OPM Mastery

On this episode of the Invest Four More Podcast I interview Anil Walia. Anil is originally from India, where he invested in real estate, then moved to Canada where he invested in real estate and finally started investing in real estate in the US while living in Canada. I have many people from Canada ask me how to invest in US real estate because prices are so high in Canada. Anil discusses how he has bought over 30 properties in Florida with financing while not being a US citizen.

In this episode Anil discusses how he began to invest in rental properties in India. It was much different than buying properties in the US or Canada. Cash flow was very low and property values fluctuated greatly. When his children went to Canada to attend school he and his wife decided to move to Canada as well. While in Canada he started a real estate business and investing in properties in Canada. Anil then discovered the US real estate market and realized how much more opportunity there was to make money on rentals in the US than there was in Canada.

After seeing the tremendous rent to value ratios in the US, Anil started researching local markets. He looked at Florida, Las Vegas and a number of other markets that had great rental property returns. After researching areas of the country he settled on Florida as the place to invest. He spent time in Florida finding agents, contractors and property managers to help start his rental property empire.

Here is a great article on how to find a contractor.

After finding a team, Anil started to buy rental properties and he was astonished at the money he was making in the US compared to Canada and India. He began to plan how he could buy more rentals and build cash flow as quickly as possible. He figured out the best way to finance rentals which was not easy for a foreigner.

Here is a great article on how to find a property manager.

Anil admits it was not easy to find a lender who would finance his properties being a Canadian citizen. Most lenders will not lend to foreigners and that is a huge road block to buying properties in the United States. Anil was able to find local portfolio lenders who would finance his properties. Anil would take the approach of buying five properties with cash and lines of credit he had against his personal house and then he would refinance them with a local lender. By purchasing with cash, making repairs when needed and then refinancing the properties, Anil was able to get much of his cash out of the properties and repeat the process over and over.

Anil has purchased 38 properties and does not plan to stop anytime soon. He still sees opportunity in Florida with high foreclosure rates and great rent to value ratios. Prices have started to rise, but he thinks it is a solid market to invest in.

Anil can be reached on his website: waliagroup.com. He has written a book on his investing strategies and loves to help people invest in US real estate from other countries. Anil is still investing in real estate and loves the passive income it produces, but it has not been easy. He has had to change real estate agents, property managers and contractors multiple times to find the best people for his business.

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If you are interested in getting personal coaching from me for your real estate investing business be sure to check out my resources page.

[INTERVIEW]

Hey everyone, it’s Mark Ferguson with Invest Four More. Welcome to another episode of the Invest Four More Real Estate Podcast. I have a really interesting guest on today. I’m really excited to talk to Anil Walia. He is from India originally, moved to Canada, has invested in real estate in India, in Canada and the US.

So I’m really interested to talk to him about how he’s invested in real estate especially how he’s been able to invest in the US real estate while living in Canada because I get many questions from my listeners and readers of the blog about how to do that.

So Anil, welcome to the show, how are you?

[0:01:37] AW: Thank you Mark. I’m fine and thanks for getting me on your podcast.

[0:01:42] MF: No, thank you. I appreciate it. I love to have a wide range of guest and I find your story really interesting. So I’d love to start from the beginning. You’re from India and you start investing in real estate in India, how did you first start investing in real estate and what are the first properties like that you bought?

[0:02:02] AW: I’m an engineer and I’m a retired commander from Indian Navy. In India, primarily I was in the military but on the side I used to buy homes for my own use. I did buy a property in Punjab which is a state in India and I lost money on that property. It is that loss which put me onto the track for more investing because it is that deal which taught me how the real estate markets work and how you make money and so that was the start. So that happened in 1991 and thereafter, I bought a few properties in India, maybe two or three and I shifted here to Canada in 2004.

[0:02:57] MF: Okay, very cool. I’m curious, how does it differ buying property in India versus Canada or in the United States? Is it a similar process or is it completely different?

[0:03:06] AW: You see the real estate market in India and Canada or the US is entirely different. There are positives for each of them. In India, the properties that I use regard in some other factors. In North America, the whole real estate sector is organized and everything is legal and everything is through checks. In India, there are deals which are half done in cash and half done in checks. The markets also there, they do not move the same day it moves in North America. More predominantly, the rents in India from the houses are much less. So you get about 2 to 3% per year, the rental yield.

[0:03:57] MF: Okay and do you still own properties in India or did you sell everything you have there?

[0:04:02] AW: No, I sold everything in India.

[0:04:05] MF: Okay, after seeing the different markets you can invest in?

[0:04:08] AW: Yeah.

[0:04:08] MF: Very good, so what drew you to Canada? Why did you decided to make that move?

[0:04:13] AW: You see, in 2001, my children, I have two sons, they wanted to study in Canada so I put them in the undergrad courses for computer science in Toronto and in 2004, they passed that and at that time my wife said that it was time to join the children otherwise, some ladies will hook them and we will not be able to find them. So that was a force for us to shift to Canada and stay with our children.

[0:04:47] MF: Okay, very nice and then once you got to Canada, you saw the real estate opportunities and different ways to invest. Were you surprised at how different it was in Canada real estate wise?

[0:04:58] AW: Yeah, you see it was so different in 2004, I read an ad by Robert Allan for some courses in Toronto. I went and joined that course, I paid $5,000 for the two day workshop and I realized in that workshop that the houses made in Canada are all of wood, whereas in India, they’re concrete homes. So I was that raw in that time but not withstanding since I’m an engineer and I have an MBA in finance so I understand the business part of it. And I quickly realized that there are a lot of money lying in real estate if you can pick up the threads and if you can understand the market.

[0:05:44] MF: Right, very cool. So what were the first types of properties that you invested in, in Canada? How did you get started in a new country?

[0:05:53] AW: Yeah, you see what happened is since I was an engineer, I wanted to apply for jobs. So I applied for jobs for three months in 2004 and I didn’t get any job. Then in January of 2005, I applied for a real estate license because I realized in my mind that I had a passion for real estate. So I took six months to get the license. By August of 2005, I got my license and since there were a lot like 70 or 80 Naval officers in this area, so they started buying homes from me and in first six months, I sold six homes.

[0:06:36] MF: Very nice.

[0:06:37] AW: Yeah but in August 2006, some aerospace company they offered me a job as an assistant engineer and so since I had worked 30 years as an engineer, so I quickly took over that job and left this profession half way. But to my back luck or good luck, in December 2008 I got laid off. It is that time that I decided that no more service and I have to be self-employed and I should look after myself.

By then, I had understood the market and I have understood how the real estate works in Canada so in January 2009, I took a vow to get into investment and real estate. Once I started this, then I looked around for tax sales in Canada and I maybe went to about 100 tax sales and gave a lot of it. I did buy a few properties and I did make money but I didn’t find it very attractive.

Another good thing which happened once I got laid off, I was always thinking that I don’t have money to make investments but then I got laid off and I met people. I was attending one seminar and I went and told the lecturer that, “I have about $300,000 in here so if you would find a deal, let me know. I can buy that deal.”

But that guy instead of telling me the deal, in the audience he says, “Gentleman, if anybody wants a hard money lender, if anybody wants money, I have a money lender in this room.” So people said, “Who is that?” and he told me, “Anil, please stand up,” and I was really aghast that I never thought I’m a hard money lender.

But he explained it to me. He says, “Damn it, you have money so it’s either you can buy a deal or lend it to them.” So I found that that was a good exposure to me so I started lending money to those so-called investors who were participating in those seminars. And that way, I could understand how the deals work and how people make money in the deal.

I used to make 12 to 13% on my investment but that really gave me an exposure deep into the investment hopefully your kind of thing and to my good luck in 2008-2009, the US market was melting. So since I had done a Robert Allan course that year, my eyes and ears were towards US and then I picked up a few more courses which were related to the US market.

And I started learning more and more. The more I learned the US market and the more I knew that there is money lying in the streets of US. But the problem was, all these gurus they were not giving us the end product. They will give you a dead fish. They don’t want to teach you how to catch the fish. So I thought that this maybe has gone with money.  So I need to understand the market myself.

So in 2009, I went and visited Chicago and then I went to Atlanta and then to Indianapolis and then lastly, Los Angeles, Detroit, Buffalo, Cleveland. So I spent 5 days in all of these towns and moved around with a real estate agent and one thing that came out very clearly, that the houses are being sold for peanuts in the US as compared to Canada.

A house which costs $100,000 in US whether it’s Chicago or Atlanta or Indianapolis, it cost $300,000 in Toronto and that house which is a $100,000 you can easily rent at $1,000 or $1,100 which gives you more than 1% monthly return. Whereas in Canada, if you pick up a house for $300,000, if you cannot rent for $3,000, it rents for 15 or $1,600 dollars.

So it made my whole perception very clear as to which is the market I should go. Though the fundamentals, they say that you must invest in your backyard and you should be able to see your properties, you should be able to visit the tenants and talk to them but the second fundamental says, you should invest in a market which gives you returns. So in this case, I had to go to the market which gives returns. So that is how my initial decision from Canada to US came about.

[0:11:43] MF: Wow, that’s a great story and insight into how you moved from India to Canada to the US and I hear it all the time from investors who are in Canada how I can’t make money in Canada because prices are so high and rents are so low and they want to invest into the US and we’ll talk about that soon but before we get too far, what was it like being a hard money lender? Was it a good experience? Was it more educational? Did you ever had some problems or issues come up with people paying you back?

[0:12:14] AW: No, it was a very nice experience. I did not lose money. I think the primary reason was because I was a real estate agent so I could analyze a deal properly even if somebody gives me an appraisal report, I did give it much weight. I used to do my own CMA and to followed that. One of the criteria that I had was my money should be safe.

Whichever deal that I went in, I would analyze a deal myself and then lend the money. Fortunately, I did not lose money and all my money and all interest payment — I did that for about two to two and a half years and all that money came back.

[0:12:56] MF: Very nice and it’s funny how you became an accidental hard money lender when you had no idea what that meant before but coming to realize.

[0:13:05] AW: And you know, that too, I was a naval officer for 30 years I was in the military. We were not allowed to talk finance on the dining table and in the parties so I never had financial sense.

[0:13:17] MF: Right, it’s amazing. I mean even in school, they don’t teach us much about money. I don’t know how it is in India but in the US, you’re taught very little about financial investing and wellbeing and mostly it’s about investing in the stock market for 40 years and hoping you save enough money. But did they teach you much in India about financial things?

[0:13:38] AW: No, nothing. In the school, they don’t teach you, in the colleges they don’t teach you. One picks up on his own.

[0:13:45] MF: Yeah. It’s crazy how one of the most important things in our lives they don’t teach us how to handle it.

[0:13:51] AW: Yeah, I think it’s the same everywhere.

[0:13:53] MF: Yeah. Did you every buy any properties in Canada for rentals or you couldn’t find any good returns up there?

[0:14:01] AW: No, I did buy a property in Canada. I have in my principle home plus I have one investment property.

[0:14:09] MF: Okay, go ahead.

[0:14:13] AW: Well not much because you see, I realized two things. Though I am a real estate agent in Canada, I could not find a good deal in Canada. In Canada, the foreclosures are handled differently than US. US is an entrepreneurial country. In Canada, we respect both privacy so it is very difficult to find out where are the defaulters, who is defaulting on the homes and things like that and banks also don’t make it public.

So if somebody is defaulting on the loan, it only becomes public when they list it through a real estate agent and it comes on the MLS. The moment it comes to the MLS, it’s a public information and it gets discounted as for the market value.

Since I could not find a below market value, below market value property in Canada so I did not buy. I thought of converting some of the homes, some of the basements into additional units but there also the return would also not match. It was more of labor than the returns. I thought if Canada is like finding a fish in the ocean if you’re looking for a good deal whereas in US, in the pond, you can see so many fishes.

[0:15:42] MF: Right.

[0:15:44] AW: Yeah, I would say I was fortunate that what happened in US, I think this will not happen in the next 20 years.

[0:15:52] MF: I would agree with you. I think it was a unique circumstance with the banks just having crazy lending standards that could not be sustained. So when you decided to invest in the US, you mentioned a number of places that you went to. How did you chose places to visit? Did you do some analytics or some studying before you came to the US?

[0:16:17] AW: Yeah, I did because I told you, I attended a few seminars and things like that so I know the various websites in the US where we can check about the US economy and the labor statistics, how the money moves, the IRS websites. There is a website called Air Class Rent Lines, all the people are moving whether they’re moving to sun shining states, what are the internal moments, how the baby boomers are moving.

So I did some research and I found out that these are the cities, Chicago, Atlanta, Las Vegas, Orlando, Phoenix, California and Los Angeles is there, but they are different markets. So I just wanted to have a feel and so what is the difference between Chicago and Los Angeles or Los Angeles and Las Vegas or Las Vegas and Orlando.

Finally, after I did this touring I took about a year to a year and a half and spent about 40 to $50,000 on all these exercises. I realize there are three profit markets in the US, Las Vegas, Florida and Phoenix. These were the three markets and also, my analysis showed that these are the three places where the markets fell the most.

The property values came down to 50% in this market so I knew that the real estate did not have an issue in the US. The issue was on the finance side, it was a financial meltdown so because the real estate sector was healthy and the prices had fallen because of the financial issue. So these are the places that the prices will rise the game and they will rise again for the same reason they rose for the first time.

So one of the results of my visit was that I came to the conclusion that out if these three places only I have to select either Las Vegas or Florida or Phoenix. My next analysis showed that I should go to Las Vegas because Las Vegas is a more celebrity kind of thing and a lot of investments have already gone and all those big wigs will ensure that these market recovers fast.

But just before investing in Las Vegas, I somehow from inside I got a feeling that I should not invest in Las Vegas because it’s a kind of Sin City, all casino and sex related activities, adult entertainment. Somehow, I felt — and the economy is all entertainment oriented, it’s not a mixed economy and then you only have one town in the desert.

So though I knew that I can get good returns but I did not feel — from my mind there was some hesitation. At the last moment, I decided to go for Florida and Florida was nearer to Toronto. It’s only a three hour flight and in Florida, again there were a lot of issues. People used to scare me. You see in Canada, there is a lot of negativity about the US. When you tell somebody that I’m going to invest in the US, “Oh no, no, don’t go there. There are hurricanes, there are a lot of crimes and rentals are very tough. They break the houses, they take,” — all kinds of stories.

So from the hurricanes point of view, I was also scared that I should not go to Miami or east or west coast of Florida. So I selected Orlando because it is central and it has Disney World. So again, the celebrity status is there and Orlando has a mixed economy as against Las Vegas. So all these factors pull in and then I also checked the population wise. The Florida population has been rising two to three percent for the last seven years and it’s the fourth popular state at this moment. It’s going to become the third popular state. It’s going to take over New York by 2016.

So I thought Orlando is a much better place, so then I decided on Orlando and we went and visited Orlando. The final decision came about when I found the US government is building a medical city there. There is a place known as Lake Nona there the US government is investing $700 million in building a medical city. It is four very big hospitals which are going to need 40,000 jobs so I thought, “This is the place” and it meets all my requirements, all analysis, everything can work.

So then in November 2011, I along with my family went with the aim of buying a property. We thought we should buy one property and I have two sons, so then we thought we could buy three maybe. When we went there, my wife and my younger son, they said we don’t want to see properties and we want to go to Disneyland so I along with my eldest son went with the realtors and I placed 20 offers on the homes and we were so scared because we don’t know like Canada as well, on top of it in the US, we don’t know much.

So we were very skeptical if the property listed at $200,000 will give an offer at $160. Out of 20 offers, we finally managed to get one. We got this property at $182,500 and it was listed at $210 and during the peak it was $410. After buying this property, it got rented in 15 days at $1,800. This really opened my eyes. I said, “This is fantastic! If the property reaches at $410 and I am buying at $182 which is renting at $1,800, where is the risk?” I said, “There is no risk, so there is actually a gold lying in US.” In fact, I subsequently wrote a book also. I wrote a chapter in the book and the name of that chapter is, “There is gold lying on the streets of US”.

[0:22:31] MF: Yeah, that’s true compared to Canada.

[0:22:33] AW: Yeah, absolutely. If you were to find a deal and you just pick up a deal and you see from the hard money lender point of view, if I am getting 12% return on the purchase price being 1% rent every month, appreciation is bonus and then if I can get a refinance, that is further bonus. Once I bought the first property, I said, “Now, no more hard money lending. Let my money come to the US.”

So I bought three homes. After buying three homes, then I went to the bank and they gave me the money. I got them refinanced and then I bought three more and then continued and until now, I am continuing. I’ve got now my 30 home, two more homes I have signed two days back. So I am at 40 by December 30th.

[0:23:30] MF: Wow, that’s awesome and are they all in Florida in that same area?

[0:23:34] AW: Yeah, they are all in Orlando and Kissimmee.

[0:23:37] MF: Are you seeing prices starting to rise in that area now?

[0:23:40] AW: Yeah, they are rising and in fact, I think five or six of my homes have doubled up.

[0:23:46] MF: Oh wow.

[0:23:46] AW: Yeah, so prices have risen and in fact, all my homes without exception, have gone up by 50% and the prices are rising but we are still finding good deals because by now, I have learned the art of finding properties below market value and so I have a good team of realtors and contractors and property managers and I can find a good property. So every time I buy a new property, I can make about $20,000 in straight equity.

[0:24:21] MF: Right, that’s fantastic! And I am curious too, one of the biggest questions that I have from people who are in Canada trying to invest in the US is one, they are so far away so they have trouble setting up a team and we’ll talk about that soon but then financing. Did you find it difficult to find a bank that would finance you because you’re not a US citizen?

[0:24:46] AW: Yes, in fact, this is one of my grudge against US, that they treat us as “stepchildren”.

[0:24:57] MF: How are you able to? I mean did you talk to just many, many banks to overcome that or were there certain steps or traits? How did you do that?

[0:25:05] AW: Yes, so many banks and this have been the biggest challenge and I think it is because it is financing only. We were able to — it is indeed our biggest challenge. This is a special art that I have developed and there are so many cases which maybe we can discuss on the third area.

[0:25:24] MF: Okay, very cool so one last question. Have you found that local banks in Florida were best or was it a National bank that helps you out the most?

[0:25:33] AW: Yeah, local banks in Florida. They were the better options.

