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Investing in Coastal Markets, Taking the Path Less Traveled, and a Positive Mindset with Cliff Cheung and Joyce Shangkuan

Investing in Coastal Markets, Taking the Path Less Traveled, and a Positive Mindset with Cliff Cheung and Joyce Shangkuan

by | Jun 2, 2020 | Podcast, WWRE

Cliff Cheung is a CPA formerly with PricewaterhouseCoopers who shifted to help smaller businesses with strategy and tax planning. Joyce Shangkuan is CPA turned realtor and real estate investor. 

Together they’ve made real estate investing a core part of their long-term strategy and have succeeded in two intimidating major coastal cities, San Francisco and Los Angeles.

What You’ll Learn In Today’s Episode:

  • Cliff and Joyce questioned the wisdom of the traditional retirement path and chose to take a different direction. After looking around at what other successful people were doing, they started to pursue financial independence through real estate investing. It’s your life, make it count!
  • Be deliberate in what you want to do, and how you want to achieve.
  • They invest in two of the most competitive markets in the country, San Francisco and Los Angeles. It’s the oldest rule in real estate, “Location, location, location.”
  • Anything is possible in this country, take ownership of your life.

Ideas Worth Sharing:

“We work really hard, and we try our best, but I think mindset is kind of the secret sauce if you will, that can really can help leapfrog you in the face of adversity and challenges.” – Cliff Cheung

“We both think that financial freedom is more important than having a house.” – Joyce Shangkuan

“Take inventory of what you have, and be grateful for what you have.” – Joyce Shangkuan

Resources In Today’s Episode:

     

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    Transcript

     

    Cliff:               Hey Mark. How’s it going?

    Mark:              Great.

    Joyce:           Hey Mark, thanks for having us.

    Mark:              Thanks for joining me. So let’s jump in. I like your story. How did you ultimately end up in real estate investing?

    Cliff:               I was born and raised in San Francisco. My mom grew up in San Francisco, but my dad grew up in Hong Kong. I grew up very much having the default American dream ingrained in my head. I became a CPA primarily because my dad and my aunt who’s my current boss. And I always thought that my route in life would be to climb the corporate ladder, get a high paying job, buy a big house, start a family, and then sail off into the sunset once I retire. And I always had this thought in my head like, Oh, well, once I retire, those are my golden years. And that’s when I’d finally get to enjoy everything.

    Mark:              You called that the 40, 40, 40?

    Cliff:               Yes. So it’s the 40, 40, 40 plan. So work at least 40 hours a week for 40 years, at least. And then retiring on and living off of 40% less income than when you were working.

    Mark:              Oh. Okay.

    Cliff:               So 40 years, 40 hours, 40 years and potentially 40% less income.

    Mark:              I’d never heard that.

    Cliff:               So I have really observed this from a lot of people that I’ve worked with. Some family friends. I’ve been in San Francisco now for almost 30 something years. So I’ve seen the passing of generations and seeing this plan play out for a lot of people, it really made me reconsiders and thinks how to reframe and shape our goals.

    Mark:              Yes. Do something different.

    Cliff:               Yes. As you had alluded to earlier, I did work with PWC and I studied accounting to become a CPA. And I worked with many clients in the real estate industry, aircraft, leasing banking, and FinTech. And this really gave me the opportunity to work with a lot of great clients. And it taught me to think very critically and to see things in ways that I might not have otherwise had I not had the experience. And it also taught me to work really long hours.

    Mark:              Discipline.

    Cliff:               Yes. And then after working at PWC for several years, I really thought is this all that life could be, I was getting a little burned out and I felt like everyone was repeating max out your 401k, stay here for partner track, wait until promotion day. It’s going to be great. All you have to worry about is busy season. Things will be better after busy season and as each year progressed for me personally, things always got busier and I always felt like something was still missing.

    Mark:              Sure. Squeezing out your life little by little.

    Cliff:               Yes. So during that time, I was slowly beginning to work with my aunt. Who’s had a tax practice in San Francisco for the last few decades and some of her clients were actually in real estate working with her and seeing not only the benefits of having your own business, but also investing in real estate. It really made me begin to second guess, particularly with the 401k maxing out, just to get the employer contribution. I was like, hmm, well, it doesn’t really make sense to put money that I can’t touch until I’m 59 1/2 because that’s quite a ways away. I saw a lot of clients and a lot of friends that we knew that had invested in San Francisco had invested in LA or other very high cost cities. And some people were able to retire at a very young age, some as young as 46 to 50. And they were able to really live lives that I thought was the American dream.

    Mark:              Sure. The envy of you working 60 hours a week.

    Cliff:               I saw that and I was like, man, it doesn’t really make sense. I’m working so hard. I’m paying a lot of taxes and one perspective that I couldn’t really appreciate; at least working in a corporate environment was that if as a business owner or as a real estate investor, I did have certain expenses. I was able to deduct that against my income. So not only am I making decent money as potentially an investor or a business owner. I’m also able to build connections with people and also write off some of those expenses versus in a corporate setting where if I wanted to start a business, I would need to save after tax money and pay lots of taxes first.

    Mark:              I had the same realization being in the entertainment business and then getting into real estate, the vast difference in taxation on the entertainment side, that’s 50% tax. And then beyond tax, we have agents and managers and lawyers. So your ultimate take home is like 40% of what your gross income is.

    Cliff:               Yes. And having that perspective and having that insight really made me re-evaluate the 40, 40, 40 plan because I was like, do I really want to pay this much taxes for the next 40 years? It really made me evaluate what I was doing not only from my corporate background; do I just want to help corporations? Like why not help individuals with their businesses through working with my aunt? It really has given me a greater appreciation for helping people because I can see how we are very tangibly helping our clients.

    Mark:              And so how did you get into real estate?

    Cliff:               So our first deal in real estate was in May of 2012. I had never owned a house to today. I was maxing out my 401k and my aunt had a client who due to some financial issues wanted to involve us into his investment property. And the investment property was in Los Feliz in LA. And it was a 12 unit apartment building. And prior to that, I really had no experience in investing. Again, my only form of investing was in my 401k and my IRA. So I considered myself a moderate investor. And after investing, I slowly began to learn about rent rolls, occupancy rates, and some construction. And it gave me insight into how the industry worked and also how challenging it was, but how beneficial potentially that it was.

    Mark:              So you partnered with a client of yours in the Los Feliz Los Angeles property?

    Cliff:               Correct. Correct. So we bought in to become partners and I feel like we were very lucky in that project, but at the same time, I think it was because we had such an open heart and open mind that when the opportunity arose, we were really able to take advantage of it.

    Mark:              That’s somewhat of a unique situation where someone who has owned the building for a long time invites you to be a partner in that. Hopefully it was a good opportunity.

    Cliff:               Yes. Yes. It was a great opportunity. He was very familiar with some of the management and construction and that were areas that we did not have as much experience in, but because we are CPAs, we do tax returns and we do books. We were able to bring value to his operations from that standpoint. And it made for a very great partnership.

    Mark:              Do you guys have a joint plan to grow your assets, which include what real estate sounds like?

    Cliff:               Yes. We really took the time to sit down and evaluate again the course of our lives and how going the traditional 40, 40, 40 route, what that would look like from a lifestyle perspective, from raising a family and being able to achieve and do the things that we wanted to do together.

    Joyce:           And we constantly talk about what our goals are. We often talked about what we want to do with our life, and we took stock of what our advantages are and what we have in our life that we can take advantage of. So I think that constant conversation between the two of us was really helpful.

    Mark:              That’s impressive to me. I’ve had the benefit of knowing you both and you are very proactive and you’re planners.

    Cliff:               We were thinking about potentially buying a house in San Francisco, which we barely might have been able to afford with a complete white picket fence. Although it would have been a small white picket fence, but we realized that that would only have tied us down more potentially. And in order to do some of the things that we wanted to do, we weren’t necessarily sure if that was the best route.

    Mark:              So you decided not to buy a house, you went straight into investing in multi-family, right?

    Cliff:               Correct.

    Joyce:           We both think that financial freedom was more important than having a house we were willing to wait until later in our years, when we do have some more financial freedom and have more disposable income to really buy maybe our dream house, a bigger white picket fence.

    Mark:              Right. You communicate about finances, which a lot of people don’t, a lot of couples don’t and having that open conversation and being able to make adjustments along the way is pretty amazing.

    Joyce:           Yes. San Francisco is a very expensive rental market and we’re very fortunate because Cliff grew up in San Francisco. We actually live in the house that he grew up in. It’s a two story house and we live in the bottom floor and his mom lives upstairs. So she’s basically our landlord. So that’s kind of our way of house hacking. We do see a lot of our friends trying to move out of the house that they grew up in because they simply just don’t want to live with their parents anymore. But although there are pros and there are cons of living with his mom, I think the long-term benefit totally outweighs the limitations that we have to endure right now.

    Mark:              Sure. I love living at home. I lived at home until I was like 24, 25 and my wife Lynn; I was dating her at the time. She made me move out and get an apartment,

    Joyce:           But that’s kind of our way of house hacking and save money that way.

    Mark:              So what have you done since that Los Feliz property?

    Joyce:           After the Los Feliz property Cliff was, or we were very eager to find our next deal. And we wanted to mingle with different investors and find someone who is years ahead of us, who can probably share more of a knowledge and experience. And so we were going to networking events in San Francisco pretty aggressively, but we were never meeting anyone. So one day I was telling Cliff, I was like, Hey, I think we should maybe change our strategy our networking strategy a little bit. At the time we had already been listening to bigger pockets for a while now. So we were pretty familiar with how the pockets work but we haven’t signed up on the forum where a lot of investor mingles.

    Cliff:               So just echoing Joyce’s sentiment. I was becoming increasingly frustrated because I did see how after we invested in the 12 unit building, how we were able to reap the benefits of not only providing a safe and thoughtfully designed place for tenants to live, we were really able to benefit financially and have some money coming in some cash flow as a result of properly managing the property. So after I discovered this, I was like, Oh my God, I want to share this with the world. And I wanted to try to find other people that were interested in a similar investment. And I was talking to current clients, people I saw at the gym, some of my friends, even about real estate and real estate investing, but I was so disappointed because every time I would bring this conversation up to people, everyone was either disinterested or they would say something along the lines of, well, that sounds great, but I need to buy my primary residence and pay it off first. Then I can think about investing.

    Mark:              I have the exact same experience.

    Cliff:               Oh really?

    Mark:              After my first half dozen multi-family properties, I was an evangelist preaching real estate investing to everybody that I knew, everybody that I worked with in the entertainment business. And none of them would do it. I was shocked. It was a head scratcher why wouldn’t anybody else do this? It’s such a great thing. And then eventually they were like, well, you won’t stop talking about this. So why don’t you find something? And we’ll give you some investment dollars. You had the same experience?

    Cliff:               Yes. I guess we had the same exact experience. So Joyce had suggested, “Oh, why don’t you go on bigger pockets and try to network more intentionally with people who are in this space.” And I was listening to a podcast and it was about some guy in LA who is a writer for Family Guy. And during that time I was like, oh, this guy sounds really nice and knowledgeable. And at the time we were looking for a new management company, so she encouraged me to, to reach out and I did

    Mark:              That’s right. I forgot about that. So that’s how we first connected is you guys were looking for a management company in LA.

    Cliff:               Correct. Correct. And right after that, we switched to this management company, they’ve been very helpful since, and around the same time this writer for Family Guy was putting together a deal and he asked us if we wanted to participate. And we were trying to go through the motion of refinancing our property at the time and looking at new properties. But we realized just how difficult it was partially because of money and the high cost per door. But because we didn’t have as much scale and distance really wasn’t an issue, but it was not having as much volume from like a deal standpoint and a construction standpoint. It made things less economically viable. And after looking at the deal from the syndicator, we were like, wow, this really makes sense. And we thought of it as being on a great team. We wanted to find a good team and be a good team player.

    Mark:              Sure. And it could be a good way to learn riding along with someone else. And I don’t want to advertise, but yes. syndications is a way to invest passively.

    Cliff:               Yes. And I think just taking responsibility and being open to different potential investment opportunities, I think that’s really what benefited us for our second deal. When I was working with this syndicator, I made it known like, Hey, if there are any opportunities for me to utilize some of my skills that I’ve acquired professionally, I would really like to take the initiative to help not only the syndicator, but help my investment. And I think by taking ownership that can really provide any, anyone looking for opportunities through skillsets that they’ve built to get more involved in real estate investing.

    Mark:              When you were down in LA, we would have breakfast or lunch and could see how disciplined you were, how organized you were and savvy you were in finances. And I eventually was like, I would love to have you look at how we’re running our accounting and help us because there are a lot of facets to what I was doing as an operator. And it was a big relief for me to bring in someone who’s a professional.

    Joyce:           I know Cliff has been very disciplined before we connected with you. And while we were aggressively networking, he’s always on LoopNet. He’s always in the gym. When he has a downtime, he’ll check on LoopNet and see whether there’s a deal. He created his own deal analyzer. So it’s basically what people on bigger pockets tell you. You have to do your homework; you have to do your own due diligence. You have to be constantly looking and analyzing to equip yourself with the knowledge. So when you do see a deal comes across then you know it’s a deal.

    Mark:              Now, if you’re enjoying the show, please do us an easy favor and hit the subscribe button. And if you like the show, please give us a five star review. As a listener I always wondered why podcast hosts are always begging me to subscribe and rate them. Well, now that I’m on the other side, I see why. It allows other listeners to find you. So here I go. If you like the show, please subscribe and give us a five star review. I like doing it. And more importantly, in an era of unprecedented hype over real estate investing, my goal is to be a truth teller. Real estate is not as easy as it’s made out to be, but you can do it. If you can get past the hype and get to the truth. My aim is for this show to help with that. Anyway, let’s get back to the show

    Joyce:           A little bit about myself. I was born in Taipei, Taiwan and grew up there until I was 10. And then my whole family moved to Shanghai and I finished the remainder of my schooling there. And when we moved to Shanghai in 2002, I was born in 1992. It was just beginning to turn into a bustling city that it is now. And my parents’ goal of moving there was mainly to broaden our worldview, which it definitely did. It allows me to see so many different things that I probably wouldn’t have seen being able to see if I were to stay in Taipei, going to a local school, because I was enrolled into a semi international school in Shanghai where I can practice English, learn English and was getting all the education that gears towards a Western education, which eventually led me to attending University of Washington.

                            So I kind of have a similar ish route as Cliff that I also study in accounting at UDaB. And I actually also landed a job at PricewaterhouseCoopers. Since we started dating, we’ve always talked about the different investment that we wanted to do. And ever since he was involved in the Los Feliz deals, we started talking about real estate a lot more. And since then, once we’ve started to get to know the business partner that was involved in that deal, he is about 30, 40 years senior than us. So he has a lot of life stories and he’s also from Hong Kong and he will always tell us about the different people that came into his life. That kind of changed his life trajectory, which was really interesting to me because in the term that he use, it’s called quarian which in Chinese culture, where there’s a lot of emphasis on symbolism, fade and sometimes superstitious belief the word literally means expensive person or someone who brings a lot of value or more eloquently a noble man.

                            So it means someone who enters your life at a pivotal moment and helps to propel you in a positive direction by sharing their wisdom experience and advice. And so I guess the closest English term would be a mentor, but a nobleman can actually be anyone. They don’t have to be someone who is more senior or experienced than you. Just someone who says, or does something that sparks a change in your mind that results in a different life trajectory.

    Mark:              I like that.

    Joyce:           So when we have more interactions with him, he would tell us about his life story, there are so many noble men in his life, because he was a hairstylist. He was a pretty new immigrant, became a hairstylist. It’s something that’s so far away that you think he’d become a real estate investor. And he now has how many units?

