Ep 04: Full-Time Passive Cash Flow Investor Jeremy Roll

Ep 04: Full-Time Passive Cash Flow Investor Jeremy Roll

In this week’s episode, Mark is joined by Jeremy Roll, a full-time passive cash flow investor with decades of experience. Jeremy and Mark discuss the possible impact of the coronavirus and the likelihood of the next recession.

What’s the best asset class to be in right now, and how important is timing when it comes to exiting profitably? Listen in and find out!

What You’ll Learn In Today’s Episode:

  • The important thing in real estate is timing.

  • When it comes to stabilized properties, price is absolutely key.

  • Strategies for learning new asset classes.

  • How to build familiarity with investments and begin to spot opportunities.

  • The role of trust when choosing a deal sponsor.

  • Jeremy’s favorite episode of Family Guy.

Ideas Worth Sharing:

“I’m all about being hyper-diversified across cash flow.” – Jeremy Roll

“Start with an asset class you can relate to, that you can understand best.” – Jeremy Roll

“Timing is absolutely critical in real estate.” – Jeremy Roll

Resources In Today’s Episode:

About Jeremy Roll

Jeremy Roll started investing in real estate and businesses in 2002 and left the corporate world in 2007 to become a full-time passive cash flow investor. He is currently an investor in more than 70 opportunities across more than $1 Billion worth of real estate and business assets. As Founder and President of Roll Investment Group, Jeremy manages a group of over 1,000 investors who seek passive/managed cash flowing investments in real estate and businesses. Jeremy is also the co-Founder of For Investors By Investors (FIBI), a non-profit organization that was launched in 2007 with the goal of facilitating networking and learning among real estate investors in a strict no sales pitch environment. FIBI is now the largest group of public real estate investor meetings in California with over 27,000 members. Jeremy has an MBA from The Wharton School, is a licensed California Real Estate Broker (for investing purposes only), and is an Advisor for Realty Mogul, the largest real estate crowdfunding website in the US. Jeremy welcomes e-mails (jroll@rollinvestments.com) to network with or help other investors and to discuss real estate or business investments of any size.

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Transcript

Mark:               So today’s guest left the corporate world in 2007 to become a full time passive investor. He’s founder and president of the Roll Investment Group where he manages over a thousand investors and invested in $500 million worth of deals. He’s also co-founder of for investors by investors, a non-profit organization with the goal of facilitating networking and learning among real estate investors in a strict no sales pitch environment. He’s got an MBA from Wharton, is an advisor to Realty Mogul, the largest real estate crowd funding website. I’d like to welcome Jeremy Roll.

Jeremy:           Hey Mark. Thanks for having me. Really appreciate it.

Mark:               Yeah. Thank you for joining me, Jeremy. We’ve got some interesting times, so maybe we could talk a little bit about that. But mainly I’m interested to hear your story. It’s a privilege to have you on too often. It seems like the real estate podcast space is flooded with pitchmen and self-promoters who don’t have a whole ton of experience or expertise, and you are the opposite of that. There’s someone who’s put in the work, knows his stuff, has been doing this for over a decade and is simply here to provide value and insight. So I really appreciate that.

Jeremy:           Absolutely, and thanks again for having me on. I’m happy to help. My mission, especially over the last few years I’ve gotten, you know, I’ve been investing since 2002. My mission has clearly been to just try to help as much as I can, as many people as I can. So I’m happy to help any way I can. And thanks for having me on. And by the way, for those of you who are listening to this who don’t know Mark well, I don’t want to embarrass Mark, but he’s a writer and has been a very long time writer on what probably could be my most favourite show on TV, which is Family Guy, of all things. So if you have never watched Family Guy and you’re up for some silly comedy, hopefully that’s okay Mark that I say I like that, it is the jokes, the writing is just impeccable, and I’m not just saying that because we’re on with Mark here. So I highly recommend it. My wife and I watch it every weekend. It’s just hilarious. So Mark, thank you for doing that.

Mark:               Oh of course. Thank you for keeping me employed, giving me a career. It’s fun. It’s fun to go to work and be goofy for eight hours a day. But I wanted to get into your story and you’ve done what most people fantasize about doing that. And that is leaving your job, leaving the corporate world to become a full time investor. You know, that’s way easier said than done, and even amongst the people who have pulled it off, you’re a bit of a unicorn because you happen to do it living in possibly the second most expensive city in the United States. And I saw that it is in the top 10 most expensive cities in the world, Los Angeles. And also you started at one of the worst time to try to pull that off back in 2007, so I’m interested to get your story and how you pulled that off.

Jeremy:           Yeah, and Mark, happy to share that. As you mentioned all this, I’m literally shaking my head because you know, my wife’s family lives in Los Angeles. I’m kind of stuck here, so to speak, and it’s not a bad place to be stuck, I’ll give you that. But the key to becoming a full time passive cash flow investor is low overhead and I am doing the exact opposite of low overhead, which is making my life much more challenging and continues to make it more challenging. So anyway, we can get into that another time. But yeah, you make a good point. It’s very difficult to be a full-time passive cash flow investor in a very expensive city and I don’t recommend people try it. It’s not always fun.

                        So my story goes back to 2002 when I was in the corporate world, and at the time I was actually working at Disney headquarters in Burbank here in Los Angeles and the stock market, the dot com crash had just happened, and the previous year I believe, and I was just sick and tired of the stock market for two reasons. One is a little more obvious than the other. So one is the volatility. I’m just kind of a low risk slow and steady guy and to watch the market go up and down 30% a year was just not for me. But I think even more importantly what really bothered me the most was the lack of predictability. So not knowing where my retirement account would be in 10, 20, 30 years, now that just doesn’t seem like a good strategy to me. The lack of predictability and not knowing how I was going to get to that endpoint with some predictability was really, really bothersome. So I started looking at different ways to invest, came across the concept of cash flow and more predictable cash flow and then eventually landed on investing as a passive investor in what are called syndications or basically group opportunities.

                        And so I started to dabble in syndications back at the beginning of 2002 but eventually rotated all my money from stocks and bonds into cash flow. And it wasn’t just syndications. There were other things I was doing as well, but cash flow based. And then by mid-2007 in fact, my goal was not, I didn’t have this master plan to actually get out of the corporate world from the cash flow. I actually wanted the pay check and the cash flow because I just wanted more predictability. I’m building my nest egg on that side of things. But at a last straw moment with a manager of mine at this time who – I was working at Toyota headquarters in Los Angeles in Torrance – and decided to take a risk and leave the corporate world because I did have enough cash flow built up to live off of at that time. And to Mark’s point, I left at a very challenging time.

                        It was mid-2007 and what’s even crazier, Mark, is that my wife, we were pregnant with our first kid. My wife actually is a teacher and she did not go back to work after having our first child in October of that year. But even then I really wasn’t that worried about it because we ended up, I kind of anticipated an economic downturn in about ’08, ’09 at that point and we had enough cash flow built up to live off of. We had a couple of years of run way without any issue. This is all kind of pre-planned. But the bottom line is that I didn’t see it as risky as it sounds at the moment, but that was because of the level of cash flow coverage we have compared to our cost of living. And back then, I wasn’t paying for private school. I lived not in a house, but we were renting a townhouse at the time in Los Angeles and so my overhead was much, much lower back then.

                        So long story short is left the corporate world in mid ’07 and my goal at the time was never to have to go back and still is that today where 13 years later, practically, I’m still out of the corporate world, living off the cash flow. And so my number one goal at this point is to kind of continue to build up my cash flow snowball, I call it so I never have to go back to the corporate world. And that’s my number one focus. And so I’ve been a passive cash flow investor since 2002, full time since 2007, and we’re recording this right now in March of 2020 in very interesting times, deep in the middle of the very unfortunate CoVid-19 Coronavirus.,

Mark:               Yeah. What’s your take on everything that’s happening? Whenever this is published, I’m sure the circumstances will have changed, but we’re coming off of what? A couple of days of bounce upward of the stock market due to the passing of the multi trillion-dollar bailout.

Jeremy:           Yes. The timing is quite interesting that we’re having this podcast right now because every day, the number’s changing. They’re hopefully going to pass that very large, I think $2 trillion bailout either today or tomorrow. The numbers unfortunately are climbing in terms of the known cases in the US for the virus and I’ve been on a lockdown here in Los Angeles as you have Mark for a week or two now. My kids have been out of school for over two weeks and I don’t anticipate that changing for quite a number of weeks or months even. So you know what I’m seeing is that a lot of people right now on the real estate side, so let’s talk about stock market side first cause that’s a little easier. Stock market is down, I think about 20 to 25%. It was down over 30% a couple of days ago. It’s taken a pretty big bounce as the stimulus is coming close to passing here.

                        And on the real estate side, real estate moves much more slowly than stock market, both residential and commercial, and me being mostly on the commercial side, which includes multifamily to me, we’re waiting or I’m waiting as an investor to see what happens in the various properties I’m invested in and everyone seems to be waiting for April 1st, which is when rent is due regardless of whether you’re in multifamily or a self-storage property or mobile home parks or other stuff. And so everyone’s waiting, bracing, waiting to see what the government’s providing as far as stimulus to people and tenants going and small businesses going, waiting to see what programs are in place on the loan side, to see what loans may be able to be payment-deferred or maybe some are current interest only and it’s a constantly changing situation.

                        Here’s a few things I can tell you as an investor that are kind of not going to change I think. Number one is when people ask me what I’m doing today as an investor because I’ve been mostly in the side lines since late 2016 in anticipation of the downturn, and so I’ve been waiting for the downturn to happen. I didn’t want it to be in conjunction with people’s health, but it’s now happening. And so from my perspective, I’m waiting for three things. I’m waiting for what I call price discovery in terms of asset pricing, which I don’t think it’s going to take place until at least 2021. Real estate moves very slowly. We’ll probably take about two years to bottom. And so I’m waiting on some price discovery to see what the price adjustments are going to be likely downward as far as asset prices.

                        I’m waiting on vacancy discovery just to determine per asset class, how are they all going to be impacted, what the vacancy rate is going to look like. And then of course I’m also waiting on rent price discovery, which is if there is an impact on the vacancy side, there probably will be an impact on the rent side. What’s that going to look like? And to me, because I’m not in a rush, it seems safer to wait until after the election, regardless of everything else, just to see the economic potential effects of who gets elected and everything. So there’s so much going on right now that I’m probably going to be on the side lines with the exception of very odd, unique pricing. Like let’s say if somebody is offering 2021 or 2022 pricing, I’m calling it, then I’ll seriously look at it, which would be a major cap rate adjustment from my perspective. Otherwise I got to wait for all the dominoes to fall and everything to unfold and become much more clear.

Mark:               Right. So when you say price discovery, rent discovery and vacancy discovery, that basically means when the dust settles, where these metrics will all be. Is that accurate?

Jeremy:           That’s exactly right, yeah. We won’t discover any of that for some time. Some things will be separate quicker than others, so they vacancy will probably go up fairly quickly, but it’ll take a few months to really find out where it’s gonna land, and rent price discovery will probably take more than a few months to see where that lands. And then asset prices govern. I mean theoretically that’s probably not going to take place till after the elections as far as enough transactions happening and even understanding where the market’s starting from in this downturn and it really takes a couple of years for the market to bottom. So even in 2021 I intend to be very careful and probably only go into deals that I think are kind of better than market pricing at the time, knowing that it’s kind of a slow transition to take place.

Mark:               Right. Yeah, that sounds like a good thing. Yeah, it does take a while for those two to ultimately play out and even the rent discovery, it seems like the rents could go down in reaction to Corona virus, but if that triggers a recession, the recession may add another wave of impact that could affect rents and prices. It seems like there’s a lot of different things at play.

Jeremy:           I couldn’t agree more and I’m kind of taking for granted that we probably started recession last month or this month, this month being March of 2020. We won’t know that until it’s done and we can actually measure it in retrospect. That’s how the recessions work and are measured, but personally I’m just one person’s opinion. I am under the assumption that this whole thing has probably caused a domino effect, due to the unemployment that’s skyrocketing right now. We’re probably in a recession at the moment, but no one could say that for sure.

Mark:               Yeah, I agree. When things seem to be settled, what are you specifically looking for? Are you just looking for stabilization in terms of pricing rents? If they’re moving upward or downward but most likely downward, you’re going to wait to see where they start to plateau?

Jeremy:           That’s right. And you know, I don’t think it’s realistic for anyone to be able to know exactly when the bottom comes in, just in terms of picking the exact bottom. But I have some targets as far as cap rate adjustments, in terms of basis points that I’m targeting myself just to create some safety as far as pricing. I’m a stabilized investor, meaning that I only invest in stuff that’s either stabilized or minor value add, and with that strategy the price is absolutely key because we’re not creating a lot of cushion in the execution of the business plan. So I have to be very, very careful on pricing and I intend to be very, very careful on pricing and that’s going to be my number one focus if I might consider anything, whether it’s this year, next year, even the year after. And so I’m not anticipating we’re going to bottom for probably two years just based on historical cycles, so that means that I’ve gotta be really careful in the next 12 to 24 months and not end up going into an asset that’s still too expensive cause it just takes a while for that to adjust.

Mark:               Yeah. I found that to be a difficult thing to navigate or at least to try to time in the 2008 because I was fortunate to have a good job in income. So I had liquidity and I wanted to get in at opportune at great pricing. You know, it’s the one of the few benefits of going through a recession, but I think I jumped in a little early on a couple things and then I was buying like one thing a year, but I feel like I ultimately started one year too early.