[0:25:37] MF: Okay, very good to know. So investing from Canada and getting financing and refinancing the properties and kind of rinsing and repeating the process over and over again has worked, sounds like very well for you. What challenges did you have in putting the team together living so far away? Were you able to do that because you had flexibility to travel a lot? Was there just a lot of back and forth trips?

[0:26:04] AW: No, you see I did travel before I started buying but to tell you very frankly, only the first house I had seen before putting in an offer. But the last 37 homes, I bought without seeing the homes. I developed a team so that whenever I locate a property from various websites because I am a real estate agent so I know how to evaluate a property to see what its real value is.

Once I am near about finalizing the order, then I tell my real estate agent to go there and send me the pictures and videos of the house. The real estate agent sends me the pictures and videos and then I send my inspector and the inspector sends me 34 pages report and then I send an EMD and then the property closes. Then my contractor and I sign a separate agreement with the contractor and the contractor does the work and he sends me the pictures every night and the final inspection is done either by my property manager or by my inspector.

After that, the houses take over by the property manager. So if the contractor hasn’t done the job properly, the property manager will come and cry. Once the property manager takes over, then the tenant comes. If any defect is left over then the tenant cries. So by the time the tenant is in, I know that because rent starts coming into my bank so I know I am the owner and I don’t have to go to Orlando.

[0:27:47] MF: Right. That’s a fantastic system. I wonder because you’re far away and you have to have these systems in place where everyone is sending you pictures and giving you constant updates, if you almost have a better system than some local investors because they feel they don’t have to be as hands on because they’re local and they’re probably not checking the houses as much as you’re getting updates from three hours away.

[0:28:13] AW: Yeah. You see for selecting a realtor, I have trained four or five realtors but the current realtor is the one from whom I had bought the majority of the property maybe about 35. Initially, I had trouble in identifying the right realtor but you keep pruning your team. I think I have changed seven to eight contractors and inspectors, I have changed two inspectors. The current inspector is excellent. I found a good roofer then there was challenges on the mortgages side so I had to change so many banks.

So you see, money making is not that easy but at the same time, it is not difficult. The beauty in the whole thing is, there is very less amount of risk because what I find, knowledge is power. SO if you acquires that knowledge and if I know sitting in Canada that this house is worth $100,000, I don’t mind paying $102 but if I get it at $98, I am happy. So once I have that knowledge and once I know that the repair value is only $10,000, if the contractor tells me it’s $11, it’s okay. If I can get it at $10,000, I am happy. So that way, there is no big issues.

I am not saying that there are no challenges. There are at times challenges but they are all very well managed. Then the picture which I had then knitted in my mind in Canada before I started buying, what happens if you don’t do anything, you generate a lot of fear but when you take one, two or three steps, then you find the real clutter keeps getting clear and the things become more brighter and you are able to take control.

[0:30:19] MF: That’s very true. The easiest way to learn is to do it and we all make mistakes but by doing it, you figure out what your mistakes are, what you can do better and if you never get out there and do it, you’re never going to accomplish anything. That’s for sure.

[0:30:34] AW: Absolutely.

[0:30:35] MF: Very cool. Now you said you’ve become an expert in finding deals, how are you best finding deals from out of the area? Are you relying on real estate agents to send you listings or are you looking online yourself and trying to do the deal finding yourself from Canada?

[0:30:53] AW: It is both ways. Mostly we do it ourselves on various websites but the real estate agent also does. You see, you have to have a real estate agent. Even for the deals that we are finding, we list our agent on the website so that those websites know that we have an agent and anytime an agent is required to visit the home, so they will give the code and etcetera.

The beauty in Canada is, a lot of people especially white people are thinking how this guy coming from India is able to buy. So they wanted to interview me on the TV. So I got an offer from the Roger TV if I could come to the TV. So I said, “I have no problem,” because I haven’t done anything illegal or I have not cheated anybody.

So they interviewed me last May and there were a lot of responses. They re-interviewed me in September, then they re-interviewed me this year in May and on 20th of November for the fourth time. They want to know how it is so easy to buy a home sitting in Canada without seeing it and making good cash flow and making appreciation as well.

[0:32:21] MF: Right, it’s challenging and it’s not easy. Like you said, it’s not easy but it’s not rocket science either.

[0:32:28] AW: Yeah, absolutely.

[0:32:28] MF: It’s about systems and staying. You said you changed contractors seven or eight times and changed agents. You can just sit back and think everything is going to be fine without doing any work but again, if you stay on it, if you have systems in place then it’s not terribly difficult once you figure it out.

[0:32:48] AW: Yeah.

[0:32:48] MF: Very cool, alright so I’m curious, have you had problems with property management companies? Have you had to change them?

[0:32:54] AW: Yeah. I have changed two property management companies. So now, I am with the third management company.

[0:33:00] MF: Yeah, I imagine it’s an ongoing process.

[0:33:03] AW: An ongoing process, yeah.

[0:33:05] MF: So you’ll have 40 properties by the end of this year. Do you have goals for the future? Do you have a certain number you want to get to or are you taking them as they come? What are your plans?

[0:33:15] AW: At this moment, I buy five homes in cash and then go to the bank and they give me a refinance and then I buy five more. So I think this can continue up to a point because if the interest rates rise or the values rise, this equation may not work. Until such time it works and because in my opinion, single family homes, three bedroom, two washrooms, between 1,000 square feet to 2,000 square feet is the best product.

Especially, we are able to buy a foreclosed home so we get the discounted property and then we are able to rent it so that is why I don’t want to shift from this segment to multi-family units or some condos or something. Until such time this formula or this product works, I’ll keep going. Maybe if the foreclosures just stop — you see Florida is number three space in US even today where there are foreclosures available.

So if the foreclosures in two or three years died on and become very less and good deals are not available, we might have to change our product or chain but at this moment, I do not contemplate.

[0:34:32] MF: Very good and yeah, I have heard from multiple people that Florida still has a very good market for rentals and finding distressed properties. I’m in Colorado and we have the highest appreciating market in the country and our deals have dried up significantly. It’s very hard to find anything but yeah, I always keep my eyes open for other places to invest as well and Florida has been on my radar too.

[0:34:57] AW: Good. Yeah, we can work together there.

[0:35:02] MF: Nice. So tell me, if someone is from Canada and they want to invest in the US, what advise can you give them as far as starting out and maybe the first steps they should take?

[0:35:14] AW: As I mentioned to you, I have written a chapter in a book, it’s called Achieve. This is the expert from the successful entrepreneurs. I wish I could show you the picture. It is listed on Amazon.com also but my chapter is, its title is “There is gold lying on the streets of US” and I have a website. My website address is thewaliagroup.com.

So if somebody can go onto this website, then I can send them that chapter and the chapter explains whatever I have spoken in the radio with you and then I’m also running a mentorship program. This I had to start because there are a lot of people that have shown interest that they want to buy properties in the US. So depending on what the person wants, I do give mentorship as well.

[0:36:15] MF: Great, that’s awesome and I will include a link. I always write an article, a brief write up on this podcast. I’ll include a link on your website and to the book so people can have access to that if they want more information. It is the best way to contact you going to that website?

[0:36:30] AW: Yeah, they can go to the website and they can ask for the copy of the chapter and I have even made an audio book for the chapter. I can send them an audio book as well.

[0:36:39] MF: Okay, great and again, that’s thewaliagroup.com. It’s W-a-l-i-a-group.com.

[0:36:49] AW: Yeah.

[0:36:49] MF: Alright, so we got your goals, we figured out what you do in Canada, are you still an active agent in Canada or are you just focused on investing right now?

[0:36:59] AW: I am a licensed agent not an active agent in Canada but I am more active in the US now.

[0:37:07] MF: Nope, that makes sense. Great, well any parting advice for our listeners here? I think I have asked all the questions I have to ask, is there anything else that you want to let them know before we sign off?

[0:37:18] AW: I feel that the best advice to the listeners is, knowledge is power. They must try to generate the knowledge in whichever field they want to go and then the second is, they must have an investor mindset. That means that even if somebody is working and doing their job, they must save money and they must invest. They should develop that attitude.

The third is, once they know where they want to go, they should look for a mentor who has chartered that route. So just follow him. On the investor’s mindset, I will tell you that when I started investing, when I found that it’s a great vehicle, I found a lot of credit cards giving me money for one year at 0.99% and so many offers them today. I have over a $100,000 on credit cards at 0.99%.

One has to be financially savvy to utilize that money but if you develop the investor mindset, you can make a lot of hard way. What I’m saying is, if the percent is working and using the service, he has good credit, he can have the credit card, he can utilize these free offers for one year or two years then he should know how to retain that money and he can invest in the real estates. Real estate is an only way who generate well. All the millennials in the world all over, they became billionaires primarily because of real estate.

[0:38:56] MF: Yeah. That’s great advice and yeah, I completely agree with you. Obviously, I have chosen real estate and it’s been fantastic for me. I really appreciate you being on the show, great information, I learned a lot myself, thank you a bunch and yeah, I may be in touch with you if I decide to invest in Florida, we’ll see.

[0:39:12] AW: Okay, thank you and I’ll also have to try to explore the Colorado market.

[0:39:17] MF: Oh yep, it sounds good. Alright, thank you Anil and yeah, we’ll talk soon.

[0:39:22] AW: Yeah, thank you Mark.

I love to interview successful real estate investors on the Invest Four More Real Estate Podcast. Joe Fairless is another very successful investors who built his wealth through large apartment buildings and has done it very quickly. Joe was in the advertising business in New York City when he decided real estate investing was the career path he wanted to take. Joe lived very frugally to save money in order to invest in real estate and it paid off big time. Joe invested in single family homes, but made his biggest profits on large multifamily apartment complexes. Joe and I talk all about how he got started and what his plans are for the future.

Joe started out in the advertising industry in New York City and climbed his way to a vice president position. In face, he was the youngest vice president ever at his agency and was making decent money. However, Joe read Rich Dad, Poor Dad and got he entrepreneurial bug. He decided real estate was the business he needed to be in and started buying rental properties in Dallas. He ended up buying four rentals in the Dallas area while he was living in New York.

Joe contributes his early investing success to sacrifice. He was making good money in New York, but New York is also a very expensive place to live. While many of Joe's friends were spending money as soon as they made it, Joe was saving every penny he could. He lived in the cheapest apartment he could find and always had roommates, even if there was not exactly enough space for a roommate. Because Joe saved his money, it was much easier for him to buy rental properties and build for his future.

Jo admits he did not do a complicated investment analysis on Dallas. He simply grew up in the area and knew it well. He had family in the area who could help him oversee his properties and he did not have to learn an entire market from scratch. Joe has since invested in many others areas of the country and now does a much more in-depth analysis. He likes to look at multiple factors:

All of these factors help Joe decide where he should invest money and where he should not.

Here is a great article on how to invest in long-distance properties.

A couple of weeks ago I interviewed Michael Blank. He invests in large multifamily complexes and so does Joe. They both see the value in buying large complexes that can produce a lot of money. Both investors use other people's money to buy the largest complexes they can find. Joe makes his money buy managing the asset, finding the deal and coming up with exit strategies. His investors can expect a steady return on the money they invest with Joe.

Joe feels he can make more money, faster with large complexes than he can buying single family rental properties. But, it is not an easy task to buy large complexes. He has bought properties in multiple cities, because he must go where the deals are. It also takes months to put a deal together and get the financing needed to buy the property.

Once Joe buys the property he adds value by putting money onto the complex. He works to remodel units so that he can raise rents and increase the value of the property.

"The goal is to control a billion dollars’ worth of property before my 40th birthday and I’m 33 years old. Right now I control $21 million, I don’t know what percent of the way I am there but I’ve got some work to do. That’s the goal, a lot of it is going to be buy and hold over the long run and that’s kind of the approach I’m going to take."

That's right, Joe wants to control one billion dollars of real estate! That's a huge goal, but the way Joe has been going lately I think he can get there. His plan to reach one billion in real estate is to only buy complexes with over 250 units.

Joe not only is a very successful real estate investor, but he also has his own podcast. The Best Real Estate Investing Advice Ever is one of the top real estate podcasts. You can also reach him at Joefairless.com or email him at [email protected].

LEAVE A RATING AND REVIEW FOR US OVER ON ITUNES

[INTRODUCTION]

[0:00:14] MF: Welcome to the Invest Four More Real Estate Podcast. My name is Mark Ferguson and I am your host. I am a house flipper, I flip 10 to 15 houses a year, I own 13 rental properties with a goal to buy 100 by 2023. I’m also a real estate agent. I’ve been licensed since 01, I run a team of nine, we sell close to 200 houses a year. On this show, we like to interview house flippers, land lords and the best real estate agents in the business.

Stay tuned for some great shows. Do you want more information on my rentals, on the numbers, how I buy properties, check out Investfourmore.com.

[INTERVIEW]

[0:00:58] MF: Welcome to another episode of the Invest Four More real estate podcast. I have an awesome guest today, he also does a podcast, a very popular podcast. With me is Joe Fairless who does the Best Real Estate Investing Advice Every Podcast. I was lucky enough to be on it a while back but he has an awesome podcast, has been a real estate investor in the corporate world and done an amazing amount of deals in a short amount of time.

Joe, great to have you on the show, how are you doing?

[0:01:29] JF: Hey, thanks a lot Mark, I appreciate it, I am doing very well and looking forward to our conversation.

[0:01:35] MF: Great, yeah, thanks for being on the show, we’ll talk about your podcast, what you’re doing now investing wise but you made an interesting transaction, you were the youngest vice-president at an ad agency, if I’m right? Is that correct?

[0:01:50] JF: Yup, that’s right. I climbed the corporate ladder relatively quickly, I started out in 2005 as a junior project manager then I climbed the corporate ladder all the way to become the youngest vice president of an award winning advertising agency in New York City for my 30th birthday, and then got the entrepreneurial bug and started my real estate investing company.

[0:02:14] MF: Very cool. What attracted you to real estate from the corporate world?

[0:02:20] JF: Well I would say, whenever I was in advertising, I didn’t, at least starting out, I didn’t have any money. I was making less than minimum wage whenever you factored in all the hours I was working. Plus I had student debt as well. I didn’t have money to invest and I didn’t even know what investing was all about. I read the book Investing for Dummies and they talked about three different types of investing: stocks bonds, LLC’s and real estate. Then I went to, or I read Rich Dad, Poor Dad and it was eye opening as it is for most people.

At that point I started, I wanted to invest in real estate but I didn’t have any money and this is a couple of years after now that I graduated. So I started saving up money and then in 2009, October of 2009, I finally purchased my first house and it wasn’t because I had some crystal ball and saw that was a perfect time to purchase in the Dallas area, Dallas Texas area, even though I was living in New York City. I just didn’t have any money to buy before and then if I did then I would have been buying before then and I would have gotten in some financial trouble if that was the case.

But fortunately the timing was perfect, I bought in October of 2009 and I had been investing in single family homes while I had my advertising job and then in addition to that, I was teaching other people in New York City how to do what I was doing because I had a lot of friends who are like, “Well how are you working in advertising but buying all these homes?” I talked — I ended up buying four homes, I have three now, sold one because it was an ugly duckling but I had four at the time and they were really curious about it. So I taught a class in New York City teaching others how to do it.

And then as I kept buying more and more, I got one house in October of 2009 that I got another house in 2011 and then the third and fourth came the next year. It kept coming faster and faster because I bought them more creatively as I kept progressing. So through those experiences, I realized that real estate was something I wanted to continue to pursue. I just evolved the model so that I was buying multiple homes now at once in apartment communities versus buying single family homes, one at a time.

[0:05:05] MF: Very cool. I’m curious, that’s interesting how you became one of the youngest vice presidents ever at that institution but you still didn’t make very good money. I know at the corporate world we’re taught to do exactly what you did, climb the ladder, get as high up as you can. But I’m guessing you’re probably much better financially off now than you were working at that ad agency just because you’re your own boss, you make your own decisions and you’re doing your own thing, is that right?

[0:05:32] JF: Yeah, I would say just to clarify, I was making nothing when I first started out in 2005. But once I was climbing the corporate ladder and once I became higher up and in particular when I was the youngest vice president, my base salary was $150,000 not including the bonus. So I was making over, you know, more than six figures or in the six figures I guess and I was using that money to save and put into real estate and the thing is, one of the keys to what I’ve done on occasion, I kept my living expenses the same over the course of those nine years that I had been in advertising.

I lived in the same apartment, well I lived in one apartment the first year I lived in New York City. That was in east [inaudible, Brooklyn. It was statistically the busiest police precinct in all the five boroughs in New York City, so it was incredibly dangerous. Then I moved out of that and I moved to the east village, which is a really nice area in Manhattan but I was living in an apartment the size of a shoe box, almost literally.

I kept that apartment with a roommate, different roommates came and went but I stayed and I kept my living expenses the same, besides rent increases over time which it really didn’t increase much. Whenever I rented it in 2006, it was I want to say about $1,750 and we split it, me and my roommate, and then whenever I left in 2015 it was 2,200. Over time it didn’t increase significantly although some of us might think that is a significant increase. For New York City it really isn’t.

Other than that all my other expenses were the same. My friends would make fun of me, they’d be like “Why are you living like a collage kid, my refrigerator was a dorm style refrigerator for nine years. It’s about half the size of a normal sized human being or a quarter of the size and I just kept tucking away my money and that allowed me one to invest in properties but then two, it allowed me to have about $50,000 to then venture out on my own and start my own company and kind of create something from scratch.

[0:08:08] MF: That’s awesome. I know when I start out, I had a ’91 ford mustang and that was my daily driver for about 10 years. Even though it looks like we’re super successful and have always had money, you don’t get there by spending all your money on anything possible. I imagine a lot of your friends were making fun of you for living there, probably didn’t invest their money and they spent most of it on New York City.

[0:08:32] JF: Yup, that is correct.

[0:08:35] MF: Yeah, I’m sure it’s easy to do there and that brings me another question I have is I know a lot of people in New York, in San Francisco, in LA who want to start investing in real estate but they can’t cash flow because prices are just so crazy in those areas. I imagine that’s why you invested in Dallas. Did you do a lot of research to look at different markets? Did you have connections in Dallas? How did you choose that area?

[0:09:01] JF: I’m originally from Texas, I’m originally from the Dallas Fort Worth area. I would say that we — we meaning my sister and I. My sister’s a real estate agent in Fort Worth and she introduced me to real estate investing, she’s the one who sent me the [inaudible]. But we talked about it and since I was from Fort Worth, the Dallas Fort Worth area, whenever she sent me deals, I would know not only the rent and purchase price and all that, I would know how good of a school district it was because I knew the school’s mascot, that’s how well I know Dallas Fort Worth.  And it just made a lot of sense for me to invest there because I was so familiar with it.

I’d like to say that I did this exhaustive analysis on all the different markets across, I didn’t, I knew the area in Dallas Fort Worth, I saw that there were cash flowing the properties and I decide to invest there. Now as far as if I currently, let’s say if one of your listeners lives in California and you’re looking for cash flowing the properties, at that point, if you don’t know of — well the first thing I would do is I would focus on the markets that you do know. Then qualify or disqualify them based on certain factors that you find those important.

Some of the factors I find most important is first and foremost jobs. Jobs and then job diversity. So making sure that all the employment isn’t being driven by one industry like Houston in the 1980’s. Like midland Texas, like Detroit forever, until recently. Make sure that that’s not the case and make sure there’s a lot of diversity.

And I live in Cincinnati now, I lived in New York City for 10 years after I graduated college from 2005 to 2015 but recently I moved to Cincinnati because I have an apartment community here and then also I see a lot of opportunity and then lastly, but most importantly my girlfriend’s here. But the girlfriend aside, Cincinnati has a very diverse employment base. You’ve got nine fortune 500 companies that are headquartered in Cincinnati. When you have something like that happening in your city then slow and steady wins the race and you’re not going to get a lot of ups and downs. You might get some explosive growth through a company growing but it’s such a diverse economy that you’re going to have a very stable property, assuming that it’s managed the correct way in terms of evaluation.

That’s what I would look at if I were out of state and those are the types of questions I would ask myself whenever I’m doing that research.

[0:12:01] MF: Right. I advise people too, if they have family or connections in certain areas of the country to look there first just because it’s so nice to have someone on the ground, someone local who can visually see properties for you, recommend professionals to use, things like that. Like you said, to do an exhaustive search of the entire country for the best rental markets would take forever.

It would be really hard to measure what’s good and bad without knowing the local area. Some of these companies like Realty Track will publish the best rental markets but they don’t take into consideration taxes and all kinds of different factors that make a huge difference. So no, that makes a lot of sense. I’m curious, how did you choose Cincinnati for apartments?

[0:12:49] JF: I was actually focused on Tulsa Oklahoma but for various reasons, primarily the prices the sellers were offering were outrageous for what they actually were worth. I looked at other markets and I hadn’t honed in on Cincinnati until I came across this opportunity and then once I saw the opportunity it’s 168 units, which is the first syndicated deal I did.

Once I qualified the opportunity, or I found the opportunity, then I qualified the market and that’s some of the research I did, what I mentioned earlier about job diversity and supply, demand and employment growth as well as population growth.

[0:13:33] MF: Nice, very nice. You went from single family rentals to big multi-unit properties. How did that transition work and what made you want to go towards the multi-family properties?

[0:13:46] JF: The transition was eye opening. I’d say — so I went from single family homes to apartment communities and there is a steep learning curve when you look at evaluating one house and then you look at evaluating an apartment community. Not only is there a steep learning curve but there is also a different mentality that you must have. You must have, as a apartment community owner, a business mentality. Whereas with single family, I think it’s darn good to have a business mentality but you can get away with not approaching it as much as a business if you have good property managing company in placed.

What I mean by that is from a time commitment, I spend three minutes a month on the three homes I own and that’s only to review the statements that I received from the property management company because things are smooth sailing. Whereas my apartment community, if I spent three minutes a month then it would be Armageddon. It’s important to have weekly calls with your property management company. I’m the asset manager so I don’t manage the in and out of tenants and approvals and that sort of thing, maintenance. But what I do is I oversee the budget, I oversee the financials, I oversee the progress of them implementing the business model that we have in place.

That would be the major transitional piece that was eye opening for me. Because I didn’t realize that at the beginning, I should have, but I didn’t and that’s one of the lessons I learned. As far as how did that transition take place well, I was in advertising in November of 2012, I sent an email to my family and I said, “I came, I conquered and now I don’t care about advertising anymore and I’m leaving the beginning of the year.” I’d been studying multifamily properties for a couple of months and I felt like I was ready to get going.

There were some things that happened in between like failed startup, I didn’t quite know that I was going to do multifamily syndication, in fact that was going to be a career consultant. But once I spent 3,000 bucks on a website in a developer and designer, I realized that I had no clients and that college students and young professionals don’t have the money in marketing and advertising, don’t have the money to pay for a consultant for their career or they don’t want to. That was a very quick crash and burn as my first startup venture.

But as I was talking to friends of mine, more and more of them said, “Well, if you ever do something larger than a single family homes, let me know, I’m looking to, you know, I might be interested in investing in them.” And I heard that more and more. I was like, “Wait a second, do I actually have customers before I have a product?” Whereas on my career consulting thing, I had a product before I had customers.

That’s another thing I learned, it’s really simple but I have a product before you have customers or excuse me, have customers before you have a product. And so what I did is I heard that more and more, “I’d be really interested if you did something bigger,” so I just started looking and I looking. That’s when I was looking at Tulsa Oklahoma for about a month and a half, things didn’t work out so I moved to another market and that’s whenever I found the property in Cincinnati.

One of the challenges, another challenge. This is an external — the first challenge I mentioned was an internal challenge but the external challenge that I didn’t expect is for my single family home credibility to not be squat. They don’t care about my single family home experience. In fact, it’s almost a disadvantage because they look at me as though I’m just a single family home buyer, which at the time it was. That’s where the importance of surrounding myself with people who are successfully doing it and can successfully help me do it on my own or with them, that’s where that comes into play.

So specifically if someone’s looking to do multifamily syndication then one recommendation I have for them is to surround yourself with the right team members and I’ll get specific. Specifically a property manage a company because what the property management company does is not only are they your eyes and ears locally and it’s especially helpful if you’re not local, but two and more importantly and to the point of credibility, they add tons of credibility in the eyes of the seller and the mortgage broker, your real estate broker. When you tell them that you’re working with such and such property Management Company, you get instant credibility because that property management company has credibility in the market if you’re working with a good one.

Another team member is a mentor. If it’s not someone that you pay then find someone who you don’t pay but you give them a lot of value or they’re a family friend. The challenge I’ve had going that approach where you don’t pay someone or you don’t have some sort of agreement where you’re giving them service of some kind then family friends, it tends to be not as immediate as needed to get the deal done because questions are coming up, they’re flying at you left and right whenever you’re in the middle of a deal.

I’d say, those are the two keys, and then obviously you got to have your CPA, your attorney and that whole crew but two of the most important would be the property management company and the mentor. I had both, that helped me align myself with, or that helped me impress the seller to a point where we ended up getting the deal done.

[0:19:49] MF: That’s very cool. I interviewed Michael Blank a couple of weeks ago, I don’t know if you’re familiar with him, but he does the same type of thing, syndication large multifamily deals and he flipped houses before he got in to the multifamily and he said the exact same thing about credibility.

He’s like, “I would go to these guys and say, “Hey I flipped 30 houses, I’m experienced real estate investor,” and he said they’d look at them like, “So what? You didn’t flip multifamily properties, you have no idea what you’re talking about.” And he couldn’t believe the backlash he got from people for not ever doing a multifamily deal. So interesting to know that.

[0:20:25] JF: Yup. Yeah it’s definitely the case and I’m a friend of Michael’s as well and he’s been on my show and I’ve been on his. So yeah he’s definitely in the space too and getting the same type of feedback whenever he was starting out.

[0:20:46] MF: Yeah, it’s kind of like a good old boys club where if you’re not a multifamily investor already then it’s really hard to break into but that’s great advice with having a mentor, property management company to show people that, “Hey, I’m serious, I’ve done my homework, I’m not just some guy with dreams and no idea what I’m getting into.”

[0:21:05] JF: Right.

[0:21:07] MF: Very cool. How long do you think it took you from the time you first decided, “I’m going to buy multifamily,” to the day you actually closed on that first property?

[0:21:18] JF: Nine months.

[0:21:21] MF: So it wasn’t a quick process then, it took a while? What were your, besides lining up the people and getting people to trust you, what was your biggest challenge during that whole process of lining up that property?

[0:21:36] JF: Well, it’s just in nine months that also we’ve got to take into account the experience I had investing for four years. So I’d been investing in single family home, and again, we’ve talked about how the experience doesn’t translate, externally doesn’t translate from a perception standpoint and the difference.

But there are some fundamentals that can be applied from single family to multifamily like just focusing on cash flow as well as seeing where the, making sure you have equity in a property when you buy it, making sure that you know what it will cost to be moved and ready or in the apartment community’s case and deferred maintenance, that sort of thing. As far as the — sorry, what was your question?

[0:22:36] MF: Just the biggest challenges, which I think…

[0:22:38] JF: Biggest challenges, sorry. Now I will fully answer. [Laughter] I’d say the biggest challenge was, it’s all about finding the money and the deal. There were challenges in both of those; finding the deals took me — looking back on it, it was relatively short amount of time but it certainly in that time period whenever I didn’t have a paycheck coming in, it seemed like a long time, even though it was about February to April, three months. It took me three months to find the deal.

As far as putting the money together, that’s a challenge too because I’d never raised a penny before in my life. The challenge I had, specifically, was I need to raise at the time I thought it was 400 but it ended up being $1.3 million total for the deal and what I ended up doing is just being very resourceful, crying in the corner a little bit, weeping myself to — cry myself to sleep every night, not really but I felt like it sometimes. One tactical thing that I recommend for everybody out there is whenever you’re raising money, create a spreadsheet and in that spreadsheet, write down everyone’s name that you know. Then in the next column, so that’s one column, their name.

The next column, write down the way you know them. So is it through church, is it through college, is it through high school, is it through your work? Then in the next column, low range and in the next column write high range. What the goal is, is to get one person from each of those groups of networks to say, “Yes I’m interested, I’d like to learn more,” then name check that person, assuming they’re cool with that, name check that person to someone else in that network because it’s much more likely to be successful if somebody goes into it knowing that other people they know who are responsible with their money are also going into it. That’s one tactical thing I’d give for advice for your listeners.

[0:25:00] MF: That’s awesome, yeah. It’s the group mentality, if someone else you know is doing it then it’s not nearly as scary to go into it and if something happens or something fails then hey, I’m not the only one who did it. No, that’s great. I’m curious too, when you do these syndications, these are pretty large deals you’re doing. How many different investors do you have going into these deals for one deal?

[0:25:26] JF: It depends but so let’s see. For my first deal there were 12 investors, I done two, I’ve done 168 and then I just closed on a 250 unit in Houston. For that one we have in total 44 investors and we raised over three million dollars. It just kind of depends on the investment for the next one, it depends on the raise and the different investors who are involved in it.

[0:26:02] MF: Wow, that’s a lot to manage, I’m curious to know, when you have these investors, are they getting percentage of the profits or are they just getting an equity share, how are they setup to make money on their investment?

[0:26:15] JF: It’s usually, while I say that every investment is different but the standard way that I’ve structured it so far is they received a preferred return, usually it’s about 8% preferred return. And preferred return is a promised to pay them first after a portion of the cash flow based on whatever they invested and then above and beyond preferred return they will be some sort of performance hurdle based on the returns.

Say, it would be a 50/50 split after the 8% and then once they reach a 20% internal rate of return at that point it would be 70/30. That’d be 70 then 30 just to align our interest to show that they’re getting their 20% internal rate return and then there will be performance hurdles for after that. They get a kind of a conservative play with their preferred return and then they get the up side in performance.

[0:27:33] MF: Very nice. No, that’s very interesting how that’s setup and imagine that would be very appealing to many investors, especially when they’re used to the stock market without any preferred returns obviously or a CD with no returns. Okay, very cool. On these property, I mean these are big apartment buildings, are you buying properties that are in pretty decent shape with rents where they should be or these properties that are distressed a little bit? Maybe under rented and properties you can go through and really increase the value by increasing the income on them?

[0:28:07] JF: Yeah. My business model has evolved, but one thing’s remained the same and that is that there needs to be upside potential in the deal. What we’re doing now is we’re buying B class properties that have a value add component to them, we’re putting in say $5,000 a unit, then we’re increasing rents 75 bucks a unit, making it above 20% return on that money and then selling in about five years once you’ve got that stabilized and you’ve realized the up side.

So that’s what we’re doing on the last deal we closed on. On the first one, we actually got it creatively through a master lease with option to purchase agreement and that allowed us to take control of the property and work on the property while we have control over it and the principle pay down on the mortgage, we’re getting the equity on that. So basically we receive all the rent and all the income but we make all the expense payments and we pay them mortgage.

We have an exercise to option that purchase whenever we want, well up until four years and that coincides with when the loan matures on the mortgage. The reason why we did a master lease versus putting new financing on it is because there was about a million dollar payment penalty when we took it over. We didn’t’ want to trigger that, it just didn’t make any financial sense or deal wouldn’t have happened. So that was one of the things that we did creatively to get to get the deal first place and it’s worked out really well for us.

[0:29:52] MF: Very nice, very cool. You got two pretty giant apartment complexes, what are your goals for the future? Are you going to keep trying to buy more and more and then slowly sell them off when five years comes up? Are you going to try and hold some? What are your goals for the future?

[0:30:08] JF: The goal is to control a billion dollars’ worth of property before my 40th birthday and I’m 33 years old. Right now I control $21 million, I don’t know what percent of the way I am there but I’ve got some work to do. That’s the goal, a lot of it is going to be buy and hold over the long run and that’s kind of the approach I’m going to take.

[0:30:38] MF: Very cool, are you trying to reach that goal by just buying bigger and bigger projects are you just trying to buy more and more of them?

[0:30:45] JF: Yeah, it’s going to be bigger and bigger. I do want to clarify when I say “buy and hold” and I kind of cut it off short just because I had to sneeze. I turned my microphone off for all the listeners. Now that I’ve sneezed, what I can say is, with the buy and hold, usually we hold for about five years and then we sell, that’s the plan.

So what we’re working on now is yeah, we are actually making offers on larger properties than 250 units. It’s never going to be smaller than 150, it’s just not worth our time quite frankly. It’s just not, the similar amount of effort is required to put a deal together that’s 100 compared to 300 or 400 or even 500. It’s just different types of inspection reports, but as far as structurally, logistically on the kind of the financing and getting the money raised and all that, its’ pretty darn similar.

So We’re looking at larger stuff and one of the regrets that most people have who are in multifamily if you ask them after they buy their first property, they’ll say when their number one regret is that they didn’t buy larger and that’s not going to be a regret of mine because I started out with 168 units, but that is one regret. We’ll continue to grow by buying larger and larger properties and once you reach a certain point of say 500 or 600 then you’re going to need to either stay there or buy a portfolios of two or three apartment communities and grouping them together.

[0:32:25] MF: Very cool. Are you seeing it harder to buy properties as the market improves or in different areas with different class buildings or are you still seeing decent deals out there?

[0:32:39] JF: There’s always going to be good deals out there, it’s just a matter of uncovering them and having, through the right relationships or mark and or marketing tactics. We’ve got direct mail going on, we have broker relationships which are incredibly strong, primarily due to my business partner who has most of those relationships. I’ve got some but he has been in the industry a lot longer than I have.

And through my podcast too, I get a lot of opportunities through my podcast. It’s a daily podcast and I have been approached, we haven’t closed anything yet but we’re looking at a couple of things pretty seriously. There is all sorts of — when you put yourself out there and you’re in there long enough and you’re doing it consistently on a daily basis, opportunities just tend to come up.

[0:33:36] MF: Nice, and speaking of your podcast, like I said, I’ve been on it and you have had 500 episodes I think on your podcast so far? That’s incredible.

[0:33:47] JF: Closing in on it. Yeah, I don’t know when this episode’s airing but we’ll likely be right around 500 whenever it does.

[0:33:59] MF: So what made you want to start a podcast about real estate investing? What got that into your head?

[0:34:04] JF: It was actually my life coach and business coach through the Tony Robbins program, he told me about podcasts. I had no experience with podcasts but I wanted to continue to get my brand out, my name out there and then learn also. But primarily at the beginning it was just to get my information out there.

Now, I look at it and it’s less about getting my information out there, it’s more about learning and connecting with others. I mean, we wouldn’t be having this conversation if I didn’t have my podcast because we wouldn’t know each other most likely, we wouldn’t know each other. It’s just a great way and I’ve also raised almost $300,000 from people who have reached out to me about opportunities that I have. And through sponsors I make money on a monthly basis, it’s an incredible business tool.

[0:35:01] MF: No, that’s been awesome and yeah my podcast has been successful as well and it was something I was a little scared to do because you’re putting yourself out there when you’re interviewing people and talking like this. But no, it’s been a really fun experience and it’s just a great way to reach people. I still think it’s amazing you do that many episodes and you have one every day, right?

[0:35:22] JF: Yup, one releases every day, it’s been doing that for over a year and a half.

[0:35:27] MF: Well, that is awesome. So great, well I think that is all the questions I have for you. I guess I have one more question that is, if someone’s just starting out a multifamily, they want to kind of follow your path or start investing in some larger units through a syndication. What’s the first thing or what’s the best piece of advice you can give to those people?

[0:35:47] JF: If they’re just starting out and they want to get into deal syndication?

[0:35:52] MF: Yeah, or just buying multi-unit properties, whether it’s through syndication or other mean, what’s the best way for them to get started?

[0:36:02] JF: Just you got to know the fundamentals. I would listen to podcasts and read books and then reach out to those who are being interviewed and who are writing those books. One of the books that I like is The Complete Guide to Buying and Selling Apartments by Steve Berges — B-e-r-g-e-s — and another one by Dolf de Roos, Commercial Real Estate Investing, which isn’t apartment specific but it’s pretty — it has some really creative ideas for how to maximize income on an apartment community as well as other commercial buildings like cellphone towers and helicopter pads and all sorts of crazy stuff. But I’d say, if you’re starting out then educate yourself and you can do that through those methods that I mentioned.

[0:36:54] MF: Right, don’t expect it to happen overnight, it takes time obviously.

[0:36:59] JF: That is true. Yes, yes, yes.

[0:37:01] MF: Very cool. Alright, yeah, again it’s the Best Real Estate Investing Advice Every Podcast and then you have a blog as well, JoeFairless.com. And that’s j-o-e-f-a-i-r-l-e-s-s.com. Going to your blog, is that the best way to reach out to you to talk to you or is there a better way?

[0:37:22] JF: Yeah, that’s fine. You can also email me at [email protected].

[0:37:30] MF: Very cool. Well Joe, I appreciate you being on the show, lot of great information, you’ve done an incredible amount of things in a short period of time so kudos to you for being so aggressive and I love your billion dollar goal, that’s awesome. I haven’t heard that one yet. So congratulations, I wish you the best of luck of getting there.

[0:37:51] JF: Alright, well thank you so much and I’m really grateful to have this conversation and looking forward to staying in touch and thanks a lot every one.

[0:37:58] MF: Alright, no problem and I’ll have a link to your blog and to your podcast in the article for this episode. Yup, thanks a lot and we’ll talk soon.

[0:38:05] JF: Alright, bye.

[END]

On this episode of the Invest Four More Real Estate Podcast I interview Clint Coons. Clint is an attorney who specializes in setting up entities for real estate investors. Not only does Clint help with legal protection, but he knows how to help investors with tax liabilities as well. I have had frustrations myself trying to get my accountants and lawyers on the same page. Clint saw a need for a company that can handle both the legal and tax liability aspects of real estate investing. Clint’s main goal is to help investors understand both the taxes and legal liability of entities and investment properties.

Clint Coons explains why investors need to have their properties in a LLC to be protected from liability. He explains what can happen if you only reply on an umbrella policy to protect yourself. He also tells us some stories of people he has worked with who have been sued and how they could have avoided the lawsuit with the proper protection.

Clint also explains how to properly use LLC’s and other entities so that properties have the most protection. If you commingle funds with LLC’s you may be making a huge mistake and not have the protection you think you do from a LLC. There are very specific rules you must follow when using LLC's.

Clint says a major problem with getting legal and tax advice is the attorneys and accountants tend to disagree on strategies to use. An attorney will want to give the investor the best legal protection, but an accountant will be concerned with tax liability. In some cases an accountant won’t be concerned with getting an investor the lowest possible tax liability, but the lowest chance of being audited.

Clint says it is very hard to finds an attorney or accountant who knows how to structure legal entities for investors that make the best sense for legal protection and tax liability reasons. You want to be protected and take advantage of the tax breaks real estate can offer.

Clint says that real estate investors should use different entities based on what type of property they are buying. Flips should be treated differently than rental properties. Based on an individual investor’s situation some investors may choose different legal entities than others. In order to qualify for loans you may not want to eliminate all your taxes! Sometimes it is better to pay more taxes if it allows you to buy more hoses and qualify for more loans.

Clint is an investor himself and owns multiple investment properties. He knew personally how hard it was to find a good source for the legal and tax side of real estate investing. He created his company; Anderson, Legal, Business and Tax Advisors, to help investors build the best strategy moving forward. If you are an investor interested in making the best tax and legal decisions for your investments I highly suggest talking to Clint and is company.

Clint Coons is an investor himself and knows the best ways to set up your real estate business. If you have ever had questions on using a LLC or S Corp or C corp, Clint can help. I am going to have his company go over my current tax and legal situation and see what I can improve on. You can get a consultation with Anderson, Legal, Business and Tax Advisors here.

[INTRODUCTION]

[0:00:14] MF: Welcome to the Invest Four More Real Estate Podcast. My name is Mark Ferguson and I am your host. I am a house flipper, I flip 10 to 15 houses a year, I own 13 rental properties with a goal to buy 100 by 2023. I’m also a real estate agent. I’ve been licensed since ’01, I run a team of nine, we sell close to 200 houses a year. So on this show, we like to interview house flippers, landlords and the best real estate agents in the business.

So stay tuned for some great shows. If you want more information on my rentals, on the numbers, how I buy properties, check out investfourmore.com.

[INTERVIEW]

[0:00:58] MF: Welcome to another episode of the Invest Four More real estate podcast. I have an awesome guest today, someone who not only will educate you but educate myself as well, a very interesting topic on how to structure legal entities when you’re buying investments, flips.

Clint Coons is with us, he is the founding partner at Anderson Business Advisers and Law Group. Clint’s a lawyer, an attorney, a real estate investor and a speaker. Really happy to have you on the show, how are you doing Clint?

[0:01:31] CC: I’m doing great, thanks for having me on.

[0:01:33] MF: Great, great. Yeah, happy to have you, really excited to hear what you have to say about legal entities as well as your investing. So I assume you’ve been a lawyer for a while and you start investing in real estate. What drew you to real estate and were you a real estate lawyer before that or did they kind of mesh together? How did that all get started?

[0:01:55] CC: Well I often tell everyone that I got started when I was two years old because my father was an avid real estate investor and he wanted to have I think two sons so they’d be indentured servants to him for a number of years to do all of this work. That was really my background growing up.

And then when I was in undergrad, I was a framer for two years. So I really thought my career path was going to take me down the contractor route but right now as we’re talking, I’m looking out my window and it’s pouring down rain outside, it reminds me of what happened in ’92, I found myself in the winter time climbing up on the roofs and fixing bird blocks that people didn’t put in. I really thought to myself, “This sucks. I cannot see myself out here framing in the winter and Washington, it’s just so wet and mucky.”

And so then I realized, I wanted to stick with law. I went on and I got my legal degree. And then I really didn’t get started in real estate again until after I got my — I was investing in the stock market, let me put it this way. I took an account, about $80,000 and I brought it up just shy of a million in about seven and a half months and I thought that my career was going to be to be over and I could retire in three years and then the wheels came off the stock market and I lost it all in about a month and a half.

[0:03:16] MF: Oh wow.

[0:03:17] CC: I know, that was pretty bad. But you know, it’s like going to Vegas, it was just like gambling, it was so easy back then. And then a year after that experience I said to myself and my partners, because I invest with him as well, the stock market is not something that I have any control over, it’s not something I wanna do. I want something that’s tangible, something that I can control and started going out and investing in real estate.

[0:03:40] MF: Nice, very cool, yeah, I have a similar experience in stock market, not at that level but yeah, you can’t control it. You can have an awesome company, an awesome stock, if the whole market tanks, it doesn’t matter how awesome that company is, it’s going to go down with it. So I totally get where you’re coming from there.

So how did you first kind of buy your first property, what drew you to that particular property and how did you get started?

[0:04:05] CC: Well I think that drew me to my first property was down in Palm Desert and it was because my wife wanted to go down there every once in a while. So that’s why I ended up buying the property and then I started renting it out and then after that it was just a matter of saving up the money, buy another house.

I’m really unique in the fact that I don’t use a lot of leverage in my investing. I use cash. When I save up the money then I go up and buy a property. Save up the money and go out and buy a property. The only thing I’m leveraged on is of the commercial side and those are bigger loans, some of them are upwards of two million dollars so I got to watch that but it’s worked well.

[0:04:50] MF: Very cool. You own properties throughout the US. What made you kind of want to buy in different areas of the country, was it diversification or you just wanted to do at the time or where you were at?

[0:05:02] CC: Growing up in Washington State, here were have growth management that really restricts your ability to build and as a result of that, you have inflated home values. It’s difficult from a rental market standpoint to really get a good return, cash on cash return on your investment.

When I was growing up, my father, he was able to get great returns on his investments because he has the time to put in the sweat equity. I just don’t have that time. I’m looking for ready made properties to roll into and what we used to do is we would actually move houses, we’d get houses for a dollar, buy a lot, put a foundation on it, pick the house up, move the house and then drop it.

When you’re all said and done and you hooked up all the utilities to their property and fixed anything, you may be into the property for about $50,000 with land and the house is worth a hundred, $120,000. And so he was able to make a lot of money doing that, and he has quite a few rental properties but I just don’t have that time to go out there and do the work on my own. So I had to invest outside of Washington because of the expense of the properties here. So that’s what drew me into different markets like Indie and Tennessee and Dallas around the country.

[0:06:12] MF: Very nice, I know there’s a lot of people in the same boat, whether it’s Washington, San Francisco, LA, New York even where you just can’t cash flow because prices are so high. I’m curious, did you use turnkey providers when you bought some of those properties or did you go out there yourself and do the research, how did you end up buying those properties?

[0:06:31] CC: I did exactly what you said, I did the research. Before I buy in a market I go out, I check out the market and get a power team in placed in that particular market before I invest. I’ve talked to a number of clients. I have clients all over the US that are real estate investors.  And you hear a lot of horror stories about people who do not work with reputable individuals when they go out and they buy a real estate and the market that they’re unfamiliar with because you got to have those individuals in place and make sure they’re not stealing from you.

And you take Indie for example, even though we’ve reviewed the market and met with the flipper down there that setup the house for us, well one of the houses, the property manager we ended up using, he was stealing from us for six months. And then he died and his kids were stealing from us and collecting the rents. And every time we call them up, they’d say, “Oh can’t keep the tenant in there, we get them in, they leave and they’re not paying.” And so finally we went out there and that’s how we found out he was dead because we go knock on the door, the kids answered and they’ve been collecting the rent checks because there were tenants in the property from day one.

[0:07:28] MF: Wow. Yeah that’s crazy. What kind of team do you have in place when you go, are you looking for an agent, a property manager, a contractor or what all are you looking for?

[0:07:37] CC: Well typically what I’m looking for is a property manager, number one, that’s my primary concern. The other ones is that I’m looking for those companies that are going to go out that find the properties, rehab the properties and then sell them to investors like myself, that just don’t have the time to do it on their own.

The only exception to that is in the Las Vegas market because we have a physical presence there, we have an office down in Las Vegas, we actually set up our own construction company down there and we were buying REO properties from banks. In 2010 through 2012 and we were either flipping those properties or we were turning them to rentals ourselves. Then that kind of dried up as the California investors, a lot of them start coming in the market and they drove up the prices and they drove down our rents.

[0:08:25] MF: Yeah, nope, I see that in a lot of places. Not only do you have the single family rentals across the country, you’ve got the commercial property. So did you buy the commercial after the single family? How did that work out getting into the commercial space?

[0:08:40] CC: No, actually, I started buying commercial before I bought residential and I was just buying in the path of progress is what I started doing there. I mean I prefer to have commercial over residential but it was just one of those things that we bought some, purchased some residential properties just to balance out our portfolio of assets but it was just buying where we saw that there’s going to be good appreciation in the future. And the price was right.

[0:09:08] MF: Right, I’m curious, I don’t do commercial myself, all my investments are residential. What are the biggest differences you see between the commercial, large — I know there’s a lot but what are the biggest differences between those commercial projects and the residential? I know some people feel, you could move real easily from residential but is it a completely different beast?

[0:09:29] CC: No, I think there’s more stability in the commercial side and once you get a tenant in there and you get them on a nice five year lease, just sit back and you cash your checks, typically, my experience, they do not leave as long as they’re a stable tenant. But the one drawback to commercial is that in some of the larger properties, we’ve had to use financing.

So when you’re looking at a monthly debt service of 15 to $20,000 a month, and you lose a tenant at the end of your lease and you can’t get another one in there for six months, that hurts. You basically, we end up, we keep a lot of cash on hand, we put it in the bank, save it for those rainy days if something like that happens. And it has happened to me before.

And so it’s just, commercial more money but there’s more expense. I’ve had properties where you’ve had to replace the roof and that can be a $70,000 project right there to go in and fix roofs. More gain but more risks is the way I look at it.

[0:10:31] MF: Right. Is your end plan to sell those eventually when they get to a certain point or are you binding for cash flow? What’s your plan for the end of those properties?

[0:10:41] CC: For the majority, we’re binding for cash flow. One, we bought with the anticipation that at the right time in that particular market, we will sell the property because it’s just keenly positioned in an area where it’s the last large piece of warehouse property on a freeway. So it’s the perfect example of a property that home depot or somebody would want to come and pick up.

The problem you know, you’re talking about it, experiences and the learning experience. When we bought this property we thought that there could be other opportunities there for a commercial development for maybe a multi-use project, some restaurants and shopping. But right across the street of this particular property, there is a small church in a double wide trailer and the county rules prohibit the serving of alcohol within, I think it’s a hundred yards or 200 yards of a church.

So we cannot put any establishment on this property that serves alcohol because of that double wide trailer. We approached the owner of the church and we asked them if we could buy him out and relocate them, wouldn’t do it. We’ve probably talked to him every year and we got the same answer in it. Because it kind of, it restricts what you can put on that property now as a result of that. That was a mistake, you learn that.

[0:11:57] MF: Right, well that’s tough to find out before you buy it too. It’s hard to go through all the due diligence when you see something like that.

[0:12:06] CC: I know. And you wouldn’t even know it because when you looked at this thing, it didn’t even cross our mind. Nothing really, when you drove by the property, clued you into the fact that that was a church siting right there. It probably has a congregation of 12.

[0:12:20] MF: That’s no fun.

[0:12:21] CC: No.

[0:12:22] MF: So you’ve got your law practice, your real estate investing, did you do real estate law to begin with or did that morph into something after you started investing in real estate?

[0:12:32] CC: Really I’m not a real estate attorney per se. My focus is more on asset protection and tax planning for real estate investors. There’s this confusion that sometimes exist amongst my clients. They’ll want to send me contracts and ask me to review them or draft contracts for their real estate investing, lease options, things like that. I have to tell them, “Hey, I’m not your guy, you need somebody local putting that type of deal together for you that does that day in and day out.”

My practice consist primarily of creating the structures to ensure that hey, if you don’t want anybody know that you’re into real estate, I can set you up so that you’re completely anonymous. If you want to make sure that something does happen on the property that you’re not going to be fully exposed because one of the things that I talk about, and I myself utilize, is risk reduction that when you want to take on this larger projects, you have to make sure that your liabilities are minimized to the greatest extent as possible that if something goes wrong, you haven’t risked everything.

And so putting boundaries around your investments and ensuring that if something does happen, you don’t lose everything I think is vital. I often I tell people, whenever I deal with a commercial lender, I just chuckle. They’ll say, “Hey, we want a personal guarantee. We’re not going to give you a non-recourse loan.” And so I give them a personal guarantee and I think to myself, “It’s not worth the paper it’s written on because if it came after me, you couldn’t get anything because I’m so protected.” That’s really what we do.

And then we have a tax side as well inside of our firm where we prepare tax returns and we look at the tax angled real estate because really, it’s not a one size fits all. So many people out there throw up LLC’s and they think, “Oh if I do an LLC I’m fine and that’s all I need,” and you have to understand that there’s a tax component to it, there’s an asset protection component and then there’s an investing component that lays right on top of that. If you’re dealing with professional that doesn’t understand all three size of that issue, you’re going to be missing out. That’s what we do at Anderson.

[0:14:26] MF: Yeah, that’s very interesting and we talked a little bit before this podcast too and that’s what really caught my attention was you made some great points about real estate attorneys, they look at the protection side a lot of the times for investors and how to protect them, the CPA’s, the accountants look at the tax side and how to structure things tax wise. But a lot of the times, they’re on completely different pages working together how to get the best tax protection and the best liability protection together.

So I thought that was really interesting how you brought that, and I get so many questions on my blog about, “Should I set up an LLC? Should I do a series LLC? Do I need one LLC per property? If I’m doing a flip, how do I set,” — it’s insane but I mean I guess that’s one question I have for you is, if someone owns 10 rental properties, what should they be considering as far as liability and tax purposes, how they structure them?

[0:15:21] CC: Well, from the rental standpoint, it depends on the state in which you’re into real estate. You brought up series LLC, so if you were in Texas, I would setup a series LLC for you. But it would be with a caveat you understand how to run that particular monster at the same time. If you’re not in Texas or a state that offers a series LLC, then it’s going to be based upon equity. Because at the end of the day, we’re not about putting together, loading people up with entities, okay?

Yeah, it’s from a financial standpoint, it works well for the firm if I put you in 10 LLC’s. But from your standpoint, it’s going to complicate your life to some extent because each of those companies is going to need a bank account. You’re going to have to do certain things to maintain them on an annual basis. And so I recommend that you group properties, no more than five doors for LLC, 250 to $500,000 in equity is what we’re looking at when we’re structuring LLC’s for people’s investments.

In a case of 10 properties, I’d say maybe three at the most and then depending on the rental income that they generate, possibly a corporation to manage it if you’re looking for some additional tax benefits. But if you don’t have the income right now off of those properties and you’re figure in all of your expenses and debt service, then that’s something that you would hold off on and all you would be looking at is the asset protection component.

[0:16:42] MF: Okay, very cool. Yeah, I heard someone else mentioned them, series LLC and they talked about Texas. So that makes sense why they were mentioning that because they were in Texas and yup, the state.

Another thing I’ve noticed too is the fees and cost for LLC’s will vary greatly per state. I think that is something people have to consider too is how much it cost to set it up and maintain it per year.

[0:17:04] CC: Yeah, I mean look at the people in California, that’s an $800 hit for every LLC they set up there. So knowing their fees beforehand is so very important.

[0:17:14] MF: Yeah, in Colorado I think our fee is $50 to set it up and $5 a year now to maintain it. It’s a little different than California. I’ve heard New York is pretty expensive.

[0:17:27] CC: But you know at the same time, sometimes certain states like say Nevada, you pay for what you get. You brought up Colorado for instance, you set up an LLC in your state, yes you do have asset protection from a liabilities associated with the property, you know the tenants that decide to sue.

But if you yourself are sued, because you’re managing the asset and you were negligent in some manner, so they sue you individually or name you as an additional party to the lawsuit and a judgment’s entered against you, those LLC’s in Colorado are not protected from your creditor. If you look back at the Albright decision which was handed down a number of years ago in Colorado, it basically stated that charging orders are not your sole remedy, that a creditor can foreclose on your LLC interests and take it from you.

That’s why for a lot of our clients who invest in Colorado we’ll wrap all of their Colorado LLC’s with a Nevada or Wyoming companies. So we isolate that ownership interest away from our client so if they’re ever involved in a lawsuit, they do not own any Colorado LLC’s, it’s their holding company that owns the LLC. And those holding companies are established in jurisdictions where a creditor cannot take the LLC from the client.

[0:18:43] MF: Oh wow. That is something I had no idea about. I knew I would be educated on this show.

[0:18:49] CC: Well it was an attorney that screwed it up for everybody because she was stealing money and then tried to claim bankruptcy and get out of it and make it all go away, and the court said no. Charging order is not the sole remedy, you can foreclose.

[0:19:05] MF: Okay, cool. So I mean, I guess one question too is, in other states, how much protection does an LLC provide? Does it provide enough that that’s all you need or is it just depend on the state and where you’re at?

[0:19:18] CC: Yeah, it really depends on the state and where you’re at. Pretty much all the states are going to give you inside liability protection, so whatever happens on the inside that say a mold claim is brought or the property burns down or whatever. The LLC is going to protect you from the liabilities associated with that harm. Where the states differ is on outside creditor protections.

A corporation for instance. If you own stock in a corporation and I have a judgment against you I could take your stock, that’s something that’s personal property, you can levy on it and it then becomes an asset of your creditor. But an LLC is unique in that they make it very difficult for you to separate out the ownership of that particular company from its member and transfer it to a creditor depending on the state where the LLC is set up.

We brought up Colorado, California, Florida, just to name a few. They do not offer creditor protections for the members, so you could take their interest and that’s one of the things we look at when we’re doing our planning is if a client has a decent portfolio, we may want to employ an out of state LLC in Nevada or Wyoming to give them an additional layer of protection. By utilizing this strategy, not only can you gain the additional protection, you can gain anonymity.

So I can create LLC’s throughout the US where nobody knows who owns them, even though you’re in a state like say Arizona that you have to disclose all the information of all the members and managers. Well if you start with an anonymity jurisdiction like Nevada or Wyoming and then you go into Arizona, you can hide all of that.

Where does that leave you as an investor? Well then it opens up additional opportunities to perform some equity stripping where you can then have your holding LLC file a friendly lien on your real estate that’s located say in Colorado and what appears if you borrowed money against the property and there’s debt on it. So that’s a deterrent to an aggressive attorney who has taken on a case that has very little merit that’s mainly shake down value.

[0:21:26] MF: Right, that’s great stuff. Like you said, many people, if they’re looking for a lawsuit, they’ll look for properties that are free and clear because they know if they win the lawsuit, they’ve got equity there they can take. But like you said, if you basically take a loan out against from one company to another that appears it’s not free and clear, so you have a smaller chance of getting sued.

[0:21:47] CC: Correct. Because the money is not there. One of my clients, we just wrapped up a lawsuit in California and I won’t go into the details of what happened but basically, the insurance or the plaintiff was settling with the night club, settled with the Ballet company for policy limits. But the owner of the property where the accident occurred, they refused to settle for policy limits with the owner of the property. Because a property owner that owned this particular building where the night club is located, well they did an asset search and they found that he was conservatively worth between 25 to $40 million because all of his real estate was in his own name. So they refused to settle with him just for policy limits.

And many times when I talk about that with people, they’re often shocked, “Well how is it that a person who owns a building, how can they be held liable for what happens in a night club?” Well liability is different depending on the state in which you reside in. For example in California, they follow what’s called joint in several liability. You could be 1% negligent but you’re 100% liable for the creditor’s claims, plaintiff’s claims or whatever they win from a damage standpoint.

So this individual was facing a situation where if he got a jury to find him 1% negligent, maybe inadequate lighting or something on the property, which led to the accident, then he could be looking at 10 to $15 million in potential damages. The attorneys knew that and that’s why they pushed him so hard for cash outside of the policy limits.

[0:23:27] MF: Wow, that’s a little scary.

[0:23:29] CC: Yeah it is.

[0:23:31] MF: At the same time I guess that shows why you shouldn’t have $25 million of real estate in your own name, you own a bunch of properties like that.

[0:23:38] CC: Yeah, and you know what’s sad, after this went on, I’ve structured him since this accident occurred and the day after settlement was reached, he got in his car, he was 92 years old by the way and he drove out and two blocks away from his building, he clipped somebody in an intersection. It’s just like, “Oh no. Here we are again.” But this time he’s protected so when they do that asset search they’re not popping in his own name again.

[0:24:07] MF: I have a question based on that. Let’s say I’ve got 16 rental properties and they’re in LLC’s. If someone wanted to sue me, is it easy for them, the CI have those properties to LLC or…

[0:24:21] CC: It is.

[0:24:22] MF: Do they even care since they’re in an LLC? What’s your take on that?

[0:24:27] CC: I mean, okay, the other side of the equation is this, that when you setup a structure around yourself that is a deterrent in and of itself. Attorneys love low hanging fruit and in 18 years of practice, I’ve had very few of my clients find themselves in a situation like I just described.

Now they’ve had judgments entered against them for several million dollars but the creditors tend to walk away with whatever they can collect from the insurance and not proceed against them individually because the likelihood of the outcome being favorable to the plaintiff is so low relative to the cost of trying to litigate that action.

And so really what we’re doing with this companies is creating this barrier to creditors from wanting to go deeper into your personal net worth because there’s no set outcome. It’s all questionable whether or not they could pierce it. Some say it’s like Colorado, of course they make it a little easier but still that wouldn’t be a deterrent to me to protect myself because anything you can put up as a road block is always going to be beneficial to you.

[0:25:39] MF: Right. So I think basically, I mean even if you aren’t doing everything correct but you are doing some effort putting in properties in LLC, doing something, there’s going to be some kind of a deterrent to losses because people will see, “Hey, he’s doing something, maybe we won’t go after him, we’ll go after somebody else who has got everything in their name.”

[0:25:59] CC: Oh yeah, something’s better than nothing. The way lawsuits work is that if somebody came after you and they get a judgment against you then they could very easily take that judgment and they’ll file in the county where your real estate’s located and at that point in time whenever you try to sell or refinance that property, they get paid off. So they don’t even have to go after and try to take the property from you, they can just sit back and wait because what better investment would you have than a judgment that grows at 10% rate of interest?

[0:26:25] MF: Right, right. Very true. I’m curious too, there’s a lot of questions about piercing an LLC and how you have to maintain it. What are the most common mistakes you see people make when they have an LLC and they don’t treat it as an LLC and people end up saying, “Oh it’s not a real LLC because you did this and this, and this.”

[0:26:47] CC: Co-mingling of accounts is the biggest one or not even having a bank accounts opened up for their LLC’s. That’s a big problem, they want to take it the easy route. It’s like when I graduated law school, my dad then looked at me and said, “Yeah, you were an indentured servant, now you’re no longer my servant, now you’re just some permanent retainer for life. So the first project I have for you is I want you to structure all my real estate.” So I said, “Well what do you want dad?” He said, “I want one LLC per property alright?”

So I called up my mom who runs everything and collects all the rent and I said, “Mom, dad said one LLC per property,” and she said, “Well, what does that mean?” I said, “It means you’re going to have to have one bank account per LLC so plan on opening about 28 bank accounts.” And she said, “There’s no way I’m going to run 28 bank accounts.” I just knew she wouldn’t either that’s why I called her. And so we grouped them, like we talked about earlier, we grouped the properties together because she would end up, if I created that structure, she would end up running everything through one account and then you might as well not even create the structure. So that’s the big one.

You also have the problems with people who create LLC’s that they don’t draft operating agreements for themselves. They just think that they file it with the state that pay their $50 and now they have protection, so that’s a problem. I see that a lot when I sit down with someone they say, “Oh I have an LLC.” “So show me your operating agreement,” that’s one page with their articles of organization. That won’t protect you.

And then the other issue you run in to a lot more so is that the operating agreements that are put in place, they really don’t reflect what the individual investors are looking for from an asset protection standpoint that they’re passively pieced together and they do not provide the protections you may assume that would be provided in an LLC, just based upon the language of the agreement.

[0:28:34] MF: Very good information. I’m curious your thoughts on this. I know you can’t say this for everybody but if someone goes to a lawyer, asks for an LLC, most of the time will they get the documents, the right things they need? Or will they get varying stuff depending on if they go to a real estate lawyer, if they go on an estate lawyer, do you really need to be going to a specialized lawyer to get those documents done right?

[0:28:57] CC: So here’s what I see a lot is that they go to the attorney, the attorney doesn’t understand the tax side, so he tells them to go find a CPA to setup to handle the tax side of the setup. Now, the individual then will go to the CPA and the CPA will make an election that does not necessarily correspond with the way the operating agreement was drafted. Most LLC operating agreements are set up as either a single member, disregarded or partnerships. That’s not necessarily the best structure for you.

There’s a case right on point just out of Illinois this year where two real estate investors went to an attorney, they setup an LLC and they started flipping properties. They taxed it as a partnership. The attorney actually took care of it for them, set it up, had a taxed as a partnership because there’s two guys there. Everything runs fine and I tell people, you have your LLC setup and it will be just fine for you until it’s tested.

Theirs got tested on audit and they’d flip a ton of properties at a bunch of rentals that they’d held on to and sold. Everything they claimed is either long term or short term capital gains, the IRS came in and said, “You guys are dealers with the amount of activity you’ve been running through here. Therefore you do not qualify for long term capital gains treatment, you don’t qualify for instalment sales, so all those properties you’d sold and still hadn’t collected the money on yet, that’s all taxable in the year of sale, you couldn’t appreciate any of your real estate, so all your depreciation has to be recaptured now and on top of that, all of your income is active to you.

And their argument was, “Wait a minute, we had an LLC setup, it’s was taxed as a partnership.” Well the attorney didn’t understand that the fundamental tax law with regards to partnership in LLC’s is if you’re a member in an LLC and you work for that LLC then you’re treated as a sole proprietor vis-à-vis that company. They tried to pay themselves salaries, you can’t do that in an LLC where it’s treated as a partnership. So what you find is that if you’re in real estate and you want to put together the right structure that addresses both the tax and the legal side, you really need to work with a real estate investor attorney who understands it.

I mean u can create structures and this is what I really like doing is you look at the individual guys that are getting involved or even if it’s you, you can allocate losses to one party who needs those losses. One of the more advanced strategies I use is for people who invest with their retirement accounts. We’ll say we’ll setup a solo 401(k), they roll some money in then they want to partner with their solo 401(k). So let’s say you’re going to buy a house, it’s $100,000. Each of you are going to put in, you’re going to put in 50k, your solo 401(k) is going to put in $50,000. So you set up an LLC and it allocates the interest between the two of you 50/50.

Under the operating agreement, the income will be split 50/50 but the losses, the depreciation that is, I’m going to allocate all the depreciation to the individual member of the LLC, not to the pension plan. Because the pension plan doesn’t need the depreciation since it doesn’t pay tax. You dump all that down on to the member, it effectively wipes out all of his income that’s associated with that company, so he’s not paying tax on that money that’s coming in. He is essentially deferring his recognition until the property is later sold, that’s when he’s going to have to recapture that.

So that’s just an idea there that I’m throwing out that how a real estate attorney who has been involved in real estate deals would look at something versus just a standard asset protection attorney. They’re not going to dig, they’re not going to ask the right questions typically in my experience.

[0:32:37] MF: Very nice. I’ve realized that too and I’ve said it myself. And accountants too, don’t always set things up for the best tax purposes I found for real estate either. Sometimes they’ll do what’s easier for them or what they think is the least likely to ever get questioned. What’s your experience as far as accountants trying to setup things for investors?

[0:32:59] CC: Well accountants, they typically will either setup pass-throughs, well anything that’s going to get them a tax return, number one. I can always tell a CPA structure when I look at it and I see eight LLC’s and all of them are filing tax returns. And I’ll look at them and I’ll go, “A CPA to set this up for you.” “How do you know?” I say, “Because he has eight tax returns now he gets to file every year.” I mean you could easily change that and set it up so that you don’t have to file one return.

But the thing here that you notice is that CPA’s again, they focused on taxes and so, they will create structures typically flow through that are designed to minimize the investor’s taxes. They’ll say, “Alright, we’re going to save you 6% or $6,000 or $7,000 a year by doing it this way.” What they fundamentally do not understand is that for some investors, saving taxes, saving six or $7,000 a year is not the primary concern. They need to, as we shared earlier, they want to qualify for loans. And so having more income show up on their 1040 is far more important to them than saving six or $7,000 because they’re going to pay more on that in hard money to put their deals together.

They want conventional financing so that requires you have big fat W2’s. You don’t want tax, you don’t want entity showing up on your 1040 if you can avoid it and when you use pass-through entities, they appear on your 1040. And when you start looking at commercial deals like what I’ve been doing then those tax returns have to be provided to your lender. Not only before you, when you apply for the loan but then on an annual basis and they’re looking at it and they’re wondering, “What is this business doing now that he has over here? Is it making money, is it losing money?”

From my standpoint, that’s always the rub for me, when I know a loan’s coming due, I purposely change how I am spending money inside of my company from a tax perspective so I look better to that lender to get a refi on that loan. Ordinarily I’d try to expense everything out and show as little profit as possible. But from a lender standpoint, that doesn’t look good. So you have to be cognizant of the fact that there’s more going on here than just taxes.

[0:35:14] MF: Right, that’s great advice because a lot of investors get into that problem where they’re making money but they don’t show any of it because through expenses, through depreciation, whatever it is and you can’t get a loan, “I’m really making money even though my taxes say I’m not, I promise.”

[0:35:31] CC: I know, and the [inaudible] is they don’t understand it.

[0:35:33] MF: Right.

[0:35:33] CC: I mean just as an aside it’s like member with the Exxon Valdez — not Exxon Valdez but the BP platform problem they had the oil spilled down there. You know, I have a cousin who lives in Louisiana and you had all these shrimpers that wanted to collect from BP a couple of hundred thousand dollars a year and they were complaining the BP wasn’t paying out, I don’t know if you remember this on the news or not?

No, what BP did is they said, “Let me see your tax returns.” Well all these shrimpers and fisherman down there, they’ve been cheating on their taxes for years so they’re showing very little in income and BP’s claim was this, “We’ll pay you exactly what you made last year. Well you show you only made $30,000 last year on your taxes, so that’s all you’re getting paid.”

So that’s how it works. When people look at your tax return, that’s what they assume you made and especially if you’re investing in real estate, it can hurt.

[0:36:25] MF: Yeah, that’s great advice. Another thing, I’d love to hear your advice on too is you mentioned flipping a little bit, the guys who set up the LLC to flip, I’ve heard people say LLC, I’ve got an [inaudible] set up for my flipping company based on what my accountant said but what are your thoughts on flipping business, if you’re doing five, 10 flips a year?

[0:36:46] CC: Wow, okay, so in that situation my typical go to structures and for flippers is going to be either a C Corporation and run all the flips of the C Corp and depending on the level of activity, I may even through an LLC in the mix and have the LLC wholly owned by the C corporation. Because if you’re a flipper, you get to this point where if you’re putting money into advertising for deals and you’re building up a local presence then your most valuable assets becomes your brand and you don’t want to jeopardize your brand by flipping properties in the name of that corporation. So from an asset protection standpoint, you want to move that in to a single member special purpose LLC that’s owned by your Corp.

Now, when I look at that structure also focused on how we’re going to move the income to you, how much do we want in your name for whatever you’re doing in the future versus what we want to put inside of say a pension plan to minimize taxes as well. So you have to be cognizant of what’s going on. Another option that I utilize is if we want to bifurcate income, if you tell me, “Clint, I want this much in active income each year, I need to show this to my lenders,” then I will setup a corporation, C corporation and I will have a limited partnership that the C corporation is part of that it manages.

In that case, you’re able to flip through the limited partnership and bifurcate your income between active, that portion which is paid to your corporation and you draw a salary from and the distributions that come from the limited partnership, which is unearned income. So it’s not subject to employment taxes and just flows down as capital gains.

[0:38:28] MF: Wow, okay, I think I’m definitely going to have to talk to you after this podcast is over.

[0:38:33] CC: See, it’s not a one size fits all approach and I have this great slide at my workshops where it throws up, you see a bunch of these guys on a dock and they’re all wearing some black g string type bathing suit and they’re big, heavy guys walking all together with these black hats on and cigars. And really, I tell people, it’s like, “How many people in the last month, how many people in the room have setup an LLC?” And probably 90% of the room will raise their hands. And I’ll ask them why, and it’s always the same. “Well my attorney told me I needed an LLC or my CPA told me I needed an LLC.” Just because everyone is doing it doesn’t mean it’s right for you.

[0:39:09] MF: That brings up a great question I had. Let’s say an individual wants to buy their first rental property, maybe they own one personal house, they don’t have a ton of assets but they do okay. Do they need to setup an LLC? Can they leave it in their personal name? What’s your opinion on — what kind of protection do they need for just buying one or two properties?

[0:39:30] CC: I’m going to tell them to set it up in an LLC just to protect it. You never know, the example I’ll use on occasion for that one particular problem or that situation is an individual I know that became a client, she bought her first rental property in Hawaii, in Honolulu. All she did was insure it. That’s what her attorney said, “Don’t bother with an LLC, just get enough insurance and you’re fine.”

The tenant burned the property down intentionally and the house burned so hot that it destroyed a good portion of the house next door. These are expensive homes and she did not have enough insurance to cover both claims. So she ended up going bankrupt. Now had she had a limited liability that owned the property, she could have saved her other assets but how much insurance are you going to buy? Is there going to be enough there?

So I suggest you just setup an LLC, if you set it up right, there’s very little maintenance for it on an ongoing basis. But what’s key here is understanding as well that if you’re going to use an LLC and you buy your first property and you took out a loan against it, so there’s some debt there, that you should also look at a land trust. And hold that property in a land trust and then assign the beneficial l interest to the LLC to avoid the lender from ever accelerating your note if they discover the fact that it’s been transferred directly into the LLC, and that’s what the land trust will do for you.

[0:40:58] MF: Yeah, that’s very interesting point too because many people will get conventional mortgages and buy it in their name and then wonder, “Hey, if I transfer this to an LLC, doesn’t that trigger the due on sale clause?” Lender can come back and say, “You owe all this money,” but if you do the land trust, you’re saying that that would not be the case, right?

