500,000; it would be 250k for a single person. That’s the 121 exclusion. And then 1031 the additional equity to avoid paying tax on that, into a like-kind replacement.

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

Anna Myers: Being too nice when I bought that Diamondhead, Mississippi. I should have walked away from that one at closing. There were some signs at closing that I didn’t pay attention to, and I was just too nice and bought the house anyway.

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

Anna Myers: I love teaching. I teach free webinars weekly at multifamilyu.com, I teach underwriting, I also co-host a lot of webinars with cost-seg people, and lenders for multifamily, CPAs… I like teaching people how to invest in apartments.

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

Anna Myers: The best place to reach me is MultifamilyU.com, and I’m Anna@multifamilyu.com.

Joe Fairless: Anna, thank you for spending some time with us and talking about your experience, how you got going, your super-power… I picture you with a cape, by the way, whenever you’re talking about your super-power in underwriting, and some advanced things to look for, like the recapitalization, and some other things like the claw-back…

Anna Myers: Yeah, the catch-up.

Joe Fairless: The catch-up, sorry.

Anna Myers: Yes, claw-back and catch-up – those are two different things.

Joe Fairless: And also, when you look at different markets, as well as neighborhoods… I really appreciate you spending some time with us. I hope you have a best ever day, and we’ll talk to you soon.

Anna Myers: Thanks, Joe.

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Best Ever Show #SituationSaturday flyer

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

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

 

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

 

Best Ever Tweet:

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

 

Devin Redmond & Thomas Castelli Real Estate Backgrounds:

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

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


TRANSCRIPTION

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

First off, I hope you’re having a best ever weekend. Because today is Saturday, we’ve got a special segment for  you called Situation Saturday, and here is the situation – it’s tax time, and you’ve got to put together your tax returns, or your CPA has to put together your tax returns. Well, you’ve got to figure out what is it with these new tax cuts and Job Act law that you can do, or what is it about that that you can use to benefit you as a real estate investor. Let’s get some clarity on that.

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

Devin Redmond: Great! Thanks for having us.

Thomas Castelli:  Great, same here.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Joe Fairless:  Like an LLC?

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

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

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

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

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

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

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

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

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

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

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

Joe Fairless:  Because you started with a smaller property?

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

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

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

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

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

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

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

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

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

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

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

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

Thomas Castelli:  Great, thank you!

Devin Redmond: Thanks for having me!

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Guest Matthew Ryan on Best Show Ever banner

JF1593: An Unprecedented Tax Strategy – Opportunity Zones with Matthew Ryan

In this episode we briefly discuss Opportunity Zones; what they are, how you can invest and how big this one-time tax deferral program really is. Similar to a 1031 exchange but with more leniency and better tax advantages, Matt Ryan has been tracking this piece of legislation before it was written into law. Listen to how he’ll take advantage of this and find out ways you can implement Opportunity Zones investments into any real estate strategy. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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Matthew Ryan Real Estate Background:

  • A social entrepreneur, founder of Re-viv, which addresses the market inefficiencies in community revitalization efforts
  • Focused on the multifamily value-add and development space in distressed areas
  • Based in San Francisco, CA
  • Say hi to him at https://re-viv.com/
  • Best Ever Book: Discipline Equals Freedom

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TRANSCRIPTION

Theo Hicks: Hi, Best Ever listeners, and welcome to the best real estate investing advice ever show. I’m your host today, Theo Hicks, as Joe is traveling to Texas today to look at a few apartment deals. Today I’m speaking with Matthew Ryan. How are you doing today, sir?

Matthew Ryan: I’m doing well.

Theo Hicks: Isn’t Matt Ryan a quarterback in NFL?

Matthew Ryan: Unfortunately, he is. [laughs]

Theo Hicks: I’m guessing you’re not a fan of the Falcons?

Matthew Ryan: Not so much the Falcons, but I need to get to his level of fame, so people can refer to him as Matt Ryan. [laughs]

Theo Hicks: That’s funny… A little bit more about Matt’s background before we get started – he is a social entrepreneur, founder of Re-viv, which addresses the marketing inefficiencies in community revitalization efforts. He is focused on multifamily value-add and development in distressed areas. He’s based in San Francisco, California, and you can say hi to him at re-viv.com.