Jeremy:           Yeah, you’re right. It is tricky. And so you know, the way I try to stay out of trouble with that is I have specific cap rate adjusted target, meaning that… and I’m going to give you some examples. I just had a call with somebody earlier today about this. Let’s say that you’re looking at a class C multifamily property in Dallas, and let’s say that that property a year ago was trading at about a five and a half cap and it was stabilized. Okay. What I’m going to be looking for is preferably like a minimum of 150 basis point adjustment in the actual cap rate and preferably 200 or better. I don’t know if 200 or better is going to be realistic, but I’m probably only going to really feel comfortable at 150 basis points or more and I may adjust that. We’ll see what happens in real pricing, but right now that’s what’s going through my head based on previous cycle adjustment.

                        So if something was at a five and a half cap last year or was two months ago, I like to see it be at a seven cap or better and then I’m probably going to be comfortable moving forward. If it drops to six or six and a half cap, that’s going to get me a little bit nervous unless there’s some other reason or a portion of the deal a little bit unique that makes up for it. And again, I’m only discussing stabilized property here and that’s what I invest in. That could be completely different strategy for a major value add or a complete rehab, a tear down and redevelopment. That’s just for the profile that I focus on.

Mark:               Sure. Because you invest in a lot of different asset classes, are you going to shift what assets you target given the different stage of the cycle that we’re approaching?

Jeremy:           Yeah, great question. So the way I work through a cycle is that I don’t necessarily shift the asset classes I’m targeting, but I do monitor the pricing of each asset class. So I’m going to give you just a quick walk through of what I did in this past cycle, assuming it’s now over. So for me, and everyone’s different, but for me, between 2009 and 2013, I invested in anything that made sense within my target asset classes. And then as 2013 I started getting a little skittish on purely stabilized apartment buildings and their pricing because there was a lot of investors piling into apartments because of all the home foreclosures. People need a place to live so it was very popular. So I kind of stopped doing market rate pricing of apartments at the end of 2013, just on my own investing.

I still actually made probably 7 to 12 or 13 apartment investments since then, but they have all been unique. They’ve all been unique situations and pricing. And then same thing happened for me in self-storage. 2015 was the last year I felt comfortable with self-storage cap rates, and I kind of went on the side lines on that asset class. And then 2016 was the last year I felt comfortable on mobile home park cap rates, and then I went on the side lines there, and that was the last bastion of people chasing yields so that was the last one to fall. Since then I’ve only done stuff with unique pricing on any asset class, but so what I do is I have a bunch of asset classes I’m targeting in a cycle and then I kind of drop off each one and continue on the others when they get too expensive with the exception of unique pricing.

                        So for this cycle coming up, keeping in mind that I target predictability in what I’m investing in, and I’m also going into stabilized opportunities, kind of what I call my Tier A target asset classes will likely be apartment, mobile home parks, self-storage and senior living. I think that those four are the ones that I’ve identified just for myself personally that I think are the most predictability amongst all the asset classes, the major asset classes for the next 10 years in terms of predictable cash flow and also where they’ll be predictable demand 5, 10 years from now, or maybe even increasing demand with some of those in 5 or 10 years from now such as senior living.

                        So those are my Tier A. I’m still going to look at Tier B and all kinds of other stuff, but that would be my favourite target for the next cycle. And I’ll go through the cycle the same way. I’ll have a certain target cap rates for each asset class, have a minimum threshold of cap rate that I’m targeting, and when an asset class breaches my minimum on a market rate deal on average in the types of areas I’m looking at, then I’ll go to the side lines with the exception of unique pricing and wait for that cycle to finish.

Mark:               I have a random question for you. You are a cash flow investor. This is another irony about you is you are a cash flow investor and you live on the West side of Los Angeles where there’s no cash flow. Cash flow doesn’t exist, but you live in one of those valuable real estate areas possibly in the country. Is there any part of the cycle, because this is what my attitude is I’m a total value-add B and C class apartment investor, and I always look at those nice properties in these A++ locations on the West side. But I always say to myself, the only time I would ever buy those is at the rock bottom of a recession when you can pick those up cheaply, but still that’s an appreciation play ultimately. Would you ever consider anything like that?

Jeremy:           Yeah, that’s a good question because I agree with the thesis that because of the volatility in this market, which I don’t invest in California in general because of that, and especially not West side LA, but I think if someone is a value add investor, I think there’s a very good argument to be had to do that, as long as you believe that the appreciation is going to come because you’re making a bet on the appreciation. So if you have a good reason to believe in that area that appreciation is going to come, it’s the old like buy low, sell high. If that’s your strategy, then buying low is probably coming up. It’s probably coming up in the next year or two, just based on the way cycles work. So now I personally probably wouldn’t be doing that for myself because I am much more interested in cash flow.

                        I try to stay really adamant in terms of focus on what I’m focused on, which is the cash flow. And you’ve got to keep in mind that I actually live off the cash flow, so every dollar that I don’t put into an asset that’s generating cash flow is kind of a liability for me in that I only have a finite amount of money I can invest and I’m kind of shooting myself in the foot every time I invest in something that doesn’t produce cash flow because in case some of my other cash flow sources dry up, then I don’t have access to that money because it’s typically illiquid that I invest in to really generate more cash flow. So for me it’s all about just getting the cash flow snowball as big as possible, which also means staying out of California in general.

Mark:               I see. So you basically, you’re looking for cash flow and it seems like you have favourite investments or ones that you believe are going to perform the best. Do you kind of step back and design like an allocation? Basically you take your whole investment picture. Do you divide it up between say some will be real estate, some will be… break that down and do multifamily and self-storage and others and then it seems like you invest in a number of alternative investments and if I’m not mistaken, probably you also have stocks and bonds in addition to that. Do you design like what you want your entire investment picture to look like?

Jeremy:           Yeah, good question. So I’m an anomaly in two ways. So I actually have not owned stocks and bonds since 2007. Now I actually just transferred some money back into this Fidelity account that I had that was dormant literally since 2007. I’m surprised it was still there. I may buy a little bit of stock if we go more than 40% down on the market. That’s kind of my minimum that I’ll feel comfortable with. Then I’ll probably buy in, and actually the only purpose of that, Mark honestly is that I personally feel like as I’m waiting to be able to invest in the next year or two, I think it’s a much better bet to have that money sitting in let’s say an ETF, like a S& P 500 ETF to gain what’s likely going to be a bit of a recovery. The stock market tends to recover much more quickly than the real estate for example, and have it sit in that type of account while I’m waiting to deploy it in the next year or two, and benefit from probably a better gain than sitting in a high yield savings account for example. And that would be actually my purpose of using the stock market, but that’s just very short term and not probably what you have in mind.

                        The other anomaly is that I am very heavily weighted into illiquid assets, the majority of which is actually real estate, but not all of it. So I don’t necessarily look to allocate myself amongst like we’ve got a pie and it’s not like 30% stocks, 70% real estate, etcetera. I’m just more about…I’m practically 100% in on cash flow and then I’m trying to divide up my cash flow pie. And if 90% of that happens to be in real estate, as long as I’m heavily diversified amongst the entire pie, I’m comfortable with that. Not everybody will be, and it may not be the smartest thing, I don’t know, but that’s just the way that I am now because my entire life has changed from cash flow, in many really good ways. And so I’m all in on cash flow. And the best way to gain cash flow from me in terms of the easiest way to find opportunities and a little bit more on the lower side has been real estate, because I prefer to be in a harvest than investment than in a business investment on average, just from a risk profile perspective.

                        And I do have a business backed by ATM investments I know Mark is familiar with, and some other stuff for cash flow, but generally I am all about being hyper diversified across cash flow. And I will say I’m in over 70 LLCs right now. In fact, I’ve easily been over a hundred of the past 18 years because I have been in over 30 sales in the last three years. So I take a very hyper-diversified approach to help reduce the risk of the fact that I’m concentrated in one asset much more than most people.

Mark:               Yeah, that’s great. And when you are looking to get into a new asset or a new investment and say you’ve done your research on mobile home parks for example, how do you take your next steps? Is that even how you work it? Do you start by saying I like this, the performance prospects of this one asset class? Now I want to find one specific deal that I want to get into? How does that play out?

Jeremy:           Yeah, good question. So it’s honestly been a long time since I had to dig into new asset class cause at this point I’ve kind of covered most of them. Senior living was the most recent one a few years ago that I had to dig into from scratch, and what I did with that one is actually went to a couple of senior living conferences to learn. I actually went to the extent of… true story. I saw someone on a panel that was going to be speaking at a conference in Florida that I couldn’t go to, and I love this backer. He is a Harvard grad. He’d been in the senior living space for 10 to 20 years. I just reached out to him randomly, was able to schedule a call with him and long story short is I’ve just learned a ton from him. I’ve actually gotten presentations from him that he’s done and learned a ton over the years about the asset class with his couple of decades of experience, and I continue to learn. I continue to look at deals, but for the average person, what I recommend is that, let’s say that someone’s listening to this and are just starting and they don’t know we’ve asked the class to start with. So the first thing I would recommend is start with an asset class that you can relate to, that you can understand better, most easily right off the bat. So for a lot of people that’s apartments and the reason why it’s apartments is because they’ve lived in an apartment or more over time, so they can understand how it works. It’s fairly easy to understand and they can relate to it.

So from there what I recommend they do is, which is what I had done over the years, it’s not just education. So you can actually go online and look up some courses on how apartment investing works, but you can also go through a lot of local meetings, especially in larger cities. Listen to speakers and/ or panellists discuss that asset class. I went to a ton of meetings when I was younger, I mean two to three a week when I was not married and way back when when I was much younger, and you just absorb a lot. But one of the best ways to learn that’s very efficient is to actually do what I call opportunity exposure. So with the advent of crowdfunding now, if you’re an accredited investor, which is basically just a certain net worth or income level that you qualify for, you can actually go onto some of the large crowd funding sites in the US and let’s say you want to learn about multifamily opportunities, in your pyjamas in an hour you can download 10, 20 deals. I’m not even exaggerating. It’s that simple.

                        When I first started, without trying to sound like an old person, I had to go and actually find a field that wasn’t allowed to be publicly marketed and go network to find it. It was very difficult to get the opportunities, to get exposure. Now the opportunity exposure is really easy and very efficient and you can download all 10 of those business plans or 20 and you put them all side by side. You read them all and you start to learn these similarities and differences, how the asset class works, what people tend to focus on, how each operator will look at a market analysis, a rent comp analysis, a sales comp analysis, and even how their business plans differ and once you start reading these opportunities to get opportunity exposure, you learn a ton. And by the way, you learn even much more than I just mentioned, but those are just some examples. So my number one recommendation is to start with an asset class that you can relate to easiest if you have the easiest starting point and then get a lot of opportunity exposure combined with some education and don’t move forward to anything until you’re 100% comfortable, and that could take a long time, but it’s worth the time.

Mark:               Yeah, I love that. That self-education of just getting as many examples of investments as you can and line them up side by side and just compare, and then you start to see trends and you can pick out the anomalies. The ones that are exceptional and do that with LoopNet. Just basically, in LA County at any given time you could go on LoopNet and pull up 10,000 multifamily buildings for sale and just compare them all and see where the exceptional pricing is.

Jeremy:           Exactly.

Mark:               A couple of quick questions because I know you don’t have a ton of time. Just out of curiosity. So what was your first investment? I think you said it might’ve been an apartment building, your first passive investment.

Jeremy:           No. So for me I got lucky cause I had lifelong friends of my family who had been syndicating for already 10, 20 years at that point and had a ton of experience, and so my first investment, I actually don’t remember exactly what it was. It was such a long time ago. It was almost 20 years ago, but it was either an office building or a retail strip centre because that was their focus time. So it was one of the two.

Mark:               And it was somebody that you knew?

Jeremy:           It was actually lifelong friends of my family. So literally a family I knew, with the sons I knew since I was like four or five years old. And so I got very lucky because a, I knew I could trust them in terms of investing with them. B, I knew I can learn a lot by investing with them because they probably spend a lot more time with me helping me to educate myself on that, and so it was just a unique situation and kind of gave me a bit of an advantage starting off.

Mark:               Yeah, that’s great. That’s amazing. That’s really helpful. Having somebody shepherd you through your first deal. Who’s on your team now, or are you mainly solo? I know you’ve got a wide network and you work with a lot of people. Do you have a team, like a core group?

Jeremy:           No, I don’t have any teams specifically. I definitely leverage a lot of teams. So I think what a lot of people misunderstand is that while I don’t have an assistant or anything myself, even though I do this full time, I am constantly making bets on other people and that’s actually what I do as a passive investor. I make bets on other people and I get to leverage those teams, which can be very large. Plus, I get to leverage people, time, credit, experience, expertise and specific asset class, etcetera. So I am highly diversified across a lot of opportunities and a lot of operators, and for each of those operators I’m able to leverage their team and structure. So it’s a very decentralized model in the way that I work, so to speak.

Mark:               I know that you vet operators very carefully, and maybe I’ve heard you say that you sometimes will bet on the operator more than the deal itself. Do you find yourself doing a lot of repeat business once you find a good operator?

