Finding Your Perfect Partner and the Top 6 Factors When Choosing a Market with Ben Leybovich & Sam Grooms

Brandon:
This is the BiggerPockets podcast, show 383.

Ben:
Warren Buffett says diversification is protection against ignorance. I say growth and equity is protection against ignorance in income producing assets because income comes in, income goes out, but if you have an exit and you can make money by exiting, then at least you are not losing money.

VO:
You’re listening to BiggerPockets radio, simplifying real estate for investors, large and small. If you’re here looking to learn about real estate investing without all the hype, you’re in the right place.
Stay tuned and be sure to join the millions of others who have benefited from biggerpockets.com. Your home for real estate investing online.

Brandon:
What’s going on everyone. It’s Brandon Turner, host of the BiggerPockets podcast here with a very cool different type of show and a very long show. Here with my good friend and cohost, Mr. David Greene.
David Green. How’s it going, man?

David:
It’s going great. We just had Mother’s Day yesterday. I got to go see my mom and have dinner with her, had a good day. Did you guys celebrate with Heather?

Brandon:
No, we don’t celebrate Mother’s Day. I think it’s a card Hallmark factory holiday, and we don’t believe in supporting big business.

David:
Well frankly, I think mothers get way too much credit as it is in society.

Brandon:
I agree!

David:
We just cater to them so much and we’re way too appreciative.

Brandon:
I know. So, so much. I mean, what did they really do? I mean really?

Speaker 2:
That’s exactly what I’m saying. Do we really need moms at all? I think we’d be fine if we didn’t have them. Yeah, I agree.

Brandon:
There’s like 12 people who just like are so angry right now because they don’t read sarcasm. Yes, mom, I love you. I love everybody who is a mom. You guys are often so-

Speaker 2:
You guys are the real MVPs for sure.

Brandon:
The real MVPs, but of course that happened like a week and a half ago after this episode came out because last week we released an episode we wanted to put out right away with Josiah Smelser. So Josiah was a good buddy of mine who walked through his journey of the difficulties he went through and how he overcame them on his small, like I wouldn’t say small because of what we’re about to talk to you about, but I’m just like single family deals, right. It’s single family houses.
Today, we’re going to do the exact kind of same concept. It’s how is COVID effecting the world, but we’re doing a two part podcast episode with Sam Grooms and Ben Leybovich. So Ben’s been on the show a number of times before and Sam, this is his first time.
So we recorded the first half of this just before the whole social distancing thing came down. And we did it in my shed here on Maui when Sam Ben were visiting. So we talked about what they’re doing, we talked about a lot of really, really great topics. Things like how to look at equity versus cash flow, some stuff about partnerships, choosing a market, how they manage risk for their big syndication deals, things like that.
So we had a great topic, but then of course the world’s changed in the past couple of months since we recorded that. So here’s the deal. Rather than a whole separate episode, we are going to tag on an extra 45 minutes at the end of today’s episode, that is a followup that we just recorded just a few minutes ago here, the day after Mother’s Day, and we put them all together. So that you can listen to the first half, hear all about their story, their journey, and then you can listen to the second, what they’ve done since then, what’s gone right, what’s gone wrong, what’s changed in the world of real estate.
Really good stuff. We talked about some really high level stuff. If you’re new to real estate, you might not understand every word we talk about today, both in the first and the second because they are very smart dudes, but just it’s very high level. If you have any questions, you can always go to biggerpockets.com/glossary or jump into the show notes and ask questions there of Ben, of Sam, of us at BiggerPockets.com/show383. But now, before we get to the show, the super long episode today, let’s get to today’s quick tip.
Did you know that BiggerPockets has an official Facebook group? Now there’s been a number of unofficial ones and people like fan groups over the years on Facebook, but we have officially started an official Facebook group, officially. How’s that for being official? And you can get to it by just go into your Facebook page and search for BiggerPockets official and you should find it there.
There’s was also a group for the rookie show, I think is a good for the money show as well. And so, but there’s an official real estate Facebook group now for BiggerPockets. So it just makes you type the word official in there and you’ll find it and we’d love to have you in the group. It’s just a great place to connect and talk and chat and ask questions and celebrate your victories. So check it out, again go to Facebook, search for BiggerPockets official and you should be able to find it there.
I think we’re pretty much ready to get to today’s show. Anything you want to say before we get into it, David Green?

David:
One of my favorite parts of this whole before and after, or maybe before and during thing that we’re doing, is that you get to actually hear all the fears and the speculation people had and then fast forward in your time machine two months and see how much of that came true. And I love that because we forget about all of the declarations that people made that were really dramatic in one direction or another. When like six months later, we don’t always look back and see, “I guarantee victory”, and then they get smashed.
And so this is a pretty cool way of seeing all the fears that everyone had, all the concerns, all the speculation and then zip forward and see what actually happened and seeing how much of that came true. And the more of that you sort of experience as an investor going through this journey, the better of a detector that you’ll start to develop for when you should be worried, when you shouldn’t be. And more importantly, what you should do to mitigate that risk rather than letting it freeze you into not taking action.

Brandon:
So good. So good.

David:
Let’s bring them in!

Brandon:
So with that, let’s do it.
All right. Welcome to the BiggerPockets podcast, gentlemen. Good to have you here. Sam, Ben, what’s up guys?

Sam:
Not much. Beautiful view out here.

Brandon:
It’s not too bad. I get to stare at Ryan this whole time.

Sam:
Thanks for having us.

Brandon:
That’s what you met, right? Ryan. That’s what I thought. All right, well we want to go through your guys story today, each of you. Ben, you’ve been on the show before. Ben’s down on the show many times before. Sam this is your first time and so why don’t we start with Ben, get your 30 second story; Ben has an ability to make 30 seconds into 30 minutes, but we’re going to get your story and then we’re going to go to Sam.
Ben, go.

Ben:
Yeah, I got diagnosed with MS when I was in college. I needed to figure something out to make money. I didn’t have a lot of cash, so I couldn’t invest in dividend stocks. I wasn’t smart enough to build a business. So just like any dumbo, I went into real estate and there you have it.

Brandon:
All right. Wow. And you bought a lot-

Ben:
That’s my story.

Brandon:
In Ohio.

Ben:
Well, not a lot, but yeah, I’ve been doing it since 2006.

Brandon:
Yeah, so you bought the stuff and if you guys want to listen to Ben’s episodes, of course we’ll link to them in the show notes and there are links to all Ben shows, but you’ve kind of made a large change in that you started with the smaller stuff and now you don’t even touch the smaller stuff.

Ben:
Correct.

Brandon:
And so we’ll talk about that today in a little bit more, but Sam, your story. So how’d you get into this thing?

Sam:
You want a short or long version? Let’s go a minute long version.
Yeah. So I was a CPA, worked at Deloitte. They’re one of the largest financial services companies in the country, or actually in the world. In 2014, I bought a house with my wife. We started renovating the house, I did everything from electrical, the plans, got the permits and refinanced, pulled out a bunch of money, got rid of my PMI and decided I loved real estate.
So I started doing that on the side, started flipping. I started investing in multifamily syndications, and then that’s when I met Ben and decided I wanted to sponsor multifamily syndications and the rest history. That’s where we’re at today.

Brandon:
All right. So I want to start a little bit with the transition from your full-time job and that hustle that you had. So Sam, tell us about, when did you know it was time to leave your job? