JF1474: Build Wealth & Live Off Of Your Wealth #SituationSaturday with Chad Carson

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Chad has been on the show in the past, and he’s back to tell us a few ways that people can retire early through real estate, which is also the subject of his new book, Retire Early With Real Estate. If you want to know how to build wealth with real estate, and then be able to live off of what you have built, grab pencil and paper and hit play! If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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TRANSCRIPTION

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

First off, I hope you’re having a best ever weekend. Because today is Saturday, we’ve got a special segment called Situation Saturday. Here’s the situation – you want to build wealth, and then you want to live off the wealth. Fortunately, we’ve got a returning guest to come talk to us about this. He just wrote a book called “Retire Early With Real Estate: How Smart Investing Can Help You Escape the 9-to-5 Grind and Do What Matters More.” How are you doing, Chad Carson?

Chad Carson: Hey, I’m very good, Joe. Thanks for having me on again!

Joe Fairless: My pleasure. I enjoyed our first conversation, and looking forward to this conversation. Congrats on the new book! A little bit about Chad, just to jog your memory… He began investing in 2003 at the age of 23. As I mentioned, he just wrote a book on retiring early with real estate, and you can say hi to him and learn more about what he’s got going on at coachcarson.com. There’s also gonna be a link to go check out the book too in the show notes.

With that being said, Chad, our conversation today is going to be tactical ways for how to build wealth, and then after we’ve built it, how do we live off of it. First, can you give us some context about your background and why you’re an expert in this particular topic?

Chad Carson: Sure. When I first started – you mentioned I started when I was 23, and I think like a lot of people, and everybody has their different life points, but when I was starting, it was all about putting food on the table. I was a full-time investor… “Alright, how can I flip a house? How can I make some income, just so I actually paid my bills?” That was always first and forefront in my mind, but as I moved forward, as I kind of stepped back from the business a little bit, it became more than a job. It was a wealth-building vehicle, which is something that is actually gonna grow over time. I’m gonna grow my network from something really small when I first started, to something bigger, and then eventually kind of hit that magic point, some people say, where you can actually live off your rental income. It’s not completely passive, I don’t believe anything is ever 100% passive, but you’re to a point where you’re not spending 40, 50, 60 hours a week grinding at it; you maybe spend a couple hours a week, paying a few bills, but you actually still have that rental income coming in consistently.

That’s been my journey as well – I started off flipping houses, I got started after a few years, saving up a little bit of money, started buying rental properties, and then evolving to the point about 16 years later where I am now… Mainly, with a business partner, the two of us have rental properties. We still do a flip here and there, and we’re more stable; we have rental income in a small college town, so a lot of student rentals, some single-family houses, and we’ve kind of gotten to the point where we have other people managing most of the day-to-day stuff for us, and we can use that rental income to do other things, which for me is travel. My family and I went to Ecuador for the last 17 months, and so we were able to use that rental income to pay the bills on the other side of the Equator.

Joe Fairless: That’s incredible. The first time – and the only other time – we’ve talked on this show is episode 457; that was over 1,000 days ago. The episode is titled “How to stay local and dominate.” At that time you owned 57 residential units in Clemson, South Carolina. Where are you at right now?

Chad Carson: We’ve got around 90 now. Since that episode we bought a value-add multi-unit property that we raised the rents on, and did some improvements to, and that was actually just before I went to Ecuador. We were in a dilemma point where we had a lot of capital that we were either gonna use it to pay off a bunch of debt and just sort of ride into the sunset that way and just chill for a while, or if we find a really good deal that we’d know we could add some value to and increase our cashflow, we’ll do that. We used the capital for that big project, and it turned out pretty well. We’ve raised the rents from $375/unit, which was super low, to about $650/unit, and it’s cash-flowing nicely, it’s stabilized. That’s what we’ve done since then. But still in the Clemson area.

Joe Fairless: Okay. In order to increase those rents, how much did you put into each unit?

Chad Carson: The total investment was 250k, so we’ll say approximately 10k/unit, or a little bit under that.

Joe Fairless:  So you’ve got approximately 90 rental units – congrats on that. On average, how much do they cash-flow each?

Chad Carson: With that stabilizement? I think between my business partner and I, with all units, it’s about $100-$150/month/unit, somewhere in there.

Joe Fairless: Okay.

Chad Carson: We have some that are a little bit more leveraged than others, and some are free and clear. It’s a pretty low rent market. Some of the stuff we had left over from pre-2007/2008, we have little mobile homes that rent for $400, and that kind of thing… So your margins are pretty tiny on those, but over time it’s gotten better and better.

Joe Fairless: And you have a business partner in most of these deals?