    Cliff:               20, 24. At one point to put it in perspective, when he was growing up in Hong Kong, he lived in an apartment with eight different family members that were probably no more than 600 square feet. And they didn’t even have a refrigerator. He would always tell me stories. He would see cockroaches just running across his food because they didn’t really have much opportunity that they would still eat the food. That really sparked a change in my perception because this quarian, this noble man. He actually played a pivotal role alongside with my aunt in helping us to reframe the way we saw things and to really rethink like, oh, well, if I’m maxing out my 401k, is that really the best possible investment option? Or did someone tell me that? And then I thought that that was my own thinking.

    Mark:              So he helped you question that 40, 40, 40 path and not doing it a different direction to try something that might be more effective.

    Joyce:           Yes. Totally. I don’t think we would happen as open to it if it weren’t for him because he basically presented an opportunity and it started to prompt us the question, the 40, 40, 40 that we’ve been educated to think in that box.

    Mark:              Awesome. That’s great. So a lot of people who listen and the perception in much of the podcast world is that investing in cities like San Francisco in Los Angeles are impossible or undoable. What do you guys see as the benefits and the challenges of trying to invest in these coastal cities?

    Joyce:           First of all, it’s very straightforward. Land is very valuable because the location is very desirable and plus the job market, usually a lot more desirable as well, the geo-economy. And then the second thing is it’s high barrier to entry. So your investment is generally very well protected because building costs are extremely high. So it’s very expensive to build something. So it would take a very experienced and very qualified investor to jump in.

    Mark:              Right and navigate the permit and all those regulations.

    Joyce:           Right. And just to go off on that too. Yes. Coastal cities tend to have stricter and more regulations as well. There are always opportunities in those details. And the third thing is that there’s super strong demand if you’re in a good location. So for example, in San Francisco and in the pockets in LA that we invest in the vacancy rates are usually very low. The occupancy rates, usually in the mid 90% pre COVID that is, I’m not too sure how this whole pandemic will effect, although I think it should be quite inelastic, but we shall see. And then the last one is just, the appreciation can be realized upon sale because in coastal city, because of all the aforementioned characteristic that makes the property appreciates quite significantly in five to seven years.

    Mark:              And I was surprised, I didn’t hear a podcast about real estate until maybe after 10 years into my multi-family investing career. And I started listening to these podcasts and everybody said, you can’t invest in major cities, go for cash flow. You never buy a product older than 80’s construction. And I was like, Oh my God, that’s exactly what I’ve been doing. All those things. I was always confused. It’s like, why wouldn’t you invest in a city where there is huge demand and your dollars are protected. The oldest rule of real estate that’s a thousand years old is location, location, location.

    Cliff:               Yes. And I think that’s only half the battle cash flow obviously is very important, but also knowing your current market and how the different areas around you, such as in LA there’s so many different pockets, just like San Francisco as well. But I also think that there’s tremendous opportunity kind of like Joyce just touched on some of the benefits. There are challenges, but there are also huge opportunities. A few challenges first are high cost per unit and high costs per square foot. If you are just starting out in your investing career, say you just graduated. You might have a little bit of student debt. This can be very prohibitive, but it also means that if you do get in that your investment is generally well-protected. And as long as you are prudent with your management style, you can hold onto the property.

                            Another challenge is tenant friendly rules such as rent control. So Mark like you said, yes, it’s very difficult in California, particularly when there are such strict tenant friendly rules. However, upon moving out, there is a possibility that you can increase your rent to market, which I’m sure a lot of your listeners understand cap rates. If you can increase your rent by a 1000 or $2,000 a month upon a tenant, moving out at a 3% cap rate or a 4% cap rate that can add hundreds of thousands of dollars of value to a property,

    Mark:              Right. The GRMS, the fact that the multiple is as high as it is. And given that the cap rates are as compressed as they are every hundred dollars that you increase in NOI has a significant impact on the value.

    Cliff:               Correct? Correct. And another opportunity is also a value adding to some of the properties or to some of the units that we’ve purchased by improving the units. We’ve been able to increase our rents quite significantly, such as adding a washer, dryer, adding garbage disposals, adding things that in some more expensive markets are generally more cost prohibitive. I think that in some of the markets where 100 to 200 unit apartment buildings are very common, a lot of these amenities come standard, but in some older inventory, that’s on the market in California, in San Francisco and LA, some of these amenities are really not standard. And if you can add modern amenities to older style buildings, I think that’s a really nice niche that a lot of people have not really discovered and riches are in the niches.

    Mark:              So maybe we could move on to something I call multi-family psychotherapy. What’s a trait you possess that has served you best both in real estate and in life.

    Cliff:               One of the major traits that has served us, or I’ll just say me is really being open minded, having an open heart and knowing that my investment style and even my life, it’s really an iterative process where I constantly need to challenge what I know and to try to obtain new information and meet different people.

    Mark:              I love that.

    Joyce:           I can speak for the both of us. Another aspect that we really want to emphasize on and try to practice every day is just to take responsibility because everything in your life is a direct result of the decision that you make. So there’s a quote that we really like. It’s from Spiderman. It goes as “With power comes great responsibility”, but the more and more we realize that opposite is also true too. It’s because when you have more responsibility, you also get more power.

    Mark:              That’s awesome. I love that. How about, are there any traits that hold you back that you feel like you still need to work on?

    Joyce:           For me? I know that everything is a result of my decision, but then in the process of getting to that result, I need to make sure. I can’t just tell myself like, Oh, if I fail, it’s my fault, but then how can I do it next time when I have more accountability, when I say I’m going to do something I’m seeing it through so that I actually make it and not just fail on it and say that, Oh, it’s actually my fault.

    Cliff:               And I would say for me, responsibility is also a double sided sword. I think anyone in life can become very steadfast and very fixed mind-set with regards to information that they either have recently acquired, or that they have known for a long period of time. And being able to incorporate new information as it becomes available or seeing how maybe some old information that you’ve learned is no longer relevant. I would say it’s a very difficult process. It requires you to acknowledge that maybe you aren’t always right. And that maybe some information that you thought was right from someone else that you admire maybe is not right for this particular thing such as real estate. So one might be a very successful accountant or a very successful actor or actress, but sometimes advice that you might receive from an accountant actor actress might not be as beneficial to you as say a real estate investor.

    Mark:              I like it. I like it. How big of a role do you think mind-set plays in your success?

    Cliff:               Well, I think mind-set really is everything. Mind-set is kind of the least stress thing. I think it wasn’t until we kind of got into entrepreneurial ventures that we realized success is predicated on you having a solid foundation. For Joyce and myself, we actually really do consider ourselves to be very average. We work really hard and we try our best, but I think mind-set is kind of the secret sauce. If you will, that really can help leapfrog you in the face of adversity and challenges.

    Joyce:           Part of mind-set is also to take an inventory of what you have and be grateful for what you have. Growing up in Asia I always feel like people that grew up in America, I always envy them so much because they already know the language that I was learning. They already live in the country that I wanted to live in. But I think right now, thinking back about my journey, I’m really grateful that I actually don’t come from America because I have a more diverse background. I know another language, I have a different worldview and it really hit home when we actually went to Senegal to build a primary school. And we just see how little they have and all they want is just to live, to have a little something that we have. It just puts everything into perspective that we’re so fortunate that we live in a first world country. And a lot of our problem is just first world problem.

    Cliff:               And also kind of circling back to what Joyce said. It’s really just taking inventory of what opportunities you have so that you can be responsible for your future. Our story’s going to be different from Mark’s story is or what any of the listeners, what their story is, but it doesn’t preclude you from writing your own story just because of whatever you’ve gone through in the past. Hopefully you can use that as a springboard to really get to where you want to be.

    Mark:              And now our question round.

    The book you’ve recommended most over the past year.

    Joyce:           I would say it’s, Can’t Hurt Me by David Goggins.

    Cliff:               And for me, I would say it’s Finding Ultra by Rich Roll.

    Mark:              That’s right. Do you have a favorite quote?

    Joyce:           Mine would be “With great power comes great responsibility” in Spiderman.

    Cliff:               Mine is not from like a film or both, but it’s kind of just referencing life. The quote goes “If an egg is broken by an outside force, life ends. But if egg is broken by an inside force, life begins”, that’s kind of the quote of our lives. And we want our transformation to happen from internally versus external factors.

    Mark:              I’ve never heard that, profound. What was your favorite movie when you were 15?

    Joyce:           Mine is a Ratatouille. I watched it on my birthday and cried.

    Cliff:               Mine was 8 Mile. I didn’t cry, but I was like, Oh man, I might become a rapper one day

    Mark:              I met Eminem.

    Cliff:               You did?

    Joyce:           What?

    Mark:              He did a voice for Family Guy on a Sunday morning and I had to meet him at the studio. He was really nice. I expected him to be mean, but he was a polite young gentleman. He took a bunch of posters home with him.

                            An online tool or app that brings you the most value.

    Joyce:           Mine would be Sweat it’s a workout app. It got me into strength training and being more tone.

    Cliff:               And mine would be my Fitness Pal by Under Armour. It has helped us a lot in our fitness and nutrition journey,

    Mark:              Belly button, innie or outie?

    Joyce:           Innie.

    Cliff:               I’m in an innie as well.

    Mark:              Double innie. Your most impressive, totally useless skill.

    Joyce:           I guess it would be my OCD to clean the house. It’s a total time sucker just to make myself feel good.

    Cliff:               I used to play a lot of basketball when I was younger. I actually wanted to become an NBA player, but then I stopped growing. So that kind of stunted my aspirations, but I can actually spin a basketball on all 10 fingers. Probably. I think my record is like 10, 15 minutes and I can spin it on like cell phones, pencils, scissors, and like all sorts of random objects.

    Mark:              That is a totally useless skill. Aside from real estate. The one thing you could spend all day talking about.

    Joyce:           Healthy eating and lifestyle.

    Cliff:               Mine would be as well. I think for us, we’ve just found health and lifestyle well-being and balance to be so profound.

    Joyce:           And we’re both plant-based.

    Mark:              Plant-based. What decade created the greatest music?

    Joyce:           I like jazz. So jazz created in any decade, as long as it’s not too avant-garde, I would like it.

    Cliff:               For me. I would say it’s probably like the 90’s boy bands; actually I wanted to be a singer like a boy band singer.

    Mark:              What about your basketball career? What high school friend do you want to say hi to right now?

    Joyce:           I want to say hi to Becky. She’s my high school, best friend. She was going to have her honeymoon in Sicily this May and I’m glad she did it and went to Hawaii last December instead.

    Cliff:               And my BFF Josh he got married last year and he’s going to have a baby or not him, but his wife’s going to have a baby in a month. So we’re waiting. And hopefully we get out of this shelter and place soon.

    Mark:              What country has the best accent?

    Joyce:           British accent. Because they just sound so proper. Although I don’t really understand what they say.

    Cliff:               I grew up around a lot of people from Singapore that speak English. Have you ever heard the Singlish accent? It’s like rhythmic and upbeat and I can’t even imitate it.

    Mark:              If you had to make a spy, alias, what would you go by?

    Joyce:           I want to go by Neo, like in the Matrix, we recently just watched the movie and I just thought it was so awesome and so relatable

    Mark:              You’ve been in the Matrix.

    Cliff:               Mine would probably be James Bond. Then if I introduce myself to people, the last thing they would probably ask me is, are you a spy? But come on. Do you think I’m really a spy with the name James Bond? We actually met a James Bond in San Francisco. He’s a realtor.

    Mark:              What a great name for a realtor. What movie can you quote the most from?

    Joyce:           Mine would be old gambling movies from Hong Kong in the 80’s.

    Mark:              Sure. The gambling genre.

    Joyce:           Because I watched so much of those growing up, but they’re in Mandarin though. Mandarin Chinese

    Cliff:               Mine would probably be Pineapple Express with James Franco and Seth Rogen. I really liked kind of how goofy those two guys are.

    Mark:              I’m embarrassed to say, but I’ve never seen that.

    Cliff:               Oh really? Oh.

    Mark:              I’ll have to watch it.

    Cliff:               Yes.

    Mark:              What’s about to get much better.

    Joyce:           I think everything in the world is about to get much better. If you think it’s going to go worse than you’re going to head into that direction.

    Cliff:               And along those lines, I would say kind of your attitude and perspective. If you are working on improving that in a positive manner. It’ll improve what you appreciates, appreciate.

    Mark:              A childhood cartoon character you had a crush on. Now I don’t want this to cause some marital strain.

    Joyce:           It’s okay. Because mine is not really a human mine is Totoro Miyazaki’s, My Neighbor Totoro. Because my mom’s successfully talked me out of wearing diapers when I was three, because she was like, Oh look, Totoro, he’s not wearing anything and so I stopped wearing diapers.

    Cliff:               And mine. It’s not really a cartoon character. Harriet, the Spy, Michelle Trachtenberg. I thought she was cute when I was younger.

    Mark:              Was she like a Nickelodeon actor?

    Cliff:               Yes.

    Mark:              A kid actor.

    Cliff:               Yes. That.

    Mark:              She was cute.

    Cliff:               Yes. She was really cute. And I was like, Oh, this is a cool movie. And I actually wanted to be a spy when I was younger too.

    Mark:              If you could have the answer to one question, what would it be?

    Joyce:           Why are we here?

    Mark:              Hey, I know it’s not a big podcast, but at least I’m trying.

    Cliff:               I think for me, it’s what comes after this?

    Mark:              And finally, when are you happiest?

    Joyce:           I’m the happiest when I can eat good foods and spend time with loved ones

    Cliff:               And I would say along those lines as well, but also share it with people because I think there’s really nothing that can replace feeling good about yourself and, and about being able to help people around you.

    Mark:              Awesome. Last of all, how can listeners reach out to you?

    Joyce:           For me. They can find me on Instagram. It’s just my first name and last name. Joyce Shangkuan. S-H-A-N-G-K-U-A-N. LinkedIn is the same. First name and last name. Email is L dot my last name@gmail.com.

    Cliff:               And for me I’m on Instagram as well. My name is it’s always foggy in San Francisco and my LinkedIn is Clifford Cheung, C-H-E-U-N-G. And my email is Clifford at Cheung, C-H-E-U-N-G and associates plurals dot com.

    Mark:              Well thank you guys so much for joining me.

    Joyce:           Thank you so much for having us.

    Cliff:               Thank you.

    Podcast

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    First Syndication During COVID Chaos with Vince Gethings

    First Syndication During COVID Chaos with Vince Gethings

    by | May 27, 2020 | Podcast, WWRE

    Vince Gethings is an active duty real estate investor in Honolulu Hawaii, who’s been building a massive real estate portfolio for the past seven years. He holds a green belt LEAN Six Sigma Process Improvement, and specializes in market research, due diligence, strategic planning, project oversight, and execution.

    Vince and his team also recently closed on their first syndication, during the chaos of the coronavirus!

    Find out how Vince overcame volatile market conditions to wind up in a much better position at the closing table.

     

    What You’ll Learn In Today’s Episode:

     

    • Starting out small and putting your own capital at risk is a great way to build systems and learn your strengths and weaknesses in a “sandbox” environment.

    • No plan is 100% perfect. After you’ve done your due diligence, commit, start taking action, and course-correct as needed.

    • Stress-test your deals. No one predicted the coronavirus, but those who ran their deals through different doomsday scenarios and prepared for the worst will likely fare better. 

    • Value-add isn’t only about increasing the gross income. Looking for opportunities to reduce expenses can be as profitable and perhaps more dependable than rental increases. Just be sure you’re not looking with rose-colored glasses, sometimes expenses are higher for a reason. 

    Ideas Worth Sharing:

     

    “The uncertainty of it was hard to wrestle with. We had to go back and completely redo our underwriting.” – Vince Gethings

    “I focus on finding properties where there is very inexperienced property management, where they have inefficient systems and bloated expenses.” – Vince Gethings 

    “Use the smaller properties kind of like a sandbox to build your systems, and more importantly to find out what your strengths and weaknesses are.” – Vince Gethings 

    Resources In Today’s Episode:

     

     

    Enjoy the show? Use the Links Below to Subscribe:

    Transcript

     

    Host:              Today’s guest serves in the US Air Force on active duty in Honolulu, Hawaii. While building a multifamily portfolio on the side, it’s been a seven year side hustle and he’s built a $5 million portfolio with 120 units under management. He also just closed on his first syndication during the Coronavirus pandemic. I’d like to welcome Vince Gethings.