[0:41:17] CC: That wouldn’t be the case. I mean right now in this environment, or in the last 12 years, I haven’t seen any lenders accelerate notes when property’s been transferred directly in the LLC’s except in situations where the person missed payments or they didn’t — failed to ensure their property because they let it lapse. That triggered something that got the lender’s interest. Or if the lender was audited by its insurer and they saw that the borrower wasn’t on title.

But for the most part, the likelihood, in the market like this where you have stable interest rates or declined interest rates, the likelihood that you’re going to have a lender call your note due is probably pretty small but rates are set to rise. As rates go up, now lenders have an incentive to start looking at who’s on title to the property that they’ve loaned against. If your name’s not on there and the business entity is on there, they’re within their rights to call that note due and make you refi the property. So I think it’s prudent to utilize or use a land trust which takes that out of the due on sale clause of your mortgage and hold title to that way.

Not to mention, when you use the land trust, think of it as a little box, you put the house in a little box and then that’s the only thing that gets recorded with the county. Then wherever you move that box to, be it an LLC number one, two, three or four in the future, nobody knows about that. All they see is that initial transfer into the box and they don’t know where that box resides in the future because that is a private transfer and it’s not recorded.

[0:42:57] MF: Wow, that’s great information. That’s a question many people have about switching to LLC’s and if it’s worth it because you might get due on sale clause. One more question I have is, what are your thoughts on people who keep a property in their name but they get an umbrella policy and feel that will protect them instead of the LLC?

[0:43:17] CC: I think everyone should have an umbrella policy. Again, it comes down, what is the nature of the claim that is brought. If it’s an environmental claim, you can have as many insurance policies as you want and you’re not going to be covered. Toxic mold is one of those claims that attorneys have latched onto now as a sure fire way to shake people down for their assets. What’s unfortunate is with that particular claim, there isn’t really any hard science behind it to establish whether or not the tenant or this supposed victim is actually damaged as a result of the ingestion of mold spores.

You take Ed McMahon, he got a judgment of $10 million for his dog that died in Florida from toxic mold. Then they reduced it, I think to eight on appeal but it was just crazy stuff. There was this show on ABC, it’s called the Lookout. It’s no longer on TV I believe but I watched the first episode. They brought in mold remediation experts to come in and check this house out and they have the house wired for video and sound and they’d already had it inspected by microbiologist who said it was mold free, well these guys come in and five out of the seven people came back to the housewife who was concerned for mold and their children and they told her, your house is full of mold, and it’s going to cost you 14 to $20,000 to fix it.

Then when they brought them back into the house later on, they brought out the cameras, the guys ran. When I tell that story, people look at me and I ask them, I go, “You know what those people are called?” “Oh they’re called charlatans, rip off artist,” I said, “No, they’re called expert witnesses.” That’s who the plaintiff is bringing in to say that your property is full of mold and the  it just becomes a battle, who do the jury believes more? From that standpoint, because this has become a hot bed for attorneys, personal injury attorneys, I would put my property in an LLC and just think of it as cheap insurance because once you set it up, you have very little ongoing maintenance cost with the company.

[0:45:22] MF: Right. As a real estate agent, I list REO and HUD homes too, I run into mold a lot with foreclosures and we’ve had mold in some of the properties we’ve bought, we’ve got a really good mold guy and he tells us, “You can do a mold test every single time and it will show mold because it’s naturally occurring in the air. It’s just a matter of what type of mold it is and if you interpret whether it’s bad or not.” So yeah, I can imagine how easy it is for people to try and claim mold is making them sick when it’s everywhere, we’re probably breathing molds right now a little bit.

[0:45:54] CC: It’s not the fact you smoke six packs a day and you start drinking at 10 in the morning and you eat fast food. That has nothing to do with your lifestyle.

[0:46:06] MF: Right. Very cool. Well Clint, this has been an awesome show, I think those are all the questions I had for right now. Like I said, I’m probably going to contact you after this and run you my stuff. Obviously you helped people out with this. I’ve got a link to go to your webpage so people can find you and talk to you and like I said, I believe you have a free consultation, you’ll talk to people. Tell us a little bit about how you can help people out in their entities?

[0:46:29] CC: Yeah, what we do at Anderson, we’ll give you initial consultation for free where we’ll look at your current situation and we’ll make some recommendations to you as to how you can protect yourself. Now obviously we do set up those structures ourselves, we setup the LLC’s, the corporations and land trust. Really what we do to generate clients is just show potential prospects that we’re willing to give away our knowledge for your trust and your business to show you how we can assist you in the areas that we’ve been discussing today.

We work in all 50 states, setting up these structures and we have thousands of clients just like the listeners on this podcast that we’ve helped structure. And so you’re dealing with a firm that we have multiple offices, we’re in two states, Washington and Nevada but we have six offices between the two states and we have staff of about 60 people both CPA’s, tax attorneys, attorneys and EA’s. And so you get a depth of experience there that most local guys just can’t operate at because they haven’t been dealing with the people that are presented with the issues that you’re going to be facing. If I haven’t done it or I have clients that have been involved in it and we can spot the issues much quicker and know how to address them than other individuals.

[0:47:50] MF: Right. Well I think just about anybody who is listening to this podcast can tell, you’re extremely knowledgeable about the subject and if they’ve talked into it, a lawyer, a CPA themselves, they’ll probably realize, they don’t know a whole lot compared to someone who knows both sides of the equations, the tax side and the law side. So awesome, any parting advice for people who are looking to get into investing, looking to start a real estate venture whether its entity wise or just basic investing wise?

[0:48:19] CC: Yeah, my advice is, don’t get hung up on the entity side of it because sometimes we can be so concerned about asset protection that we lose track as to what the end goal is which is to start building up a passive investment stream of income.

Entities are important but it shouldn’t take the place of the fact of you going out there and putting in offers and buying property. I can see that  happen with people before, they’ll call me and say, “Well I need my entity setup before I’m going to do my first deal and I’m just holding off on investing.”

No, you shouldn’t, you should be out there. Because let’s say you’re buying a piece of property and you have to obtain financing. You can’t put an entity together to take that title of that property. So again, there’s no point in not moving forward with your deals. We’ll deal with it after you get the property in your own name, then we’ll protect it.

[0:49:14] MF: Yeah, great advice, I’ve had that question too. I can’t move forward, I can’t buy anything so my next step is to get my LLC setup and I have to research it, figure out the best way and it’s like, “Well, you don’t have to.” Like you said, go buy the property, get started then figure that out afterwards.

[0:49:29] CC: Correct. You may not even buy it in the state you’re living in and so you set up an entity in your home state and you’re buying it across the country. So it doesn’t do you any good.

[0:49:38] MF: Right, very nice. Well Clint, awesome job, I learned a ton about entities and protection, lots of things I didn’t know. I’m sure you helped out a lot of people, like I said, you’re with Anderson Business Advisers and Law Group. We’ll have a link over to your site on our information detailing this podcast. Great to have you on the show, I will be talking to you soon for sure.

[0:50:01] CC: Alright, well thanks for having me on, it was a pleasurable way to spend my afternoon, I appreciate it.

[0:50:05] MF: Great, glad to hear it, alright, take care.

[0:50:07] CC: Alright, buh-bye.

[END]

On this week's episode of the Invest Four More Real Estate Podcast we talk to Michael Blank. Michael is a very successful real estate investor who owns multifamily apartments and restaurants! Michael gives us some great advice on how to invest in multifamily, how to find private money and even how to run a pizza joint. Michael also has a very successful website and coaching program for real estate investors.

Michael Blank started out in the software industry and did very well. In fact, he was part owner of a company that was bought out, which gave Michael start-up money to invest in real estate. Michael started in the restaurant industry by purchasing into a franchise. He admits he knew nothing about pizza making or running a restaurant, but hired someone who knew what they were doing. The restaurant industry had nothing to do with real estate, but it taught Michael many lessons about passive income and running a business.

The pizza industry was up and down. Michael knew he had to diversify or find something else to occupy his time. After reading Rich Dad, Poor Dad he knew he wanted to be involved in real estate. He found opportunity after the housing crisis and was able to flip 30 properties in about three years. He admits flipping was fun, but challenging. He also admits his success had a lot to do with market conditions at that time and after the housing market recovered it was much tougher to make money. After the market was not conducive to flipping, Michael switched his focus to multifamily properties.

Flipping houses produced some great income, but it did not provide ongoing income. Michael became interested in multifamily housing and rental properties, because of the income they produce every month. Michael loves multifamily houses because you can own many units under the same roof. Once you understand how to find and buy multifamily properties, the larger the project the better. Just because a project is larger, it does not mean it takes a lot more time to manage than a smaller project. When Michael buys multifamily properties he does not mange the tenants, but lets a property manager handle that aspect. He focuses on managing the property, raising rents and deciding what renovations should be done to increase the value.

Buying 100 plus unit properties is not easy to do and it is not cheap either. Michael uses private money to buy many of the properties he controls. He will use a syndication, which means he manages the properties and has control over how they are run, but other people have ownership in the properties. Michael is able to pool together money from multiple investors who are sometimes guaranteed a certain return and sometimes their return is based on the performance of the asset.

If you know where to look, there are many people willing to invest in real estate, but they don't want to do all the leg work. Michael has made many connections over the years in the real estate industry, restaurant industry, through his blog and through networking. He explains how he has been able to convince his connections to invest private money with him in this episode.

Many investors say beginners should start out with single family homes, then move up to small multifamily homes and then graduate to larger multifamily projects. Michael things if you want to eventually buy large multifamily complexes, then start with large multifamily complexes! He does not think starting with single family or smaller multifamily projects is a necessary step to reaching the large projects. In fact when he started investing in multifamily, the owners and agents involved did not care that he had single family investing experience. They saw someone who had never bought multifamily before and assumed he had no idea what he was doing.

If you would like to talk to Michael about investing in multifamily properties, check out his website: TheMichaelBlank.com. Michael has many free resources and great information for investors.

Don't forget I am holding a webinar this afternoon for real estate agents! Sign up here.

[INTRODUCTION]

[0:00:14] MF: Welcome to the Invest Four More Real Estate Podcast. My name is Mark Ferguson and I am your host. I am a house flipper, I flip 10 to 15 houses a year, I own 13 rental properties with a goal to buy 100 by 2023. I’m also a real estate agent. I’ve been licensed since ’01, I run a team of nine, we sell close to 200 houses a year. So on this show, we like to interview house flippers, landlords and the best real estate agents in the business.

So stay tuned for some great shows. If you want more information on my rentals, on the numbers, how I buy properties, check out investfourmore.com.

[INTERVIEW]

[0:00:58] MF: I have an awesome guest today, Michael Blank who has a very interesting history, software programmer, part of a software company, has owned restaurants, has invested in many multi-family properties, has flipped houses and has even done a little bit of commercial stuff.

We’re going to talk with Michael about his history, how he got started, some tips, some things he’s learned along the way as far as investing in multi-family raising private money and maybe a few tips if anybody wants to start a restaurant too. So Michael, great to have you. Thanks for being on the show. How are you doing?

[0:01:32] MB: Good Mark, thanks a lot. I appreciate it.

[0:01:35] MF: Oh yeah, no problem. Yeah, I found your bio really interesting so I’m glad you’re on. The first thing I always ask my guest is how they got started in real estate, what was the first steps they took? I know you were a software person, you are in that field, and then kind of — well tell us how did you get started in real estate from that state?

[0:01:53] MB: Well, I did what everybody should do and I got a Masters in computer science because that’s what everybody else should do. That’s how I prepared for it. I had no plans early on, I did what I was told which is go get good grades, get a good job with benefits. And I did though want to experience a software startup and so after several years out of college, I did actually join a software startup and this was in the late 90’s, right place, right time, I was one of the very early employees there and we eventually went public and three years grew from zero to $200 million revenue. We had offices worldwide and put a bunch of money in pocket, which was awesome. You know?

[0:02:32] MF: That’s how everybody want to start right?

[0:02:34] MB: Yeah, so life is great. I’m young and I just got married and whatever, it’s great. This was now in 2004, I read “Rich Dad, Poor Dad” and I’m like, “Ah, I am such an idiot.” It doesn’t matter what I have in bank account because if I stop working tomorrow, the money stops flowing and that just didn’t appeal to me. Initially, my plan was to have my own software company. Before this, I had moved around inside my company with the marketing and also in sales at the very end which is the toughest job I’ve ever done by the way and it’s the sales stuff. I learned a lot.

Anyway, so I read “Rich Dad, Poor Dad” really reflected on what I want to do next and I said, “You know what? I think I’m going to can my entire graduate career and all that stuff and I’m going to do the Rich Dad, Poor Dad thing.” So I did two things at the same time because I basically quit my job at that point and I had all this money in the bank so I had the time. I focused — a cash flow business for me was restaurants. I knew some people who got into a franchise, a very popular franchise at the time and they were like, “Yeah, you hire a guy to run all these restaurants. You just build them out and you sit back and you count the passive income”. I was like, “That’s great! That’s exactly what I want. I don’t know anything about restaurants. It doesn’t matter, let’s do it.”

On the real estate side, I decided to flip houses. I align myself with a local mentor and at the time, it was 2005 and 2006, the market was red hot so we’re sending out postcards. That’s what we were doing. We were looking at sending out postcards, setting up the 1-800 number, taking the calls and I flipped a few houses and I did two houses that made more than my entire salary at this company. I was like, “Wow, that is just mind blowing!” And so I did a few more of those, kind of did it on the side and finally we got started with the restaurants. It got very busy on the restaurants but I decided I wanted to get into commercial real estate.

So I went into a boot camp and started marketing in Texas and starting out letters and brokers and building teams. I must have looked at like a 100 deals. I swear hours and hours of crunching numbers and spreadsheets and making offers and finally, I had an 82 unit under contract and I had it under contract for one day because I thought about it and said, “Oh my gosh. If I play this thing out, I’m going to have to be in Texas for days on end.” And we had just built two restaurants and we’re buying a restaurant. It was nuts. There are only so many hours in a day so I need to pick. I need to choose. And I was very heavily invested in restaurants so I put the whole real estate thing on hold for all of 2006, 2007 and 2008. It makes me look like a genius because I missed the entire recession but it bit me on the butt on the restaurant side. I mean no one came out unscathed in that time.

And then in 2009, I decided as thing stabilized and I got into house flipping full blown and not just a hobby but as a business and it was quite different. I had deployed almost an entire net worth in these restaurants. I had a 20 unit plan in my brain. I had a whole business plan worked out, it didn’t worked out that way but my whole plan was 20 units. I’ll put all my net worth in this three or four or whatever restaurants and that will carry me forward. It will be my core business and I’ll expand from that. That was my grand master plan. So I was essentially semi-retired at this time doing these restaurants and counting my passive income and got into flipping houses but hey, I had none of my own capital.

So the only way that I could do it was to raise it and I had raised money from friends and family, a substantial amount of money. We did about 30 properties in three years and it was a lot. It was the first time that I got the taste for other people’s money. It was only because I had none of my own anymore. It was all deployed and I was like, “Wow, the raising money thing is mind blowing. It’s mind blowing!” I did eventually get into the commercial space and bought a small 12 unit building in Washington DC and that was my first syndicated deal, which means that private placement memorandum, subscription agreements, operating agreement and really kind of did it the right way.

And then a couple of years later, I did the same thing for two restaurants. So I syndicated the purchase of two restaurants and currently have investors looking for additional deals. I’ve really done a lot of different things. My focus currently is really apartment buildings and I’ve been getting out of the restaurant business and investing myself of that and really focused 100% on apartment buildings.

[0:07:04] MF: Very cool. Yeah, you talked a lot of different things there but one thing I wanted to get into and before we get into the real real estate side, I’ve always had a dream of opening a pizza restaurant myself. I mean not really because of the money but I like to make pizza. I know it doesn’t really make sense to make a pizza restaurant because of that, but tell me what was the biggest challenge you had and the biggest thing that surprised you in the restaurant industry?

[0:07:30] MB: Here’s the thing. I got into the restaurant business without really having a restaurant experience and it was okay at the time because I wasn’t actually running the restaurants. The only thing I did was write checks and I did the marketing because I am pretty good at marketing but I hired a guy to run all these restaurants.

So the lesson on the one hand is align yourself with people who know what they’re doing if you don’t. That’s lesson number one. Lesson number two though is don’t get into any investment that you’re not afraid to run one day and that’s what happened to me. When the business stopped performing, I couldn’t afford my guy anymore and I let him go, which means now, I am running six restaurants. Well, not only did I really know much about restaurants but I didn’t really want to run six restaurants.

And so there was lessons all round in that and I’ve always known that I’m not a restaurant guy. I enjoy the marketing and I enjoy interacting with people and getting them to perform better and to realize their full potential. I love that, but I don’t love the actual restaurant operations. So I guess it’s the same thing for real estate really. I mean do you really have to love the real estate part of it? Not really but it helps. The advantage of the real estate especially on the apartment buildings, first of all you have a property manager built into business model. You don’t have that built into restaurants necessarily. You have to make sure that the opportunity allows for it.

But with apartment buildings, it’s already built into business model. Mostly everybody does it and if they don’t perform, you’ll find someone else. It’s not like you’re going to be collecting rents yourself on a 30 unit building. So that can’t happen or is less likely to happen on a multi-family front than any other business that you own.

[0:09:11] MF: Right, well I imagine if you are looking to find someone to manage six restaurants versus a property manager to manage an apartment building, it’s a little easier to find a property manager than someone with restaurant experience.

[0:09:23] MB: Yeah, exactly. A restaurants are a very complex business, it really is and you have to know what you’re doing but you also have to have the heart for it and the passion for it. There are people who really love it and if you’re that kind of person, good for you. If not, maybe you should rethink the investment.

[0:09:41] MF: Right, no, it makes total sense. You went from the restaurant business to flipping houses. That’s a lot of flips, 30 properties in about three years or so. I’m curious, we’ve talked to a lot of flippers, one big surprise was you made so much money on your first deal because so many people end up losing money or it becomes an education process instead of a profit process.

[0:10:01] MB: Oh I lost money. Don’t get me wrong. It was not on those first two though. It was like deal 17, which is good. If you lose money your first deal, you’re probably not going to do your second. It’s just my guess. You’re like, “Ah, that sucked. I’m not doing that again.”

[0:10:16] MF: Right, yeah, I know it makes it tough. When you’re doing those properties, what was your biggest challenge flipping? Was it finding contractors or like I said, was it finding the money?