Chad Carson: Just the two of us. I had one guy that we started 16 years ago, 50/50 partners. I would be the acquisitions guy, private money guy, finding the money; he would manage the remodels and manage either selling them or renting them. That’s evolved a little bit since then. He’s got another business that he spends a lot of time on, but we’ve kind of maintained that old structure where we’re 50/50 partners, and it’s worked out really well.

Joe Fairless: Very cool. So $13,500, 50/50 partners… So you’re bringing in about $6,700/month on this rental portfolio.

Chad Carson: It might be a little bit more than that. It’s probably for each of us 8k-10k/piece. But we’ve reinvested a lot of that money; I don’t take all that money out. Some of that money is dividends, some of it we reinvest in paying down debt or buying new properties, that kind of thing.

Joe Fairless: Yeah, asset management, baby… Right? [laughs] Okay. So 8k-10k/month. For our Best Ever listeners, now that we’ve got context for where you’re coming from, the outcome of our conversation is to help the Best Ever listeners with some tactical things or ways to 1) build wealth, and 2) once we’ve built it, live off the wealth… How do we wanna approach our conversation?

Chad Carson: There’s different camps within the real estate investing world. There’s no right or wrong here, but I think the voice that I speak for a lot is somebody who’s similar to me. I’m gonna talk about smaller business, and people are gonna hear 90 units and think “Yeah right, that’s not really that small”, but it’s all kind of relative. There’s people who have businesses where they go out and own a thousand units, there’s people who have rental businesses where they own three units, and I sort of lean towards the smaller, kind of do-it-yourself type landlord. It’s something that resonated more with me. We have our own little management business, we stay small, in one market.

So in terms of building wealth, real estate for me is a really simple game, in some ways. It’s not easy, but it’s simple. There’s a couple major paths that I write about in the book that you can use to build wealth. One of those that I think we all are pretty familiar with is just a simple buy and hold rental property. But what I try to get into the tactics is when you buy a rental property and you say “I’m gonna hold this for 10-20 years”, how are you actually building wealth? What are the mechanisms to take that rental property that you buy, which maybe has a little bit of cashflow upfront, but then turn that into wealth, turn that into increased cashflow that you can actually live off of and use in your day-to-day life? What is that?

And one of those, which we don’t have a lot of control over, is just sort of passive appreciation – you know, buying in a good location, the property tends to go up in value… I have benefitted from that, for sure, because I bought properties 12 years ago, 15 years ago, that just by holding on and a good location, over time, we’ve kept up with inflation or better… So that’s absolutely a mechanism. That’s something that if you’re just patient, and you hold, and you buy strategically in good locations, where jobs are increasing, where people are moving into, you’re gonna give yourself a chance to have that benefit you.

So I think that’s part of it, but then there’s also some more active tactics that I’ve always tried to use. Some of those – I’ve mentioned that 28-unit property that I was talking about in the beginning – one of the ways we can add value to a property to find an opportunity to use your entrepreneurship… I like properties where somebody has mismanaged that, and there’s a lot of vacancy, and you can fill up those vacancies and increase the value of the building that way; I like buy and hold properties where I see some  opportunities to build something on the property, like add a washer and dryer building that you can make some coin laundry money from, or… There’s a ton of different ways. This is like the multi-unit investors like you, Joe – you all are so good at finding all these hidden income opportunities.

When we think about buy and hold, it sounds kind of simple and boring in the beginning, but when you think about it and say “I’m right here with this property. What’s the way I can maximize the value, maximize the income?” and think about that as your wealth-building mechanism. That’s been a big part of my own success, is sort of using that entrepreneurship, and not just sitting passively, but doing both – benefit passively, and also benefit from your entrepreneurship.

Joe Fairless: What are some other ways you’ve increased income at your properties?

Chad Carson: Washers and dryers, as I’ve mentioned, is a pretty basic one. I’ve allowed pets, which was kind of a dilemma for me. My property manager is like, “Yeah, we could get a lot of these students who want pets”, and I’ve just had mixed experiences in the past, but I have found we can add pet rent to that. I’m keeping track of the numbers on whether that’s gonna be a net win or a net loss, but that’s certainly been one for me.

The other has been changing use. Let’s say I’m renting to a family who sort of sees themself as one unit, and they have one set of income coming in, and instead of doing that, you have a 2-bedroom unit – I could rent it for example in a niche like student rentals, which in my case is sort of my niche [unintelligible [00:12:29].12] I have two students who think about each of their rooms as sort of a separate income unit. So they think about it per bedroom, whereas a family thinks about like this one rent for  the whole unit.

So just by transitioning it from a family unit to a student rental unit, I’ve been able to increase the rent as well, because of that different mentality, that different demand, that different marketplace.