    Vince:            Hey Mark.

    Mark:              That’s quite a bio you got. You just closed on your first syndication during Coronavirus. I got to hear about this. So maybe we jump into that first. So when did you close, what was your closing date?

    Vince:            April 15th.

    Mark:              So right in the thick of the panic, where was this property?

    Vince:            This was located in El Paso, Texas.

    Mark:              El Paso. Okay. And how many units?

    Vince:            It was three properties that were all adjacent to each other. That made up a 96 unit community. And we ended up carving out all but 48 of them. We kept the 48 best properties.

    Mark:              Do you remember when you entered contract pre all of this I would assume, right?

    Vince:            It was back when it was like an over there problem. Not here. It’s not going to happen here. And so I think like early February is when we got into contract. So it wasn’t really that serious in the USA yet.

    Mark:              Interesting. And how did you pick El Paso? Had you bought there previously or what was appealing about this market?

    Vince:            So I’m not the primary push to go to El Paso. So my main market was Michigan. We had closed on 52 units there with some partners in Michigan, and two of my partners had ties to El Paso. So after we closed that deal, got to stabilize they came to the group and say, “Hey, we should look at El Paso.”‘ One of them he’s an LP on a syndication in El Paso on like a 300 something unit deal. And then another partner is in the army and he was stationed at Fort Bliss. So both of them had like really good things to say on El Paso. We started doing our market research. It didn’t take long to come around to them.

    Mark:              And by the way, where do you invest in Michigan?

    Vince:            It’s going to be, what’s called the Tri-City area. So Midland, Bay City, Saginaw.

    Mark:              So that’s up North, right?

    Vince:            Yes.

    Mark:              Oh, nice. I’m from the Midwest. I’m From Cleveland and I have cousins and been to Michigan a lot. Michigan’s a cool State, especially up North.

    Vince:            I think it would be mid Michigan is the middle of the State, I guess, would be geographically more accurate.

    Mark:              So you must have been in your contingency period as the pandemic just started to unfold and enter the US and was that nerve wracking?

    Vince:            Absolutely. So it was crazy you never want anything crazy to go market swings while you do due diligence. But the hard part about this one was nobody knew what was on the other end of this. We started looking at some of the best operators in the country, what were they doing? What were their forecasts? And it was ranging everything from the world’s ending. Go cash out and buried in the yard to this will blow over the whole V balance, analogy of, yeah, we’re going to hit really sharp down and then we’re going to have a really sharp up. And then everywhere in between. So the uncertainty of it was really tough to wrestle with. And we just had to go back and completely redo our underwriting. We listened to some of our mentors, our advisors and got new advisement from them on how to stress test our deals. And as far as our proforma

    Mark:              Like you said, this is so unprecedented, there was no model of a past pandemic to look at to see how multifamily weathered. So what were their advice?

    Vince:            So the way we did it was we had about four or five people that we value their insight a lot. And we just put them in an Excel sheet, like almost like rows or columns, like advisor one says this, advisor two said this, and we kind of asked them the same question. What would you put your economic vacancy at, during this period over the next six months to a year and ask them all the same question and then rent growth or additional income lost lease, things like that. And we built it into an Excel sheet and we just average them out. And the average came to a 30% economic vacancy for the next six to nine months was the average for their 0% rent growth all the way to a 10% negative rent growth, no additional income over the next year. And I think those are the big ones. The big levers

    Mark:              Did you ask for a big concession?

    Vince:            We did. We ended up putting those numbers in to our model and it didn’t kill the deal, just the return wasn’t worth the risk. So we had to go back and ask for a concession and what we did was super transparent, super empathetic to the broker and the seller like, Hey nobody could have predicted this, but this is where we’re at now. Everything we’ve done up to this point, doesn’t matter it’s not applicable all the underwriting, all the negotiating, this entirely, completely new deal and a new market, we need to start over is kind of how we approach that conversation. And actually it ended up to where we voted to get out of the deal first. So it was like on a Friday, we voted to, Hey, let’s back out of the deal.

                            And if it’s still available, come July, August we’ll re-engage. So I’d called the broker, gave him the bad news. And then we spent pretty much all weekend from Friday night to Sunday no sleeping, just lots of coffee, lots of time on Excel sheets to figure out how we can make this deal still work. Like what would we need to still preserve our investor’s capital, give them a decent return and just limit our downside as much as possible. What would that look like? And we draw out some models, some financial models, some proformas and different scenarios. And then by Monday we had about 11 pages worth of notes that we went back to the broker with and like, okay just so you know, we’re out of the deal, but this is what would make it work for us.

                            And then, kind of just throwing a hail Mary to see, if they would go forward or not. And they ended up giving us a cash credit at closing, plus all of April’s rents, as a credit, as closing where normally it would be like a pro rata rent for the month. We ended up getting full rent rolls worth of rent for April. So regardless of what April’s collections were, we got a hundred percent is basically what happened. So I ended up being about 90 grand seller credit at closing. And then when we modeled that into the thing that gave us about 14 months of mortgage payments upfront at closing. So we felt pretty confident after that.

    Mark:              That sounds like a pretty good concession. What was the total purchase price?

    Vince:            Purchase price was around 1.5.

    Mark:              1.5. And you got a $90,000 credit?

    Vince:            Yes.

    Mark:              When you had your Friday call, how did the broker react? I’m sure they could foresee this coming. I mean, every broker was getting the same call.

    Vince:            I didn’t want to come across like, hey, we’re just using this crisis as a way to squeeze more stuff out of the seller and just come across like that.

    Mark:              Taking advantage.

    Vince:            Taking opportunity from the crisis, so I didn’t want to come across like that. So I thought it was just preserve the relationship with the broker first and just sorry this happened we’ll get the next one. Is kind of how that call went. And then we spent all weekend trying to just remodel like a month’s worth of underwriting.

    Mark:              What happened with the loan basically along your journey I would imagine your lenders were reacting to the pandemic as well as everyone else. And a lot of things were changing on the loan side. So what was your experience with that?

    Vince:            So, going into it, we had three lenders lined up. One of them backed out completely. “Hey, we’re done, we’re putting a moratorium on all lending for the next 60, 90 days.” The second lender who was actually our lead lender came back to us and said, they dropped the LTV from 75 to 65. And then the last lender who we ended up going with didn’t move on any of their terms. They gave us incredible terms. And any day of the week, not just for the Coronavirus or anything, if we got these terms in December, they would have been phenomenal.

    Mark:              Who was the lender?

    Vince:            FirstLight out of El Paso. A local credit union out of El Paso.

    Mark:              And what were your terms? What did your terms look like?

    Vince:            So we got a 75% LTV they did not move on that. Interest rate was a 3.625, 25 year and I think 20 year term with no yield maintenance.

    Mark:              Nice. That’s amazing, that’s a really good loan.

    Vince:            Yes. And so the only curve ball they threw us was after we got back into the deal. So we got the seller credit, the $90,000 seller credit at closing to help cushion what’s going to happen over the next few months. The lender called and while they were doing their committee. And they wanted 12 months of PI upfront. And because we talked to a lot of smart people and our advisors and mentors. We saw this coming. So we had already earmarked whatever that credit was that we were going to get was going to be for mortgage payments that were for PI debt service for at least a year. So we modeled for a year up to 18 months of PI or PITI in an escrow account. And that’s what happened was we ended up having to do 12 months of mortgage payments, but we had modeled all the way up to 18 months and the deal still works.

    Mark:              And that’s not a bad thing to give up, especially during this kind of situation you’re getting it back. It’s not an additional cost that leverage will come back to you after 12 months, it gives the lender comfort. The challenge is just coming up with the money, especially when you’re syndicating. How did you raise your funds? Did you have a challenge finding investors?

    Vince:            Not really, no for this deal, the raise wasn’t that high it was only 650,000. And between the four of us, we were able to leverage our existing relationships. And we had credibility from the 52 units that we just closed last year. So we had the proof of concept. We already had the systems in place. We were just rolling them into a new market, into a new deal. That’s almost identical business plan. So we didn’t have a whole lot of struggle getting the confidence of investors or the bank to buy into our business plan. But yeah, the raise wasn’t too hard on this one. We didn’t really have any newer relationships that weren’t already cultivated over the last few years.

    Mark:              Got it.

    Vince:            Who knows that we’ll actually have to go out and raise some funds.

    Mark:              What was your strategy on this one? Is this a value add or stabilized?

    Vince:            No. Its value adds C-class. In 1984, build C-class, C-neighborhood. My value add is a little bit different than most people’s. So I, as an operator, I do mainly the execution of the business plan and the rollout of the different phases. And I focus a lot on management systems, so inefficient management systems and expenses, that’s my bread and butter. So when I look for value add, I don’t necessarily look for properties that are 100 to $200 under market rent.

    And the goal is to go in there and raise the rents $200. And that’s what will make the deal work. I focus on finding properties where it’s very inexperienced property management, where they have inefficient systems, bloated expenses, when you get their T12 and they’re operating at 60% or sometimes higher OPEX ratios. That’s what I focus on because I know I can come in there and just with my knowledge of running programs and experience with that, and just run more efficient systems and reduce expenses. So that’s my main, business model.

    Mark:              That’s smart.

    Vince:            And then we usually raise rents anywhere from like 10 to 15% it’s usually what we look for.

    Mark:              Now, if you’re enjoying the show, please do us an easy favor and hit the subscribe button. And if you like the show, please give us a five star review. As a listener I always wondered why podcast hosts are always begging me to subscribe and rate them. Well, now that I’m on the other side, I see why it allows other listeners to find you. So here I go, if you like the show, please subscribe and give us a five star review. I like doing it. And more importantly, in an era of unprecedented hype over real estate investing, my goal is to be a truth teller. Real estate is not as easy as it’s made out to be, but you can do it. If you can get past the hype and get to the truth. My aim is for this show to help with that. Anyway, let’s get back to the show.

    Mark:              It’s smart to try to focus on expenses. As long as I often see buyers that are a little too optimistic on what they can like, Oh, we could do better than what the sellers are doing with their expenses. But I always think it’s better to improve the property on the expense side than depend on improving the income side.

    Vince:            Yes. Absolutely. You can do your research and figure out what the expense per door cost is for your market. And you can get pretty dialed in if it’s $3,800 a year, if it’s $4,200 a year, whatever it is, but for income to me, it’s harder to dial in what the rent premium is for that market. Like if your entire business plan is we’re going to go in there and we’re going to raise rent $150. Because based off your Rentometer report. And it says that average rents are $150 higher. There’s so much goes into that, that people don’t realize what amenities are those $150, higher units offering. It’s not just apples to apples. To me I think I can control expenses a lot more than I can anticipate a rent bump.

    Mark:              I never trust the Rentometer. Is that how it’s pronounced, Rentometer?

    Vince:            I don’t know.

    Mark:              I look at it a lot and I’ve noticed that it doesn’t reflect what I experience on my own buildings on what the rents are.

    Vince:            Exactly.

    Mark:              So that’s cool. Let’s step back because you have a fascinating story. You were in the military and you’ve been doing this for a while seven years. So you must’ve jumped in 2013. How did you get into it?

    Vince:            So, I bought into, it was Bay Area, California, where I was stationed and I was into like the bigger pockets, live in flipper strategy thing. So I was using it’s called the VA, the VA home loan house hack which is pretty much you just buy a house and live in it and flip it while you’re living there using VA zero down loan. So that was my strategy. So I bought that in 2013, sold it in 2016 and had a pretty good amount of capital from that. And then from there, I didn’t want to flip anymore. So I was looking into small multifamily, so reading the Brandon Turner books, and I got into buying duplexes and fourplexes in Michigan, because my wife was from there and I bought 20 units in around 18 months. So that was my initial jump into multifamily was all duplexes and fourplexes in Michigan.

    Mark:              And were you using proceeds from your sales in the Bay area or was this re-raising capital for these deals in Michigan?

    Vince:            No, that was using the proceeds. So I cashed out of that house in the Bay Area, California, and I think it was like 130,000. So that was my seed money to start buying property in Michigan. And at the time I was just doing your conventional 20% down, get a house 20% down and get a house and then I liked it. So I ended up cashing out of my 401k, my IRAs and my brokerage accounts and stuff like that and going full into real estate. And that’s where we got the 20 units from. And that was by mid-2018 is kind of where I hit that plateau in my investing

    Mark:              The plateau. What was the plateau that you were hitting? Was it just limited cash?

    Vince:            It was couple things. So the plateau, I shopped 20 units pretty fast and I thought I was doing good. And then I ran out a lot of that capital. And then my systems reached their bandwidth capacity too at the time. And I don’t know how to explain it, but it was like, I know there was something that I didn’t know, I was able to identify like, there’s more to this than what I know than just the knowledge of my time. So I had to go out and go get a coach, a mentor, somebody to help me break through that plateau to the next level. And that’s when I went out and researched a bunch of programs, jumped into one and then ended up getting 52 units within six months. Actually, I think I was under contract for four or five months after starting the program and getting some mentorship from really smart people.

    Mark:              Was that Jake and Gino.

    Vince:            Yes. The Jake and Gino Wheelbarrow Profits Academies was what I jumped into.

    Mark:              Nice. Those guys are great.

    Vince:            Yes. Absolutely. So with Gino’s mentorship, definitely I just blew through that plateau. And I think it was like put on a timeline. I think it was like October, 2018. I started the program and I was in contract on a 52 unit by like January 2019.

    Mark:              And where was that 52? Was it in Michigan as well?

    Vince:            Yes. That was the same market Michigan. And we closed out as a JV. So our partnerships it was me. I found three people through networking and meetups. We all put 25% down and we close on that 52 unit and started scaling up our businesses and knowing where we lacked and what parts of our businesses needed the most attention.

    Mark:              I love that. I really like your process of step laddering. I like that you used your own money for the first few years and did multiple deals that’s admirable because you risk your own money at the outset before you start risking other people’s money. And then you got a mentor and partnered with likeminded people and went in and got bigger and you were growing all along and learning, learning a ton. I’m sure. And then you did your first syndication during a disastrous pandemic.

    Vince:            There’s always a kind of a question of when should people get coaches and to me it’s definitely up to your personality, but for me, I think most people would benefit from doing a couple of deals. Even if they’re small, just to figure out like one day they can go through an entire transaction, start to finish and understand the basics of real estate. But more importantly, kind of use that as like a sandbox. It’s very hard to go bankrupt losing everything on a duplex. So use the smaller property like a sandbox to build your systems. And for me more importantly to figure out what your strengths and weaknesses are, if you’re very cognizant of your performance over those early transactions.

    And you’re honest with yourself you can annotate what areas you’re strong at and what areas you are weak at. So you could either spend time increasing your strengths, increasing your weaknesses, or go find partners that compliment your weaknesses, which is what I did.

    Mark:              Right. Divide and conquer by getting someone else who’s good at what you’re weak at. And then you have a frame of reference from your own experience. When you get into coaching, you probably understand their lessons at a deeper level as a result. Is there a failure or mistake that you made early on that later, you found key to your success?

    Vince:            Early on over renovating units. I think was one of the first things I’ve done. And then so couple properties with that, or couple of mistakes big on that sandbox property, the first fourplex I bought. So one, I over renovated the unit and wasn’t really conscious of my budget, I was renovating, like I was going to live there, not what the market was going to support. So I learned a lot from that and lost money from that. So to speak it just means I have to hang on the property longer than I planned to recoup that in cash flow that the extra CapEx that I put into it. So there’s over renovating units, not sticking through with multiple bids from contractors.

    Mark:              Sure. A lot of people.

    Vince:            Everybody says that, Oh, go multiple bids. And then they just fail in actual practice of following through the bids and slowing down, getting bids, vetting them, sitting down, looking all apples to apples as follow up questions. And not just going with the first person that you like.