Matt, before we get started, can you tell us a little bit more about your background and what you’re focused on now?

Matthew Ryan: Yeah, my career focus is, as you said, multifamily value-add and development, specifically within distressed areas in and around primary and secondary markets. Think of these as the census tracks that are the blossoming neighborhoods, the neighborhoods that are – to use an industry term – rapidly gentrifying.

What a lot of Re-viv is focused on is not just the investment, but also trying to pair with non-profits and community entities to create what we call social [unintelligible [00:03:04].13] model, where we’re basically funneling a portion of pre-tax profits into those communities, and also trying to focus on providing long-term affordable housing and workforce housing.

Theo Hicks: Obviously, someone who’s a regular investor doesn’t have to, as you mentioned, work with other non-profits and other organizations, so could you talk about how that works? How do you find them, what do they do to help you with the business plan, and things like that?

Matthew Ryan: Yeah, it’s really at the tail end of what we do. A lot what we focus on is, like I said, the value-add portion, innovative approaches to affordable housing through co-housing – that’s a particular model that we’ve looked at right now. We actually have a project right now that we’re doing… So if you look at, say, a co-housing model, we’re actually providing rents that are 35% below, with no subsidies.

But back to your question as far as the actual funneling into the non-profits – it’s at the tail end. The simplest form right now – we’re just using 1% of pre-tax profits from the asset management company and then finding local non-profits and community organizations and donating directly to them. That’s really the simplest form that we do it right now.

In the long-term we’re trying to focus our efforts in innovation around not only just the affordable housing space, but also around workforce housing and policy, and helping drive positive policy that can actually incentivize developers to preserve affordable housing, as well as develop it.

I think one of the key things that we were gonna talk about on the podcast here, which is a great opportunity, is the opportunity zones, that just came out, which is a provision in the tax code that is directly incentivizing investors to take money and invest in distressed  census tracks.

Theo Hicks: Okay, so opportunity zones – you said it’s a provision in the tax code that essentially incentivizes developers to develop in these distressed areas… What types of incentives are there? Is it just tax breaks? Do they help you fund a portion of the development? How does that work?

Matthew Ryan: It’s very similar to a 1031 exchange, but it’s actually more generous than a typical 1031 exchange… Not only in just the way that it’s structured, but also in the actual deferred capital gains. With the 1031, I have $100,000 capital gain; I invest in a project… I’m just deferring that capital gain, right? Especially if, say, only 30k of that is capital gain and the other 70k was my original basis or my original investment, right? Well, with an opportunity zone, if you have the $100,000 capital gain, you can invest that into another project and actually defer the gains through the investment, through the life of the investment, if you keep it in an opportunity zone fund or an investment within an opportunity zone for ten full years. And if you do it a five or seven-year term, then there’s a 10% and 15% step-down on the actual capital gain that you pay. So again, very similar to a 1031 format. It specifically applies to capital gains and capital gains only, but it’s not just real estate gains; it also applies to stock gains, and other various capital gains that are recognized.

Theo Hicks: Is there a list of these opportunity census tracks somewhere?

Matthew Ryan: Yes. If you just google “opportunity zones California”, that will take you to a designated page that will pull up an interactive map that you can go in there and check out the opportunity zones in your area. They typically do that by state. The local governments have designated these census tracks, so… Yeah, this was done as of April of this year, and usually Google is the best way to go about it, for sure.

Theo Hicks: And then would there be actual listings on there, or would you say “Hey, this is the census track”, so any property you buy in this area or any land that you develop in this opportunity zone you get those tax incentives?

Matthew Ryan: Yeah, it is up to you to find the investments, and it is also up to you to ensure that your investment – or if you do an opportunity zone fund, which I know some larger syndicators and investors are doing… That if you’re doing a fund, at least 90% of your assets are located within an opportunity zone.