I think shifting who your tenant base is – whether that’s students, whether that’s group rentals, whether that’s medical students… If you can find some kind of niche, and find out whatever that tenant needs, find a way to serve their needs really well – that has a huge increased income opportunity.

Joe Fairless: That concept is fundamentally sound when you’re talking about changing the use… Because what that reminded me of is when other investors buy a plot of land, and then they subdivide it out, basically it’s the concept of multiplication, right? You multiply your income streams through some creative method… In your case, you’re changing the use.

So your focus and recommendation for building wealth is buy and hold deals, and you’ve got a couple ways to do it. One is passive appreciation – let’s cross our fingers, hopefully we buy in a good location and all is well. But it might not, so therefore the second thing is the adding value to the property, mismanagement, adding washers and dryers, you’ve allowed pets and the jury is still out on that, changing the use from family to student rentals. Anything else that you can think of that you’ve done?

Chad Carson: There’s one that’s sort of a hidden opportunity that I find a lot of investors don’t pay attention to, and that’s similar to use, but it’s looking at the zoning of a property. I think this is very relevant in urban areas. Typically the most competitive areas often are the areas where everybody wants to live, or land is really at a premium, or it seems hard to find deals, and the best deals are often hidden below the zoning. What I mean by that is if you study your zoning — and I learned a lot of the zoning, because I was on the planning commission in my little town for a couple years; I learned a ton. I had no clue upfront about how the development process and the zoning process works… But I started looking at maps of all the zoning, and you’ll start noticing trends. You’ll notice that there’s little single-family houses sitting on this one parcel that’s zoned RM4, which in my town is the most dense multi-unit zoning. Or you might have a single-family house, but it’s on a duplex zone.

When you start studying the zoning, there’s all sorts of nuances. For example, you might be able to carve that lot, cut it in half, build another duplex on the back of the lot, with a driveway. I think those are things that developers really study, and people who go from the ground-up and build from the dirt, but we – I say “we” as people who are smaller, do-it-yourself kind of landlords, or people who buy rental properties to buy and hold – don’t really study that as much as developers do… But it has a huge benefit.

Just for an example, you might be negotiating with a seller of a property, and they say “I want 300k for this property”, and you run your numbers and look at your cap rate, you’re like “No, there’s no way. That’s like a 4-cap, or that’s a 5-cap. That doesn’t meet my numbers”, but if you have those hidden opportunities, you look at it and you say “You know what, the back half of this property, the dirt there is worth another $50,000.” If you knew that, and if you knew you could go build another duplex on the back and increase your income that way, that could turn a deal that on the surface looks like nothing – it can turn it into a deal, just because of understanding zoning, city development processes and that sort of thing.

Joe Fairless: I love it. So now there’s two parts to this process. One is building wealth; anything else as it relates to building wealth before we move on to living off wealth?

Chad Carson: Yeah, I would just add your use of leverage is another point that a lot of investors think about. I wrote about it in the book – there’s not a right and wrong way to think about it. It’s like a spectrum of people who say “You should be extremely highly leveraged”, and then on the other extreme they say “You should have zero leverage”, like Dave Ramsey style.

I tried to show that there could be success within that spectrum. My personal preference has tended to be a very conservative use of leverage, but definitely using leverage. Make sure the cashflow is very strong, make sure I have mortgages that don’t have balloons on them the next 2-3 years, always long-term mortgages… But then I’ve also profiled people and found people that use zero debt and have 35 single-family properties producing 15k/month in cashflow, and never used debt in the entire process.

As you’re thinking about building wealth, amortizing your debt is a big part of that, but reinvesting your cashflow if you didn’t have any debt or if you had little debt, and just doing it that way – it takes a little longer to get going, you might have to choose markets where the prices allow you to pay cash, or you and a  partner to pay cash… But I guess I would just add that to your wealth-building stage. You’re gonna have to choose what you’re comfortable with and what your risk tolerance is, but there are strategies that can still work, whatever you choose to do.

Joe Fairless: So we built ourselves a portfolio, and now we want to live off that wealth… How do we build it to the point where we can now live off of it, versus we’re still trying to acquire that magic financial freedom number?

Chad Carson: So this is the point where — just some basic math. For example, for me – I started looking at saying “What are my expenses every year? What are the basic, basic, basics that I need to cover for me and my family just to feel basic comfort, so I’m happy with it?” I had a couple different numbers. I had just “Alright, here’s my bare bones… I could do this, this fine if I had this much per month.” Let’s just say that number was $3,000/month. If I cover that, we do okay. I don’t have enough for the trips and the fun stuff that I wanna do, but we’re okay.