Jeremy:           Yes. My favourite scenario is someone who’s very experienced, who I can end up investing with multiple times for many reasons. And so my preference is to invest with someone multiple times, but it’s certainly optional, no requirement. And frankly, you know, if I invest with someone once to try it out and it doesn’t work out well, of course I’m not going to invest with them multiple times. That being said, like the sponsor I started with, I messed with I think over 20 times, 20 times for sure or more. Another sponsor I have in mind who I’ve invested with probably 10,15 times over the years, and so there’s another one I’m thinking of doing. I think I invested with eight or nine times. It’s definitely a nice scenario and it’s not just about that I already know the people and I know who I’m making a bet on, it’s about I’m looking for someone who’s got the similar philosophy to me and there’s one sponsor in particular, actually a couple of them where if they bring me a deal, literally 9 times out of 10, I’m going to end up moving forward because we’re analysing and we’re looking for almost such a similar thing that we will think the same way, we’ll be targeting the same thing and we’re very conservative, and if it’s someone I really want to make a bet on based on their execution and their expertise and if they’re bringing me… it’s almost like somebody who’s bringing me a chocolate frosted doughnut. That’s my favourite doughnut and 9 times out of 10 I’m going to say, yep, I’m going to have that one. One time I’m going to be like, ah, the chocolate isn’t really what I wanted. But if someone’s bringing me a maple frosted doughnut, it’s like okay, it’s a doughnut, but it’s not the right thing. So if the person who is bringing me is on the same page knowing that I want that chocolate frosted donut each time and they’re looking for the same donuts themselves, like they’re buying a case of six and there’s give me one. That’s the thing. That’s why the philosophies that lines up is so, so great when that happens so I can make a bet on someone multiple times. That’s really how it happened.

Mark:               That’s amazing. It seems like it probably takes time to build that level of trust with different operators, but once you get there, life is good. So I know you have limited time, so I want to let you go, but I was going to ask you a couple quick questions. Do you have any advice that you would give investors right now as everyone seems to be panicked and uncertain of what to do?

Jeremy:           Yes. So, what I would say is if you’re trying to figure out should I invest now, should I wait, etcetera, I’m going to give you my perspective and I’m one person’s opinion, of course. They’re going to want to get a lot of opinions and I’m not a financial advisor and investment advisor. I should’ve said at the beginning, so everything, I’m just here on this podcast, I’m just sharing my perspective as an investor, but as a relatively low risk, passive cash flow investor, investing in stabilized opportunities. If somebody asked me what I’m doing now, my answer is literally nothing. I’m waiting and I’m waiting for that discovery of those items that we talked about. And so for me, in fact, I think I’m doing myself as a disservice if I’m actually going to jump on something right now because I’m not going to discover how much vacancy there’s going to be in something in a few months after this whole crisis unravels. I’m not going to discover what rent pricing is going to be at quite yet, and I’m certainly not going to know what price I should be paying because there probably won’t be very few if any transactions that will occur.

                        So what I’m doing personally and what I would tell other people to do is to wait. Wait until after the elections, see who gets elected, what effects they may have on the economy and on real estate. Wait for the discovery of all those items we mentioned before and then in early 2021 then start setting very seriously. In the meantime, if you get a very unique situation or very unique pricing or some other unique reason that would compel you to move forward in something, I wouldn’t tell someone not to. I’m looking at something right now that’s kind of unique that I might do in a few months and not necessarily wait until the end of the year, but generally I would tell people to be very careful right now, because in many ways if you go in right now, you can both be still be paying peak pricing if it hasn’t adjusted enough, and you can also be paying a multiple of income in the stuff that I invest in and you could be paying a multiple of income where the income isn’t there to the same extent, both because of increased vacancy and reduced rent in just two or three months from now, so you’d be doing yourself a complete disservice. So just be very careful right now. Again, we’re recording this in March of 2020

Mark:               Yeah, I agree 100%. What is the one practice or discipline that you have that you think reaps the most benefit? It seems like you have restraint and conservativism, but yeah, I want your opinion on that.

Jeremy:           I think that one of the things that helps me the most aside from just trying to be really well organized and kind of maximize the efficiency of my day is I’m able to think really high level and see the entire cycle as a picture. And so the way I have painted it for hopefully the listeners earlier was I have the whole cycle long strategy, which could be 5 years, 7 years, 10 years or whatever it is, and I try to execute on it and I’m very numbers focused and I try not to be emotional about it. So I love mobile home parks for many reasons. As an investor, I think they’re going to be great in the long term. Does it mean that I should invest in them in 2017, 18, and 19? No, unless there was a unique situation. Was it frustrating? Highly. Were the last three years ultimately frustrating for me as I sat around, couldn’t find hardly anything to invest in, and were in a bunch of sales to lock in the right pricing and my cash flow was going down every year? Crazy frustrating. But the discipline of sticking to your numbers, not getting off the ball of having a minimum threshold of cap rate for example, or multiple that you’re willing to go into. I think the discipline of being willing to sit around and wait and continue to wait even today, knowing that next year will probably be better, is absolutely key. Because one of the most important things in real estate is timing and I like to give people an example.

                        Here in LA, I could have invested in the best building on the best block of Rodeo Drive, very high end area with the best tenant in 2007 with the best operator to make a bet on, and in 2010 I could’ve been foreclosed on and had nothing. And in 2010 I could have invested in the worst building in the worst location with the worst operator and conceivably made big profits in 2017 when that sold. And so timing is absolutely critical in real estate. And right now I think we’re about to have one of the best times to potentially go in, but we’re not quite there yet. Regardless, I think it’s so critical to understand your own opinion and paint your own picture of what the timing looks like at a particular time and fix your guns with it. I think that’s really, really important if you’re going to try to be very long-term successful.

Mark:               Yeah, I love that. Yeah, I agree. Final questions because I know you’re in a hurry. Do you have a favourite Family Guy episode?

Jeremy:           Oh my God, you and I talk about Family Guy a lot. Favourite one? I’ve seen so many. Even just recently I’ve seen so many. There was one recently that I thought was really good and you and I talked about this and I think you have been involved in this. There was like a throwback to the…I think they went in a time machine and went back into the ’80s or ’90s and the references, the ’80s or ’90s.

Mark:               Yeah, I wrote that.

Jeremy:           There you go. So you wrote it on top of it, all the references, the constant references for someone – I’m in my mid 40s – were just so fantastic and just spot on. And you guys do a lot of flashbacks, which are also hilarious in their own right, but the entire episode was just one big flashback and boy, was that funny. Honestly, for those who’ve never watched these episodes, they’re very extreme comedy. There’s a lot of crude comedy, but any episode is good and I really don’t say that lightly.

Mark:               Well wow, you’re a good promoter for the show. And like I said before, keep me employed. Finally, how can listeners reach out to you?

Jeremy:           Absolutely. So anyone out there who, if there’s any way I can help whether you’re new or experienced, you want to network. If you’re an operator, you have opportunities. If you’re an investor group looking for investors or looking to just trade notes on that, I’m happy to talk to anybody and help any way that I can. So don’t hesitate to reach out. My email is the best way to reach me. So that’s Jroll@rollinvestments.com is definitely the best way to reach me.

Mark:               Well, thank you Jeremy so much for doing this specifically and especially because this is the second time we did this because I forgot to hit the record button.

Jeremy:           Yeah, Mark, thanks for having me on. I really hope this episode is helpful for people out there and be safe and keep healthy right now. That’s the most important thing with the timing we’re talking about here. It should be quite interesting to see what happens in the next few months and hopefully everyone listening will be okay in the coming months.

Mark:               Yes, agreed. Thanks Jeremy.

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Ep 03: From Biologist to Full-Time Real Estate Investor with Lee Ripma

Ep 03: From Biologist to Full-Time Real Estate Investor with Lee Ripma

Lee Ripma is a former consulting biologist who recently walked away from her high-salary job to focus on real estate investing full-time. So how was she able to quit her job after just 2.5 years in the real estate world? Today Lee answers that question and more.

Listen in as she delves into her best advice for aspiring investors and explains the biggest factors you need to be looking at when picking your market. If you have been thinking about quitting your job and starting out in real estate, this is the episode for you.

What You’ll Learn In Today’s Episode:

  • The biggest factors in picking your market.

  • Why people and relationships are so crucial in business.

  • How Lee got into real estate investing.

  • What finally pushed her to quit her day job.

  • Why she doesn’t care about cash flow anymore.

  • The importance of freedom in your career.

Ideas Worth Sharing:

“I think that getting started is more important than researching the very best market.” – Lee Ripma

“Freedom is my big driving value.” – Lee Ripma

“People and relationships really matter in business, and they really matter in real estate.” – Lee Ripma

Resources In Today’s Episode:

Enjoy the show? Use the Links Below to Subscribe:

 Transcript

 

Mark Hentemann:              Hi. My name is Mark Hentemann and I’m a real estate investor. I started out in the early 2000s buying multi-family in Los Angeles with my first script payments as a writer on a new show called Family Guy. I was nervous about my prospects of pursuing a job in the entertainment business, and was looking for some kind of financial security. I found that in real estate. This is a weird thing for me to be doing, but real estate is a passion of mine. It’s been an avid side hustle for over 20 years. I thought there might be a space in the podcast universe for a show about investing in or from major expensive cities – Los Angeles, San Francisco, Seattle, New York, Denver, Austin – and for me it’s also a chance to have conversations with some of the smartest people I know in the investment space and I don’t get out much, so it’s also a chance to meet some of my heroes. I hope you’re able to get something out of this too. So with that, let’s jump in and get started.

Mark:              Number one, how do you not be an awkward podcast host?

Lee Ripma:                 Well, maybe don’t ask questions like that.

Mark:              Good. I have to get this down. You got a pen?

Lee:                 I’m in a completely different location.

Mark:              Ah, yeah. Right. Good point. Okay, a bit of fun. Welcome Lee. Thanks for being on the show. So you were formerly a successful, highly paid environmental biologist who recently walked away from that career to pursue real estate investing. How did that happen?

Lee:                 Well, I started building up my real estate investments on the side and once I was educated to the point that I knew how to kind of do these investments, I had some passive income. I understood real estate. I quit my day job and went into real estate full time.

Mark:              So you started investing on the side while you were a biologist?

Lee:                 I started in 2017 and so it was about two and a half years before I left.

Mark:              What was the catalyst that finally made you quit?

Lee:                 I had been growing less and less interested in my day job, I guess. It felt just like a zero sum game to me. My heart wasn’t really in it anymore and so when I knew that I had this deal and I had some passive income, I just thought now’s the time. So I worked remotely, so I live in LA, but my job was still in San Diego and so I was driving, I was thinking about it and I thought, I’m going to quit in one month. I’m going down for this meeting and I’m going to quit that day. And as I was driving down, I was getting cold feet about doing it, but I ended up doing it, the thing that I had sort of set out to do.

Mark:              It’s a big step. Hard to pull the trigger.

Lee:                 Yeah, it is. You know, it’s, it’s a lot of security. I had a pretty nice salary. I got health insurance, I got a 401k match, all the benefits of being an employee. Of course there’s a lot of downsides to being an employee as well, like limited income.

Mark:              And trading your life for your pay check. People buy houses because that’s what they’re told to do, but then you kind of collect all these obligations. A house is a big obligation. A nice car is a big obligation and you just become trapped somewhere in middle age where you have all of these things you’re responsible for and accountable for and it just kind of can stuck away at your life.

Lee:                 And that’s really what I didn’t want. I really enjoy doing things outdoors. I love backpacking, I love skiing and I’ve always worked to not tie myself down to responsibilities.

Mark:              Freedom.

Lee:                 Freedom. Freedom is like my big driving value, and so the house thing just didn’t make any sense to me. And then I found bigger pockets. And through that I learned how to value commercial real estate.

Mark:              So that caused the shift.

Lee:                 Yeah. And so commercial real estate made sense to me. Single family homes never made sense to me because they were just valued on your neighbour can sell his house for this much so your house is worth this much, and that didn’t make sense to me.

Mark:              Completely emotional and subject to the psychology of the market.

Lee:                 Totally, and that was why I never did it. I just would sit there thinking this has no intrinsic value. I don’t understand why I should do it. But commercial real estate has intrinsic value because it produces income and commercial real estate made sense to me.

Mark:              And so what would your next step?

Lee:                 I learned enough about commercial real estate. I was looking at California and everything seemed to have negative cash flow. I didn’t understand value add really. I didn’t understand California investing at the time. And so I was really sold on cash flow because I’d been listening to bigger pockets and they always talk about cash flow. So I wanted a cash flowing market and San Diego isn’t a cash flowing market, so I decided to go out of state and that’s when I picked Kansas City.

Mark:              I think that’s something that a lot of investors wrestle with, especially in California, in these big cities. Do you do it locally in your backyard and deal with the high cost of the city’s real estate obviously, or do you go for cash flow in some of these more attractive regions outside of LA, outside of California?

Lee:                 And at the beginning I thought, okay, everyone on Bigger Pockets is talking about cash flow. I got to get cash flow. Now with hindsight, I don’t really care that much about cash flow, but at the time I did and so here’s what I did, Mark. Keep in mind that I am a research scientist. I Googled top 10 cash flowing markets in the United States and I went down the list and it was Omaha, Nebraska, and somewhere in South Dakota. It was all these Midwest markets. I did not know anyone in any of them, and the only one that I had ever been to was Kansas City and I had been there in college and I was going to partner with a friend of mine from San Diego. He was a Kansas City Chiefs fan and there was a direct flight to Kansas City. And so I just thought, okay, how about Kansas City? And I got on a plane and I went to Kansas City and I did a lot of research while I was there. And I essentially ended up getting my first deal under contract then. It was February, 2017

Mark:              How did you find that property and how did you find management? Cause that would scare me. You and I have talked about our various stories. I ended up investing in LA mostly because I didn’t know any better when I got started and I had a great fear of owning something far away that I couldn’t see and couldn’t get to.

Lee:                 Yeah, totally. And I’ve got some management nightmare stories, honestly. My first deal, it was a complete nightmare. Complete nightmare.