If you wanna do a one-off investment, Theo, you could basically just invest in one individual home or project, and you just need to make sure it’s in a designated census track. And as far as finding the deals – I think it’s interesting you bring that up… There’s tech companies that are already starting to create specialty software to help pool assets in these areas… So there’s a little bit of tech navigating to that, but right now it’s just really be checking a website, using whatever your favorite lead generation tool is, and obviously working with brokers who know the areas well enough to be able to say “Hey, find me deals in these specific areas.”

Theo Hicks: So how are you finding these deals? Are you using all those strategies you’ve just mentioned? Or what’s your best way to find these deals?

Matthew Ryan: We use a couple different software tools that basically aggregates within specific census tracks. We’re using the opportunity zone overlays that are given to us by the state government, and then from there just using whatever your favorite lead gen tool is, and pooling assets, and then either cold calling, or also, as you said, using broker relationships to say “Hey, I’m not sure if you have some listings that are in and around these areas, but these areas obviously for us make a bit more sense.”

The one thing that I should mention – I’m probably hopping a little bit ahead here – is that there are some strict guidelines as far as how you invest in opportunity zones. What I mean by that is a typical value-add player may have some limiting factors, because what you have to do is you have to increase your basis by whatever you designate the actual property to be. So let’s just take a million dollar property – you say the land is worth $400,000 and the building is worth $600,000. In order to qualify for an opportunity zone, you have to invest at least $600,000 into that property in order to qualify for the tax deferral. Of course, the reasoning behind that is they wanna spur job growth, they wanna spur development in these areas.

And I will say, originally, the original guidance they had given is that you had to do 100% of your overall investment, so you had to invest a million bucks; they’ve actually scaled that back, to make it a  little bit more — not easy, of course, but a little bit more forgiving, if you will, to investors. So really heavy value-add plays, as well as development plays, are really gonna be the only types of opportunities that you would wanna pursue.

Theo Hicks: So you deal with the value-add and the development… Which one do you do more of?

Matthew Ryan: Right now we’ve been mostly focused on value-add, but with this provision, the opportunity zone provision, and really kind of within our thesis, we were tracking this piece of legislation for about two years before it actually came out… Actually using the non-profit, that came out with some of the original distressed community index, the Economic Innovation Group – we were using some of their data to help identify potential markets.

With that being said, we are navigating more towards development plays and actually creating an opportunity fund for smaller development, in the smaller [unintelligible [00:09:54].07] basically anything in the 5 to 20 million dollar range. So we’ll be focusing and shifting our business plan a little bit more towards development, but still trying to focus on heavy value-add, and even smaller value-add plays that may not be outside of an opportunity zone.

Theo Hicks: I know a very common question that I hear a lot is “How do you underwrite these highly distressed properties?” Because typically, for a value-add, it’s gonna have a decent enough occupancy that you can use historicals to figure out what the ongoing expenses are gonna be… But if it’s super-distressed, you can’t really base your underwriting assumptions on the current expenses… So if you wanna talk about what your process is for underwriting these deals and figuring out what the purchase price is?

Matthew Ryan: Yeah… Carefully. [laughs] Carefully. You have to find a local expert, and usually that’s a property management company, someone who’s embedded in the community for a while, who can really tell you what your predicted rents are gonna be once you’re finished. If you’re a heavy value-add player, it’s how far do you wanna push your product, and is there individuals within that marketplace that are gonna appreciate the product that you’re delivering?

For workforce housing, we’re finishing a project right now in Sacramento where we may have overdone the finishes a little bit, but I think you have to just be careful about understanding who your actual tenant base is gonna be. I think that’s really one of the key things, a property management company who can help you with that.

As far as the underwriting, there’s really no silver bullet. You really have to be diligent. I come from a construction background; I owned a construction company for five years in Charlotte, North Carolina, so I have a lot of that experience that I carry with me, that is very beneficial in the underwriting process, and we now have people that we’re working with in our marketplace that are well-seasoned [unintelligible [00:11:38].20] general contractors who have almost ten years experience. Being able to have those partners is really key to your underwriting, because as you know, from an investor, you’re the conductor, and you need to have a good orchestra who can go out there and give you all the bits and pieces you need so you can assemble a good underwriting proforma.