Then I might take another number – in my case, I’m in a smaller town, lower cost to living, but $5,000/month. With $5,000/month I can do all the extra things I wanna do. That’s fine, $60,000/year. So I just started working it backwards from that, and saying, alright, how many properties would I need – and in my case, this kind of goes back to that debt leverage and what I’m comfortable with… How many properties would I need if they were free and clear of debt, if I had these things  paid off? I’ll lean towards that in a  moment… So how many properties would I need?

For example, you might say “Alright, I have a duplex that rents for $1,200/month total, and…” — let me make sure I make my math kind of simple here, so I can do it in my head… That’s $600/month net, after I pay all my operating expenses. So $600/month times 10 is $6,000, so $7,200/year is what that one property would bring in.

Joe Fairless: $600/month times 12?

Chad Carson: Yeah, times 12 would be $7,200/year.

Joe Fairless: Okay, got it.

Chad Carson: So how many of those properties would I need to do that? I don’t think I made my math easy enough there, but… Basically, when I did the math, I looked at it and it was not a lot of properties. I said, if I had had these paid off, I’d have eight properties, ten properties maybe for me personally; they would produce enough that I would have enough income to pay all my expenses.

So I guess my point there is in this transition point from building wealth to actually living off your income, is a very different animal. When you go from having a salary, or you’re working at a job and you have that income coming in from another source, that’s a different animal from you having to produce it yourself and make sure your rentals always pay your bills.

I like to go from a more leveraged portfolio to a more conservative portfolio. That could mean having them all free and clear – that’s what some people choose to do. Hey, I’m just gonna do it like a debt snowball, where I use all my income for 3, 4, 5 years, I accelerate the paydown of my mortgages to the point where they’re all free and clear. That’s one way to do it, and I’ve mentioned earlier that we had a lot of capital a few years ago, and we thought about going that route, “Let’s just pay a bunch of stuff off.”

But we actually went to another decision point where we said, you know what, right now we’re about 70% loan-to-value; let’s just get to a safer place, like 40%, 50% loan-to-value, but not necessarily paying everything off, because long-term living off your rental income there’s a lot of different risks that you need to think about. One is just having enough money to live off of, but you also have to think about inflation, you have to think about deflation… You’re gonna live off these things for a long time.

So what we decided was kind of a happy medium – having some of our properties free and clear, meaning they’re lower risk, they produce a lot of income, they’re stable; other properties – highly leveraged, with good, safe leverage, but those are kind of our growth properties, which are gonna continue paying the loans down, and if we have massive inflation, we have some good, low-interest leverage, then it’s gonna benefit us in that case.

That’s sort of the decision point that all of us, if we’re transitioning to a more passive state with our rental properties, need to think about – what does our portfolio look like? How many properties do I need? Do I need 150 units, or could 10 or 20 units be enough to do what I want? Because the other side of that is the more properties you have and you’re trying to be more passive with it, the more potential management issues there are. You can definitely hire more people to take care of a lot of the day to day stuff, but my philosophy is the simpler you can make it with your portfolio and still meet your financial needs, the better, because it’s just more efficient.

Joe Fairless: So identify your number and the amount you need to bring in monthly, and then reverse-engineer that to see how many units you’ll need to do that. You mentioned earlier your units cashflow around $150 – it sounds like a little bit more, based on the 8k-10k/month cashflow… So what numbers should we use to ballpark that, to determine how much we need?

Chad Carson: I think it’s market-driven. I always use $1,200/month as like  a gross, round number. If you could look at a local duplex in your area, or a single-family house, and that was the median rent for you… In a lot of Southern metropolitan cities where I am, that’s sort of a realistic number. I like to work it backwards from there and just say, alright, $1,200/month; if I had 50% expense ratio, which could be a little conservative, or it could be more to some people, or it might be right on… But you’re gonna net about $600/month. I look at it that way – if you’re going to go the free and clear route, if you’re gonna say “I’m just gonna pay these properties off”, I would just look at it that way: about half of my rent is $600/month, so how much do I need? If I need $6,000/month, that’s 10 properties, and I would just work it backwards.

For me, my numbers are a little bit more leveraged still, at this point; that’s just the decision we made. So maybe you look at it and say “Alright, on average I make $200/unit on the properties that I have. I just need to acquire and stabilize this many units to $200/month and work it backwards that way.”

Joe Fairless: Anything else as it relates to building wealth and then living off wealth that we haven’t talked about that you think we should?

Chad Carson: I would just say over the long run diversification is something else I’m thinking about a lot. I’m a real estate investor through and through. I love owning assets, I love the control you have with real estate, I love the influence you can have on your returns, but over the long run, I think when you’re taking like a 30-40 year view, and this is your nest egg that’s gonna support you, and not your kind of aggressive “I’m gonna go after it” entrepreneurial money, I’m thinking more about beyond real estate a little bit, too. I still have a heavy portion with my properties, but within real estate I’m thinking about being a lender a little bit more, not just the landlord… So being a hard money lender, owning some notes.

And even beyond real estate, I’m thinking about equities and index funds, particularly in my retirement account, because I don’t wanna spend as much time on those, focused on those as much, but I like this idea that if the real estate market did really poorly in your area, you have kind of a 3-legged stool – you’re supporting yourself potentially with equities, you’re supporting yourself with rental properties, maybe you have some notes here that are not as correlated with your rental properties, and not just depending on one source, or maybe even one location. I’m very concentrated in one market, so having properties in multiple markets, having your money in multiple markets and having that diversification is a pretty smart move in the long run, because nobody can really predict exactly what’s gonna happen… So spreading your bets out a little bit can make a lot of sense.

Joe Fairless: Chad, how can the Best Ever listeners learn more about what you’re doing, and check out your book, and get in touch with you?

Chad Carson: I hang out at coachcarson.com. I write a weekly newsletter there, so you’re welcome anybody to come over there; I have a lot of free information that you can check out, along the lines of what we talked about today, using real estate to retire early, financial independence, a lot of case studies, so feel free to visit me there. I also have links to my book there. It will be on Amazon and Bigger Pockets as well.

Joe Fairless: Thank you again for being on the show and talking about building wealth, and then also living off the wealth. Once we’ve gone through the acquisition stage of getting our properties, then it’s transitioning that into actually living off that wealth. The way you suggest to acquire those properties is to do buy and hold deals in good areas, where you can get that passive appreciation, hopefully, but don’t rely on that.

Focus on adding value to the properties, looking for mismanagement, building washer-dryer buildings or putting in those units, in your case allowing pets, changing the use from families to student rentals, or just looking at the zoning and seeing what type of opportunities there are for zoning. Then also taking a look at the leverage too, and optimizing it for the accumulation – that’s the word I was looking for – stage, and then when you transition into the living off wealth, then perhaps optimizing it for something else, and you walked through the process for how you do that… So thanks again for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

JF1447: What To Look For When Vetting A Potential Partner #SkillSetSunday with Danny Randazzo

Listen to the Episode Below (26:14)
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Today we get to hear personal, real life stories from Danny’s own experiences with finding partners. As everyone knows, real estate success is definitely a team effort, and who you choose to partner with or team with can have a tremendous impact on your investing business. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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TRANSCRIPTION

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

I hope you’re having a best ever weekend, first and foremost. Because today is Sunday, we’ve got a special segment for you, it’s called Skillset Sunday. You’re gonna come away from this conversation with a new skill, or a skill that you can hone based on what you learned here. That skill that we’re gonna be talking about today is what to look for when partnering with investors on your deals, who are bringing funds to help you close the deal, and maybe what are some red flags that you should be on the lookout for, too.

So what are some things that you look for for good partners, and what are some things that would be an indicator that perhaps they wouldn’t be the best partner for you. With us today to talk about his experiences and to walks us through his thoughts, Danny Randazzo. How are you doing, Danny?

Danny Randazzo: I am doing well, Joe. Thank you so much for having me on. I’m looking forward to shedding some light to my experiences and probably some of my pitfalls with the Best Ever listeners, to help them get ahead of the game when raising funds and putting deals together with investors.

Joe Fairless: I love that it’s gonna be based on your experiences, versus us talking theory… Because it’s one thing to kind of talk about hypothetic situations, but we’re gonna be talking about specific examples based on your experiences.

A little bit about Danny… You probably recognize his name if you’re a loyal Best Ever listener, because he was interviewed in episode 961, titled “House-hacking Bay Area to a one-million dollar commercial building.” Yes, his first investment property was a one-million dollar commercial building; he now controls 6.5 million dollars worth of commercial, multifamily and single-family investment properties.

He has multiple focuses with both commercial offices, multifamily apartments, he does Airbnb, short sales and foreclosures… And he does most – if not all; I’ll have to get clarification on that – where he lives, in Charleston, South Carolina, a place where my wife very much wants to go, but we have not been yet… And you can say hi to him at his company’s website, RandazzoCapital.com, which is in the show notes link.

How about we’ll start off, Danny, if you can give a refresher, and just let us know a little bit about your background and where you’re coming from, just so we have some context?

Joe Fairless: Yeah, Joe. My background is in financial consulting, and I kind of got started in real estate through reading Rich Dad, Poor Dad and understanding that time is one of our most precious resources, and having a corporate financial consulting job, your time is not always your own. You have to travel, you have to be in meetings, and you have other things and duties to report to… So that lifestyle and that mindset shift through Rich Dad, Poor Dad led me down the path to real estate and really building a portfolio of passive income, and having places for friends and family and investors to invest alongside, to help grow their passive income and achieve their financial freedom, goal, as well. It’s something that I’m truly passionate about.

And like you said in the intro, all of my real estate holdings are now in the Charleston, South Carolina market… So I invest where I live, and what I like about the market there is we’ve got great economic indicators. Population growth and job growth are really driving the market demand for all types of real estate, and in the area, Joe, when you and your wife come down to visit, you will see the growth that’s taking place and the buildings that are going up, and the people that are constantly moving in, and also the tourists that are coming in to visit.

Joe Fairless: How many deals have you partnered with investors on?

Danny Randazzo: I have partnered on five different deals with investors, and learned unique things with each of those.

Joe Fairless: So when you now have an assessment of the lessons learned, and for the purposes of our conversation we’re focused on what to look for in the quality of investors, and then what are some red flags… I imagine, first — well, I was gonna have a leading question; I’m not gonna do it. So how do you approach it? What are some things that you look for?

Danny Randazzo: Well, having gone through the process a few times, and learned along the way, one of the things that I probably failed at form the beginning was not having all of the details sorted out in the operating agreement.

All of the structures that I use, I have the investor be an active member in the LLC. And there’s pros and cons to doing it that way, but based on the friends and family and the investors that I had, everyone felt more comfortable becoming an active member in the LLC, and having decision-making power in that. However, as good of a relationship as you have with people, I think things can potentially change when you are pooling your money together and buying and investing in real estate. I think that’s the first thing that is important for the Best Ever listeners to understand – you should have everything in writing as far as the decision-making, how it’s gonna work, and really think through tricky or difficult scenarios, because as well as you know that person, their mindset may change when their money is actually in the deal and you guys are trying to execute a business plan.

Or if someone maybe is a stubborn individual and can’t be persuaded to go along with the vision that the rest of the investors have, it can cause problems within that structure, so it’s definitely a con to that structure as well.

Joe Fairless: And taking a step back, you mentioned it but I just wanna reiterate that basically it’s a joint venture, it’s not a syndication. You’re doing a joint venture where you’re business partners with the investors. Compare that to a syndication or a security, where the investors expect a return based on your performance, not the group’s performance. That’s a rough definition of a security… And I’m not a securities attorney, but that’s basically what it is.

So you don’t do that. You have a joint venture… So you’ve got a lot of cooks in the kitchen. How  do you take control of the decisions, if you can, so that people who might not be as actively engaged or knowledgeable about what needs to be done don’t overrule the individuals who have more experience and are more actively engaged?

Danny Randazzo: One caveat before we get into that answer… The structure of having business partners, like you said, that you joint-venture with – I think it works well for smaller deals, maybe under that kind of million-dollar purchase price threshold where you are raising a smaller amount of capital and you’re really partnering with maybe 3-4 different people… So that multi-member LLC would have 3-4 members at most, so there’s not as many cooks in the kitchen.

Once you are in the kitchen together and you’ve got those 3-4 people and you’ve got your deal going, your question was how do you avoid making slow decisions or inefficiencies in the decision-making process, and it’s something that you certainly have to manage.

One thing that I struggled to do – I don’t think I did a good job of having everything in writing from the beginning as to what requires a vote, and what types of decisions should be made to the person on the ground, and really managing the day-to-day and overseeing the asset.

One thing I’ve learned through some research is that other folks have used this similar process before, and they’ve had a set dollar threshold, like you would with a property manager, where if an improvement or a change is made for $1,000 or less, you don’t need to have the conversation with the rest of your business partners, but you as the person on the ground close to the asset can go ahead and make that decision and keep the building in great condition, and everything is fixed up on time, and that kind of streamlines the process.

So I would say that would be one thing – that you and your business partners would wanna have a discussion about a document in your operating agreement that says “If a decision needs to be made, is it above a certain dollar threshold?” That way, if you are the day-to-day manager, you can seamlessly make some of these decisions and not get bogged down in some of the details of which color trash can to buy for the apartments, or what type of paint should we get, so we can save a few hundred dollars on a lower-quality paint versus getting a high-quality paint that lasts a little bit longer.

Joe Fairless: I love it. That is really helpful to significantly decrease the amount of decisions. Is there a dollar amount? I know you’re not an attorney, but I imagine being the savvy guy that you are, you probably asked the attorney “Hey, can I have a dollar amount of, say, $500,000?” and the whole group would agree on this, so it’s not like you’re saying this just so you can go full-speed ahead without anyone’s consent… But if they’re not wanting to be involved and do all these votes and phone calls, they’re like “Hey, Danny, we trust you. Run with it!”, from a paperwork standpoint, can you have a really high dollar amount so that you basically don’t have to go to them at all?

Danny Randazzo: Every deal is different. As I am not an attorney, I would suggest the Best Ever listener reach out to their local attorney that they work with to get that figured out. From my experience, what I think I have learned is that yes, you can have some sort of agreed-upon dollar amount, and it seems like it needs to be relative to the types of normal expenses that a property would have.

So if you are buying a one million dollar commercial building, you may have furniture expenses that are a few thousand dollars, so maybe for that property it makes sense to have $10,000 thresholds where you can make decisions on behald of all of your business partners up to that amount… But if it exceeds $10,000, then you wanna have a vote on it.

Now, on the other hand, if it’s a $200,000 Airbnb property, that $10,000 may be a little bit too high. You might need to bring that down to maybe $5,000 or $1,000, because your expenses are not gonna be as significant.

Again, it’s really up to the business partners and what they are all comfortable with in terms of decision-making and what should require a vote and what doesn’t require a vote.

Joe Fairless: Okay, so we’ve talked about how to set it up for success and mitigate the chance of having some disagreements, but we haven’t talked aboout what I mentioned early on in the show, and that is what to look for in an investor, and then what are some red flags… So how do we wanna transition into that?

Danny Randazzo: We can jump right into what to look for in an investor. From what I’ve seen, an investor that you would wanna have in this type of joint venture business structure is someone who has some sort of investing background where they are knowledgeable of the decisions that they’re making; they understand investing, they understand return, and they can understand a business plan for that strategy.

Another thing to look for from a solid investor standpoint is that they bring a unique skillset to the table. Maybe they have a background in the mortgage industry and they can shed light on getting a better loan or a rate… So I would look for a different skillset that you may not have. Maybe you have an attorney who is very busy with their dayjob, but also bring a unique skillset to the table to help with some of the contracts or help with due diligence, or researching market analysis, or things like that.

So I would look for an investor who knows what investing is at a high level, and they’re comfortable with investing dollars and having available funds. You’re not taking every last dollar that they have available to pay their bills… So they have some sort of savings and reserves… And then that they bring a skillset to the table, because again, at the end of the day you are business partners with them and you all need to make decisions together, so you wouldn’t wanna have someone who is inexperienced or very unsure of what investing is, and that may require a lot of your time.

Joe Fairless: What about communication style? Do you look at that at all, or do you consider that? I think that is a definite lesson learned for me as far as what to maybe avoid from having an investor become a partner, and that could be their communication… So are they timely in reviewing materials and quick to respond on urgent matters. You don’t wanna delay your property progress if you’re waiting on outstanding decisions and people can’t be reached.

The other component to communication that I think is really important is the style in which you are going to work together. Could this business partner be a negative drain on the overall business itself because they are very bogged down in irrelevant details or cant get focused on the bigger picture and are very concerned about minor items? Or they may have a different vision for the property, so I think you need to be very careful and really vet your investors and future business partners around their communication.

The second piece to that is around their goals – their personal goals and their investing goals. If you have a misalignment of goals, it can negatively impact that property’s progress, and at the end of the day, your business partner — you’re almost marrier to them and it’s very tough to work together if your goals are not aligned… Whereas your goal may be to maximize the revenue for the project, and another investor/business partner’s goal may be to minimize every single line item expense at the property, and rather than focusing on generating more revenue, they’re focused on saving a minor amount on the expense side.

So I think you need to, again, understand what the goals are of those persons, and really balance that with what your goal is and what the vision is for that property, and do they align… Sometimes at the end of the day you may see that it’s not the best fit for a certain type of investor, or an investor with a certain shorter-term goal, as opposed to a longer-term goal to work with you on that project.

Joe Fairless: You mentioned at the beginning that you’ve done five deals with the investors… This information is based on your experience, so can you give us a specific story about any of these points that you just mentioned?

Danny Randazzo: Yeah. On one of the deals we’ve got four total partners that are investors in a property, and we definitely had a misalignment of goals. At the end of the day, it was for an Airbnb type of property where some of the investors were looking to minimize the expense of the cleaning fees for the property, and going to a cheaper alternative cleaner, while trying to maintain the same level of experience for the guest – I think that was a misalignment of goals to reduce that cost and maybe potentially negatively impact that guest’s stay. In the longer-term picture, if you have great stays and great reviews from your guests, that positively impacts your long-term success with ratings and reviews for your Airbnb properties; and ultimately having a higher rating and review could allow you to increase your cost or rent per night that you’re getting, as opposed to trying to cut down on some of the expenses.