Mark:              In my experience, I’ve had a lot of properties for a long time and sometimes I’ve had to step away from it partially because I’m running a show or in production, and I just have to leave it up to the property management company and I go come back to it and I see that things have slid so significantly. But fortunately in LA with my properties, I often come back and think, Oh my God, what a mess. But then I sell it and you get like, oh yes, this was more of an appreciation play. I kind of make up for it, but still wrestling with property management.

Lee:                 It’s tough.

Mark:              The other thing that I think is interesting about our comparable stories is that you grew up in San Diego and live in LA, these major coastal 24 hour cities and you chose to invest in the Midwest, and I grew up in the Midwest and I’m in LA and I have invested in LA and I went 18 years of straight buying multi-family in LA, mainly because I didn’t know what I was doing. You know you were saying you didn’t know much about the Midwest when you got started, but I didn’t know much about anything. I didn’t know anything about LA when I got started. So we both started by default in these locations.

Lee:                 It’s kind of funny, right? I didn’t know anything about the Midwest. When I went down that list, I’d never been to any of the places on it and I’ve never lived in an area where real estate wasn’t really, really strong. I actually grew up in the Bay area and I lived in San Diego for almost 10 years before moving to LA. I’ve always lived in major coastal California cities. And so a real estate market that’s terrible, where the population is declining and properties are being boarded up, I’ve never seen that.

Mark:              And I grew up in Ohio and I remember driving to high school, passing these big buildings that were just abandoned. I don’t know. I don’t know that I was aware of that consciously when I started investing. I think mostly I got into investing in LA because I had a little money and a broker kind of took me under her and found me a duplex and pushed me into it. You know, in retrospect, thankfully she steered me right. I didn’t know anything, so I just kept doing that in LA or trying to.

Lee:                 Yeah, absolutely. And I think we’ve both ended in the same place, which is now I love LA and I love real estate and LA and I’m doing development in LA now and I think the returns are amazing and I’ll still invest in Kansas City. I’ll still build that portfolio. But I’ve definitely now understanding the drivers of return on investment and understanding the different markets and strong markets versus cash flow markets and all these different things. I do really like LA now. I think that people focus way too much on the larger area, the MSA and saying, oh Cleveland or Oh Kansas City, when really what matters is your sub market and there is so many sub markets within Kansas City, within LA. There are some markets in Kansas City that are horrible. I would never invest in them, and there are some markets that are amazing and I would, and so you do need to look at the MSA and you need to look at the jobs and population growth. That is important. So I would say those are the two biggest factors, population growth, jobs and then another one, how much supply is there? If people are just building and building and building, then you’re going to have this oversupply.

Mark:              Let’s go a little deeper on picking your market, whether it’s a major market or a tertiary market, whether it’s a coastal city or the Midwest. What are the factors that you want to look at? Because I think a lot of investors in high-priced cities are wrestling with this.

Lee:                 We talked about how much research I did Googling the top 10 cash flowing markets in the country. I think what I thought was it matters more that I get started and are people making money in Oklahoma? Are they making money in LA? Are they making money in San Diego? Are they making money in Kansas City? Yeah. People are making money in real estate in most markets in the United States. And so what I really wanted was a market where I knew it was strong enough and I could learn all these principles and that’s what I did. I think that getting started is more important than researching the very best market. I think there’s really just the very best market for you. For Kansas City, I was able to pick it for some logistical reasons. There was a direct flight there and I think that’s a good reason to pick it.

Mark:              A huge reason. I think that’s one of the key factors is can you get there easily. You never know. You may be able to just watch it from afar, but if something goes down, you got to get there and get there quickly.

Lee:                 And the flip side of that is, it’s not like I know how to fix anything in my property. Like if my plumbing breaks and there’s water flooding in, I don’t know what to do. So having trusted people in the market you’re investing in is huge. And so having either making those relationships or maybe the relationships that you already have and having people who can handle that because you know, I have never had a situation where I have said, I have to go to Kansas City. I have to go right now and I’ve flown out there because something was going wrong with my properties. It’s never happened.

Mark:              You’ve always had somebody in that market as your eyes and ears.

Lee:                 Yeah, and I think if you don’t, you’ve got a bigger problem than you’re going to have to get on a plane.

Mark:              I’m envious of these people that they have a lifelong friend who’s in real estate in a faraway market, and that’s the person basically that allows them to invest in that market.

Lee:                 Absolutely, and you know, I didn’t have that in Kansas City and now I do. So you can get it.

Mark:              So what do you think the biggest misperception or myth that’s perpetuated in real estate investing is nowadays?

Lee:                 One of the big ones is that because we live in a digital world, people and relationships don’t matter, and I think there couldn’t be anything further from the truth. You know, people bring you deals, people make the world go around and relationships really, really matter. You’ve got to have people who you treat well and who you compensate well for them helping you, and those are the people who are going to pick up the phone when you’ve got a plumbing disaster at 3:00 AM in a city that’s 3,000 miles from where you live. And so people and relationships really, really matter in business and they really matter in real estate. You cannot do any of this stuff alone. It’s very much a team and you need a team in place to be able to handle it. So I think that is a huge myth is that people don’t matter and that people will try to cut someone’s commission or they’ll try to talk down a contractor and it’s okay to negotiate with people, but you don’t want to make it so they’re making nothing and you’re asking them to just cut their profits to the bone.

Mark:              Could you name who are your most key partners and key relationships that have benefited you the most?

Lee:                 In Kansas City, I actually structure my deals with local partners and so I don’t use management companies because of all the problems. I take on a local partner and I usually bring the deal and I bring more of the money but not all of it, and they bring the management of the rehab and the oversight of all of that. So I’ve got a couple partners who I really like working with in Kansas City who are awesome, and I’ve got a really great realtor in Kansas City who is an investor herself, and the local partners and then the local realtor/investor.

Mark:              There’s no more stress that I’ve encountered in real estate investing than a lender that you don’t believe is going to perform. You know, you’re approaching your closing date and the bank is suddenly having problems.

Lee:                 Yeah, that is absolutely. That is the absolute worst, and that is why most real estate deals fall apart is over lending.

Mark:              It’s surprising, but a lot of lenders I work with, they don’t really feel obligated to you. Even though you’ve signed a letter of intent, paid them money, they’re taking their sweet old time to thoroughly do their due diligence process, whether it meets your escrow timeline or not.

Lee:                 We need these other insurance requirements and you think like, I would have gotten you whatever you wanted, but now you’re doing it at the 11th hour and I don’t have time to do it. You know, and it’s just horrible. And then you’re having to extend and you’re having to leverage your own personal relationships. No, no, no. I promise I can close. Let me give you more money or let me put down more. You’re scrambling and it’s needless, because if they had just told you upfront, this is everything we need, you would have gotten it to them and it’s absolutely unnecessary.

Mark:              Totally unnecessary headache. And not only that, but you’ve got your deposit at stake. I recently closed on a building in Austin and we had $400,000 as a deposit and once you hit your closing date and you’re not closing because your lender hasn’t performed, the seller could cancel escrow and keep your $400,000 or however much you put down. Next question is, when is our next recession?

Lee:                 You know, I wish I knew. I think the thing about real estate is that it’s cyclical. Everyone knows that it’s cyclical, but we don’t know when the cycles are coming and something has to happen for there to be a recession. And that’s the thing is that we don’t know is when is that coming? We know it will come, but it could be years before it does, or it could happen fairly quickly. I think the important thing is always thinking that it is cyclical so it is coming and never thinking like that won’t happen. That won’t happen to me. That won’t happen for a couple of years. That’s when you could really get into trouble and so just making sure whatever investments you have, you’re going to be able to finish them no matter what the economy’s doing and you’re going to be able to hold them and not lose them, no matter what the economy’s doing. You cannot control the market. You cannot control the greater economy, but you can control everything about your investment and that’s what’s great about real estate is how much you control you have. Making sure that you can weather a downturn always is so important.

Mark:              That’s a great approach. Having reserve for all of your buildings because you’d be surprised at how your cash flow can go down and when your value goes down, sometimes the lenders have a requirement that you maintain a LTV of 75% max. They’ll go to you as a owner and say, your building has lost value. We need you to make up the difference to get your equity to where it needs to be to meet our LTV standards.

Lee:                 Absolutely.

Mark:              I remember in 2005, 2006 there was a prevailing notion because everyone had expected to experience a recession probably in like 2002 to 2003 started there. People saying, Oh, it’s over. It’s over. It’s similar to what’s happening now, but it kept going on and then all of a sudden there was all this media saying, oh, we’re in a new era. Alan Greenspan, our Fed Chairman is so brilliant that he’s navigated us into a place where we will no longer have these cycles, that we won’t go through recessions and we’re entering a new economic era. And then of course, 2008 comes and everything collapses.

Lee:                 If you look at the historical data, yeah, it’s coming. It’s always coming.

Mark:              Markets aren’t logical. So often, like you said, it’s going to require a trigger. But once that trigger comes, all of the market confidence turns to fear and it could rapidly decline.

Lee:                 And the funny thing is people are always saying, oh man, I wish there was a recession so that I could buy a ton. If you’re saying, oh there’s a dip, I’m going to buy. The property values are going to go back up. So there has to be something that would truly cause you to not want to buy and for everyone to not want to buy it. That would be when we were in a recession.

Mark:              Blood in the streets. I experienced this in 2008 people that were very smartly sitting on the side-lines in 2006 waiting for a correction because they couldn’t wait to take advantage of the discounted prices. I was one of them. Prices dropped by 15% in early 2008 and a lot of investors, me included, jumped in and I bought a 14-unit building and Lehman Brothers crashed right after we removed contingencies and then the whole thing collapsed. So that 15% discount that I thought I was taking advantage of was the beginning of a waterfall that went into one of the deepest recessions we’ve experienced. If you’re in the game for a long time, you’re going to be going through a few of these and like the things that you say, the value add, buying with the downturn in mind. You’re buying a building, you plan to hold it for five years or more, you’ll go through a recession and hopefully it won’t be an issue.

Lee:                 Yeah, and I’ve got just quickly, I’ve got this friend who always like, Oh, I’m just waiting for prices to go down and then I’m going to jump in and there’s going to be so many deals. He’s been saying that since literally like, I don’t know, the end of 2015 maybe, and he’s still never bought anything.

Mark:              There’s really no easy way to deal with it. I guess, just keep investing. It’s like dollar cost averaging, keep investing into investments that will be resilient if and when the recession comes.

Lee:                 Exactly. Yeah.

Mark:              So what to you is investment kryptonite? The biggest thing that kills an investment?

Lee:                 Well, there’s the obvious one that sellers can have unrealistic ideas about what they can sell a building for. This is happening a lot right now where people want way too much for their buildings. So that’s kind of the obvious one. But the thing that kills a lot of deals that I’ve seen is actually people. This comes back to relationships and people matter. And this just happened to me the other day where I submitted an offer for … this is for a development deal parcel. And the agent called me up and he was just awful. He was insulting me and all this stuff and I’m like, What? What’s happening? I’m just trying to buy this building. And I had submitted a full price cash offer and then I was like, yeah, cool. Never mind. I just bailed because I didn’t want to deal with him. Life is short and there’s other properties that will completely work. And so it’s funny because I had submitted a full price cash offer and he called me up. He had some aggressive counter or something. I was like, never mind. And then I saw that he had put it back on the market. It’s still sitting on the market. And he could have sold it to me, but I won’t buy it anymore.

Mark:              Arrogant!

Lee:                 And so I think that people really do tank deals. Agents doing things that are just foolish that don’t serve their clients. That’s a perfect example, him getting really aggressive when he had a perfectly good cash buyer. I made no sense. And so he’s doing his client a major disservice. So I think that people kill deals a lot. But then of course high prices are often why you can’t buy a deal or unrealistic expectations from a seller is why you can’t buy.

Mark:              So you and I have known each other for a while and I have always thought of you is you’re a great combination of analytical research based scientist and also you’re incredibly proactive. As a project manager, you were just on fire all the time. You got stuff done. So you’re both very capable of taking action but also very good at the analysis. What steps have you taken as you grew as an investor that allowed you to become great at what you do?

Lee:                 That’s nice of you to say. I have a very high action bias, and sometimes if you ever hear people talk about disc assessments, and if you look at that, I am a very, very – I’m like an off the charts D, which essentially means that I’m just really driven by action and that’s kind of what we were talking about the markets and I say, well you just need to pick one and you just need to go for it and then you can always pivot later and I’m big on that. You know, taking an action that isn’t going to bankrupt you and just learning through doing and you’ll refine as you go. And as long as you’re not doing something that is going to bankrupt you, land you in jail or anything like that, then what is your real downside? Well, you maybe waste some time, you waste some energy, but you will have learned so much through taking that action. And so I’m always really big on that. You know, you want something? It’s time to go get it. You’ve got this deal under contract? Great. It’s time to go close it. I’m not afraid to work hard and I’m not afraid to research and learn the things that I don’t know. And when I first started, there was so many things that I didn’t know and I didn’t understand, but I never would have been able to learn them without going through the process.

Mark:              Do you have any hilarious failure stories and what did you learn from those?