    Mark:              Do you use third party property management or do you manage it yourself?

    Vince:            I do. So being in the military, I built my entire company, which are three, companies now all with me not being there. So all out of state, all third parties managed.

    Mark:              Managed by a third party operator and you just monitor them what they’re doing.

    Vince:            Exactly. So manage the managers is what I do.

    Mark:              Exactly. What do you think? What do you consider investment Kryptonite’s the biggest thing that kills an investment?

    Vince:            Cash flow is probably the biggest one. If it doesn’t cash flow, then you’re taking on a considerable amount of risk for that property.

    Mark:              Right. And you need to verify and look skeptically at the advertised cash flow. I don’t know, after 20 years of buying multifamily buildings, myself often, what is advertised as cash flow, mysteriously evaporates sometimes when you take over the building.

    Vince:            Yes. Absolutely. I do a full on financial audit when we go into due diligence. It’s kind of like this whole circle thing. We started the rent roll. So it’s okay, let’s get the rent roll and then get the leases and then bump the rent roll against the leases. And then I asked for the bank statements, I’m like, okay, well now I want the P and L so I get the T12 and bumped the T12 against the rent roll against the bank statements to make sure that they’re getting the rent they say they were getting.

    They’re reporting the rent, they’re say they’re getting. And then the amount that’s actually getting deposit in the bank matches the rent roll and the T12. And then I go one step further of getting last X amount of years of taxes or K1’s or whatever they have to show that, okay, this is what they’re saying on the T12. They collected, what they’re actually reporting as their gross revenue on their tax returns. So I take all those documents and I just create like a storyboard or a storyline and just audit all of them across each other and find discrepancies that way. And I found that to be pretty effective.

    Mark:              That’s great. Verifying the deposits in the bank is smart. Sellers are incentivized to get the maximum price for their building. So they will often inflate the cash flow that is really there.

    Vince:            And a lot of the time it’s not give them the benefit of the doubt. It’s not them inflating it, or just trying to misrepresent. A lot of times I find out that it’s just bad bookkeeping. They’re just trying to like, yeah, I taught myself how to bookkeep and all this stuff. And I’m like, you’re giving me like, scan copies of like yellow tablet, paper. I’m like, what? So, there’s a kind of a mix between both, but yeah.

    Mark:              What do you think the biggest myth or misperception being perpetuated in real estate investing is nowadays?

    Vince:            I don’t know, for me, syndication’s easy. I got a dozen deals under my belt before this last one. And I still had a pretty high level of stress and learned a ton of stuff. So I think that would be the thing for me. Also, I’m not that smart, so I’m sure there are guys out there right out of college, they got MBA and they’re just super sharp and their MBA or finance degrees that can probably crush syndication out the gate. But I think for most people, they try to make syndication a lot easier than it actually is.

    Mark:              Right. I think it’s more challenging than is advertised. And you know, what is nowadays the current economic environment is going to be a great school for syndicators. It’s going to be a challenge. It’s easy to be successful when the wind is at your back when the market is charging upward. But when it’s going through some rocky terrain, that’s when you’ll have to hone your systems and prove yourself. What’s a trait that you possess that has served you best both in real estate and in life?

    Vince:            Kind of a trait and a good and a bad is the ADD kind of personality or affliction I have. I just have to keep moving and I have to just jump in. For real estate, you see a lot of people that get analysis paralysis, where everything has to be perfect. Every plan has to be perfect. Everything has to be in its place before they can take one baby step forward. And what happens is they just don’t do anything for years and years and years, and they just never get into it. For me I can’t sit still long enough to have plans 100% perfect. So I get to a point where it’s viable with a good probability of success. It’s going to be 90% successful let’s just jump in and take action. We’ll figure out the other 10% as we go. It gets a little bit better when you get experienced. But I think if you’re just early on, don’t wait until the plan is a hundred percent perfect to jump in because it’s never going to be

    Mark:              Right. You’ll never know everything. There will always be unknowns. And you just got to act, you may have just answered this with that response, but is there a trait that you feel that holds you back that you still need to work on?

    Vince:            Probably being more extroverted is a trait that I think I need to get better at. Being able to just talk to people, go, network more and be more outgoing, more enthusiastic, where it doesn’t just drain my energy. Because normally I can go out there and I can work a room. I can go teach a class, but then I have to go sleep for like 20 hours after because I’m drained. So hopefully I get better at that. The more I get used to networking more and being in groups more but that’s probably the biggest one.

    Mark:              I’m a complete introvert by nature. And so I’m always trying to force myself to be more extroverted. That’s why I’m doing a podcast, gets me out of my shell. If you were to pass on some advice to your younger self, what would it be?

    Vince:            Partner sooner and go buy commercial property sooner.

    Mark:              So are you ready for our question round?

    Vince:            Yes.

    Mark:              And now our question round.

    The book you’ve recommended most over the past year.

    Vince:            Never Split the Difference by Chris Voss.

    Mark:              Good book. Favorite quote.

    Vince:            “Set goals to match your potential, not your ability.”

    Mark:              Nice. An online tool or app that brings you the most value.

    Vince:            Asana.

    Mark:              Do you eat food past its expiration date if it looks fine?

    Vince:            Yes. Probably.

    Mark:              A bad or cheesy movie that you love.

    Vince:            Pop Star with the guy from Brooklyn 99.

    Mark:              Yes. Andy Samberg.

    Vince:            Andy Samberg.

    Mark:              I never saw that.

    Vince:            That’s my like mindless, just crack a couple of beers and sit on the couch and just laugh for dumb jokes.

    Mark:              I have about five of those movies. Your most impressive, totally useless skill.

    Vince:            I can hacky sack pretty well. It’s pretty useless.

    Mark:              That’s great. Which decade created the greatest music?

    Vince:            The 90’s.

    Mark:              Any bands,?

    Vince:            Man, for me, it’d be Sublime, they’re all punk rock type.

    Mark:              Oh yeah.

    Vince:            Music genre.

    Mark:              We got real in the 90’s. Grunge was a rebuttal to pop rock of the late 80’s.

    Vince:            Like every genre music exploded in the 90’s was great.

    Mark:              I agree. What was your most awkward year?

    Vince:            I don’t know. It got to be some kind of freshman sophomore year shenanigans.

    Mark:              Aside from real estate. One thing you could spend all day talking about.

    Vince:            Flying planes.

    Mark:              Yes. You’re in the Air Force. Do you fly?

    Vince:            Yes and no, I am in the Air Force, but I’m enlisted. So I do not fly planes for the Air Force, but I am a private pilot and I have a small Piper warrior out here in Hawaii that I fly on my personal time.

    Mark:              Oh, nice. Your favorite sound in the world?

    Vince:            Silence. I got three little kids. So is that an acceptable answer? The sound of silence.

    Mark:              And the answer is acceptable. Have you ever had a paranormal experience?

    Vince:            I think I have, but it’s one of those things where you’re asleep, but you’re kind of conscious like that weird state of like in between. And like you see something and then you don’t know if you were dreaming it or not.

    Mark:              I just saw a weird article and I don’t know if it was fake news, but in the Air Force, do you ever hear about pilot encounters with strange unidentified objects?

    Vince:            I’ve read a lot of reports that probably same as you have, but then there’s like some of those like weird audios from the voice recorders or it’s like the pilots kind of narrating what they’re seeing. Those are pretty weird, but I’ve had more experience more of like a haunted plane than I have with some like UFO type stuff.

    Mark:              Cool. Weirdly like a couple days ago it was published by CBS news saying that the government was acknowledging that they have all these photos and they showed the photos of these strange objects taken by pilots. And I think it was Air Force.

    Vince:            I have to check it out. That’s cool. I’ve seen some recorders where you’re talking like a fighter pilot going mock two and something passes them going faster just blows past them in the sky. And for that to happen, they got to be going mock three, mock four. And it was like, it wasn’t anybody from us, but they’re all on YouTube and stuff like that. So who knows if they’re real or not.

    Mark:              Right. Right. The most amazing place in nature you’ve ever been.

    Vince:            By living in Hawaii. So there’s that, but other than that, I really like Tahoe.

    Mark:              Yes. Tahoe is great.

    Vince:            It’s a pretty cool spot.

    Mark:              I love it. Yosemite. You’re not far from Yosemite as well. What movie can you quote from the most?

    Vince:            Stepbrothers is pretty quotable.

    Mark:              I love Stepbrothers. When are you happiest?

    Vince:            That’s a trick question. Obviously when I’m with my family.

    Mark:              That’s a trick question. You have to say that?

    Vince:            Yes. I think you have to, if my wife’s going to ever hear this.

    Mark:              Finally, where can listeners reach out to you.

    Vince:            If you want to reach out to me, connect@tricityequity.com or on Facebook, we run a meetup group, the Honolulu Chapter of Multifamily and More so you can find us on there. Honolulu Multifamily and More. Our Facebook group meet up and can come chat with us and join our virtual meetups now is what we have.

    Mark:              Awesome. Well, thank you so much for doing this.

    From Pizza Delivery Boy to $300M In Transactions, The Power of a Tribe, with Kris German

    From Pizza Delivery Boy to $300M In Transactions, The Power of a Tribe, with Kris German

    by | May 20, 2020 | Podcast, WWRE

     

    Kristopher German went from delivering pizzas and working as a security guard to closing over $300,000,000 in commercial real estate. He consistently ranks among the top 3 commercial agents within the RE/MAX Commercial National Division, and over the last 13 years, has been awarded every award RE/MAX has to offer.

    He attributes this success to a client-centered business based on hard work, honesty, and unparalleled negotiation skills.

    Kris also is a landlord himself, and owns multi-family investments in both Los Angeles & San Bernadino counties. Having bought, sold, and improved his own investment properties, Kris is able to offer this practical inside information to his clients and the industry he serves at large.  

     

    Be sure to check out The Apartment Dealer on YouTube for more information!

     

     

    What You’ll Learn In Today’s Episode:

    • Those with persistence can outpace those with talent, and usually do.

    • We become the average of the five people we spend the most time with, choose wisely.

    • The loan profile should always be part of your deal analysis.

    • Avoid deals where the cap rate is lower than the interest rate. 

     

    Ideas Worth Sharing:

    “Pray as though everything depended on God. Work as though everything depended on you.” – Saint Augustine |  Tweet This!

    “Why not have more of the good stuff? We’re in this deal for the cashflow. We’re not in it for calls in the middle of the night, tenants who are a pain…” – Kris German | Tweet This!

    “I have to win, I have a family to provide for.” – Kris German | Tweet This!

    Resources In Today’s Episode:

       

      Enjoy the show? Use the Links Below to Subscribe:

       

      Transcript

       

      Host:              Today’s guest was a 26 year old pizza delivery boy, when he decided to change his life. He’s now a successful multifamily investor teacher, and one of the top three commercial agents nationally for Remax having received every award, the brokerage offers, including the Lifetime Achievement Award, Hall of Fame Award and the Circle of Legends Award. He’s closed over 300 million in transactions and still finds time to be an active community leader and philanthropist. His story is an inspiration I’d like to welcome Kris German.

      Kris:               Thank you. Thank you for having me.

      Mark:              I am a fan of your videos. They’re always very well informed. They’re always backed by a lot of data to support your statements. And most importantly, I feel like you’re a truth teller. Recently, we were at that irrational exuberance phase of the market and a lot of real estate professionals stand to make a lot of money. If they continue cheerleading for investors to jump in, it’s going to be great. And you’re one of those people that advise people to proceed with caution. And I think that’s the right way and that’s the true way that investors should be proceeding. So thank you.

      Kris:               Yes. There are some shark salesmen out there, but anyone can go back and look at the log of say the videos that were recorded at our educational events that we do. We coordinate educational luncheons throughout the year for landlords. And you’ll see between myself and the individuals that I bring to speak at that event, you call me a truth teller. That’s exactly what they are. They don’t have a dog in the race, so to speak. Other than to tell you whether it’s the real estate attorney or the market forecaster, or if it’s the guy speaking on commercial lending, other than the tell the landlords, here’s what they see at that moment. Here’s where we came from. So from where we came from and where we are currently, this is what we can learn about what may come to be.

      Mark:              Yes. I like your team. Do you want to mention who’s on your team and what their role is?

      Kris:               Those that have been with me the longest are Steven Spear real estate attorney out of Redondo Beach, Bruce Norris of the Norris group, who is a hard money lender. Doesn’t like to be called such, but he is a market forecaster. The guy just has an innate ability to track whether the market’s going up or going down. So kind of eerie so much to the sense that we held an event in October of last year and people can go back and watch the footage on YouTube. And he brought up the discussion of wouldn’t it be interesting if we had some sort of systemic event in 2020 now, of course he didn’t know it was a virus, but here we had a systemic event. And so, we had the likes of him.

                              Gil Figueroa, who’s a commercial loan broker, over two decades, commercial loans. And then somebody like Gianni Galati from Chase Commercial Lending, as you know, Chase has been a very aggressive lender, especially within Los Angeles County. Gianni is another one, a couple of decade’s worth of experience. So anyways, these type of individuals who actually have been in the industry much longer than I. I’m a student in the room. I happen to be the host. I’m learning at the back of the room alongside the other landlords so that I can then take that information and say, okay, here’s what I see day to day as a realtor. Here’s what I’m learning from these other facets of the market. Now, how can we couple it together and ensure our clients are best informed. And so we’d like to provide that service.

      Mark:              So backing up, how did you get into real estate and why?

      Kris:               So how long do we have? I think we’ll go to 2006. So in 2006, where Kris German the apartment dealer found himself wasn’t so sexy. In terms of some name like that, I was a father of two; my wife and I had been married for a few years. And I literally am a by day, a high school security guard. And by night delivering pizzas. And finally, in December of that year, I said, look, I’m not a dumb guy. I’m motivated. I can work hard. If I find something to dive in and pour myself into, I need a change. And thanks to God a guy that I went to high school with a close friend of mine was one of the best men in my wedding. Out of college he had went to work for Marcus and Millichap, and I just approached them and said, look, “I don’t know anything about real estate. I don’t know a prelim, title, escrow none of this, but I know that I can be a good student, if you’re willing to teach me, I’ll do whatever you need me to do.”

                              I’m still working at the school district Monday through Friday nine to five sort of thing. And then in the late afternoon I would drive to downtown Los Angeles because his one stipulation was this that I couldn’t take away from his business because he was doing very well. And he couldn’t teach me long distance because commercial real estate is not something you can learn long distance. We didn’t have Zoom meetings back then or any of this type of technology. So he said, “You have to come to my office.” So Monday through Thursday, I’d go downtown Los Angeles stayed in the office until about nine o’clock at night, and then make the Trek back, home, back and forth. That’s about a one hour drive, either direction and got licensed by March of 2007. And by September of 2007, I had made enough money in commissions that I was able to walk away from the school district, dive into commercial real estate.

                              And the success took off from there. That year I was rookie of the year in that office. The next year I was in the top 10 for that office. And that was hard to do because I was amongst the likes of individuals that were making 1 to $2 million in commissions annually. I mean, these guys turned a lot of deals, but it was really a blessing. Number one, people ask me, “Kris, why do you sell apartments?” “Why don’t you sell warehouses?” Just happens to be my senior. That’s what we call it. My good friend who taught me the business. He sold multifamily. Had he sold retail. I probably would be selling retail today to be honest. Because I didn’t know the difference. I was just looking for an opportunity. And in that office, I worked alongside some of the most hardworking, genuine guys who really killed it in the industry. And so that became my perception of what was the norm you got in at 7:00 AM you left maybe at 8:00 PM, you better be out at meetings. This is what it took to succeed. There were no people that were in it just part time or anything. And so that’s what I was surrounded with, and that really helped.

      Mark:              It sounded like you needed to be hungry. If you wanted to succeed.