So it’s definitely a learning curve to get through that, and you have to manage personalities and opinions, and then at the end of the day come together still and do what’s best for the business. I think you can quickly realize the difference between individual’s goals and vision when you have some sort of disagreements that you need to work through, and then again, you still need to be cordial and have a professional relationship with them to have a successful and profitable business running, all while looking forward to your potential next deal, and do you wanna work with these individuals again or not. That’s up to you.

Joe Fairless: Clearly, in that example you wanted the more expensive service because you saw long-term gain from positive reviews, and someone else or other people wanted the cheaper service, perhaps sacrificed some experience… So which one did you all end up going with and how did you arrive at that conclusion?

Danny Randazzo: We ended up going with the cheaper service, and we were able to work through that and get several bids to come to the agreement that we can ideally strive for the same level of service and give the guest the same experience hopefully… So we’re really running a trial period now to make sure that we’re not losing any guest experience on that… But what that really did – it caused a lot of disagreement and hardship between each individual involved in the process, and at the end of the day it wasn’t a significant amount of savings on a per month basis… But again, kind of that short-term mindset that some people can have negatively impacts the greater good of the whole.

Joe Fairless: Anything else that we should talk about as it relates to identifying characteristics of good joint venture partners, versus partners that wouldn’t be the best?

Danny Randazzo: I would say if you’re gonna have active investors, make sure you understand their goals and how they operate as a person. Then number two – get everything in writing. For all of these different scenarios – we talked about a few, but just think through every decision that you make with your property and what that input would look like of having another partner involved in the decision-making process with you, and just document everything and every decision that you need to think through and make in writing, so that way there’s no confusion about who knows what and how the property will function. That should alleviate some undue stress on some of these harder conversations that could come up down the line.

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

Danny Randazzo: They can get in touch with me at InvestWithDanny.com.

Joe Fairless: Danny, thank you again for spending time with us… It sounds like there’s first some prep work that needs to be done before even speaking to investors, and that is knowing what the operating agreement will be, some things in there regardless of the partners, to help smooth out the process of a joint venture, because there could be a lot of cooks in the kitchen…

One of those tips that you had is to set a dollar threshold that needs to be voted on if it’s above that threshold. And anything below that, then one of the individuals, just like a property management company, can go ahead and exercise their judgment and use those funds to do whatever needs to be done at the property; that way you don’t have to have 1,000 decisions being made by a group. Also, you mentioned having everything in writing.

Then a couple things to look for that I wrote down that you said for potential investors – one is someone who knows real estate and is savvy-enough to provde input and know what’s going o… But then also ideally brings a unique skillset that is complementary to the group and that can be leveraged to have even better returns for the investment, like someone who knows mortgages, or maybe property management, or something else.

Then from a red flag standpoint, two things – one is communication; if they are timely in communicating with you leading up to the deal, then it’s reasonable to assume they’ll continue to be timely afterwards. There are exceptions, but at least you will qualify them in some way that way. But if they’re not timely, it’s gonna be very hard, I imagine, to get in touch with them regularly after you close. So if they’re not timely in getting back to you before, afterwards it’s tough.

I can tell you, with my business partners, that is the — not number one; trust is number one, but holy cow, number two is responsiveness. I can pick up the phone right now and get a hold of Frank, my business partner… And if he doesn’t answer, he’s on a call and he’ll text me he’s on a call, and viceversa, and then we’ll just get in touch immediately after that.

So communication and timeliness of communication is right up there, like number two for me… So I hear you on that. Then also, the second thing is investing goals – personal investing goals and their style.

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

Danny Randazzo: Thank you, Joe.

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JF673: How Speaking Engagements, Education, and Obeying the Market Helped Him Raise MILLIONS For Big Deals

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Today’s guest is not afraid to open his mouth, and at the same time he is a great listener. Hear how our guest is funding huge projects and developments from simply adding value to other investors. He is raising big money, speaking at REIA’s, and helping others along the way!

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Alex Franks Real Estate Background:

    – Principal of Bowler River Developments
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JF630: Why You Need to Call this Lender TODAY!

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Today’s guest is one of our sponsors and of course he’s a sponsor for a very good reason, amazing terms! Tenant to hear how his fix and flip company has a program called Rental 30 and what it can specifically do with your assets, even if you’re not making a lot of money!

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John Warren Real Estate Background:

– Founder and CEO of Lima One Capital
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Listen to all episodes and get a FREE crash course on real estate investing at: http://www.joefairless.com

Made Possible Because of Our Best Ever Sponsors:

You find the deals. We’ll fund them. Yes, it’s that simple. Fund That Flip is an online lender that provides fast and affordable capital to real estate investors.

We make funding your projects easy so you can focus on what you do best…rehabilitating homes. Learn more at http://www.fundthatflip.com/bestever.

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