Lee:                 My first deal was honestly a complete nightmare. I bought, it was a four-plex and a duplex and I bought them at the same time and they were being sold by a distressed seller and I had only known about one of them. I only knew about the four-plex, but then I had done some research and realized that the investor owned a bunch of stuff on that same street and he was basically going underwater on all of it. He had overpaid for it originally. He was getting divorced and he was not performing on his note. And so the commercial loan that he had on everything was being called, so it was like the perfect storm of distressed seller. And so I made him a cash offer on this four-plex and this duplex at the same time. And I thought that I was really ahead of the game because I had identified this broker and the broker did property management and he also did rehab. So I was like, Oh, this is going to be great. I was like, okay guy, go over there, give me a quote to do all this stuff. And he had given me a quote for all the work and I was like, Oh, this is great. I know my rehab budget and I can really plan for this and it’s going to be perfect. They were also going to do my property management.

                        Well, closed and my rehab budgets were so off. This guy was a total …he did not know what he was doing. So my underestimating those rehab costs, I was sending the guy checks and he was uploading pictures and kind of had dropped off. So it was like, you know what? I told my partner, you know what? I’m just gonna fly to Kansas City. I’m just going to see what that guy is doing over there.

Mark:              You’re in LA at the time?

Lee:                 I was in LA at the time and so I flew out there and I was like, Hey guy, meet me at the property at seven in the morning or whatever. He’s an hour late, and then it just snowballs from there. I didn’t know anything. When I started, I didn’t know anything about construction. So I get there and he’s doing all this work and he’s just doing a terrible job. I don’t know anything about construction, but I know about project management and I know what poor workmanship looks like, and both of those things were just awful. So I remember I called my partner and I said, we’re going to have to fire this guy and we did and got someone else in there who’s a great contractor. But my rehab was maybe $70,000 over what I had budgeted. I mean, it was just massive.

Mark:              How much had you budgeted for?

Lee:                 And again, I thought that I had a quote from the guy who was going to do all the work, and so I think it was maybe 50,000 for the four-plex, just for the four-plex. I think my budget was maybe around 50 or 55 and this was a complete rehab by the way. And so if I had known anything, I would have known, Hey, that’s a red flag. You can’t do all that work for that money. But I didn’t so I ended up…my budget was around $120,000 in the end. A lot of people I think would have just quit. They would have just sold it in the middle of the rehab, but I have a lot of tenacity, I guess and I have a lot of belief in my own ability. I might go way over budget and these things might happen, but in the end I believe that I will be able to prevail though. And so it went way over budget. It went way over time. It was a really, really long process and rehabs are like that. Big major rehabs, they almost always go over budget and they go over time, and if you’re not prepared to weather that, you can get into a lot of trouble. So if you’re not financially prepared to weather that, it can be tough.

Mark:              Yeah. It could go over cost, over budget, over time even when you have a good contractor. It amplifies it when you hire a flake and a lot of people have good talk. They can talk the game, but then when you’re far away trusting them, who knows what they’re doing?

Lee:                 Totally, yeah. And I think investors play into this where they want a great contractor but they don’t want to be a great client. So if you want a great contractor, be a great client. You need to treat people well. You need to make sure that they are actually making money. You cannot ask them to work for no profit, because if they’re working for no profit, they’re going to start cutting corners. They are going to put your job last, all this stuff. You need to make sure that the people who are working for you can feed their families and are making enough money and then you’ve got to pay them right away and you’ve got to have a really detailed scope of work. You’ve got to be really clear. There’s all these things. So if you are a good client, you can get a good contractor. And I think people don’t understand that relationship. They suck and they expect this other person to be great.

Mark:              So you may have covered this, but I have this question, multifamily psychology. Which trait do you possess that you think has served you the best, and which traits do you think you possess that still holds you back?

Lee:                 We kind of talked about me really have this big action bias. I think having an action bias is really helpful in this industry. But I think building relationships is probably the thing that I’m the best at it. You’ve got to build these long term, trusting relationships and leverage other people, because I couldn’t even do this work myself if I wanted. I can’t even put in a ceiling fan. I can’t hang dry wall. So I’ve got to have people who are doing those things and having those great long term relationships and being able to leverage those relationships and get other people to work for you is what’s going to allow you to scale. I had to go to Kansas City and get really involved locally and make friends and relationships locally and that was huge. That was the key to my success. By nature, I am a collaborator and so I am a really bad property manager and I always put a third party property manager in between me and the tenants, because they’ll say, I can’t pay rent until the 15th. You can’t collaborate with your tenants to get their rents paid. But by nature, that’s what I do. So I’m like, Oh, that’s great. We’ll take some now, take some later. Oh sure, whatever. I even had a tenant who was like, you’re way too nice to be a property manager.

Mark:              He told you this?

Lee:                 The tenant told me that, so I know that about myself and I don’t do it.

Mark:              Create a buffer between you and those kinds of situations

Lee:                 So I think knowing yourself and knowing what you’re good at, which parts you can do and which parts you need to be tasking out.

Mark:              Know your weaknesses and outsource them if you can.

Lee:                 Absolutely.

Mark:              Well, this is great. How can listeners reach out to you?

Lee:                 So I’ve got my own website called Redhair Holdings and then I also work for a company called Square One Residential, and that’s where I do the development work in LA. So both Redhair Holdings and Square One Residential, and I’m also really active on Bigger Pockets.

Mark:              Well thank you so much for being one of my very first guests.

Lee:                 It was fun. Thanks Mark.

Mark:              You have been very accommodating to me as a fumbling host.

Lee:                 You’re getting there.

Mark:              I’m getting there. I’ll work on it.

Lee:                 It was really fun. I appreciate the opportunity, Mark.

 

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East Riverside SubmarketLocated just minutes from the Austin Central Business District, Oracle's new campus, and the...

The Biggest Misconception Around Real Estate with Nate Adams

The Biggest Misconception Around Real Estate with Nate Adams

Nate Adams is the president of Chassy Media, a production company that specializes in feature films and premium documentaries. He has also gotten into the real estate field, and he joins the show to discuss his journey and the similarities between being in media and real estate.

Listen in as he shares how to go about negotiating with banks the right way, as well as the importance of staying focused on what you want. You’ll learn the biggest misconception around real estate, how to determine if people are serious about their interest in you, and what it takes to become successful.

What You’ll Learn In Today’s Episode:

  • The biggest misconception with real estate.

  • How Nate got into the field.

  • How he negotiated with the bank the right way.

  • The best way to determine if people are serious about their interest in you.

  • Similarities between being in media and real estate.

Ideas Worth Sharing:

“Always go to the local banks and make a friend.” – Nate Adams

“If you work very, very hard, and you learn to out-work people, then you become successful.” – Nate Adams

“Are people willing to write a check?” – Nate Adams

Resources In Today’s Episode:

Enjoy the show? Use the Links Below to Subscribe:

Transcript

 

Mark:              Hi. My name is Mark Henteman and I’m a real estate investor. I started out in the early 2000s buying multi-family in Los Angeles with my first script payments as a writer on a new show called Family Guy. I was nervous about my prospects of pursuing a job in the entertainment business, and was looking for some kind of financial security. I found that in real estate. This is a weird thing for me to be doing, but real estate is a passion of mine. It’s been an avid side hustle for over 20 years. I thought there might be a space in the podcast universe for a show about investing in or from major expensive cities – Los Angeles, San Francisco, Seattle, New York, Denver, Austin – and for me it’s also a chance to have conversations with some of the smartest people I know in the investment space and I don’t get out much, so it’s also a chance to meet some of my heroes. I hope you’re able to get something out of this too. So with that, let’s jump in and get started.

                        Nate Adams. Nate is an award winning director and producer, president of Chassis Media, which he runs with Adam Corolla. Nate was born and raised in Montana, was a three-time high school state wrestling champion and will somehow be able to work that into any conversation, and he also likes Metallica and working with great people. We’d like to welcome Nate Adams.

Nate:               Thanks Mark.

Mark:              I didn’t realize you were a three-time state champion. That’s a big deal.

Nate:               You know, I started wrestling when I was five years old and as for me, the only way I knew I was going to get out of this small town in Montana that I grew up in. It got me a college scholarship. It’s a sport that taught me the fundamentals of how to work hard also.

Mark:              You and I have had coffee a bunch of times and I know you’ve dropped that you were a wrestler, but I didn’t know how accomplished you were. That’s impressive.

Nate:               I’m surprised because like I said, I usually can work that into any conversation.

Mark:              And I didn’t know you liked Metallica enough to put it in your bio.

Nate:               Oh yeah, huge fan.

Mark:              I know you just did that documentary about corn. I kind of got a sense that you were into metal.

Nate:               I do like that kind of music for some reason. Strangely enough, it actually calms me down. It really does.

Mark:              I have a story. When I was doing Bordertown, that show, I had this weird call one morning from the head of 20th Century Fox casting. I think he was the casting guy and he said, do you know James Hetfield? You know who he is? And I’m like, yeah, that’s the guy from Metallica. He’s like, do you want to have lunch with them? He’s really interested in getting into voice-over and so I was like, yeah, why not? We went to a restaurant and had lunch with James Hetfield.

Nate:               I would barely be able to sit through that lunch without going out of my mind.

Mark:              He was a really nice guy down to earth, rational, talked about his place. He lives outside the Bay area.

Nate:               Most of those guys live up there, yeah.

Mark:              Talked about his hard living and trying to get clean and be a good dad, but, but yeah, the whole purpose of it was to see if maybe he could do a role and he’s got a cool voice. He’s got this like warm, like a Sam Elliott voice that’s just really deep and resonant.

Nate:               He has an amazing voice. It’s very interesting. Like if you listen to Metallica in the 80s, his voice was high and then at some point all of a sudden, it got much deeper.

Mark:              He just trashed his voice.

Nate:               Yeah, I think you’re exactly right. It’s always amazing to me that guys like James Hatfield, who are probably one of the biggest, you know, those guys sell out arenas and all of a sudden he wants to get into voice-over work. Why do you need to get into voice-over work?

Mark:              Why do you need that? I just assumed that his manager or his agent pushed him into it. Like hey, you use your voice for a living. Let’s get you some spots on some shows.

Nate:               I’m always amazed cause I predominantly make documentaries. You know, I’ll meet people and they are big celebrities and they’re like, hey, I want to make a documentary, and I’m like, why do you want to make a documentary? You’re already making A-list feature films or my friend Nick Santoro. He’s Adam’s friend too and he runs a bunch of huge TV shows and he sets a meeting with me. He’s like, I want to make a documentary. I’m like, Nick, you don’t want to make a documentary. Why do you want to make a documentary?

Mark:              A lot of those same people, big celebrities, they all want to do their own animated show because they think they’re easy. You don’t have to be on camera. You could record it from your house and then they all want to meet with someone who can be the show runner of their idea, but then their idea is terrible.

Nate:               Well, I have to say Nick’s idea was fantastic.

Mark:              Oh yeah?

Nate:               And it’s a documentary that will be perfect for us that I think one day we will do. But you know, I agree with you.

Mark:              And the sad thing is, is that the network will often put it on the air if a celebrity is big enough, promote it with name, but all right., Well we both happen to invest in real estate, so I thought maybe we’d talk a little bit about that.

Nate:               I would love to because that’s kind of my side hustle.

Mark:              Same here. Big side hustle. I’ve been doing that for 20 years. First script payment, but yeah. How did you…?

Nate:               I wish I was that smart.

Mark:              I don’t know that it was smart. I know I was definitely not smart at that time, but I just closed my eyes and jumped in.

Nate:               You should talk about that, Mark. Explain to people what’s the freelance? What does it mean to work in the entertainment business? You know, you explain it from your end and I’ll explain it from my end.

Mark:              I have been so fortunate to no longer be a freelancer. Family Guy. Who knew? Family Guy is now 21 years old and I’ve been on it pretty much since the beginning, and other than the Simpsons, that kind of longevity for any one project is unheard of. But yeah, I went through that in the early days. You know, going from project to project, always hustling, always trying to stay employed and having gaps all the time.

Nate:               Yeah, that was one of my main incentives for getting into real estate. There’s two ways you can work in the entertainment business. One is you can get a job for a major studio and be a producer or work for Fox or Warner or someone like that. Or you can be a freelance person where you’re a writer or a director or a producer and that’s how I came up. But the problem with that is it’s a little bit of ‘feast or famine’ where you produce something or direct something and you make a chunk of money, and then you might not work for four months and when you’re not working for four months, you’re sweating. And I’ve worked with Adam probably for the last seven years and we’ve made a feature movie and five, six feature documentaries and we’ve done really well. But before that, it was always only ‘eat what you kill’ and that can be a scary place and that is what drove me into real estate investing.

Mark:              How did that work? Did you have some buns saved up?

Nate:               It’s funny because I used to rewrite scripts and I remember when I got a big check back in the early 2000s where you were smart and bought your duplex, I was really dumb because I said in my head, you know what? I’m just going to live as cheaply as possible in this one-bedroom apartment because I don’t know if I’m going to get a job in two weeks or a year, but I want to have enough money to always keep writing. My sister who’s a CPA was like buy a house and I was like, no, I’m afraid of the payment and I didn’t know what house hacking was or anything. And my friends of course were not smart enough to give me any fiscal advice at all. So I stayed in the apartment. It wasn’t until I got stable and was working where I realized I don’t have a 401k. I got in my 40s and said, I want to retire one day. I’d better have something when I do.

                        And I had started listening to real estate podcasts and learning a lot on my drive to work and I was in Montana where I’m from and one of my really good friends’ wife’s dad has a bunch of apartment buildings in this town in Montana I’m very familiar with. And he said, well, you know, I’m retiring and I’m going to start selling these things off. And I said, really? I’d like to buy one. This is in Great Falls, Montana. Great Falls, has a lot of blue collar, but a good size town from Montana, probably 60 to 70,000 and I’m very familiar with it and my best friend is the wrestling coach there. And he’s like, Hey, I’m a teacher. Very handy. I’ll manage these things for you. So I pay him and he manages. I trust him. And that was another thing for me is I just wanted to really trust who was taking care of these buildings.