      Kris:               Oh definitely. Oh yeah. Because I’m getting up at 4:30 in the morning, because now I’m living at Rancho Cucamonga getting up that early and going into downtown LA. So I could avoid the morning traffic because I had a mantra first one in last one out. And that’s what I wanted to be. I wanted to be the first one in and the last one out, because the way I looked at it at that time is these other senior agents. If they’re making this type of money, who am I to show up after them and to leave before them, if I truly have hopes of reaching some success. And then on top of it, I watched these agents start to purchase properties themselves. And these were young guys. At that time, they’re 27, 28, and 29 years old, beginning to buy multifamily properties, flip multifamily properties. So again, it gave me that believability that, okay, here’s one of my peers, I see them doing it, I guess it isn’t what I was taught about money growing up.

                              And it was only something held exclusively for the rich that the common person, even if you only had two nickels to rub together, truly could amass real estate over time. And I have dozens of client testimonials of primarily people who came from other countries, interestingly enough, and came here, nothing to their name. And now they own a bunch of investment real estate. I know one of the largest multifamily investors here in Los Angeles County, he came as a foreigner and they didn’t come with much to his name. So yeah. I just had the ability to meet these kinds of people along the way. And I said, well, I guess Kris can buy a triplex. And so I bought a triplex, it was the first one

      Mark:              To interrupt, but it reminds me of that saying, have you heard that you were around a bunch of high performers, very solid people hardworking. And there’s that saying. You’re the average of the five people you hang around the most.

      Kris:               You hang around the most.

      Mark:              So that makes the difference.

      Kris:               And now interestingly enough, okay. So in high school I mentioned I had my close friend, well, three other buddies of mine that we went to high school with. They do the same thing that I do today. And we all were in that office at that time.

      Mark:              Really.

      Kris:               So you can imagine it had some pluses and minuses. Because you could imagine being back with your high school buddies or making some money, so good and bad can come with it. But yeah, if you look at the average income of those individuals, not only they had their average income, they’re all investors today.

      Mark:              Amazing. And so you went from being a security guard and a pizza delivery guy to becoming an agent at Remax in LA and then you’re buying triplex. Did you mention. Is that your first investment?

      Kris:               Yes I purchase a triflex it was the first one. And I really cut my teeth on that one because the way that it was structured, there was a duplex up front, the house in the back of the duplex building was uninhabitable. The previous owner had started to go do some rehab, literally had taken the building to the studs and the interior and stopped there. So when I take it over, there’s no plumbing, there’s no electrical, there’s no dry wall, there’s no installation and full disclosure. I didn’t grow up with like a dad and wrenching on a car or swinging a hammer on the weekend. I’m not that guy. So I don’t know what I’m looking at, but there again, just being at the right place at the right time, my father-in-law spent many years in construction. And I had befriended a couple of my clients who helped walk me through the process.

                              And so we did that entire building. Really that’s my philosophy that I carry with me today is when we buy a building, we go through them. The building has to underwrite such that I can swap out the electrical, the plumbing, update the kitchens and bathrooms and still make a certain ROI. Why, say, well, gosh, what, if you could skip all that. Well, I think that there are two components to this. Number one, we’re doing this podcast May of 2020. So in California, we now have state wide rent control. One of the ways around that, depending on where you own is if you do substantial improvements to a property, you can actually still vacate the units. So there’s reason number one, to do plumbing and electrical so that you can vacate units that have underperforming rents, you can get them to market.

                              Two, many of these buildings probably will represent the vast majority of my retirement down the road. And I’m still fairly young. And so when putting all new sub panels and electrical and plumbing, I know 20 years down the road, I still won’t be getting many maintenance calls because literally they’re new from the inside out. And I’ve done many of these projects. And matter of fact, today, I just recorded a video of a building we just completed. My ROI after my construction costs, the rehab costs my initial investment. We’re at about 14%.

      Mark:              Great. And where are these? Where the buildings are?

      Kris:               In San Bernardino County. So because people might hear 14% and if they’re listening to this podcast and I don’t know Montana, they might be like, well, that’s average or whatever. Because cap rates are higher, but here in California, LA San Bernardino County people are happy if they get a 5, 6% return. Here we are where we’re doing not only are we talking about the initial entry rate of return, we’re talking about after construction costs we’re still somewhere typically between 10 to 12% on average. And so that’s just my personal deal. What I do.

      Mark:              And do you hold long-term? You say you do all this renovate the plumbing and electric and the major systems. Do you plan to hold forever? Or do you plan to 1031 exchange and go into larger scale?

      Kris:               They say everything’s for sale. Would I get to use it again and again, but yeah, I’ve talked to some of these apartment investors, not so it’s not true because when there’s an offer on a table, all of a sudden they’re hemming and hawing. So in my portfolio, there’s a few though that we have done that work, but I’m not necessarily attached to them. And if I needed the money to do a 1031 exchange, then yeah, I would sell them. It’s all about the rate of return. In other words, if we took a look at the rate of return on someone’s equity versus a hypothetical exchange into property, A, B or C, and they find that they could definitely increase their income. There are more tax benefits for having done so, and all the rest, why not have more of the good stuff.

                              We’re in this deal for cash flow, we’re not in it for calls in the middle of night, tenants that are a pain, a governor who’s launched an all out attack against landlords and all these different ordinances over the last month. That’s not why we’re doing it, but we deal with it. We grit our teeth because of the cash flow, because of the tax incentives and because of the growth of our financial legacy for our heirs. Well, for us initially in our retirement to have a good standard of living and then for our heirs, and hopefully, we’re talking three, four generations down the road.

      Host:              Now, if you’re enjoying the show, please do us an easy favor and hit the subscribe button. And if you like the show, please give us a five star review. As a listener I always wondered why podcast hosts are always begging me to subscribe and rate them. Well, now that I’m on the other side, I see why it allows other listeners to find you. So here I go. If you liked the show, please subscribe and give us a five star review. I like doing it. And more importantly, in an era of unprecedented hype over real estate investing, my goal is to be a truth teller. Real estate is not as easy as it’s made out to be, but you can do it. If you can get past the hype and get to the truth. My aim is for this show to help with that. Anyway, let’s get back to the show.

      Kris:               So if you could maximize and compound all those benefits, and it’s all in the simple decision of doing a 1031 exchange to expand, then why not?

      Mark:              I have a similar approach. I usually find that trading up to larger scale, ends up being the way to go. So that’s been my pattern.

      Kris:               It’s all the good stuff. Just on a larger scale. That’s all it is

      Mark:              Exactly. Did you find that your strategy evolved after your first triplex?

      Kris:               So I think where my philosophy came from was because, okay, here, I finished this triplex and I literally get no calls. I never have to go to the building. I’m getting rents that are probably 15% above all my competing landlords on the same street, because I have a much better product. So this was all accidental. And so it’s almost like, do you enjoy art to the Caribbean movies?

      Mark:              Sure.

      Kris:               So, Jack Sparrow, there’s a one scene where this whole ship blows up in the whole thing and he’s swinging on a rope and somebody says, do you think he plans it all or it just happens? Literally, I didn’t plan any of this. It’s just happening this way. So I say, okay, I did these renovations and I’m not being bothered with any maintenance calls. And that’s great. Because I’m too busy a realtor. I’m getting higher rents than anyone else on the streets. I wonder if the two can be associated, because then I look at some of my clients who literally are at the building every other day, getting calls for this and that they literally are like the counselor and everything else of a particular property.

                              I don’t have time for that. And I’m not knocking anyone’s management style. But as I look at their product type, well, they were the ones that were being chincy when there were improvements needed and when maintenance items were needed, I didn’t want that. I wanted the scenario that I have with the triplex where literally I might go drive by the building once a quarter, just to make sure someone didn’t pick it up and steal it. I mean, literally because there’s no other reason to go. I have a better tenant base because again, the unit type that I’m offering brought about a different tenant base, different income, socioeconomic status, where they were not a headache for me.

                              And so then I just stuck with that formula. And I found that even in communities where somebody would say, for example, I have a building in Maywood and people who know that area, if you’re familiar with that area, like Maywood, South Gate, Cudahy, that area like the 7, 10, 105 corridor at general or 91 corridor.

      Mark:              Okay. Sure.

      Kris:               These are bread and butter tenants. Your renovations, you’re spending more money than you have to. You’re not going to get the type of tenant that you want. Well, there’s a video on YouTube that people can go see every rehab that I did where traditionally people on the same street were getting about 900 bucks for a one bedroom. It’s a tiny one bedroom, like 425 feet at most. It really looks like a studio, but it is a one bedroom $1,400.

                              So I’m able to collect $500 more. The type of tenant is different than what’s in the neighborhood, not to knock any type of tenant. But what I’m getting at is these people do not call me, do not miss rent payments. And because I gutted the unit from the inside out, there’s no maintenance call needed. And so I just have stuck with that. That’s what works for me.

      Mark:              Do you focus on a specific area or does the deal dictate where you’ll invest?

      Kris:               Again being a realtor, I’ve been forced to get familiar with many different communities. ‘Cause it’s different than say a realtor who sells single family homes. Typically they’ll sell homes maybe in one city, two cities, depending on how large the city and how many homes. But if you’re going to succeed in apartment sales, you have to work several communities in order for there to be enough inventory, to be able to put things together.

                              So having worked with clients who had interests in these various communities, I learned alongside them, what were the asking rates? What was the tenant base? And that really has helped me so that I can feel comfortable owning in East LA Maywoods, San Bernardino County these different areas that really are quite different from each other, but also very similar when you understand the type of tenant base that you can attract in each of those areas.

      Mark:              What do you look for in a deal? What makes a good deal for you?

      Kris:               Well, obviously my choices right now are dictated by cash flow. I’m not at a point where I’m buying trophy type properties just for the depreciation. So I have some clients that are at that point in their investment life, they make enough income from their holdings. I have one client who told me, Kris, you have enough units when the laundry income can pay for your lifestyle. And so I thought I’m going to steal that one. That’s a great idea. And a laundry income takes care of everything and the rents are on top. I’m not one of these individuals; I’m still in the building phases.

                              As you know, I have a large family to provide for, I have seven children. Our eighth child is on the way. So cash flow is King. So my deal is first dictated by cash flow. I’m not interested in structural issues and major stuff like this. I’ll do the lipstick type stuff and the renovations and even plumbing and electrical. That’s not that big of a deal, even though it seems like it could be quite daunting. I’ve learned over time. It’s really not what goes into it, but structural. I’m not dealing with structural if it’s really gang infested, I’ll pass, even if it’s not on that property. So I am also sensitive to the tenant demographics in the area. Cash flow is first and foremost on my mind.

      Mark:              With eight kids I could imagine. I could only imagine.

      Kris:               Yeah. It’s not for the weak.

      Mark:              Is there mistake or failure that you experienced early on that you learned a lot from that you do differently now?

      Kris:               A mistake. And I don’t want to say there’s been, so you’re talking just from the investment side.

      Mark:              From the investment side. That may be, you learn from it’s become a key to your success now.

      Kris:               That triplex I didn’t exchange early enough.

      Mark:              Early enough. Okay.

      Kris:               I had got somewhat attached to it. It was my first one. And I had redone the entire thing from the studs. And as I looked at other properties, I was confusing over-estimating the quality of this three unit that I had versus what was the opportunity if I would have sold that and bought a six unit seven or eight unit. And I eventually did that. I sold that three unit. I bought an eight unit, but I’d done it. I completed that probably three years after I really should have. And so I would have had more growth. And so I would say that just being busy with my realtor side of the business, representing investors, purchasing, buying, selling apartments, I didn’t necessarily address my own investments well enough. And just here over the last few years, I’ve gotten more aggressive where it’s like, okay, now we need to start exchanging and doing some different things.

      Mark:              I had a similar experience. I think I had an emotional attachment to my first duplex and I held it for a long time. And then as you do more and more deals, you become more dispassionate and just more, the emotions have gone away. It’s all analytical. You’re like, does this make sense or not?

      Kris:               We all think about our first crush, right? And so it has some space in our mind, in our heart, but your wife, isn’t going to be happy if you hang on to that for too long. So you got to let it go move on to the better stuff. So that’s what I would say.

      Mark:              Now this is a little random, but I heard you speak about one of your videos, how foreign money had bolstered possibly the San Gabriel Valley, like some locations during 2008. And I started investing outside of LA in other parts of the country and as I’ve done so. I’ve read about how as the rest of the world has become more wealthy, large economies like China and India and those massive Asian countries, the American dollar remains the most stable and the American political system remains the most stable. So US real estate assets are the target of a lot of the world’s money. And what I read was that 90% of that money goes to three cities, Los Angeles, New York, and Miami, Florida. And I think San Francisco to a lesser degree, but I know it’s large enough to have an impact on the markets. I think there was $490 billion in 2018 of foreign money that bought US real estate assets.

      Kris:               So, what I could speak to is, local here and foreign money was the saving grace during that real estate recession we had from 2008 to 2010, because specifically in the San Gabriel Valley, that was my main core area at that time. And I have branched out since then, but at that time I ate and breathed the San Gabriel Valley. There was so much blood in the street, the quote, warm buffet, that American based investors like you and I were thinking, it’s only going to get worse.

                              Let’s take ourselves back to that time. At that time, people were actually saying, hey, there might be bread lines and soup lines. People were just talking craziness. And so American based investors were saying, well, I’m out, I’m going to sit the side-line and I’m not going to invest. And eventually here comes the Chinese money and they got comfortable basically at a certain cap rate, a certain GRM. And that became our bottom in that particular market for every 10 sales, I would guess seven of the buyers were Chinese. It was that type of degree of separation between foreign money and local money.

      Mark:              The floor of the market would have been a lot lower without that.

      Kris:               It would have been lower because people were not eager to get back in the market. Vacancy had ticked up. You had areas like Arcadia, Pasadena, South Pasadena, which are really like “Á” rated type areas, but they had some of the most vacant properties because they were housing tenants at that time who took advantage of buying single family homes as single family homes became affordable. So a lot of people didn’t like what they saw in the water and here come the Chinese, thank goodness and started gobbling up multifamily. And that really stayed the course and started thinning out probably around 2017.

                              And I guess they had different issues at home. It wasn’t as easy to bring the money and so forth. And so as that got complicated, then investors at the same time here became a little more embolden. And so then between 2016 and 2019, you saw people actually flipping apartment buildings just as you would do a flip on a single family home. And they would go in and do some lipstick. And this was prior to rent control. So they could raise rents overnight and then flip the building. I would just get done sending an advertisement for a building I sold saying highest price per unit ever in X city’s history. And then there’d be another sale that would top that. And that’s the run-up that we saw.

      Mark:              That’s fascinating. Do you know why they targeted San Gabriel, but not other neighboring communities?

      Kris:               There’s a lot of Asians in the community already.

      Mark:              That’s what I would imagine. It’s just, they already had family or relatives or contacts. There was a comfort there.

      Kris:               Exactly. And so they had agents, real estate agents who were here that were actually going to China, bringing the investors here. And so you had a lot of that going on. And I don’t know how much real estate these individuals were buying outside of the San Gabriel Valley. Because again, it was survival of the fittest at that point as a realtor. So you’re just honed in on one area. But again, they made up the vast majority of the investors at that time.

      Mark:              What are your thoughts right now? What do you see happening in the multifamily market in the next year?

      Kris:               Well, this, this health crisis, this virus, really threw us a curve ball, but I think it magnified, what was already coming. In other words, the stock market for the last year and a half of people that I respect who are in the market, people, they’ve been screaming from the rooftops, Hey, there’s going to be an adjustment. We’re due for an adjustment. So this virus comes along and only compounds the adjustment that we were due for. Well, I would say in like kind for multifamily. You had a situation where tenants were already spending over 50% of their discretionary income for rent. How much more could we really push the rental rates beyond where we are now? And then with that came the various city and County and state protect, tenant protections in terms of rent control and what have you.