Then from there I think it’s just a matter of being — I was having this discussion with a property manager yesterday for a project… You really have to embed little pieces of conservatism in your underwriting. I joked with him, I said I kind of embed little nuggets of money everywhere within my underwriting proforma, so I know that I’ve got some juice in my proforma that if things go wrong, we write in good contingencies, and I’m just very conservative in that, so that way I never feel like I’m running up against the wall as far as our underwriting is concerned, because there’s so many things that can come up in a heavy value-add play.

The only thing I would add in the end is really spending your time in due diligence to walk the building. And not just walk the building, but spend time in the building. Look around. By the third or fourth time that you’re actually in a building, it’s amazing to me because many times in the hundreds of homes that I’ve spent inspecting, I’ll come back a second, third or fourth time and I’ll find something new, I’ll find something interesting that I didn’t see before. That’s so invaluable… And you can’t just count on necessarily someone who’s a hired inspector to have that diligence.

Theo Hicks: Oh yeah, seriously. Best Ever listeners know my experience with inspectors, so I totally understand what you’re saying there. How are you actually funding these deals? Is that what that opportunity fund is, or is that something different?

Matthew Ryan: Yeah, so we’ll be launching an opportunity fund for everything that we do from a value-add position; it’s mostly just been the 506(b) and 506(c), working with accredited and non-accredited, and syndicating our deals as one-offs. Then I’ve also done a lot of personal deals and grown a personal portfolio, and most of that has been through family and friends, or  in most cases taking on the debt myself.

Theo Hicks: So when you’re raising money from accredited investors and when you’re doing it yourself – that’s different from the opportunity fund…?

Matthew Ryan: Well, opportunity funds are absolutely going to be investor-led. So we’ll either be doing one-offs investments through syndications, but as I said, we’re looking to create a fund – more of a semi-blind pool than a true fund structure. We’d like to get a fund structure that makes sense, it’s just the rigidity of that, and the time and the energy, as well as the money… We have to see how much – for fear of redundancy – opportunity or how many deals are out there in these areas that really pencil. There’s been a lot of (of course) people excited about them; a lot of naysayers are saying “Hey, be careful. These are gonna be dangerous deals. These are gonna be deals that people are gonna stretch themselves on.” I think there’s some truth to that, but obviously, you wanna be conservative, and from our perspective, we’re really gonna get out there and raise some capital and then be aggressive about what we can do, as far as when a fund structure makes sense, or individual one-off syndications.

Theo Hicks: Okay. Essentially, you’re just raising money like everyone else, but you [unintelligible [00:14:37].09] opportunity fund, and it’s used to purchase these properties in these opportunity zones.

Matthew Ryan: Exactly. And I’ll just highlight again that the opportunity zone fund is really a setup for those individuals who have capital gains. If they wanna defer their capital gains, they can invest in an opportunity fund, and they have 180 days to take their funds and put them into an opportunity fund. Once the money is in the fund, then you have 31 months to deploy the capital and to actually invest and improve the property.

Again, 1031 I think is 45 days to identify, 180 days to close? So you’re seeing a greater level of flexibility; a great level of flexibility as far as the type of capital gain that can be put into an opportunity fund, and that’s why I think it would make a great investment mechanism for us… If we get the fund put together and raise enough capital for it, I think it can certainly make sense, but we’re still gonna be looking for investments, and if we had an investor who could bring a lion’s share, a couple million dollars, and do a heavy value-add or a development investment, I think it also makes sense to do one-offs and give them that opportunity, because the reporting structure for this is so simple. They literally have already put out a sample two-page tax form that basically you have to fill out every year for every investment. So they’ve really tried hard to make this easy.

As I said, the fund structure makes it a little bit more complex, but they’ve ironed that out. They’ve given investors a great deal of flexibility with the 180 days and the 31 days to deploy the capital.

Theo Hicks: So for someone who’s listening to this podcast and they’re saying to themselves, “Hey, this sounds like a great investment idea”, what is your best real estate investing advice ever to that person to get started in these opportunity zones?