Mark:              How did you structure it between you guys? Did you all go in on it or was it mainly you?

Nate:               They’re all me. I just pay him a property management fee and he takes care of it for me. And it’s nice because they actually care. He doesn’t manage 50 properties. He just manages mine.

Mark:              And you’re friends so he’s got your back. Cool. What was your first deal there?

Nate:               So my first deal was a seller financing deal. I bought a five-unit building from my good friend’s wife’s dad.

Mark:              So you bought it straight from him?

Nate:               He owned all of his properties outright, but you know, seller financing. I didn’t really know what that meant. I’d heard it on the podcast and he explained it to me very clearly. Basically he’s like, Hey, I’m the bank and we’re going to work out an interest rate and a price and very straightforward. This is a guy that I know and he’s basically like, I’m going to make this so that you make about $500 a month, and structured out the deal. And then I went to the bank and I realized I could get a better loan from the bank. So he lowered his interest rate.

Mark:              What was the interest rate?

Nate:               Originally he wanted 5 and I got it for 4.35.

Mark:              That’s great.

Nate:               Which in Montana, it’s very good to get something that low.

Mark:              I hear that the market you’re in dictates the interest rate you get and the major markets tend to get the lowest rates cause they’re the most stable.

Nate:               You’re exactly right. So the way this one worked out is he wanted $300,000 and then I had a guy who I still use for all the buildings that I look at do the inspections and we found a bunch of stuff that needed working on, and basically we worked it out at the 1% rule. So at the time the rents were about $2800, $2850 so I ended up paying $285,000 for the building and I knew the rents were low. Five units and they were right around $550 each. It really should be about $750 because this building, the first building I got as we were negotiating, there was a huge hailstorm which happens in Montana a lot and it damaged the roof and the siding. So I ended up getting a new roof and a free paint job on the buildings. That worked out very well for me and I didn’t realize how well until I have the second building that I have now, which needs a new roof and new siding.

Mark:              This is your other five-unit, your tale of two five units?

Nate:               Yes, I have a tale of two five-plexes and the first one that I bought was almost turnkey. It was very nice big units. All two bedrooms, one baths. On the second one I bought was more of a burr or a flip, very beat up. Needed a lot of renovation but significantly cheaper. So the first one I paid $285,000 and the seller financing part of it, usually you have to put 25% down, but I didn’t have to because I bought it from the owner, so I only put 50 down and I got to negotiate my rates and there were no closing costs.

Mark:              That’s amazing.

Nate:               We just did a very simple legal agreement. Since I’ve raised the rents, I have a ton of equity in that property. So if I want to get a second on it, I can refinance and get some equity out of it if I want to. And then the second building I bought, I just learned a lot of lessons on that one being new. I run a production company and a distribution company, so I love real estate, but I just have not a lot of time to do it.

Mark:              For managing the projects.

Nate:               So when I bought the building, the basement had been flooded. They basically just gutted it and it was a five unit building, but they were only renting the three upstairs units and the basement was just kind of a gutted basement with sheet rock and here’s a newbie mistake. Because I didn’t step foot in the building, I didn’t really do the square foot math. I just did the math of I know that rent values in this town very well. So I said, Oh, I can get X for two bedroom and Y for one bedroom as long as I fixed them up nicely. What I didn’t realize is that people are used to pretty big apartments.

Mark:              Yeah. You just assumed that all one bedrooms were pretty much equal.

Nate:               Yeah. Just newbie mistake

Mark:              And it was probably a good way to do it. The first one you buy just to get your feet wet, but it was a stabilized building and then the second one whether you wanted to or not, you took on a bigger project.

Nate:               Yeah, well I took it on because I saw the value, so like I said, I paid $285,000 for that first one. This one had been on the market forever and it was $170,000. I started doing numbers and I offered $152,000 and they took it right away.

Mark:              They were motivated.

Nate:               I could tell they were motivated and I think people were very afraid of that opened basement and I thought, Oh no. No, that’s going to allow me to just build everything new from scratch.

Mark:              That’s a great thing. Whenever you can find a building that has some element to it that scares everyone off, it’s often a great opportunity if you can handle what that is. I do that a lot. Look for something that’s got a blemish that’s going to scare people away.

Nate:               I completely agree with you. And this one, I’m about to refinance it. I went through remodelling the entire basement. I learned a lot along the way. Rewiring the building would have been easier at the beginning of the remodel when the basement was open, but once that had already been done, it’s just easier for me to pay the electric in those three units.

Mark:              So you’re just paying…? Okay, got it!

Nate:               I just build it into the rent.

Mark:              So you do your own version of a rental?

Nate:               Pretty much. And then this was the first time I’d negotiated with the bank. So I built in… in the loan, the banker had agreed to have the bank match all of the remodelling I was doing. So the bank was going to pay 50% of my remodel. It’s pretty basic.

Mark:              Yeah. And were they reliable? I found that sometimes banks, they make you jump over a bunch of hurdles to get your money.

Nate:               This is a local bank and I hear this a lot. Always go to the local banks and and make a friend. And that’s what I did and this guy has been great. He’s working with me now on the total refi, but I’m only going to refinance it at $180,000 and just keep the equity in it and I’ll still finance my down payment out of it and keep most of the money that I put into it.

Mark:              That’s your strategy?

Nate:               Yeah. For me, I liked the idea of these 15 year loans because like I said in my 40s and I know that I’ll be in my sixties when these things are paid off and then if I want to refinance them or just have that equity or that’ll be my retirement.

Mark:              Have you held onto your original five-plex? Do you plan to hold them all forever or are you going to step ladder? What I kind of do is I try to get into a unit mix that’s maybe 20-plus to get those greater economies of scale, so I 1031 exchange up to that point and then I’ll probably start holding.

Nate:               This is the stuff that I’m trying to learn from you, Mark. For the people that are listening, Mark is extraordinary at investing in Los Angeles, which is a very difficult place to invest in. So we’ve had many conversations about it and so I invested passively in one of Mark’s syndications to learn about what he does to invest in Los Angeles because it’s so different from investing in Montana, and the investing in Los Angeles is looking at that. That’s something that I’d like to use to build wealth, and to allow me to buy bigger properties because I do understand what you’re talking about in economies of scale.

Mark:              If you’re going to put your time and energy into it, you want to get the maximum results maximum.

Nate:               And seeing what you’ve done with still having your career on Family Guy, which is an incredible amount of time that that takes. So if you’re doing that and still being able for you to manage such a large portfolio and still continue buying in the way and in the capacity that you’re doing it, I see that it’s possible.

Mark:              I don’t think I’m that aggressive. I think when I listen to podcasts sometimes I see these people that are go big, that kind of motto and sometimes I think I’m kind of slow. I’m chugging along, but I have settled into a strategy similar to you is buy a building or two or three a year, and trade up to get to 20-plus units and ideally closer to the 50-plus range and then start holding at that point and just try to grow and leverage.

Nate:               Exactly right. Yes, it’s difficult sometimes because it’s funny, there was a nine-unit building that I was going to buy and we basically ended up selling two of our films to Netflix at the same time and I got caught up in that whole process. I lost that deal because I was just working so much and I just didn’t write an offer and I’m kicking myself.

Mark:              Just for clarification, you lost the real estate opportunity because you were closing with Netflix?

Nate:               Yes, I was closing the Netflix deal.

Mark:              I get that too. I love the real estate. It’s the one thing that I’m going to do for the rest of my life, but I also love writing. I love producing, I love creating shows, movies and I don’t want the real estate to blow that up so it can’t interfere in a huge way. I got to really kind of focus on systems and efficiencies and ways to manage it.

Nate:               That’s an interesting part of all of it is is just there’s a lot of people it seems like who want to quit their day job, and you and I are a little different because I love my day job. I love making things and doing what I’m doing. I love the creative part of my job a little more than the business part, but I still like the business part. I like making the deals with Netflix. I like the channel we have on Pluto TV. I like structuring all of those deals and acquiring content.

Mark:              And you know I’m from Ohio, you’re from Montana. When I came out to LA, I thought it would all be a bunch of sharks in a cynical world. Maybe you have a different experience of that cause you’re on a different side. You’re on the money side of the business partially, but I didn’t find that at all. I found the people to be great. They’re inspiring, they’re all kind of chasing their dreams. You know, the writers, I find the writers to be great, and so I just look forward to going to work.

Nate:               To me, the writers are always the best people, so I think you’re a little bit sheltered that way. This is the business where you can go broke with people being kind and complimentary to you. Nobody’s ever going to tell you your script sucks or your stuff sucks. They’re just not going to buy it and they’re not going to take it and they’re going to tell you you’re fantastic and your writing is fantastic and what you do is fantastic.

Mark:              And they’ll say, you know, we read your script. We love it. Could you do another draft for us?

Nate:               Can you do as much free work as humanly possible, and tell we’ll see? Yeah, that’s always my barometer and this is true in real estate. My barometer is, are people willing to write a check? Then that’s how I look at everything. When I’m getting investors for a project or I’m talking to people seriously about something, it’s are you willing to write a check? And that’s why when I came to you to talk about LA real estate, I was like, Hey Mark, I don’t have a ton of money but I’m willing to write you a check because I want to learn how you invest in Los Angeles cause I have no idea.

Mark:              You and I were talking a little bit ago about this. LA scares 95% of investors cause it’s this intimidating coastal city market. I got into it. I didn’t know any better. It was just ignorance that caused me to invest in LA and a little bit of fear of going out of state and not being able to have eyes and ears on the property. But one of the things about LA is that there’s 3 million properties in the County of LA. That’s one thing that I’ve always found is when I hear on podcasts, the market’s impossible. The market’s gone crazy, it’s too high. You can’t find any deal in LA with 3 million properties. At any given time, there’s probably 200,000 properties on the market, or say you estimate that at any given time, 5% of the total inventory is for sale. Maybe what is that? 600,000? I kind of think that if anyone were to tell me there’s no deals, you can’t find anything worth buying in LA, I would say I’ll find something in one hour.

                        I’ll look online. There’s thousands if not tens of thousands of properties for sale. I would put down my filters criteria, screen down to a cap rate that I want, which would be a five cap or above, and screen for a cost per square foot which I want, say $250 is what I would shoot for, and that would eliminate most of the properties. That would get you down to maybe a few hundred because the replacement cost in LA, the cost to build is roughly around $500 a square foot, depending on what part of the city you’re in. And if I can buy at $250 a square foot, I know I’m buying it for half of replacement cost, and that means I’m getting a really cheap building that’s being purchased for about the cost of the land, so the property is pretty much free.

                        And so I’ll renovate. I want to make that property nice and it’ll weather any kind of downturn because you’re so far below the median of what everyone else has spent. I’ll pick the pockets and I always have maybe about five or six of the I would say, 50 neighbourhoods that are off the radar now but you can see all the trends are there. The beauty of it is that because new construction and development takes so long, you could go online and hunt down and find which pockets are going to be great in three to five years. And right now if some of those aren’t on anyone’s radar and you can start buying because you know the big players are going to make those areas hot. But one thing we could talk about is similarities between the entertainment business, the media business and real estate investing. But I think you were going through a rehab and you were saying it has scary similarities to seeding a movie,

Nate:               I mean what I was noticing is, as I was doing this flip of this second five unit building that I bought, it’s super interesting in terms of when you have a movie, you have all these departments. In each of these departments, if you sort of mess up any of these, you kind of mess up your whole film. So you as the producer, you have to talk to all the department heads and they’re all doing different things, but you’ve got to sort of be the intermediary between them and it’s like when you’re running a flip. You’ve got the plumbers and the electricians and you’ve got the roofer, and I mean for me I did it all kind of separately.

Mark:              You got your team and the interesting thing is probably similar to a movie. Like you’ve got your lifelong team, you’ve got your key players that you always use those key players on every deal you do in real estate, and then you have a bunch of people you’ll just one off. I’m sure movies are the same way.

Nate:               You know for me, I have that as well. When I shoot all of our docs, I always try to use the same DPs and guys that I know so that I know the look is going to be done well. And it’s the same with a person who does plumbing or tiling or electric that’s really good and you know they’re always going to do very well for you. Then even if they have different workers, it doesn’t matter. You just make sure that you have that main person.

Mark:              And similar to a flip or rehab, everything is time sensitive. You got your schedule, you work on your schedule, fine tune it for a long time.

Nate:               Yeah. And you have your AD, that’s the assistant director who kind of runs the schedule and keeps everything going every day. And sometimes like on the flip, that has to be me. You know, you’ve got to keep these guys in line and keep it going.

Mark:              Also the money. Often you don’t get to say go until you get the financing lined up.

Nate:               Yeah. As a producer, it’s your job to raise the money and it’s your job to get the finance and it’s your job to make sure that the art department does not overspend. It’s your job to make sure that plumber stays within his budget. Got to keep all the departments on budget and keep track of all the money, and if you go over, it’s on you. In a movie if you’re the producer, if you go over, you’re the investor on your flip, it’s on you.

Mark:              And then when all is said and done, when you’re finished, you hope it’s something that people will want to come see.

Nate:               You’ve got a different audience in a way, but you are making it for an audience. And when you’re doing your flip, you’re making it for renters. If everyone wants to rent it and it’s easy to rent and you have no problems, you know you’ve done a good job with your flip and you have a good product. Same with your film. When you make a film, if you take it out to the market to sell it, if everyone wants to buy it or license it and it does well on Rotten Tomatoes and you can go out and see how you’re doing, checking it.