                              So that opportunity is now gone, you really have to buy a deal depending on where we’re talking about on face value and not on speculation. At the same time, you have most commercial lenders that have jumped their interest rates on commercial loans, even though the Fed has lowered rates, commercial rates have gone up. The lending requirements, at least as the recording of this are much more stringent. They’re asking six to 12 month’s reserves in impound accounts and all sorts of things. This is going to have an impact. We just don’t know how much, if you talk about what have I seen the last 30 days nothing’s moved. Almost next to no properties have sold. We don’t know what that means. Long-term. I would say probably by August, we’ll have a sense of, okay, what buildings were listed during this pandemic. What did they finally sell for?

                              That’ll give us some indication of what this all meant to the marketplace. And then depending on the prospects of procuring loans at that point, we’ll see where that pushes cap rates, because you have to have a spread between the cap rate and the interest rate. You can’t have a situation where, I guess you could, but you shouldn’t be buying a deal where the cap rate is lower than the interest rate because you’re losing money on the money borrowed. So in other words, if we just went from banks lending at 3 1/2 percent now let’s say at 4 1/2 percent, well, does that mean we just pushed prices to five caps? We just went from a four cap to a five cap. I don’t know. There’s not enough data yet, but if things stay on the trajectory that I currently see them, I think that’s a fair guess.

      Mark:              Interesting times, fascinating times. I’m sure we’re going to look back and what a learning opportunity, to just sit and watch how this thing unfolds.

      Kris:               Yes. It has been an issue. When you have people buying toilet paper to fight a respiratory disease, you know, it’s interesting times.

      Mark:              So a good way to segue into what I call multifamily psychotherapy. What’s a trait you possess that has served you best both in real estate and life.

      Kris:               I think persistence, whether it was being persistent to win the hand of my wife or being persistent when I first started learning the business or being persistent to be a good student. To literally sit at the feet of other landlords to say, okay, what and how are they doing what they’ve done? And can I do the same?’ If I get the data I’m willing to persist until I get the outcome.

      Mark:              How about, is there a trait that holds you back that you feel like you still need to work on?

      Kris:               I’m an, “A” type personality. And I sometimes err, on the side of being too straightforward, just because salesmen kill me where they’re just talking in circles and you could tell they’re smiling with their grand, but not with their eyes, if you know what I mean. So they have ill intentions. And so they’re just trying to persuade somebody to do something maybe against their own insight. Look, here’s what it is. It can’t be anything other than what it is. And if that makes sense to you, then it makes sense. If not, I’m okay with that then. But I probably have cost myself a listing or two or different things because I’m just that type. I’m just an “A” type. No filter. I’m going to tell you what I’m thinking.

      Mark:              That’s great. Well, to wrap it up, I was going to do the question round. And now our question round.

      The book that you’ve recommended the most over the past year,

      Kris:               I’ve been suggesting and recommending Unshakable by Tony Robbins.

      Mark:              It’s his financial book, right?

      Kris:               Yes. Primarily geared towards investing in stocks, but he also does address real estate. But I just think it gives you if you’re a 100% real estate guy like myself, it’s a quick primer to get you to fully understand what you need to seek the advice. If you want to go into the stock market, especially since there’s opportunity. Other than that, it’s always thinking grow rich. That has been one of my go to that I refer people to all the time.

      Mark:              How about a favorite quote?

      Kris:               St. Augustine, “Pray as if everything depended on God and work as though everything depended on you.”

      Mark:              An online tool or app that brings you the most value?

      Kris:               Zoom. This is how I’ve been able to work satellite with my team.

      Mark:              What was your favorite movie when you were 15?

      Kris:               Braveheart.

      Mark:              Do you eat food past its expiration date if it looks fine?

      Kris:               I’m very particular in terms of being health conscious. So no way. No how. Literally, my wife will and I’ll be like, did you look underneath the can or look at the thing? And she has no problem with me. No, I’m finicky in that way.

      Mark:              Belly button, innie or outie?

      Kris:               Innie.

      Mark:              What’s your most impressive, totally useless skill?

      Kris:               I give analogies for everything. I don’t know. Just these different analogies come to mind.

      Mark:              Aside from real estate, one thing you could spend all day talking about?

      Kris:               Metaphysics. That’s another side of me. I enjoy the study of metaphysics. I enjoy philosophy, Metaphysics, Theology. That’s my deal.

      Mark:              I love it. What decade created the greatest music?

      Kris:               I really appreciate old school, hip hop and R and B. So I would say late 80’s. Late 80’s, hip hop, where you have the LLK and the NWA’s and these guys come in just before early 90’s where you have all the Boyz II Men and these groups, that’s some of the good stuff.

      Mark:              What high school friend do you want to say hi to right now?

      Kris:               I’d be remissed if I didn’t say hello to my buddy, Anthony. Essentially my best friend as well, Anthony. We’ve been running mates in many ventures and he can vouch for me that, yeah, Kris really had pizzas in his car.

      Mark:              What country has the best accent?

      Kris:               The Irish, I really liked the Irish accent.

      Mark:              I’ve gotten a different answer for that every time.

      Kris:               I just like swag like Conor McGregor. I just like that whole–

      Mark:              Brogue. If you had to make a spy, alias, what would you go by?

      Kris:               That is a tough one. Jack Sparrow, just because, like I said before, it looks like Kris has it planned out, but a lot of this stuff has been accidental along the way.

      Mark:              You might’ve just answered this. What movie can you quote the most from?

      Kris:               Rush Hour. I remember seeing that early college and just the back and forth between Chris Tucker and Jackie Chan. Just some good stuff there.

      Mark:              A childhood cartoon character you had a crush on.

      Kris:               I don’t remember her name, but the girl figure in Roger Rabbit.

      Mark:              Is it Jessica Rabbit?

      Kris:               Jessica. Jessica was hot, man. Jessica was hot.

      Mark:              I never saw that movie.

      Kris:               Really. Oh, wow. I don’t know how old your kids are, but you got to have them take a look at that one.

      Mark:              Yeah. Yeah. If you could have the answer to one question, what would it be?

      Kris:               The winning numbers to the next lotto.

      Mark:              Good. Great. And lastly. When are you happiest?

      Kris:               When I’m just hanging out with the family. When we’re on vacation, we enjoy going to Coronado Island. I spent a lot of time on my business. My wife respects, my kids in terms of respect my time that I need away. So it’s great when we can all just be together and I can turn the phone off. At the end of the whole thing, it’s going to be these memories we create. We’re not going to be saying how many units? Obviously that provides a means for us right now, but you’re a father. So you can appreciate where I’m going. It’s about these memories we’re building with these kids.

      Mark:              Definitely. And finally, where can listeners reach out to you?

      Kris:               If you’ve been interested to catching these videos that have been referenced, you can go over to YouTube, YouTube forward slash The Apartment Dealer. You can follow us on Facebook, The Apartment Dealer, Instagram, The Apartment Dealer, just Google The Apartment Dealer and you can find Kris German everywhere.

      Mark:              Awesome. Well, thank you so much, Kris, for taking time out of your busy day and keep doing what you’re doing.

      Kris:               Well. Thank you. Thank you for having me. It was a pleasure and everyone be safe, be well. We’re almost out of this thing.

       

      Syndicating is a B*tch with Bruce Petersen

      Syndicating is a B*tch with Bruce Petersen

      by | May 14, 2020 | Podcast, WWRE

       

      In this week’s episode, Mark is joined by The Apartment Guy℠, Bruce Petersen, who is a syndicator of large multi-family properties throughout Central Texas ranging in size from 48-292 units. He was awarded the Austin Apartment Association’s Independent Rental Owner of the Year for 2016 and the National Apartment Association’s Independent Rental Owner of the Year for 2017 as well as Think Realty’s Multifamily Investor of the Year 2019.

       

      Bruce targets stabilized properties where he can buy a cash-flowing asset and drive value through building “community” and improved operations. He is able to do this by implementing his proven systems and deploying his experienced staff to replicate his business model across the new acquisitions.

       

      Make sure you pick up a copy of Bruce’s phenomenal new book, Syndicating Is a B*tch: And Other Truths You Haven’t Been Told.

       

       

      What You’ll Learn In Today’s Episode:

      • Syndication is tough. It can be incredibly rewarding, but the stress is high, there is a lot that can go wrong, and if your not prepared you can be setting yourself up for failure.

      • Property management is a full-time job, and it can slow your growth, but it can give you unprecedented control over how your properties are run.

      • Look for ways to add value outside of unit upgrades and utility bill-backs. Think laundry machines, covered parking, and even credit repair.

      • Life is too short to do things that suck. 

       

      Ideas Worth Sharing:

      “They have to live somewhere, but they don’t have to live in your damn property.” – Bruce Petersen | Tweet This!

      “You got to have way more reserves than you think you need.” – Bruce Petersen | Tweet This!

      “There will always be a correction, and if you’re not reinvesting in your property you’re going to get yourself in a lot of trouble.” – Bruce Petersen | Tweet This!

      Resources In Today’s Episode:

       Books Mentioned in the Show

       

      Enjoy the show? Use the Links Below to Subscribe:

       

      Transcript

       

      Mark:              He was awarded the National Apartment Associations, Independent Rental Owner in 2017, as well as Think Realty’s Multifamily Investor of the year. This past year, his strategy is to buy cash, flowing properties and drive value through community and improve operations. He just published a new book, entitled Syndication is a Bitch and other truths you haven’t been told, I’d like to welcome Bruce Peterson.

      Bruce:           Hey man, thanks for having me on. This is going to be a blast. I’m certain of it.

      Mark:              Of course. Thanks for joining me and congrats on the new book.

      Bruce:           I appreciate it. I think this will have already aired by the time it’s out, but it’s out April 5th, special pricing for the first couple of weeks, but I’m excited about it. It was a book I felt I had to write because I was tired of seeing good people, good companies with a good product, but stand on stage and sell only the rainbows and lollipops for the most part, because they’re trying to sell something to you. People would get into it and go, Oh, this is really hard. They didn’t make it sound like it was as hard as this really is. So it was important for me to write the book, just kind of tell you every step of the process to syndicate an apartment complex, but also tell you some funny, maybe some scary stories along the way of the things that have happened to me and likely will happen to you at some point. So it’s just my way of pulling back the curtain. So you go into syndication if you choose to with your eyes wide open.

      Mark:              As soon as I saw the title of the book, I was like, yes this is needed because I agree. I think just the reality is that a lot of the platforms out there and the pundits and thought leaders and gurus, they all have multifaceted businesses where they are doing coaching, boot camps, syndications, and podcasts, and all of those things rely on investor enthusiasm. So there’s like an incentive, a disincentive to tell the scary stuff.

      Bruce:           Exactly. And that’s exactly what I saw. Again, it’s a great way to make a living. And again, I really believe that most of these national groups are very good people. They have a very good product, but what I try to tell people, pull yourself out of the emotion of that weekend event. Think rationally, surely it can’t be perfect all the time for everybody and it’s not we have issues, but it’s still the most profitable thing I’ve ever found to do. It’s still the most rational thing I’ve ever found to do. The passive cashflow is great. So I still love everything about it, but it is a lot more difficult than many people will lead you to believe. That’s all.

      Mark:              I agree. Obviously, I’ve been doing it for 20 years. I love it as an asset and as an investment, but there’s some warts that come with it. There are warts that come with everything and people should know about them and embrace them. Little challenges. I first heard about you a few years ago when I was first getting into the Austin market and you’re very well respected. Everybody that ever knew you had a very high respect for you despite the salty language in your book title. But I wanted to hear about how you got into real estate. How did you get started? I think you pivoted, right?

      Bruce:           Yeah, I did. So I want to talk about something you just said the salty language and just who I am as a person. It bothers me when people want to judge, I get it. People are going to judge. I am not going to change who I am. They’re words that society chose to place meaning upon it’s just four letters put together in a certain order. And now we’ve assigned a negative connotation to it. I’ll be talking to a room, I’ll be on stage, addressing a bunch of people and you can just see people cross their arms and scowl.

      Mark:              Are you serious?

      Bruce:           Past the way I walk. I have incredible value to share with you that if you’ll listen, I not kidding. I can teach you how to make a million dollars a year doing this, but you’re so hung up on the word shit that you just tuned me out. And now you’re going to go back to work at 7-Eleven, 40 hours a week, hating your life and more power to you. But I think just people need to not be so damn sensitive. But anyways, that’s my little soap box. Now we’ll go into my pivot.

      Mark:              That’s so funny. Did you second guess? Sorry to interject, but did you have second thoughts about your title?

      Bruce:           Not at all. Actually I work with my business coach and my ghost writer to come up with it.

      Mark:              Yeah, I think it’s great.

      Bruce:           I told them I am a very authentic, genuine, transparent person. I do not want to represent myself in a way that’s not really me. That’s why I wanted something bracing to be on the cover because I want you to know what you were about to pick up. And I actually mentioned it or make light of it early in the book to say, look, I’m not for everybody and I get it. It’s totally okay. You might not care for my delivery method. You might not care for me as a human being. That’s okay. I’ve got really good information for you. I can make you a lot of money and I can save you a lot of heartache if you’ll just listen.

      Mark:              Well, good. Well, let’s hear about what was your former life and how did you make that pivot into real estate?

      Bruce:           Okay. So again, I barely got out of high school then I went to college because in 1986, that’s what had to do, you were supposed to go to college. So I went to college. I sucked at every bit of it. I didn’t like it. I’m a lifelong learner. I’m pretty intelligent, I think, but I did not thrive. In fact, that structured like a military thing. I couldn’t go into the military, either respect those guys madly, but it’s not my personality. So I dropped out of college and not having a degree, especially in the late 80’s, early 90’s, I fell into retail. There weren’t a lot of options for me without starting my own thing.

      And so I worked in retail for about 18 to 20 years and I loved that. ‘Cause I’m a people person until I realized I’ve been lying to myself, everybody gets into retail, says, “Oh, I’m a people person. So I love retail.” Well, you love retail until you realize this sucks. I love working with people, working with the customers. It’s great. It’s brutal on your body. People don’t realize this, but you can make pretty decent money in retail, but it’s hard. Lots of hours, lots of employee turnover. So I hit a wall about 18 to 20 years in and I just stopped working for other people and started researching real estate, being a single guy with no kids. I was like, I got to figure the next 50 to 60 years of my life out here.

      So I just started looking for a mentor in real estate. And I got very lucky to find a woman that helped me. And she helped me see the wisdom of going straight into apartment complexes and then went into apartment complexes into actually syndicating deals. So that’s how I got my start. That’s my background and bought my first property, a 48 unit in North Austin, Texas in 2012. And we’ve been off and running since we’ve done a little over 1100 units to date and love, every bit of it.

      Mark:              Nice. And so in 2012, was your mentor with you during that first purchase? And did you syndicate that first one?

      Bruce:           Absolutely. I didn’t know what I was doing. So I said, “Hey, you’re going to be at the closing table with me”. She goes, “No, why would I be there?” I was like, “Oh, I just thought that was normal.” She goes, well, “Look, if you’d like me to be there, I’ll be there.” So she drove up from San Antonio to sit with me at the closing table. Sound kind of funny. Yes. So she was with me the whole way. At the beginning, I took over a 48 unit property. I’ve hired and fired people my whole life, but I don’t know how to interview a property manager. ‘Cause I started managing my own property and let the property management company go. So I had to figure out how to hire a property manager.

      Mark:              So to back up, you bought it with third party property management and then fired them and did it yourself.

      Bruce:           Exactly. They did an okay job for me, but I knew long-term. I wanted to have my own management company. So I kept them on hand for the first six months. Then after six months I went to them and said, look, “I want to exercise my 30 day out with you. And I want to take over.”

      Mark:              That’s fascinating to me because everybody seems to have a love, hate relationship with their property management company. And most investors constantly are asking themselves, should I just do this myself? How was that when you made that change, did you regret it at first?

      Bruce:           No, I’ve never regretted it, but I’ve got two approaches here. Two thoughts on that okay. If it weren’t for, as you said, the love, hate relationship with management companies, most management companies, I hate to say it. They’re just terrible. They’re absolutely terrible. They’re in it to make a buck and they don’t really care about your property or you or your investors and that’s a pretty harsh thing to say, but I firmly believe it. Now you’ve got them great big players, the Amylase and the Camdens and the Gray Stars. I think they’re really good. But people that do what I do on a small scale, we can’t afford those guys usually. So we’re dealing with some second, third, fourth tier management companies that are just chasing the hot industry right now, where they can make a quick buck.