Matthew Ryan: Are we talked about are they already a real estate active investor, or a passive investor?

Theo Hicks: Let’s say they’re an active investor.

Matthew Ryan: Okay. So if they’re an active investor, you definitely need to understand where your opportunity zones are, first and foremost. Secondly, you need to think about structure – what your capital stack looks like. Can you raise enough equity to do a fund? Do you have the experience to put a fund together, or does it make more sense for you to try to find a building or one-off investment in an opportunity zone, and then try to syndicate that deal? That would be where I would start first and foremost, and I think another thing that’s been fruitful for us is finding other individuals that you could potentially partner with, who may be good JV’s, and maybe you guys can pool your money together and get into a bigger investment, or be able to set up a fund yourself. I think those would be good starting points for anyone to be interested.

Theo Hicks: Is there a go-to website, or book, or a  blog where people can learn more about this investment strategy?

Matthew Ryan: Yes, we’ll be posting a webinar that [unintelligible [00:17:20].18] here in San Francisco – we just did a webinar series on it… And to be honest, we’ll have that on our website and on our blog here shortly. If you just, again, google search “opportunity zones” right now, you would be hard pressed to not find a plethora of information. And anyone who has specific questions, feel free to reach out to me; I’ll give you guys my e-mail address at the end, and I’ll give it to you right now again – it’s matt.ryan@re-viv.com.

Theo Hicks: Are you ready for the Best Ever Lightning Round?

Matthew Ryan: Yeah, let’s do it.

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

Break: [00:18:01].18] to [00:19:09].23]

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

Matthew Ryan: That’s always a tough one, and I’ve debated this one a lot in my mind before I hopped on here… I’d say one of my more recent favorites – and I’m reading his second book right now – is a guy named Jocko Willink. Are you familiar with him?

Theo Hicks: Yeah, I know who Jocko Willink is.

Matthew Ryan: Discipline Equals Freedom – that was one of the books that I read at the beginning part of this year, and it’s funny, I can almost hear that guy screaming at me through the book… For those of you who don’t know him, he’s an ex Navy Seal, and now does a ton of business training, as well as Navy Seal training. There’s a simple way and format in which he institutes his philosophies, not only in business, but in the military. It’s just been very profound for me, and something that I really enjoy.

Theo Hicks: And if you follow him on Twitter or Instagram too and see him post a picture of his watch at like four o’clock in the morning, covered in sweat…

Matthew Ryan: Oh yeah, yeah… He’s one of those guys. And this second book – gosh, of course I’m drawing a blank now… Extreme Ownership. He’s one of those people, he exudes leadership. I don’t know how you feel, Theo, but when I see that watch, or if I see a post of his, it kind of motivates me to wanna get up the next morning. It makes me feel like a big wuss for staying in bed, versus getting up at 5 or [5:30].

Theo Hicks: What is the best ever business decision you’ve recently made?

Matthew Ryan: Wow, that’s a tough one… Recently? I’ve kind of thought back to my original investment. My first ever investment was a duplex that I did in Charlotte, North Carolina, and that was really the catalyst for me. It was at a time when I was still in my construction company, and it allowed me to really pivot and think about real estate as a career. It also led into the thesis behind what Re-viv is, by way of experience of a community member there, Ms. Pam, who was a community member and was in a gentrifying neighborhood, worked two jobs, took care of her grandkids, took public transit to her night job… At the time, she was one of those people that I thought of that said “What happens to this person as these neighborhoods continue to turn over?” For her, she was kind of an inspiration person to me, to think like “Well, we really need to rethink about how we do value-add and how we do investment and community revitalization. We need to find a way to keep  these people as part of our community, while also bringing growth to these communities.” That was the one that kind of set the tone for me, and really gave birth to the idea of what Re-viv would be.

Theo Hicks: What is your best ever deal besides your first deal and your last deal?