Mark:              And if it’s a disaster, it could the end of your career.

Nate:               Yes, but definitely in the film space, and I have friends who are extraordinary directors and they got put in director jail because they did a bad movie that was out of their hands. But you get blamed if you’re the director or the producer and it doesn’t do well. It’s like if you’re a syndicator and you lose a bunch of money on a deal and the word gets out in the market, people are not going to invest in your syndication.

Mark:              A lot of people seem to be syndicating now.

Nate:               Yeah, you’re right.

Mark:              You know, we’re at the very, very late stages of the market. If there was an ideal time for the market to be flooded with syndicators, it would have been like 2011, nine years ago. It’s a little late in the process for new syndicators.

Nate:               It really is becoming flooded with syndicators. I am a little curious to see how this is going to shake out because most of these syndicators have never been through a down market.

Mark:              It’s very eerily similar to 2006, 2007. There was a huge rush of new investors jumping in. Everybody has short memories. Nobody could remember the last time real estate was difficult.

Nate:               That’s something I think people need to understand a little bit too is that it is a long game. There’s always going to be things that come up in your investments. Like even the one I bought that was turnkey. I think I’ve renovated three of the five completely and I’ve just used the cash flow from the units to do that.

Mark:              Okay. Sure. That’s nice.

Nate:               I don’t take a ton of money out of it, but I don’t need it either. So just on the note alone, it’s paid 20% of itself down and I haven’t done anything. Just from really not doing much. Like I said, that building requires very little of my attention.

Mark:              I love the fact… you never see that. So you often might have a building that has zero cash flow, but it may have $6,000 of principal getting paid down or even $10,000 worth of principal being paid down every month. If you do that across a number of buildings, basically you’re getting that while you sleep and it’s not even on your radar.

Nate:               I just think of it as a retirement that I didn’t have. I go, Oh, I’m just putting that money away. I’m paying, you know, $1500 on this building and $1500 on the other building or something. Well, someone’s paying it for me. I’m not paying it.

Mark:              And it’s forcing you to save that money. You can’t touch it. You can’t go spend it.

Nate:               And I don’t even know exists. I don’t even know it’s there.

Mark:              Yeah. I used to have this thing before I got into investing in real estate. When I was in my mid-20s I was convinced I’d grown up, entered the adult world. I was convinced everything in the world, especially the things that are off your radar that you couldn’t see was working against you. The gas bills, the utility bills were always going up faster than my income. All my investments had loads either on the front or the back or some kind of hidden fees. So many hidden fees just siphoning your money away from you at every aspect of your financial world and it would bum me out. I was like, there’s a massive financial conspiracy to get in my pocket and take my money away. But then I got into real estate sceptically and I found that that’s the opposite. I put up this large amount of money to throw down a down payment on a building. It was $40,000 when I got in, but then I was kind of concerned about this building and would I survive? It was a duplex, but all the things that were off my radar was working in my favour and I kind of gradually discovered that. The building was appreciating because the area was improving where I bought that building. I wasn’t paying attention to the financials that closely so my loan was getting paid down every month and then the rent next door was going up each year, but my loan payment stayed the same. So there were multiple aspects of it that were making me money while I slept or while I wasn’t paying attention and I had never experienced that, and it was the exact opposite of what I had experienced up to then.

Nate:               Yeah, it’s really amazing. The same as for me where there’s so many great things about it, you know the tax savings, especially because of, I don’t know about you, but the way that I get paid through a corporation, it saves me a ton of money and I pay less taxes because of my real estate that I didn’t even realize that.

Mark:              It’s like the benevolent aspect of the financial world that’s there for you to help you as opposed to predatory. It’s like a good friend, not a predatory financial advisor or someone that’s going make the bulk of the money off of your investments, not you. So let’s jump to a couple other questions. What do you think the biggest misperception or myth is that’s perpetuated in real estate nowadays?

Nate:               It’s a little bit of what we were talking about with where the market is. You’re not always going to make money in real estate, so you want to be careful. Well, I think there’s two for me personally. I think you know people who tell you you can make money in real estate with no money down unless you’re going to be a wholesaler.

Mark:              I never understood that. My question is walk me through that because I think that’s either a hugely risky or non-existent. Invest your own money. Put your own money at risk before you put others at risk.

Nate:               And I’m with you on that. I’ve kind of felt like now if I got someone involved in a rental where I invest, I would feel comfortable because I’ve learned so much the hard way. I’m a lot more comfortable about saying, Oh I think I might do one of these, get a buddy, because I had a few buddies say, Hey dude, get me in one of those, and now I’d be more comfortable doing that. But the other thing is you’re always going to make money in real estate through appreciation. And I think that because of where we are and if you’re buying right now, you’ve got to make sure that the property that you’re investing in is safeguarded for the market to take a hit and the economy. Can you endure if your rents have to go down? Can you endure if you have some vacancy for longer than you anticipated when you do your analysis? I think that that’s something that we’re probably going to have some issues with the next couple of years.

Mark:              I think there is going to be a lot of issues. I mean, it was Armageddon in 2008. So many real estate investors lost their buildings and not just new investors, but some veterans had a domino effect. Even in LA, you hear about it all the time is some people lost one building after the next because one got behind and they had to pull money from every other building. So I agree. I think there’s probably going to be a bit of a reckoning. Also on that, next question I was going to ask you is when is our next recession? I thought I would ask everyone to make a prediction and we’ll give the winner some kind of award, but it’ll be cool to see who can pick it.

Nate:               Okay. Now how are you judging? Like with the bottom? What’s the …?

Mark:              I would say when does it start? I think the definition of a recession is two consecutive quarters of negative GDP growth. Say there is a measure, a specific measure that tells you when you’ve gone into recession.

Nate:               I’m going to say June of 2021.

Mark:              June of 2021. All right. I like it. You could be right. Let’s see, which trait do you possess that has served you best both in real estate and in life?

Nate:               Probably, we talked about wrestling in the beginning and for me the thing that I really loved about wrestling was it was a very equal playing field. You wrestle some guy that you both got to weigh in at the same weight, whether you’re a guy or girl and women’s wrestling is becoming very popular now. I might be doing a doc on that, but it’s the same weight, same size. You are out on the mat, just got your shoes and your singlet and you do it. Whatever happens, happens. So hard work really made a difference. There are different people that come into it with different physical abilities, but for the most part if you work very, very hard and you learn to outwork people, then you become successful. And I think for me that has always carried through, just that habit of outworking people. Putting the time in and understanding that you’re not going to learn this move if you do it a hundred times in a row. You’re going to learn it if you do it a thousand times in a row. When I started analyzing properties, I was like I don’t know if this is right or not, and then you start doing more and then when you actually do your analysis and then you put it to practical use on a building and you see, Oh I was wrong there. I had no idea that I should have had that electrical guy there and that would have been this much more money. I should have factored that in. And also being able to learn from your mistakes and being willing to admit that you make mistakes cause I make them all the time.

Mark:              The best investors are always humble. Once you get arrogant, you’re going to get burned.

Nate:               And a sense of humour. That for me, the other thing is I try to keep a sense of humour.

Mark:              Understand that it’s the process. I think you can maintain a sense of humor if you realize you’re just working the process. If you get too married to outcomes, then your failures will be more devastating. But if you realize this is just a practice that I’m going to do every year and I’m going to keep doing it until I’m 90 or 100

Nate:               And I always remember like the worst things that ever happened to me in my life are the funniest stories that I have now. The most horrible things that ever happened to me, while it was happening it’s like you can barely function because it’s so terrible.

Mark:              But those are the best stories, the funniest stories. There’s this thing that’s in our writer’s room. It’s an observation after decades of working in comedy rooms is that when new writers join the group, there’s this truism that you’re not really funny until life has punched you in the face.

Nate:               Exactly.

Mark:              All the funniest people have gone through hell.

Nate:               It’s exactly true. The more times you’ve had to pick yourself up and the harder you’ve been knocked down, and the ability. What I find too, I mean, you spend a lot of time with comedians and my partner is Adam Corolla and we do a lot of comedy stuff. I spend a lot of times with comedians. When you talk to them when they’re not doing their sets, they have some incredible lives. They talk and you’re like, wow, comedy is the only thing that must have saved your life. So I think that there’s something to be able to look at those horrible stories of when you’re in the third grade and you pooped your pants in class and thought you’re going to die, and now it’s the funniest thing that you’ve ever done.

Mark:              And it demonstrates resilience. You know, you bounced back. You came back swinging the next day.

Nate:               That’s the part. Same with real estate. You getting up. I’m always learning things and I’m like, Oh, I should’ve known that.

Mark:              Right. Well, cool. This has been great. How can listeners reach out to you?

Nate:               I’m on Instagram and Twitter @NateAdams26 N-A-T-E-A-D-A-M-S 26. My company is Chassy Media C-H-A-S-S-Y. You can find us@chassymedia.com or chassy.com C-H-A-S-S-Y.com if you want to see our docs and stuff.

Mark:              And we’ll put that in the show notes.

Nate:               Perfect.

Mark:              Nate, this has been great. Thank you so much for doing one of my very first podcasts, being my guinea pig.

Ep 01: From Struggling Writer to a $75 Million Portfolio with Mark Hentemann

Ep 01: From Struggling Writer to a $75 Million Portfolio with Mark Hentemann

Welcome to The Wild West Real Estate Podcast, the show that brings you real estate strategies and insights to help you navigate an investing landscape that often feels like the Wild West. I’m Mark Hentemann, a comedy writer with a 20-year side hustle in real estate investing. After starting out in the early 2000s buying multifamily, I have since built a $75 million portfolio in what is often considered a market you can’t invest in: Los Angeles.

In this first episode, I will share my story, including the good, the bad, and the ugly. Now, I am not a guru and I do not want your money. I just have a passion for real estate I am on a mission to share my knowledge and help friends and like-minded investors achieve their investment goals. Listen in to learn about the best investment I ever made, how it got me started down the path I am on today, and more.

What You’ll Learn In Today’s Episode:

  • How I got started in real estate.

  • Why it is not that hard to invest in big markets.

  • The importance of perseverance.

  • How to make the best investment of your life.

  • Why house hacking is a great way to get started.

  • How I avoided financial ruin.

Ideas Worth Sharing:

“I was on this rollercoaster ride and I didn’t know when to get off … so I didn’t” – Mark Hentemann

“House hacking is a great way to get started.” – Mark Hentemann

“Buy in an up-and-coming area of a major city.” – Mark Hentemann

Resources In Today’s Episode:

Enjoy the show? Use the Links Below to Subscribe:

Transcript

 

Mark:                 My name is Mark and I am a real estate investor. I started out in the early 2000s buying multifamily and have since built a $75 million portfolio in what’s often considered a market you can’t invest in – Los Angeles – and I did it as a side hustle. I’m a writer/ producer in the entertainment industry. One of the original writers on the show Family Guy, I have created some shows for Fox and MTV, done some movie projects and been lucky enough to be nominated for a couple Emmys, but this is my real estate story.

                        I got started in multifamily about the same time I got started in the entertainment industry and I got into multifamily because I had been horrifically broke. I was looking for a way to make sure that never happened again. My hope is that with this show you might find a story you can relate to, and that through interviews with some of the smartest investors I know and deep dive discussions, you’ll discover strategies you’ve never thought of and, find out it’s not so hard to invest in big markets, global 24 hour cities that scare most investors off, but I think are the safest investments out there and also happen to have the highest returns. I’m not a guru. I’m not here to sell you anything. I don’t want your money. I just happen to have a passion for real estate investing, multi-family specifically.

                        This is a weird thing for me to be doing being a comedy writer. I don’t want anyone I work with to hear this. They’ll just make fun of me. It’s not cool to talk about investing or being smart with money, but the truth is getting into real estate investing early made my career in the entertainment business a lot more fun. It took the pressure off. So since I don’t have a guest for this episode, I’m going to tell you the story of how I got into investing. I grew up in Ohio and after college I moved to New York because I thought it would be fun and I wanted to try to make it as a writer. I was the proverbial starving artist. I was broke, writing scripts 12 hours a day, trying to scrape enough money for food and bolting awake in the middle of the night wondering how the hell I was going to pay my rent each month. The starving artist thing gets romanticized, but I’m here to tell you there’s nothing romantic about it. It sucks. Anyway, that experience made me make a vow. Whether I ever made it into the entertainment industry or not, I would do whatever it took to never go through that again. Looking back, that was the fuel that drove me. I was committed to take control of my financial future, to educate myself and be smart about it. See, this is the stuff that’s going to get me ridiculed at work, but it’s the truth. I was chasing a pipe dream. I never knew anyone who’d made it in the entertainment business and knew it would be a rocky ride at best, if I even made it in, and if I did, I’d probably be spit out at an early age. But then a miracle happened. I got hired to write for David Letterman. I then moved to LA and joined a new show called Family Guy.

                        Today, Family Guy has done almost 400 episodes, but back then we were constantly on the verge of cancellation. No one expected it to last, but Oh my God, I was actually employed. I got my first couple of script payments and had maybe $45,000 saved. I also had debt. I had moved to LA from New York with my wife, my fiancé at the time with about $30,000 of student debt. So you we had some money in the bank, but we also had loans to pay. We were living in a one-bedroom apartment in this place called Park La Brea, this massive former World War Two army barracks in the centre of LA that was converted into an apartment complex. A lot of people started out there. It was cheap, but then my landlord raised the rent and on one bored Sunday morning after looking at new apartments, I wanted across the street into an open house. There was a broker there and she asked me why I wanted to throw my money away on rent when I could put my $45,000 towards a mortgage payment. That sounded like the dumbest thing I could possibly do. I was like, are you crazy? In my job, I could be out of work tomorrow. You think I want the responsibility of a mortgage? Apparently there wasn’t much traffic at this open house because I talked to this broker for a while and eventually I said, if I were to ever take on a mortgage, it would have to be the best investment I have ever made. Not that I’d made any investments, but I said, don’t show me any cute houses. I wanted something in a good location that I could fix up, rent out, something that could provide a financial cushion that I was desperate for, for when I was unemployed, which I was certain was coming at any moment.