      So I think many of them are bad if it weren’t for many of them being bad, full transparency here too. The hardest thing about syndicating and investing in real estate is running my management company without any question. I love it because I love having employees. I love developing employees, being there to see them shine, get promoted and excel, but it is easily the most difficult part of my real estate business or empire to use a cheese ball word. It’s hard and it’s not super, I mean, it’s super profitable from a percentage standpoint, but you don’t make a lot of money per property. You just got to have a lot of properties, which makes it even harder.

      Mark:              It gives you control, but it also gives you a ton of headaches.

      Bruce:           Exactly.

      Mark:              So what did you do next from there?

      Bruce:           So the 48 unit, I had it for a little less than three years. Well actually a little less than 2 1/2 years. I bought it in September of 2012, sold it in February of 2015. I got my investors, my limited partners, 300% return on that sale. But in my heart, what I like to do is help and teach. So I didn’t even buy another property for a while. I wanted to help and teach others. So I wasn’t the most experienced person in the world, but I knew I had enough experience to at least help people and provide value to people that had never done this before at all. So I started mentoring others in how to do this. And I did that for about a year to a year and a half. So I took a break from my personal portfolio, got married in that time and came back to it, bought my second property, 120 units with my wife. We syndicated that deal as well in North Austin again, and we bought that in December of 2015, held that for almost a full three years and then sold that and did a 1031 tax free exchange into a 200 unit property on a golf course beside a Lake in San Antonio.

      Mark:              In San Antonio. So you moved from Austin to San Antonio and run up to 200 units.

      Bruce:           That’s the only place I’ve ever bought her in these two cities.

      Mark:              Did your criteria evolve over time or what’s your profile of the investments that you look for?

      Bruce:           Well, no, it hasn’t changed. I’ll take a deep value add anytime I can find one. The problem we had faced, I liken it to the 2005, 6, 7 run up in flipping single family properties that everybody was paying full retail prices on a property that needed a crap ton of rehab work to be done because they knew it would go up 400% in the next day, which was just stupid.

      Mark:              And speculate.

      Bruce:           They know a lot of people in the ass. So I was seeing a smaller version of that and multifamily that these deep value add that maybe were 60, 70% occupied busted out windows, lots of deferred maintenance, lots of collection issues. They were selling for full retail as if they were fully stabilized assets. I’m like, that makes no sense. So we’ve just been focusing on the fully stabilized properties that make money from day one. We go in, we tighten up the operation because we’ve been doing it for a while. We know different income streams to implement that others haven’t done rates and expenses. And we really work on creating community at the properties, which leads to lower unit turnover. So we’re just buying stabilized properties at this point.

      Mark:              And what about right now, given the current economic situation with Coronavirus?

      Bruce:           Well, I’ll address that on two different fronts as well. The first worrisome time for all of us that are worried about rent collections was April. We all cross our fingers and held onto our butts. Thinking Oh my God, what are we going to collect in April? But everybody that I’ve talked to did very well. We have collected between 95 and 98% on every single property we own. And then we come into May and then, okay. May surely is going to be the first month where we have a really big impact so far anyways, we’re quite a bit higher in collections this time of the month than we were in April. So far we haven’t been negatively impacted. I think May though will settle out to be a lower collection month than April. June might be even worse because you’re going to get your one time stimulus check and that might carry you through maybe a month, month and a half of rent. And then what are they going to do?

      So we’re holding on there. And then as far as the market at large, kind of more of a macro look at multifamily nationally, we’re not buying anything at all. And I know other people are, and I’m sure they’re going to do fine. I wish them the best. There are too many unknowns and too much uncertainty in this market. I have not got the slightest clue how to underwrite a property at this point, because if June collections on average across a nation or on a sub market are 50%. Oh my God, well, I just paid you on your trailing 12 month financials. Meaning I probably way overpaid for this property. How long is it going to take me to get it back the full collections? So for right now, we’re going to be fine long term. I believe that with every ounce of my being, but for right now, I don’t know how to assign value to a property. So we’re just sitting on the side-lines until we get some more certainty and clarity,

      Mark:              And having gone through 2008. It’s frustrating when you buy and then you have to go through the dip and your property drops 20% and then you have to wait for it to recover that 20%. Why not just buy it after it goes down? If you can calculate that. Personally, I think it’s not that tough. What I did in 2008 was I just waited for two consecutive quarters of GDP growth to indicate that we had hit bottom. And that’s when I started buying.

      Bruce:           And a lot of people ask me about, well, this was before Corona hit because we were in this raging bull market forever and people would always ask me, well, what about the next correction? What happened in 2008? Look for the people that were buying in 2005, 6 and 7. If they were good operators, they were fine. Like you said, they may have had to extend their whole timeline by a year to three years. But they eventually got out, either broke even, or they made a little bit of money, but they didn’t lose the property. And I don’t know a single person that lost any money during that time either. But again, I’m talking about good operators.

      Mark:              I know a couple big LA multifamily operators that got caught and over leveraged and had a domino effect and lost multiple buildings. I’ve heard those horror stories. So it does happen. You just have to be careful. Leverage is a big cause and reserves, you’re going too big, too fast is what I saw that caused it.

      Bruce:           And that’s what I tell people also, how big should I go for my first property? Go as big as you possibly can, but do it safely. Don’t get out over your skis. Don’t take on too much debt. You better be very amply, capitalized, meaning reserves in the bank, don’t run it skin tight and razor thin because things can happen. Even if the Corona this thing that nobody ever saw coming this, a black Swan event, it doesn’t even take one of those to put you in a predicament. If you don’t have reserves. I’ve got some friends that owned in South Texas in Corpus Christi that I think it was 2017 when hurricane Harvey blew through it only wiped out a few buildings of their 10 to 15 unit building properties. They needed to have reserves because they lost a ton of their income. Now they were made whole through insurance, but it took a while for that process to run its course. So you’ve got to have way more than reserves than you think you need,

      Mark:              And I think now people are starting to recognize that rents can go down. I think for the last five years, there was a worrisome sort of notion that multifamily is recession proof and rents don’t go down, they only go up. But yeah, if you’ve been through a downturn, you know, that rents do go down and you have to be prepared for that, with your reserves in not being over leveraged.

      Host:              Now, if you’re enjoying the show, please do us an easy favor and hit the subscribe button. And if you like the show, please give us a five star review. As a listener I always wondered why podcast hosts are always begging me to subscribe and rate them. Well, now that I’m on the other side, I see why it allows other listeners to find you. So here I go. If you like the show, please subscribe and give us a five star review. I like doing it. And more importantly, in an era of unprecedented hype over real estate investing, my goal is to be a truth teller. Real estate is not as easy as it’s made out to be, but you can do it. If you can get past the hype and get to the truth. My aim is for this show to help with that. Anyway, let’s get back to the show.

      Bruce:           And that’s another part of the book that you can be very successful in this and real estate investing is very rational for the most part, but yes, rents do go down and people will always counter. Rents can and they probably will go down again at some point. Everybody has to have somewhere to live. So I will be safer. I think you’re overly cautious. You’re right. People always need a place to live, but you know what? Back in 2008 and 9, sometimes that place to live was under a freaking bridge. So you’re right. They have to live somewhere, but they don’t have to live in your damn property. So quit try to convince yourself that this is bulletproof it’s recession proof. Oh yeah, you can. And a lot of people are [inaudible 18:29] real quick.

      Mark:              And what are they going to do during the peak of the boom, the market gets flooded with new inventory. Buildings are popping up all over the place and you’ve got tons of competition for your vacant unit is competing with 3000 other vacant units. So yeah, you’re in this economic ecosphere that you just have to try to understand all the aspects of it and yeah, it’s a great investment. And if you learn how to do it and you’re conservative, you’ll do very, very well, but there are risks lurking out there.

      Bruce:           Absolutely. And that’s why in a strong market, you better not be raping that property of all the profits. You need to be putting lots of money back into the property to keep it up, to keep it maintained, to even improve some of the amenities and be smart about it because that day’s going to come, we’re going to have a downturn and we’re in it right now. But there will always be that day coming and whatever cycle we’re in, there will always be a correction. And if you’re not reinvesting in your property, you’re going to get yourself in a lot of trouble.

      Mark:              You mentioned you had some go too ways to raise revenue on a new property. Could you share some of those?

      Bruce:           There are a couple of them that everybody knows and it’s easy stop rubs. You’re going to build back a portion of your water bill, to the tenants who are the ones using the water. It’s fair. It’s legit and then everybody thinks, okay, I want to go in and spend three to $5,000 to upgrade a unit and get another 100, $150 in rent. Those are the easy things everybody knows. Well, we have things that we do for our residents that helps them repair bad credit, where we charge them a small fee per month. It’s only six bucks to them, but all those little dollars add up because if you’re buying with a cap rate, if you have a leveraged transaction, meaning you take on debt for every dollar, I increased the profitability by I’m increasing the value by anywhere from 12 to $18 for every added dollar.

      So $6 is not a lot, but you add 10, 20, 30 people on a property that would have taken you up on that. A proposition that starts to add money. We’ve also gone in. And if we were at a point in a laundry room contract that we can get out of it because they’re really hard to get out of, but a few of them that we’ve bought we’ve been month to month when we took over in that contract. So we got rid of the contract, bought our own machines that has about 100 or 150% ROI. It’s massive. And the one I just did on roughly a 200 unit property, I increased the value of the property by $900,000 by doing that. And I’ve got about another point, the point and a half percent return to the passive investor by doing it as well. ‘Cause we took our collections monthly from $1,450 a month on average to $6,000 a month on average, that makes a huge difference in your value and your return. So that’s probably the most profitable thing we’ve done.

      Mark:              Yeah. That’s phenomenal. What are your thoughts on the market right now with Coronavirus? How has it impacted you as an owner?

      Bruce:           I wish I could tell you my thoughts. I don’t know. Nobody really knows what the hell’s going on, but every day you think you have a handle on the latest legislation or cares package that came out and then tomorrow they throw more crap at you. So we don’t know. We don’t know what’s going on. We don’t know what tomorrow holds. I’m sure some of your listeners have heard, but there is something going around where they’re trying to say that you can’t collect rent from anybody period. It might be COVID affected people only, but that’s still going to be a sizable number of people. But they’re trying to have, I forgot what it’s called, but it’s a rent and mortgage payment forgiveness program that as long as we’re in a state of emergency nationally, you can’t collect rent from these people at all, but you’re not asking the grocery store to give me groceries for free.

      Why am I being forced to do this? Because I have bills I got to pay. And if you don’t pay me your rent I can’t pay my bills. And now you’re going to be living in an apartment complex that maybe I can’t get pest control done any more for you, get your pool clean for you anymore. Have trash picked up. I don’t think it’s ever going to go there, but that’s this domino effect that these people that are passing this legislation or trying to, they’re not thinking about that stuff. So again, hate to get on a soap box and a rant there, but we don’t know what’s coming. We think we’re okay. April collections were really, really good. We expected problems. We’re collecting between 93 and 98% at each of our properties. So we got affected because we usually collect all, but about 500 bucks, we’re really good at collections.

      So we’ve seen a slight dip. We’re waiting to see what’s happening. So until we have a better feel for where this ultimately is going to fall out, I’m not buying anything because I don’t know how to underwrite a deal anymore. I don’t know what makes sense.

      Mark:              It seems like there’s so much uncertainty that it’s hard to move forward.

      Bruce:           I think ultimately we’re going to be fine. I think multifamily honestly is going to weather this storm better than most, as long as the government doesn’t completely destroy our businesses for us. With this legislation, 2008, 2009 real estate fair better than a lot. Now real estate got destroyed got hair and all that, but investment real estate, commercial real estate by and large did better than a lot. And then within commercial real estate multifamily wasn’t spared at all. But we were spared a lot of the heartache that a lot of other niches got hit with. We rebounded quicker. We didn’t get hit as hard and I really think that’s, what’s going to happen again, that people have to live somewhere.

      You don’t have to have the new iPhone, the new fidget spinner or a pet rock, whatever, but you got live somewhere. So I think we’ll weather it as well or better than everybody except maybe freaking Amazon and Zoom. These two copies are killing it right now, but I think long-term we’re going to be good. We just got to get through this weird stuff.

      Mark:              Exactly. Get back on track to the way it had been operating. Was there a failure or a mistake that you experienced early on that later, you found to be a key to your success.

      Bruce:           Failure. I’ll talk about one thing that really, it worked itself out finally, but it taught me a very painful, well, a very scary, stressful lesson. The third property we bought was a 256 unit property in San Antonio. And we were buying it on an assumption. Okay, perfect. This guy that I’m buying it from has a better loan that I can source currently on the open market. And at that time it was a great loan, 4.39% interest. Two years of interest only left. By today’s standards that’s a terrible loan. But back then it was a very good loan. So we were going to go through with an assumption seller agreed. Yep. We’ll sell it to you. We’ll sell it to you on the assumption. Well, after we get through our due diligence, so now my $75,000 of hard earned money is truly hard, it’s gone. If I can’t close, right. Well, they said, no, the lender said, no, we’re not going to do this assumption for you. I’m like, what are you talking about?

      I know lending guidelines. I have the requisite amount of net worth and liquidity that you guys should be happy with. They go, “We don’t care.” You’re right. You do. But you don’t have as much net worth and liquidity as the guy you’re buying from. So inherently you are more risk than they are. We don’t think you’re risky, but you are riskier than they are like, Oh my Lord, I just lost $75,000 of my personal money. I don’t put that on the passive investors. A lot of syndicators I think do. And I think legally you can and all that, but I don’t feel comfortable with that. I got hung out to dry. They didn’t. So we’re going to eat the whole 75.

      Luckily the seller is a massive operator nationally that has worked with his bank for years. And they stepped in and said, “Nope, if you do not sell this property on an assumption to Bruce. Well allow me to sell it on an assumption to Bruce, we’re not going to deal with you ever again. We’ll, walk off, we’ll find another lender.” And that was enough to scare them into making us and approving us. So I learned you better put verbiage in your purchase sale agreement that protects you in case that assumption does not get approved by the lender. So learned a hard lesson.

      Mark:              Wow. Yeah. Few. Jeez. That’s always terrifying that the lenders don’t really feel that obligated. Once they give you a letter of interest in a rate lock and you move down the road and they’ve made this verbal commitment to you, they can back out at any time long after you’ve removed contingencies.

      Bruce:           Yes. They can and on that one. We didn’t even get to that point because we figure that would ever be a problem. So we didn’t have verbiage in there to protect us. But again, we got lucky, the seller stepped up and helped us out there. ‘Cause we didn’t even have a finance contingency. The market had gotten competitive enough that your terms had to change to win deals. It was a good deal. So we thought, Oh, we’ve never had a deal go bad on lending. So yeah. We’ll waive our finance contingency. So yeah, we were truly hung out to dry if they hadn’t to come through our rescue, basically.

      Mark:              Fascinating. What’s your criteria? What does a good deal look like to you?

      Bruce:           Well, what does a good deal look like to me is based on what my investors think. I’m always asking my investor base, what’s your appetite for yield right now? What do you feel you need to consider a deal seriously? And when I first started doing this, everybody expected 10 to 15% cash on cash returns. Well, now people are coming down to the 5, 6, 7% range and realize that’s still better than anything else I can get anywhere else without taking a lot of undue risks.

      So I got to find a property that will support the expected return on the investor side. But I have started to come up market. I was buying C-minus properties at the beginning, but now I’m buying B- plus properties. I haven’t gone into an “A” there’s not enough spread there for me to make a decent enough return for my investors. But on the B- plus I started noticing that the C-properties were trading at the same cap rates that the B properties were trading at. So I thought, well, why don’t I go up market and get a better property, better staff, better tenants. So, we’re still buying cash flow in assets, fully stabilized assets, but we have gone up market now and we’re dealing more in the real estate space now.