Matthew Ryan: Wow, that’s an interesting one. I’ll default actually to the first house that I ever bought. It was the only investment that I didn’t make money on, and everything that could have gone wrong in that seven or eight year period that I owned it went wrong, to the point where — I actually had a realtor who was listing it for me who passed away. I went through two more realtors after that before we actually tried to sell it, and then I actually ended up selling the deal myself, after getting a tenant in there and working with the tenant… And they had seen all the work that I had done, the blood, sweat and tears and how I managed the property… But they bought it from me.

I sold it at a breakeven. Obviously, if you did a financial metric on it, it was not a breakeven… But it was one of those things that really taught me the lesson of sticking with something, staying true to doing the right thing, which at the time was very difficult. There were so many times I debated just cutting it loose and selling it at a loss… You know, it just kind of taught me how to persevere, and like I said, stay consistent and stay true to what you’re trying to do.

Theo Hicks: What is the best ever way you like to give back? …besides your overall investment strategy.

Matthew Ryan: Yeah, you took that one away from me… I was gonna say it’s one of the things I enjoy about being in a social-based enterprise – you can kind of have a twofold mission; you can make money, but also do good.

I’d say on a personal basis I try to find non-profits that I enjoy, that I feel have causes that are near and dear to me. I’ve just gotten in a habit of putting them on a reoccurring donation every month. That’s been cool to me, because then I don’t feel like I have to constantly do it… And it’s nice getting the occasional thank you card, or receipt, or note from people. I think that’s been a good, positive thing for me.

Theo Hicks: What’s the biggest mistake you’ve made in real estate?

Matthew Ryan: Yeah, over-emphasis on finding the deals, and not the investors first. That would be the biggest one, and I think you hear it all the time. It was one of those pieces of advice that I’ve foolishly felt like “Oh, I can do this differently. I can find a deal, and I’m sure if I’ve got a good deal, I can find the investors.”

I think the problem with that, especially for those of you who are just getting started, is that it just doesn’t give you the confidence that you need to proceed aggressively with a deal, and it really takes away from all those important factors that you and I are familiar with as far as the due diligence period, and putting your team together… If you have that anxiety and that fear of trying to get the investment, you’re not gonna be able to focus and do your due diligence properly, the way that it needs to be done… And I would say that’s probably one of the most hindering factors, by not having your investor pool worked out.

Theo Hicks: That is really good advice. Very good advice. What is the best ever place Best Ever listeners can reach you?

Matthew Ryan: You can always check me out on Twitter. I’m not terribly active there. E-mail, matt.ryan@re-viv.com, and you can also call me at 415 805 8933. I’m always open to chat with people… And we’ll be posting some more information to our blog around opportunity zones.

Theo Hicks: Well, Matt, I really appreciate you coming on the show today and talking about opportunity zones. I’d heard of them before, but I wasn’t very familiar, but now I am. You talked about tax incentives for people to develop and buy properties in these opportunity zones, which you can find by literally just googling “opportunity zones” and then your state.

You mentioned that there are a few guidelines, one of them being that you need to invest the same amount as the property value into the property. If it’s a million dollar property and if the land is worth $400,000, then you need to invest at least $600,000 in order to qualify. You mentioned how if you wanna get started, you first need to understand where the opportunity zones are, and then figure out how much capital you’re capable of raising, to determine whether you should put a fund together or start off by doing a one-off deal in that area. Then it’s gonna be important to make sure you find other individuals to partner with.

Then we also went over your strategy for finding deals, which is there’s some tech out there now that pools together these properties in these opportunity zones… And then just your regular lead generation strategy and working with brokers.

Then we also talked about how to underwrite these highly distressed deals. It’s similar to underwriting any deals – making sure you’re very careful and conservative, so putting in a lot of contingencies, although I’m sure there’s an emphasis on the contingencies for these types of properties, because a lot more can go wrong, as you mentioned.

It’s important to find a local expert, so work with a property management company who knows the area very well, and then an experienced general contractor to help you estimate the construction costs. Also, you wanna make sure that the types of product you’re offering is actually gonna be in demand, and then make sure that you walk the building multiple times and spend time in the building, because each time you visit the property you’re likely going to find something new.

Again, Matt, thanks for joining us today. Have a best ever day and we’ll talk to you soon.

Matthew Ryan: My pleasure, thank you for having me.

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