[0:10:25] MB: No, finding the money was actually relatively easy and the reason was because it’s a single family houses, people know and understand single family houses. It was a relatively small amount of money, $25,000. It was a simple transaction. They got a promissory note that the title company handled. I was $25,000 in, secured by real estate, six month hold, very short time and 12% interest, everything was right. It was an easily understood investment, low risk, high reward, complexity low, people said yes. Okay?

The apartment side and restaurant sides, raising money for them was much more of a challenge but — so the money raising side, what surprised me at the money raising side was actually easy on the single family house. What we struggled with is definitely, as you pointed out as you know, is the contracting side. I had to actually hire a project manager. It was a contractor that did one of my houses and I said, “Why don’t we work closer together? We’ll put together a comp plan. You manage all of the construction side.” And it was too many months into it until I realized that this guy was in way over his head. Way over his head.

He was a great contractor but had no people or administrative skills, which you need for managing other people. We really didn’t make as much money as we should have and we lost some money as well because of it until I found the right guy. The right guy that had the capacity, that communicated well, had good people skills and it’s all about the people you have around you as you know. You have some that you find you’re having to micromanage and I tend to do this more than others.

I’m like, “I can make you be the person you can really be. I’m going to work with you. I’m going to make you my project.” And I’ve done this so many times now that I’m like, “Stop that. You probably have the wrong person.” Obviously, you want to further someone but when you’re micromanaging someone, not a good sign. So this guy did not have to be micromanaged and life was quite a bit different. So definitely having a strong contracting team around you is critical.

[0:12:24] MF: Nice. I’ve got 11 flips going right now. And I hired…

[0:12:27] MB: That’s a lot.

[0:12:28] MF: Yeah, it is. It’s a lot and it’s tough to do that and I hired a project manager, just like you said, earlier this year. He’s one of my contractors but he also had a management background in the corporate world. It’s going slower than I thought it would getting things in place but it’s moving along so I’m hoping next year things will be much smoother. We’ve got the processes down but yeah, try to do that all myself — I was trying to do it myself before and I was taking up to a year to flip properties because just managing the contractors and getting them done was insane.

[0:13:01] MB: It was insane, right?

[0:13:01] MF: Yeah, so tell me more about the private money? How did you structure this deals and allow people to buy in for $25,000 at 12%?

[0:13:10] MB: Right, so I thought it was a very complicated process in the beginning but really, it’s much simpler. So here’s how it works; you get your verbal commitments from your investors. They then essentially wire the money to the title company and they in turn get promissory notes that you sign at closings. They put their money in escrow and in return get promissory notes and those are recorded on the deed. If you have multiple investors on there, let’s five or six, they are all listed on the deed. Right? So I couldn’t sell the house and not pay the money back. It’s all in the deed.

If it’s a different title company and I’m selling it, they see it on the deed and it references the promissory notes, they have to disperse those. It’s just like a bank essentially. Jus like the bank. So they’re protected, it’s a well understood process but I found that not every title company understood the process. It’s not like every title company, they will look at you and go, “I don’t know how to do this”. You can’t do that.

So you have to have a title company that understands that but otherwise a very well understood, very simple process. And that’s how we structure them together. It was basically a simple promissory note, 12% interest per year and when you sold it, there is a payoff. You calculate the interest accrued to that point and you pay it out.

[0:14:19] MF: Nice, were you able to finance your payers with the whole purchase price of these properties or were you bringing in your own money to it too?

[0:14:26] MB: No, you raise as much money for the purchase price, closing cost and the repairs. And in the beginning, I wasn’t raising quite enough, so I would like for example, if a project went over I had to put my own money in so I raise a little bit more the next time around You maybe raise a little bit of $10,000 more than you need in case there’s an overrun. That’s probably a good thing to do.

[0:14:44] MF: Very nice. Very nice. Did your investors have a problem with or being price point with these properties they’re at and having four or five different people on the same property or did they trust you, trust the process and just go forward with it?

[0:14:58] MB: Yeah, that’s good point. These are friends and family acquaintance kind of people and I guess maybe they trusted me but I think it’s a good point. I mean in a false situation, if theoretically it’s five investors in a deed, how do you foreclose on the property? You have to know who the others are, they have to organize and you have to agree and basically, it will be a nightmare. Right?

So this is why a hard money lender will never agree to share the note with anybody because of that. But these are not sophisticated investors. These are friends, family and acquaintances and they essentially trust you that you’re going to do the right thing. Yeah, you’re right. I mean a hard money lender would not agree to that.

[0:15:37] MF: No I think that’s just a good point that when you’re getting private money, there are a lot of these companies popping up that claim to be private money online and across the web and what they really are is hard money disguised to be private money to try to attract more people. But real private money is what you said, friends, family, acquaintances, people you’ve met along the way who are just personally basically giving you money and you give them a return.

[0:15:59] MB: Right, I mean hard money, I’ve done a pseudo hard money early on. It was a sophisticated investor who basically behaved like a hard money lender and those are hard because the term is nearly six months and if things go longer, you can get into trouble. A lot of hard money lenders are very heavy handed and they’ll just start the foreclosure process on you.

In my case, when something took longer and in one case, it took significantly longer like six months longer on one project and one took like eight months longer. So this was like 14 months total, now in that case, I just called my investor and said, “Look, I need an extension, you’re going to get more interest. Here’s an addendum for the note that extends the note by six months”. They’re like, “Okay,” and then everything is fine.

Whereas a hard money lender will start calling you every single week and they’ll start getting involved and they’re going to start looking to see what’s going on. So private money in the traditional sense is actually superior to hard money with a little extra work, it’s much better.

[0:16:54] MF: Oh yeah, completely agree. So what steps do you go through to find this private money and how did you pitch your projects to them? Was it difficult asking friends and family for money?

[0:17:06] MB: In the beginning it was and I struggled a little bit by asking friends and family who, you know, I might see for Thanksgiving for example. I have people still ask me to this day. “You know what, I don’t take friends and family money.” I’m like, “Really? Wow, you just cut off 90% of your sphere of influence if you do that.” If you understand it better, they’re afraid that they’re going to lose someone else’s money. Okay, fine. I get that. But even if you lose a stranger’s money, you’re still losing someone else’s money.

So really, the spectrum it’s really not there. It depends on, and to answer your original question — how do you approach people? — it depends on where you are in your experience level. If you have a track record, then you could put together a portfolio, you know, before and after pictures. That was extremely useful when you half dozen you can show before and after pictures and what you bought it at and how much money you make. People will go, “Ah, that’s cool. This guy knows what he’s talking about”.

In the beginning though, you don’t have that and so what do you do? What I did was I made up a portfolio and I basically just went and looked at houses and put together essentially a business plan for a house. I went and looked at one, got the MLS, looked at the house, took photos, put together photos and then put my scope of work how much is it going to cost, have the comps together and how much is it going to cost. A whole business plan for this house and I said, “This is what I’m going to do. I don’t have this under contract but when I do, it’s going to look just like that.” And people will look at that and go, “Oh yeah, this guy knows what he’s doing. I see what he’s doing, he’s got the comps,” and it at least allows you to build some level of credibility until you get that first or second success story.

[0:18:35] MF: Nice and well you said something really important too in that you had the comps, you had the numbers, you could show them that “I could buy it for this, I have this much repairs, it will sell for this.” I hear a lot of people trying to pitch private money and go look for funding and they don’t know those numbers. They say, “Oh I got this deal. It’s $60,000 and I think it’s worth somewhere between 140 and 180.” It’s like, “Well with the repairs what is it?” And they don’t know. And it’s like you have to know as much as possible to convince someone you know what you’re talking about.

[0:19:04] MB: That’s right.

[0:19:05] MF: Cool, so you went from the flips, you still had that restaurants at that time and then you went looking into the multi-family commercial space, what made you want to jump into that space as oppose to single family?

[0:19:18] MB: Well, my plan always was commercial real estate apartment buildings, a buy and whole long term wealth creation. That’s when I got started in 2007 I went out to the boot camp. I was hot and heavy for about nine months. I really spend a lot of time analyzing deals, building a team, sending letters and then, like I said, I put that on hold. That was my initial plan. The reason that I really got into more flipping is because the market is so unique in 2009, 2010 and 2011. We had so many foreclosures, such a supply of cheap property and then in our area, the Washington DC area, as many parts of the country the retail market was recovering so quickly so that the spread was enormous. There was not a lot of people doing it and it was very easy to get property and very easy to sell.

And so I knew it was a narrow window of opportunity that I felt I needed to take advantage of and I put my multi-unit on hold a little bit until finally I started taking action on it. But really that’s been my plan all along. I think there’s a lot of people who feel like they need to go to a single family route first before they can graduate to apartment buildings and looking back on it, I don’t actually think that’s necessary. In fact, depending on what your goals are, it could be a major distraction.

[0:20:29] MF: Okay, cool. So now, I’ve got my 16 rentals, they’re all single family except for one kind of up down duplex which is pretty much a single family anyway. What attracts you to multi-family more than single family? It’s okay if you disagree with me. I’m okay with that.

[0:20:45] MB: You know I hear you Mark but here’s the thing, It all depends on what your goals are and sometimes, you’re going to have the same goal and you can get there in different ways. I will approach it for “what are your goals and how do you achieve your goals?” Let’s say that your goal is that you want to be able to retire in three to five years or whatever the case maybe. Meaning that you need enough passive income off of something to quit your day job let’s say.

You decide that you need, I’ll make it up, $7,000 a month and now you figure out, “How am I to use real estate to accomplish that?” And you start looking in single family houses because that’s what everybody thinks and starts off and you stay. “Well yeah, I can maybe in my area buy a house and after all expenses maybe I can make $200 or so per month.” And you divide that number into $7,000 and I can’t do math in my head but it’s a pretty large number of houses that you would need.

Then you start thinking to yourself, “Oh shoot, that’s a lot of houses that I need. Am I going to get there in the kind of timeframe that I want? Or maybe I’m going to do one or two houses a year and I’ll get there in 15 years,” or something like that. And that’s fine, the one deal per year strategy is a fantastic retirement strategy. “Or do I want to try to get there faster?” And if you want to get there faster with single family houses, you’re going to have a challenge with that because it’s a lot of transactions versus if you decide that you either control a 100 units using, let’s say, using private money to make $7,000 per month. I can probably get there in maybe two or three deals versus 100 individual houses. I maybe do my first 15 unit and then I do a 25 unit and then I do whatever is left, a 50 unit after that. So I’m in there in three hops versus hundred individual hops.

On the other hand though, it’s harder to buy apartment buildings. You need more capital, it hard to find the deals. It’s easier to get the capital through single family houses and it’s easier to do deals. So I know guys who specifically have portfolios of rental properties and they raise money for that because that’s what’s working right now and that’s the strategy they chose and the strategy is fine but a lot of people don’t really think about what their goals is and the time frames they want. They feel like they need to go through the single family route to get where you really want to go and that’s a huge myth.

If someone really wants to get to multi-family apartments for passive income and long term wealth creation, they don’t need to do single family house. It actually doesn’t really buy them as much as I thought it would. I thought when I flipped the houses it would be a shoe-in to go into apartments. But all of 30 investors, I think only one or maybe two actually went with me on the apartment side. Everybody else said, “Nah, not for me. Forget about it”. Then when I talk to the brokers, they go, I’d say, “I flipped 30 houses and now I’m going to buy your building.” They’re like, “Yeah but how many apartments have you done?” I’m like, “Well none but I did 30 houses” and they’re like, “You’re a newbie.”

And I’ve got very little credit for my house flipping career. I mean all my portfolio that I built up my nice pretty pictures don’t really buy me anything. I’m like, “Well shoot, everybody told me or I thought that this would let me get in there more easily here,” and that was actually not the case. I realize now that the reason people think they have to go to single family house is to expand their minds to get more comfortable with it but there’s actually other ways to do the same thing without actually going through single family houses.

[0:24:10] MF: Right. That makes perfect sense and when I say I invest in single family, I always tell people too, that doesn’t mean that’s the only way to do it. That doesn’t mean it’s better than multi-family but I think in may particular market in Colorado, I can make more money on single family than multi because our cap rate is 5% on multi-family and there’s nothing available but if you’re in somewhere else with more multi-family or a better cap rates, it can definitely make more money than single family.

[0:24:35] MB: Yeah, that’s exactly right and so you’re trying to achieve the same goal with a strategy that’s working where you are and if you try to pursue, for example multi-family in a hot market like San Francisco or Boston or wherever else, it might take you a very long time to get there. Unless you’re willing to invest in other markets which is always an alternative but you’d say, “Hey, I want to stay local. I don’t want to hop on a plane and do something remotely I would know. I would do something here.”

You thought about this and what I’m saying is I’m finding a lot of people don’t actually think about this in a lot of detail. They just do it kind of without thinking because that’s what everybody tells them to do. I’m just saying that you’ve got to think through the strategy and make sure that it aligns with your goals.

[0:25:16] MF: Yeah, I know. That makes perfect sense. Well you said one interesting thing too, it’s much harder to buy large multi-family apartment complexes. I imagine it’s harder to raise private money for them too. How did that process differ from purchasing a single family flip?

[0:25:33] MB: It’s harder for several reasons. One is normally, the minimum investment is higher than $25,000. I don’t want 50 investors on a deal, so minimum investment is higher and that disqualifies a lot of people who either don’t have that money or don’t want to invest that kind of money. Second of all, it’s a longer hold period. It’s normally five years until we either sell or refinance. It’s much longer than six months. A lot of people are not comfortable with that.

Third, it’s a more complex transaction. There’s much more paperwork involved, there’s operating agreements, there’s private placement memorandum, there’s attorneys involved and normally a confused mind says, “No.” So for those three reasons it’s harder to raise money for apartment buildings.

[0:26:17] MF: Yeah, no that makes perfect sense and what about finding those deals? Have you found it harder to find those deals? Is that why you are going to different locations, different areas?

[0:26:25] MB: Yeah. It is clearly and this market right now is definitely fairly hot because of the current stock market, a lot of uncertainty in the market, a lot of people are putting their cash on sidelines and when you tell them you can put your money to work for 10 or 15% over the next five years, they’re like, “Okay, tell me more”. There is a lot of cash on the sidelines, a lot of people are willing to overpay to get that certainty and that stability.

There is also a lot of four money chasing US real estate and so it makes it difficult to get stuff that’s listed kind of like it was in 2005 and 2006 in a single family house market where investors were not looking at the MLS anymore. What we’re doing now is we’re going back to the old days, meaning 2005-6 we’re going to get deals through sending letters, postcards, networking, knocking on doors and we got lazy over the last decade because there was such a great supply of real estate.

I think we got lazy a little bit. People say, “Oh you can’t,” that doesn’t mean it’s not laying around anymore which means you actually have to work a little bit. And so I think that’s what we need to do. We need to start working at it a little bit more like we did a decade ago.

[0:27:38] MF: Right. I always tell people if everybody can invest in real estate and make a bunch of money, there wouldn’t be any profits left over. There won’t be a great opportunity for those of us who do do it, who put the work in and can find those deals.

[0:27:51] MB: Right.

[0:27:51] MF: Cool. So I keep hearing you say “Private money, private money,” do you ever use bank financing?

[0:27:56] MB: Yeah, absolutely especially — I mean real estate, it’s the only business in the world that you can get bank financing for. I mean on the restaurant side, it’s an all cash deal. There’s no bank that’s willing to loan on a restaurant or any other business for that matter. Unless you have real estate as a collateral which again is real estate. That is why I love real estates, apartment buildings specifically because you can get an 80% or sometimes more from bank financing and it’s almost free. I mean 4.5%, that’s like free money. It’s ridiculous I love the leverage of what you can do with that. It’s such a unique thing.

[0:28:31] MF: Yeah, I know. I completely agree. Walk me through a multi-family deal. It sounds like you find the deal, you get your private money investors together and then how does this syndication work? How do you make your money? How does it all come together?

[0:28:45] MB: Yeah, a good question. First of all, the raising money part starts way before you get your first deal or any deal under contract. That’s the first thing because you have a chicken and an egg problem and it goes something like this. I can’t put a deal on a contract because I don’t have my investors so I can’t put a deal on a contract or I have a deal and a contract and now, I don’t have enough time to raise the money, which is also true, so what do I do?

Well, I’m stuck and I’ll just give up versus what I’m doing in a multi-family is the same thing that I did with the house flipping when I first got started. I make up a deal. I literally make up a deal. I will create a business plan pro-form of financials projections of a real deal with a real photographs and real financials and everything about the deal is real except they don’t actually have it under contract but I use it as conversation piece to start reaching out the potential investors.

I would say, “Hey, here’s what I got going on. I’m really excited. Here are the potential returns, some of the risk. Let me show you what a deal might look like, are you interested?” They go, “Yeah, let me find out a little bit more about that” and you address their concerns and their objections. You build a relationship with them and at one point, they’d say, “I’m good for a $100,000, just let me know when you get a deal” and you stay in touch with them until you actually get one under contract.

Then you create an investor package that substantially looks like the one they saw before. When they get it, it looks about the same but the pictures are different, the numbers are a little different and they have a comfort level and they can quickly say yes. Essentially, you get your verbal commitments upfront for either all the money you need or let’s say, at least 75% of that and that’s the work you do beforehand because it will be very stressful and some people do this and God bless them.

They will actually put a deal on a contract and then they go raise the money and they hit the phones and they get it done by the skin of their teeth and they write a book about it. That’s great and I’m not a last minute guy. I like to reduce my stress in life. At least I set myself up for success where I have at least most of the money, if not all of it verbally committed upfront. When you get something on a contract, the first thing you do is you create your investor package.

You send it to investors and say, “Hey, I got this deal. You said you were in for a $100,000 are you still good?” Yes or no and for more and for less, that’s great. The next step really is that, you’re going to get an operating agreement for your review. You’re going to review that and you have to sign. You also get a private placement memorandum which is a really long boring document that discloses all the potential risks about the deal, about the tax consequences about me.

You don’t have to sign it and you don’t even have to read it. I’m required by it to see laws to give this to you. You can throw it in the trash if you want or read it, whatever and there is a subscription agreement that says that they’re investing a certain amount of money and that they’re either a creditor or not and creditor investor and again, to address some of the SCC requirements. The most back and forth happens on the operating agreement.