      Mark:              Okay. Interesting. What do you think is the biggest myth or misperception that’s being perpetuated right now in the real estate space?

      Bruce:           The reason I wrote my book. I think people oftentimes are not being purposely misled, but they are being misled because when they go to these real estate conferences and expos and seminars and these two day events, they’re trying to sell you a platform, a program, an educational package, that if I tell you the scary shit, that’s going to happen to you, you’re not going to give me 20 to $40,000 for me to teach you. So I think that’s what it is. I think so many people buy into the hype and the emotion of these events and they don’t realize this is hard. This is very hard. Things are not going to go well, sometimes. It’s just going to happen no matter how good you are, how thorough you are in your due diligence, you’re going to find stuff after you purchased. You had no idea what’s coming.

      And I think people get into this now thinking it’s a panacea, it’s a Holy Grail. It’s, rainbows, lollipops, unicorns, and we’re all going to make a lot of money and make everybody happy. Give people great places to live and nothing can go wrong. BS things are going to go wrong. We’ve had people die on property fires, arson. People I know have had entire buildings disappear in hurricane. So that’s my biggest thing right now. I think a lot of people don’t realize what they’re getting themselves into and how hard it’s going to be. It’s a great industry and there’s a lot of money to be made, but there’s a lot of work that goes into it.

      Mark:              Yeah, I agree. What’s happening now is a little bit reminiscent of what I remember in 2008, there were all these alarm bells happening in the economy. All these danger signs yet the thought leaders at the time in the real estate space were still cheerleading for everyone to jump in. Now it’s still a great time to jump in. And I couldn’t figure out why, but there was one woman who was older, maybe in her 70’s. And she had been investing for 40 years in Southern California and ran like a real estate group.

      And she was telling everybody, stop investing, get on the side-lines, shore up your cash. We’re headed for trouble. And I was always grateful for her, but couldn’t figure out why the other ones, nobody else was sounding these alarms. And obviously it’s because all the gurus, the thought leaders, they don’t really have diversified businesses. They do syndications, boot camps, conferences, seminars, coaching, and all of those things depend entirely on investor enthusiasm. So they were very reluctant and it was a conflict of interest for them to be sounding those alarm bells.

      Bruce:           And that’s what I talk about in the book. That’s why I wrote the book because I wanted to be the guy that pulled the curtain back and showed you what really goes on in these syndications. Again, I love syndication. I think they’re a great thing, but please guys, before you step into this, understand with your eyes wide open, you are going to have trials, tribulations, stress, and all kinds of things. So I really think most of these quote, unquote gurus, these educational platforms. I think they’re good people. I know most of them, I think they have a good product and they’re good people, but they’re trying to sell to you. So they’re only for the most part going to accentuate the positive. They might pay lip service to the negative because they have to protect themselves legally. I got to tell you that pass performance is no indication. They have to do that legally but that’s a lot of times about the only thing you’re going to hear.

      And I was tired of seeing that and having people get into this and go, Oh crap. This is not as easy as they made it sound. So it was important for me to write the book, and the book I’m giving you every single step of the way through a syndication, how to find investors, how to talk to them properly, how to make sure you don’t get hung out by doing the wrong thing within the eyes of the SEC. All the people that are going to be on your team, your real estate attorney, your syndication attorney, your bookkeepers, your management company, who you need when you need them and about what you should expect to pay them. And then the entire process of closing a property, the 60 to 75 day, I break that down a week by week project by project. But I’m telling you some scary stories along the way, because I want you to understand that there is a lot that goes into this and shit’s going to go wrong. So if you want to keep doing it after you read the book, fine, go to one of these seminar, sign up. They’re good seminars, but know what you’re getting into.

      Mark:              Yes. It’s still worth doing real estate is absolutely in my opinion, very worth it. But there are headaches. There’s a lot of challenges to it, but you know, it’s worth it in the long run if you’re prepared and I think your book would be invaluable. So I have a thing called multifamily psychotherapy. What’s a trait you possess that has served you best both in real estate and in life.

      Bruce:           I think I have a high degree of EQ Emotional Intelligence. I know for the most part, how to talk to people and give them what they need. And it really comes up in staffing, working with my employees. I know that each person is a human being and an individual. Not everybody’s going to respond to the same teaching method, the same carrot or stick, that kind of thing. So my EQ, I can usually tell by talking to you, are you full of shit? Are you telling me the truth? I love interviewing. I love it. It’s a sport because I can see through most books some people get by on me and you know, it’s okay, it’s going to happen. But my EQ is very, very high.

      But then the second half of that is empathy. Treat people the way you expect to be treated. Somebody has an air conditioner go out. What would you expect to be done for you? If you were that tenant, treat it that way. We have policies and procedures to follow until they’re not follow-able. If you make the right decision by a tenant who was a human being, you’ll never get in trouble. If you didn’t do SOP Standard Operating Procedure, just be able to tell me why you did what you did. And if you always defer to doing the right thing by a human being, you’ll never make a mistake.

      Mark:              I love that second part of the multifamily psychotherapy. Is there a trait you feel that holds you back that you need to work on?

      Bruce:           Absolutely. And I don’t work on it though. I don’t know if you know who Gary Vaynerchuk is? But he’s big on know what you’re good at and doubled, tripled, quadrupled down on it, but realize also what you suck at. Hire somebody else. The problem I have, I can be on stage. I can be in front of lots of people. I can do these podcasts. I’ve been on TV. I’ve been on radio. I thrive. You put me in a room where I don’t know anybody. And I got to work a networking event. I flip out, I’ve never had a panic attack, but I’ve had the closest thing I can imagine to a panic attack. I freeze. I don’t know how to do it.

      I get really anxious and uptight. And I will literally, if there was somebody on the other side of the room with a million dollar check for me, I will still walk out of the door. ‘Cause I freak out. But again, put me on a stage in front of 10,000 people. I’m on fire. That’s my thing. And I’m fully aware of it. So luckily I married a social butterfly. I’ve learned to do like in the Jake and Gino event or the bigger pockets event at the networking parts of those events. I’m like a puppy, dog. I follow her around the room. She starts a conversation. I will interject and start talking. She will then break away, go find the next one. Then I’ll go over there and follow her again. I know my weakness, that’s my weakness. I’ve learned to accept it and work on it. She hates being on stage. So we compliment each other very well.

      Mark:              That’s hilarious. That’s similar to me. My wife is a social butterfly and I am reserved. I don’t know how to break the ice with anybody.

      Bruce:           Those small talk is really hard for me.

      Mark:              If you were to pass on some advice to your younger self, what would it be?

      Bruce:           Get going quicker. I worked in retail for almost 20 years and it’s always people saying, well I should have gone bigger. I should have bought more. No. For me, it’s even more fundamental than that. I have so many friends that work at a job they hate. I’ve had one person actually almost take his own life because he hated his life like dude. So to my 25 year old self don’t work in retail for 18 years, if you hate it, you hate it. It’s scary. Rip the Band-Aid off, cut all those ties. Tony Robbins, burn your boats, get out there, figure out something that you really do like. Life it’s the cheese ball thing. Life is too short to do shit. that sucks. And that’s what I would say. I would push myself to get out there faster.

      Mark:              Awesome. I love it. So are you ready for our question round.

      Bruce:           I’m scared, but yes, I’m ready.

      Mark:              And now our question round. The book you’ve recommended most over the past year.

      Bruce:           Well, three of them, but it’s Killing Sacred Cows by Garrett Gunderson. He pokes holes in money myths. We’ve all been told. Wealth Can’t Wait by David Osborn. And then the third thing would be how Hal Elrod The Miracle Morning read these and it’ll set you up for success. If you follow these principle.

      Mark:              A favorite quote.

      Bruce:           I think it was by Henry Ford, but it’s, “If you always do what you’ve always done, you’ll always get what you always got .”

      Mark:              An online tool or app that brings you the most value.

      Bruce:           The CRM that we use, we use ActiveCampaign and it makes my life so much easier. I try to manage my database of investors. It helps them with communication a lot.

      Mark:              Do you eat food past its expiration date? If it looks fine?

      Bruce:           Oh my God. Yes. I left a mayonnaise cheese and ham sandwich on my desk for like two days. I ate it. I don’t care. Do not care.

      Mark:              I’m sure I’ve eaten expired food in the last 48 hours. If you had to come up with a nickname for me, what would it be?

      Bruce:           Mark ‘Stewie’ Hentemann. We got to get the word Stewie in there. ‘Cause I know kind of your background and I’m a huge Family Guy fan. I love Stewie.

      Mark:              Awesome. Good answer. I knew that would throw people. A bad or cheesy movie you love.

      Bruce:           My favorite movie of all time. It’s a wonderful life.

      Mark:              Your most impressive, totally useless skill.

      Bruce:           If you ever watched Cheers back in the day, Cliff Klavan was considered the walking encyclopedia of useless information, I guess that’s it. I just know shit that nobody should ever know.

      Bruce:           Which decade created the greatest music.

      Mark:              The 70’s and the 2000’s. The 70’s because that’s when I kind of came of age. But I think that 2000’s, like Altro Rock, Godsmack and Disturbed. Oh, I love that stuff.

      Mark:              I love the 70’s too. What was your most awkward year? T.

      Bruce:           They’ve all been awkward. They’ve all been awkward. I don’t know how I got my wife. I didn’t get married ’till I was 45 bad answer, but my whole freaking life.

      Mark:              That’s great. Aside from real estate. One thing you could spend all day talking about.

      Bruce:           My passion is baseball, baseball, baseball, baseball. I want to own a double ”A” or triple “A” baseball team in the next five years.

      Mark:              Your favorite sound in the world.

      Bruce:           It’s a child’s laugh best sound in the world.

      Mark:              Have you ever had a paranormal experience?

      Bruce:           No.

      Mark:              The most amazing place in nature you’ve ever been?

      Bruce:           Its Vegas Count.

      Mark:              That’s a perfect answer. Vegas Count. If you could have the answer to one question, what would it be?

      Bruce:           When will all this shit be over and we can get back to normalcy and what is normalcy even going to be?

      Mark:              The best sandwich you’ve ever had.

      Bruce:           This is a local joint, the Noble Pig, which unfortunately they closed their doors. About a year ago. They had a smoked duck, pastrami sandwich, best sandwich I’d ever eat in my life, but I can no longer get it.

      Mark:              Belly button, innie or outie?

      Bruce:           Innie.

      Mark:              What movie can you quote the most from?

      Bruce:           The one quote I do go to often is “wafer thin mint.” I don’t even know what Monty Python movie it’s from. I just know it’s a Monty Python thing with a big dude eating dinner.

      Mark:              The meaning of Life. Mr Creosote sketch in The Meaning of Life. I love it. What country has the best accent?

      Bruce:           France.

      Mark:              A childhood cartoon character. You had a crush on?

      Bruce:           When I was a young adult like the heavy metal. Remember that? I just remember thinking, what is this? This is unbelievable.

      Mark:              Mine would be someone from Scooby-Doo Daphne. Maybe. Is that her name? What’s one thing on earth. Everyone can agree on.

      Bruce:           We would all like to continue breathing. I think we can all agree on that. We all want to breathe again tomorrow.

      Mark:              When are you happiest?

      Bruce:           So being married late in life and having now an adopted daughter and a stepdaughter I’m a dad now I’ve never been dad my whole life. And it’s just a special thing. I didn’t think I’d ever have that. So what it is for me is any time we are together as a family in the kitchen, cooking a meal in the kitchen together, preparing a meal together.

      Mark:              I love it. And finally, where can listeners reach out to you?

      Bruce:           So the website is apt-guy.com. Now it’s being revamped right now. We’re cleaning it up, making a better version of it. So you might actually be able to find it at spelled out apartmentguy.com. And then social would be Instagram, which would be apt.guy or Facebook, theaptguy.

      Mark:              Well thank you so much, Bruce. It was great to finally meet you. And this is great.

      Bruce:           Same here, man. Thanks so much for having me on and tell Stewie I say hi.

      Mark:              I’ll do that

      Loss To Lease, The Golden Metric?

      Loss To Lease, The Golden Metric?

      by | May 11, 2020 | Blog, Resources

       

      What is loss to lease?

      If you’ve spent as much time around profit/loss statements as us, you’ve likely come across the term “loss to lease” multiple times.

      It can be a rather large deduction, and you may be wondering who is this lease, and why do we keep losing to them? 

      Let’s dive into it.

      Loss to lease is defined as:

      “the difference between the market rate (or gross potential rent) and the actual lease rate for a property or unit.” 

      Think of it like your mom’s favorite kid. The gold standard you’re always trying to live up to.

      Well good for Karen, mom, some of us are happy the way we are!

      ….I may be too close to this issue.

      Let’s use examples instead  

      Say you have a unit renting for $900 per month with a lease coming due.  You let your resident know their rent will be increasing by $27 (or 3%). After some consideration, the resident calls your bluff and moves to terminate their lease.

      But, you (as the skittish operator) decide it’s better to keep a resident in the unit at $900, then incur the cost of a make-ready and vacancy.

      Advantage, resident. They gracefully accept your surrender.

       

      Now, the difference between the market rent of $927, and their actual rent of $900, is your loss to lease. Or, in this case,  $27 per month.

      The larger the difference and the bigger the complex, the more this number expands.

      Our simple formula:

      [(Market Rent – Actual Rent) * (# of units)] * 12months = Annual loss to lease

      $27 x 1 unit x 12 months = $324 per year “loss”.

      $27 x 100 units x 12 months = $32,400

      Like death from a thousand cuts, these small amounts add up fast.  

      This “loss” is just a paper loss. You’re not required to pay anyone the difference. Rather, it’s an indicator of how efficiently a property is operating. The higher the loss to lease, the more money is being left on the table each month. 

      Why should you care?

      At this point, you’re likely wondering how the loss to lease is relevant to your investing. 

      In essence, there are two scenarios where loss to lease plays a key factor.

      1. Acquisition.

      When looking at a property to purchase, you’ll often get presented with the seller’s idea of market rents. Surprisingly, this isn’t always accurate (can’t think of why).

      So, it’s crucial that you conduct your own market research.

      Look at nearby similar communities, compare their rents to your own. 

      Rentometer is a great tool for this, as is Apartments.com, Zillow, Facebook Marketplace, or other ILS systems. Yet nothing beats in-person secret shopping your competition.

      The added bonus is feeling like some watered-down version of James Bond, but there are tangible things that don’t come across in staged property photos. 

      Once you have an idea of where the market rent is, you subtract the property’s current average rent and you now have the loss to lease.

      So easy, a caveman can do it.  In fact, many experts believe they often did. The earliest cave drawings are speculated to be intricate (for the time) loss to lease calculations. Which would make the world’s oldest past time calculating how much money we should be making, and then grumbling about it to our cave-spouses.

      In the present, we use this to show how much upside is currently achievable on a property and to determine if the investment is worth making. 

      Which brings us to our second use for loss to lease…

       

      1. Operations

      It’s time to put up or shut up.

      Put your money where your mouth us.

      Go big or go home.

      You’ve set your goal and now it’s time to chip away at that loss to lease number, whether through renovations, efficiencies of management, or outright bribery (“concessions”).

      Remember this number is not static. As the market rent changes, so does your loss to lease. It’s important to keep your finger on the pulse of the market, that way you make sure your property is always operating at peak performance.

      Your loss to lease number is just as critical during operation as it is when purchasing.

      Wrapping up

      In the real world, some of your units will be near market rent, and others will be very far below.

      It’s also quite likely that getting your lower rents to market levels will require significant capital and labor. 

      To top it off, the higher paying leases will be the bulk of your organic turnover. The more seasoned resident base paying the lowest rates will find it less attractive to move, especially in rent-controlled markets.

      This shouldn’t deter you from the loss to lease calculation. It’s a solid metric, both in acquisitions and operations, but these are factors you need to take into consideration.

      How have you been using the loss-to-lease in your portfolio?

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