                        We parted ways and I figured I’d never hear from her again, but two weeks later she calls and says, I found the property you need to buy, but there’s a catch. You have to become a landlord. I was like, a landlord? That doesn’t sound very fun, but I was curious. So I met her at the property. It was this 1920s duplex. It had charm, but it was pretty rundown. The sellers were raising goats and chickens in the backyard – in the middle of LA. I remember they were moving to Kansas to dig a hole and build an underground house and live off the grid. There was graffiti on the block, but several properties were being renovated and I knew this was an up and coming area, walking distance to Larchmont Village, this charming strip of coffee shops, restaurants in a farmer’s market that everyone seemed to go to. In LA, being able to walk everywhere on the weekend is huge. So I saw the potential and I told the broker, all right, what do I got to do? I thought maybe this could be step towards financial security. It could also be a disaster.

                        Well, it was LA, so of course there was 15 other buyers. It was listed at $379,000 and I offered $350,000. The seller countered everyone. Over the next two weeks, the price went up about $15,000 every day. I had no idea how to assess the value of this thing. I couldn’t sleep. I was on this roller coaster ride and I didn’t know when to get off, so I didn’t. It was listed at $379,000 and I paid $435,000. I was sure I had just made the biggest mistake of my life. I thought I was going to be bankrupt, broke, possibly even in jail for my dumb decision. If I could just survive this, I vowed to learn everything I could about real estate, so this would never happen again. There was nothing I could do except try to survive and avoid financial ruin. My first tenant was Mike Henry, my friend who wrote for Family Guy and also does the voice of Cleveland, Herbert and Consuela, if anyone watches the show. Mike made fun of me for being a landlord and I threatened to evict him on a daily basis. I thought I had way overpaid, so I immersed myself in learning real estate, investing, reading every book I could get my hands on, trying to navigate my way out of this mess I’d got myself into, but I fixed up the property, renovated the kitchen, the exteriors and landscaped. I found that I really enjoyed it.

                        In year one, I thought I had made the biggest mistake of my life. In year two, I refinanced, got a better rate, got out of PMI and thought maybe this isn’t such a bad thing. In year three, Mike got his own place. I boosted the rent $400. It was covering all my expenses and I thought this is the greatest thing in the world and by the way, Family Guy did get cancelled during that time, I think twice. Boy, would I have been a lot more panicked if I didn’t have this duplex.

                        I bought in the year 2000. The market had already gone up significantly and most people, including me thought we were at the end of the run, but as some people may recall, we still had a ways to go. I sold in 2005. I had bought it for $435,000 and sold for $1.2 7 million. I put down 10%. Back then, I wasn’t aware of the FHA loan that would have allowed me to put down maybe three and a half to four and a half percent. My down payment was $43,500 and I netted 835,000. It was roughly a 2000% return on my investment. Ridiculous! I’d also made good on my commitment to read and learn everything that I could about real estate. I asked my accountant if I could claim the $500,000 primary residence tax credit on my side of the duplex, then also 1031 Exchange the profits allocated to the rental side. To my surprise, they said yes, so we pulled out $500,000 tax free then deferred the rest by buying a 16-unit and a 4-unit.

                        I was off to the races, hooked. I liked this game and I was committed to doing it for the rest of my life. I had unexpectedly discovered financial security faster than I ever could’ve hoped. This would be more than a side hustle for me. It was something I wanted to do until I’m 100. It would become my devotion, my financial practice. I wanted to study and learn every aspect of it. It was also the perfect hedge against the uncertainties of the entertainment business, providing financial security in a volatile line of work. Anyway, that’s how I got into real estate investing.

                        Here’s some takeaways. Number one, house hacking is a great way to get started. I know this is a cliché, but you get to own your own residence and still get into the rental business. A huge benefit is the FHA loan I mentioned for first time buyers, which allows you to get into the game with the smallest possible amount of money. You can potentially put 4% down. I put down 10% because I didn’t know about the FHA loan, but that 10% loan resulted in a 2000% return. I’ve never matched that return because I’ve never had such strong leverage. Just be careful.

                        Take away number two. I got lucky. The real estate market was an expansion when I bought and it sure helps having the wind at your back. It forgives your mistakes. I invested throughout the 2008 recession and it was the opposite. It took a lot of skill to navigate that and make a profit, but luckily I was prepared by that time. The 2008 recession took a lot of investors down.

                        Take away number three, buy in an up and coming area of a major city. These transitional pockets are in every city. Find one. Often they’re adjacent to or on the fringes of higher priced areas. Just like you want the momentum of a good economy, you want the momentum of a growing area. Well that wraps things up. In the future, we’ll have guests on this show, hopefully more entertaining than me. Some amazing investors and pros using really creative strategies that I don’t hear on other podcasts, and that’s really the reason I wanted to do this, to come at real estate investing from a different perspective, to show how you can live and invest in a major city or invest out of state. I do both.

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Parker Heights

Parker Heights

East Riverside SubmarketLocated just minutes from the Austin Central Business District, Oracle's new campus, and the...

10 Ways Recessions Impact Real Estate (& How to Dodge the Worst of It)

10 Ways Recessions Impact Real Estate (& How to Dodge the Worst of It)

 

Given the recent stock market volatility, many real estate investors wonder, “Are we headed into a recession? How will that affect real estate? And how long is Brandon going to stay committed to that beard?”

 

The beard is a puzzle that’s baffled scientists for years—but when predicting how the next recession will affect your portfolio, history can be a guide.

 

Is Real Estate Recession-Proof?

 

This is a common misconception. Unfortunately, it’s not.

 

Many silly real estate investors who believed that myth got wiped out during the last recession. But the good news is that real estate can be recession-resistant. With proper precautions and an understanding of recession dynamics, you can prepare your portfolio to navigate choppy economic waters.

 

I had the great privilege of going through the horrific, Armageddon-like real estate collapse of 2008 with multiple properties. It was like a Michael Bay movie—people screaming in the streets, explosions, cars flipping over…

 

OK, not exactly. But it could’ve been if they’d have let him direct “The Big Short.”

 

I had six multifamily properties at the time.

 

Below I’ll walk you through the economic cause-and-effect patterns that impact rents, values, and the ability to maneuver (sell/refinance) during recessions.

 

The Pre-2008, 2008, and Post-2008 Investing Climates

 

It all started pleasantly enough…

 

I discovered real estate investing in 2000 and loved it. Everyone did. You couldn’t lose. That went on for seven years. Then, 2008 happened.

 

Lehman Brothers and Bear Stearns, two of the world’s largest investment banks, collapsed. The stock market plunged, and the financial world went into panic mode

 

Sound kinda familiar?

 

These events then unleashed an economic chain-reaction. Below are several of the ways real estate was impacted.

 

 1. Real Estate Investment Activity Ground to a Halt

Shell-shocked investors watched with fear, uncertain how long the economic slide would last. Values were at record highs prior to the crash, and many felt this was a long-time coming. The sense was that things could get a lot worse before they got better.

 

When investment stopped…

 

 2. Construction Ground to a Halt

New construction projects, and many already in the pipeline, were put on hold. Investment dollars dried up, because the investors providing those dollars were reeling from their own losses. And confidence that new projects would get completed and be profitable was in doubt.

 

One thing was certain: The boom clearly over.

 

Ten million workers are employed by the construction industry. Many are project-based, not salary-based. So when the construction activity stops, a chunk of the labor pool becomes unemployed overnight.

 

Many other industries are impacted by the health of the construction sector.

 

Also… in boom years, there’s a tendency to overbuild.

 

You’d think that building would be based on need. But when the spigot of construction financing flows enthusiastically, no one’s there to monitor how much gets built and turn off the spigot.

 

The result is oversupply.

 

There’s a saying that goes, “Boom markets die from oversupply.” Another one goes, “Cranes in the air, investors beware.”

 

For some reason, there are a lot of cute rhymes about overbuilding. I think Dr. Seuss may have moonlit as a construction economist.

 

3. Banks Became More Conservative

The recession began with a spike in delinquencies and defaults, which turned into a tidal wave of foreclosures. Lenders who’d made risky loans started going bankrupt, culminating with the world’s largest lender at the time: Countrywide.

 

So, banks reacted by becoming more conservative, making it difficult for struggling property owners to refinance. And purchase loans were given much more scrutiny.

 

This conservative lending added to the market slowdown.

 

Meanwhile…

 

4. Renters’ Incomes Went Down

The stock market plunge and growing layoffs caused consumer confidence to drop. People were cautious and spent less. This caused corporate profits to go down, resulting in salary cuts and layoffs.

 

We were seeing a steady uptick in unemployment.

 

Many of those laid off were renters, who then struggled to pay rent. Many others were homeowners, struggling to pay mortgages. (I won’t go into the compounding effect of adjustable-rate mortgages, because it was specific to 2008. The intent here is to highlight general recession patterns.)

5. Renters Sought Cheaper Alternatives

Renters in high-priced, A-class apartments moved down to more affordable B-class units. Others moved in with friends, or back home with their parents. There was a “renter consolidation” that caused…

 

6. An Uptick in Vacancy

It was most pronounced in A-class properties, but it was felt at all tiers and exacerbated by the overbuilding of recent years. Much new construction tends to be A-class, because it’s the most profitable.

 

However, apartment vacancies were mitigated, because a new pool of tenants was entering the market…

 

7. Former Homeowners Became Renters

Job cuts caused many struggling homeowners to fall behind on their mortgages. Here’s yet another downer saying, “Recessions create renters.”

 

Not as catchy. It doesn’t even rhyme.

This brought some stability to multifamily occupancy levels.

But due to the confluence of factors—oversupply, lower incomes, investor fear, and tightened lending…

 

8. Property Values Declined

Single-family residences were hit the hardest. There were far more sellers than buyers.

 

Also, SFR values are based on buyer sentiment (or “emotional buyers”). The emotion had been irrational exuberance during the preceding years, but now it was fear.

 

Multifamily values were more stable, due to their income stream supported by leases. But that didn’t mean multifamily properties were in the clear.

 

Rent growth stalled, transitioning into rent declines in some locations hard-hit by the recession.

 

Additionally, unit class mattered. Rent drops were most precipitous in A-class, as many tenants could no longer justify paying top-of-the-market rents for luxury units. Many A-class renters relocated to B-class properties.

 

Meanwhile, to address the turmoil…

 

 9. The Fed Stepped in and Lowered Interest Rates

It was an attempt to stimulate the economy, and it provided a lifeline for many property owners in trouble.

 

Owners who were not in trouble (aka were prepared for the recession) had an opportunity to refinance at rock-bottom rates, improve the health of their portfolio, and navigate out of the storm.

 

But the lenders were still reeling from their losses. And as values went down, they were enforcing the “maximum loan-to-value” clause—a clause often forgotten in normal times because loan balances go down and property values go up.

 

But during recessions, when property values slide, borrowers who had been at max leverage (often 75 percent LTV) find themselves having to pay down their loan to meet the required LTV.

 

What does this mean?

 

Basically, if you bought a property for $1,000,000, and the lender’s max LTV (leverage-to-value) is 75 percent, they will give you a $750,000 loan. But if for any reason your property value drops to, say, $900,000, your $750,000 loan has now increased to 83 percent of value. So, the lender will require you to pay down the loan to get to 75 percent LTV.

$900,000 x .75% = $675,000

Therefore, you’d be on the hook to fork over another $75,000.

This happened to me.

 

I had to pay down a loan by $95,000 to meet the LTV requirement. The upside, however, was that due to the Fed’s rate cut, my interest rate went from 4.5 percent to 3.5 percent, and my loan balance was now lower—resulting in a big boost to cash flow.

 

And luckily, I had the reserves to make that $95,000 payment!

 

Lastly…

 

10. Where You Invested Mattered

Each market experienced the recession differently. The severity and recovery timeline varied depending on where you were. Markets with diverse economies were the most resilient.

 

Prices recovered sooner in major markets, as cautious investors sought the safety of top-tier markets.

 

Those top-tier markets then became the first where prices became overheated as the economy recovered, so investors moved on, seeking returns in secondary and tertiary markets.

 

And the whole cycle began again…

 

Key Takeaways from the Last Recession

  • Don’t over-leverage. Especially late in a boom market.
  • Be prepared for rent volatility. Many investors don’t realize rents can go down. But they do!
  • Have reserves, and bolster your cash positions (no-brainer).
  • Monitor the supply of new units being built in your market. (I make a point to invest in cities where it’s very hard to build.)
  • Buying value-add helps—you can offset declining values through forced appreciation.
  • Avoid A-class properties, or bolster those reserves. (I’m not anti-A-class, but I prefer to buy these premium assets coming out of a recession, when they’re beaten up and bargain-priced.)
  • B & C-class multifamily is most stable (but not immune). This was my experience, and statistics seem to support it.

Rent Declines 2008-2010 and Rent Growth 2010-2018

 

I’m fortunate that all of my multifamily properties survived the 2008 recession. And yours can, too—just prepare!

 

I hope this was helpful and good luck!

 

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