That operating agreement governs the rights that the investors have versus what you as the general partner have. What kind of voting rights they have, what you can do, what you can’t do and so that really governs the relationship and that’s the important piece that they have to review and sometimes, there’s an attorney involved to review that document. Once everything is signed, then they have to wire the money to the closing attorney where they do in a single family house.

Then the closing attorney disperses the funds. That’s how the closing happens and I think your other question is how you pay yourself on it, right? Was that your other question?

[0:32:14] MF: Right. How do you make money? Because they’re investing the money, you’re not managing the property right? You got a property manager in place, so what’s your role in the whole besides finding the deal, what’s your role after you buy it?

[0:32:24] MB: Well, your role clearly is you are managing but you are managing the manager but look, if your property manager doesn’t perform, you’re going to have to go out there and replace them. You’re going to have to interview, you have to make the rest and you’re still managing the assets. It’s called asset management. You are still reviewing the numbers and you’re making adjustments.

For example, one of my deals, I end up replacing my property manager because they weren’t performing and it wouldn’t get the job done. There is not really a fit and so I was spending way too much time micromanaging back to them. I was micromanaging the manager and I was like, “Dang gone it, this cannot be. Everybody told me this was a passive investment. Something is not right” but I knew that if I wanted to go because I interviewed a bunch of property managers.

If I had to go out now and interview a new property manager, it’s going to take time and I have to get into the car and I’m going to have to meet them. I was already in the passive income but you’re just not getting the job done. There is actually work in managing the manager and reviewing the numbers and making certain adjustments. My conclusion Mark is, there is no such thing as a truly passive investment and I’ve made the mistake on the restaurant side.

I sat on my own retirement for probably three and a half years while I didn’t go to a single restaurant. All I did was meet my multi-unit guy once a week for lunch and pat his shoulder on the back and I completely went radio silent on the restaurants and it bit me on the butt real hard and the same thing can happen on any investment. Whatever you have, it is passive to a degree but it can’t be so passive that you don’t know what’s going on and you’re completely in silent mode.

There’s a lot of work that you’ve done leading up to this and there’s a lot of work you need to do during it. You deserve to be paid in various points of the deal. The first one is, when you buy it. You pay yourself an acquisition fee between one and three percent of the purchase price. If you do a million dollar deal, a quick math is $30,000 or so. It can be a nice payoff but if your investors are having a hard time with this, you can educate them a little bit about what happened for you to get to that point. Which is you probably look at a hundred deals before that one literally, analyze a 100 deals and maybe made 20 offers, got really close on five of them and you actually end up buying this one. If you calculate the hours spent up to this point, you are working for minimum wage frankly. You deserved to be paid, to get up to this point and that’s number one.

Number two, you can pay yourself an asset management fee which is normally either a percentage of income from the property or percentage of the assets or the equity that was invested. You can slice it either way, one to two to 3% of that and that really compensates you for the work that you’re doing while you own the asset and then there is a disposition fee, again, one, two or whatever percent of the purchase price whenever you return to principle.

If you do a cash out refinance and you return all the principle to the investors, their risk is off the table, you deserve to be paid for that. Having said all that, those are different ways you can pay yourself but having said that, the deal has to be driven by the investor returns. They’re the number one priority. If you pay yourself at the expense of the investors, it’s a bad deal.

If you don’t pay yourself at the expense of investors, it’s not a win/win but at least you’re in the game and your investors are making the money or the returns and you’re building a track record right? The worst is that you pay yourself and asset management fee while the investors are not getting any distributions at all, it doesn’t look good at all. It leaves a bad taste in the investor’s mouth and they’re going to get disgruntled and may not even want to invest with you in the future. You have to make sure that when you structure a deal, try to pay yourself but make sure that the returns are still there for the investors.

[0:36:08] MF: That makes sense, I wasn’t trying to say you didn’t do any work, you didn’t deserve that money but how you get paid. One thing I’m curious too, with the flips, you would pay the investors 12% interest no matter what happens right?

[0:36:20] MB: No matter what happens.

[0:36:21]MF: On the multi family, you’re paying them a return based off what the property makes instead right?

[0:36:26] MB: That’s right but again it depends on how you structure a deal. You can structure a deal where they get a preferred return of some amount. Let’s say I agree to pay them a five preferred return and then we’ll do a 50/50 split above and beyond that. For example, that 5% is essentially like an interest payment. Quote guaranteed regardless of how the property performs and then whatever’s left is then split 50/50.

It depends on how you structure the deal, the investor’s always like preferred return and the preferred return though is not good for you. Because if the property is not going according to plan and all you’re doing is paying out the preferred return, if you don’t pay it out in one year it accrues in the first the next year. You get deeper and deeper in the hole and you actually never get paid anything. It’s great for the investor but not really that good for you.

[0:37:16]MF: Right. What about ownership? When you do this deal, are you the sole owner or do the investors have part ownership as well? How does that work out?

[0:37:24] MB: There’s ownership and there’s control, they’re two different things. Let’s say on a standard deal I might give the investors 80% of the equity for putting up all the money and I get 20% simply for putting the deal together and managing it and making sure everything goes well. Depending on the deal, 10 to 30% should go to you. They are in fact majority owners but depending on how you structure your operating agreement gives them limited control.

I have one deal that essentially are my friends and family and they have no say whatsoever. I can do whatever I want, how I want to do it and they have no say in it. I can sell a building and refinance, I can do whatever I want. They’re fine with it because they trust me and they trust I’m going to do a good job. But I have another deal that are more sophisticated investors and they want more control. So I have a sandbox that I can operate and I can’t hold back more than a certain amount of reserves, I can’t borrow more than a certain amount, I can’t sell it without a vote, I can’t refinance without a vote. if I commit some kind of fraud, they can actually vote me off the island and take control of the asset.

You can do it if there’s a default situation they can take over, if you default on any contract that define the operating agreement, they can theoretically buy a vote literally, it all depends on what the investors, whatever the investors want. It’s equity versus ownership and they don’t necessarily have to be the same, it all depends on the how you structure the operating agreement.

[0:38:50]MF: Cool, interesting stuff, I know it can be complicated but very interesting on how you set those up. I am curious. What type of buildings do you typically go for? Are you going for older buildings, newer buildings, are there certain unit sizes you look for or just whatever makes money?

[0:39:08] MB: It depends and the answer to those question is going to be different for everybody depending on where they are. If you’re a newbie investor, you’re looking at anything from duplexes, quads, up to maybe a 20 unit. If you’re a more seasoned investor you’re going to look for something a little larger than that. It depends on where you are, with regards to opportunity, the ones that you’re looking for a certain kind of opportunity because it’s one of the only ways you can get your returns which is value add opportunities.

What’s a value add opportunity? A value opportunity is something where you can do something to raise the overall income of the building, which in turn and raises the value of the building. The higher the income, the higher the value. The reason for that is, especially because it’s a relatively hot market now, if I’m buying something in a fair market value, I can’t achieve the returns for my investors and still pay myself. I can’t do deals like that but if I buy something at fair market value and it’s under performing asset, meaning that the rents are maybe low, the expenses are high because the renovations I should be making so I can raise a rent or maybe the rent’s haven’t been raised in 10 years and just low.

If I go in there and I do some stuff because I’m an entrepreneur and I need to do stuff, I need to improve stuff, I raise the income and therefore I raised the value. And when I refinanced and/or sell, I now can have a higher return and that’s how I can achieve the returns for the investors. Or I buy something at a really high cap rate. Meaning, I’m getting something cheap, I’m getting something at a discount, kind of like you do on the house flipping side, you’re getting something cheap and you get lucky every once in a while where you just happen to get a motivated seller and willing to let it go just to get rid of it.

Those are rare, you can still get them but those are rare, I can’t build a business around that, even on a house flipping side, you always had to do something to the property, you always look for the deals where you go in there and you put some lipstick on the pig and you sell it and you make a bunch of money, that’s great. But really, you’re still going to put between 30 and $50,000 into a house slip and you’re really doing a deep cosmetic, maybe even some exterior work, you still got to do something to it. It’s the same thing with multifamily. Normally you got to do something to it. That’s just the nature of the business.

[0:41:18]MF: No, that’s good stuff and yeah, it’s a completely different beast but a lot of the things are similar with single family versus multi family. I have a question for you that I’m sure many people are thinking right now. Someone wants to get started investing in multifamily, whether they’re done single family, if they’ve never done any kind of investing, do you think they should start out very small? With like a duplex, a quad like you said, maybe even house hack where they live in one unit and rent out the others? Or do you think it’s feasible for them to go after a 10 unit, a 20 unit property if they haven’t done it before?

[0:41:51] MB: I get this question a lot Mark. My advice is, no, don’t start with a little quad or duplex, don’t do that. Really stretch your comfort zone and try and do the biggest deal that you can. Let me give you an example, when I first bought my 12 unit and this was after I had flipped 30, 20 houses at that point. I got this thing on a contract and I went to this property and I was just totally overwhelmed. It was a three story brick building and it looked like it was going to crush me, I just couldn’t bear the idea of what I needed to do next and so I just kind of sometimes do things, you have to overcome your fear, I started doing it, I just followed my due diligence to check list and I did what’s on there.

An amazing thing happened after about 10 days. We ruled all of the rent rolls of financials, I had visited the property several times, I met with contractors, I’m calling the lender, I’m doing all this activity and becoming more and more familiar with this building that for me was unfamiliar. Within about 10 days, I wished it was a bigger building. Because for two reasons. One, my comfort zone expanded rapidly in that time period because I became comfortable with this building, I was it in, looked it up, I poked at it, I kicked it, I talked to people about it, I looked at it.

At the same time I realized that it was as much work to do a 25 unit building as it was a 12 unit. Literally same amount of building, same amount of work. The only reason someone wants to get started with a smaller building is because they don’t have a comfort zone to get beyond that because they’re coming from where they are right now, a single family house, comfort zone, then the next step is obviously a duplex. That’s the next step to go, there is no other step to go. But my argument is, this is what I tell my students as well.

You can go through this mental exercise of the sample deal package for example that I talked about, create a sample deal package and the only way you can create a sample deal package, an investor package is if you go find the deal, you request a marketing package, you read it from cover to cover, you visit the property, you request the financials, you analyze the deal, you create these financials and the projections and literally you’re spending maybe four, five hours, maybe even a little bit more, really kicking the tires on this one deal.

And if you do that, all of a sudden, at the end of this exercise of never having on a contract but simply dealing with it, all of a sudden your comfort zone expands. If it doesn’t expand to the 15 unit or 20 unit, you do it again and you do it one or two or three times and all of a sudden you’re like, “Ah, 20 units is not so bad. It’s not so bad.” If you hadn’t done an exercise and you had done the duplex route first, you could have done two, three, four, five duplexes because you had it in your mind that that’s the route you’re going to do and we, as entrepreneurs, we’re focusing. We’re focusing on that.

But really it was a total distraction. Yes you may be did a duplex and extra six months. Really in that time, you lost six months of actually expanding your mind and looking for that 20 unit right? Because all you need is that one deal, is that one deal. Do the biggest deal that you can but just work actively in the way I describe to expand your comfort zone and you don’t necessarily have to go through a small duplex or quad to get that.

[0:45:12]MF: That’s awesome, I can tell you’re all about attitude and mindset and really going after things too, not staying in your comfort zone and just like you said, it’s easier to do this small deals but if you don’t have to, why?

[0:45:25] MB: That’s right. Unless you have a duplex strategy okay, there’s nothing wrong with any strategy whatsoever as long as it’s an intentional thought. Like I’m saying, a lot of people just do it because without thinking, that’s what people tell them, really, if you think about it, if you look at the how am I going to spend my next 12 months, is it by picking up four duplexes which is going to take me all year.

Even if I’ve worked really hard, if I pick up four deals the next year, that’s a lot! Or do I spend a 12 months to pick up one 15 unit deal? Because I can tell you, once you do a 15 unit deal, you’re not doing a 15 unit deal the second time around. You’re going to do probably a 50 unit deal in year two.

Now you’re at 65 units in 24 months and you’re at, I don’t know what you are. Maybe 10 units on the other side. Now you’ll eventually wake up from your duplex strategy and go, “Oh man, now I’m finally ready but I already wasted the last two years on this,” and maybe you didn’t have to do that. It all depends on what your goals are.

[0:46:29]MF: That’s great, that’s awesome. I know that you mentioned your students, you have a great website. Themichaelblank.com. Tell us a little bit about your website, about what you’re doing over there and how you’re helping people.

[0:46:41] MB: Yeah, I was asked about three, four years ago about how to go about raising money and how I put the deals together and I was like, “Man, one day maybe I’ll put some of this together and I was asked to teach about apartment buildings at my local Ria and I did an all day Saturday, it was really well attended and it was really encouraging to me and I think I have a little bit of a passion for teaching, I really enjoy it and so I said, “One day,” this was like three years ago.

“One day,” you always say one day and then one day I actually thought about that experience and I was like, “You know what? I think I’m going to do it.” I started writing about, blogging about a partner building investing with a  special focus on raising money and put up the website, themichaelblank.com and I put out a free eBook that’s called a Secret to Raising Money, to buy your first apartment building and started blogging on the bigger pockets.

I’m in year two of being a weekly contributor like you have been as well. Not easy to write an original article every single week as you know but I also have a podcast like you do and a YouTube channel, there’s a lot of free information on the website. It will be a good place for people to start if you want to raise money for really anything but specifically for apartment buildings.

[0:47:53]MF: No, great stuff and yeah, you have a lot of great resources on there and I think anybody who listens to this podcast can tell you know what you’re talking about when it comes to multi-unit and putting big deals together, great stuff. Awesome. Well I think that is everything I wanted to cover with you. Do you have any parting advice for people looking to get started on multifamily?

What’s the most important thing they can do if they haven’t invested yet and are thinking about getting started buying multifamily properties?

[0:48:23] MB: Yeah, the biggest thing really is taking action and everybody’s first action is of course reading a book or doing a seminar and that’s easy and most people are able to do that. I’m talking about a kind of action that’s a little more strategic, that requires a little more reflection on your life goals or what you want to achieve, maybe involving your spouse and family in this kind of decision.

Then really committing to a course, a strategy and if you’re committed to that, that means you’re not just buying a seminar and there’s people that buy my course all the time and that’s great but really, as a coach, I want someone to change a life.

I don’t want you just to buy my course, I want you to actually apply what’s in there and I see a lot of drop off between that step and really, it’s because you’re not really very clear about the why, the big why. I wanted to retire, I want a million dollars, everybody wants a million dollars right? Why do you want a million dollars, what does that mean to you? What would that allow you to do?

What is a meaningful thing to do, is it to pay for college for your kids, is it to leave a legacy, is it so that you can do something more meaningful in life, you have to be very clear about that. When you’re very clear about that. It’s much easier for you to actually take continuous action which is what you need to do.

It’s really being clear at what you want and why you want it. Then taking continuous action, not just an action for a short period of time but continuous action.

[0:49:46]MF: Awesome, I love that. Great advice. Okay, well that’s all I’ve got, best place to contact you I’m guessing Themichaelblank.com your website? Thank you a ton for being on the show. I know I learned a lot, I hope everyone else did too and yeah, I’m sure we’ll talk again here soon.

[0:50:02] MB: Thanks Mark, I appreciate it.

[0:50:03]MF: Alright, nope, thank you very much.

[END]

Most of the guests on the Invest Four More Real Estate Podcast have been real estate investors. I have had a few investors who are also agents, but today we are interviewing Kyle Hiscock who is strictly a real estate agent and a good one. In this episode Kyle talks about how he got started in the business, how he has become a very successful agent and how he has used a blog and social media to promote himself.

Kyle was in the high pressure sales business after finishing school. Kyle was good at his job, but did not like the high pressure aspect of selling over the phone. His father had been a real estate agent for many years and he decided to try it out part-time. If this sounds familiar, I got started in a very similar way! After Kyle was exposed to real estate, he knew he loved it and wanted to make it his career. He worked hard to build a business so that he could become a full-time agent and quit his sales job.

Even though Kyle was able to get started as a part-time agent, he does not recommend it for everyone. Kyle had a lot of help when he started out part-time, because he worked with his father. His father was able to help Kyle's clients when Kyle was at work. Kyle warns that if you are a part-time agent and have no one to help you, you are doing your clients a disservice. Real estate agents have to be able to help clients at all hours of the day. If you can't talk to your clients, lenders or title companies during the day because you have a full-time job, it will be very tough to make it in the business.

Zillow and other online real estate sites sell leads to real estate agents. That is one of the ways those sites make money. I personally use Zillow, but we are thinking of dropping it at this point due to low conversion rates. Kyle and his father do not use Zillow or any other type of paid online lead source. Kyle says they have had much more success with good old-fashioned real estate strategies:

While Kyle and his father do not pay for online leads, that doesn't mean they ignore the internet. Kyle has built one of the best real estate blogs out there: Rochester Real Estate Blog. Kyle started the blog a couple of years ago and has written many articles about the local market in Rochester New York and real estate in general. While it is tough to put a number on how many leads come from the blog. Kyle says he is now getting a steady stream of leads because of the blog. He warns that it is not an easy process to build a blog and it takes time to gain an audience.

Kyle works with many real estate investors, but he doesn't work with every real estate investor. He has some very loyal clients who come to him and who he sends deals to. He makes it very clear that he does not have time to work with investors who are using 20 different agents and always shopping for the best deal. He works with investors who he knows will use him if a deal comes along. For those investors looking for a great real estate agent. Remember that loyalty goes a long way!

For real estate agents who work with investors, Kyle suggests agents choose who they work with carefully. He says that many investors are tire kickers who aren't serious about buying. When figuring out who is serious and who is not, he says common sense will usually tell you who will actually buy and who will waste your time. One tip is to make sure the investor is pre-qualified to buy a house.

Kyle Hiscock does an awesome job on this episode explaining how to be a successful agent and what has worked for him. If you want to get in touch with Kyle check out Rochester Real Estate Blog here. Kyle has also built a huge following on social media, which has also helped his real estate business. You can find him on twitter here: https://twitter.com/kylehiscockre.

If anyway is interested in boosting their real estate business, be sure to check out my Six Figure Real Estate Agent Success System.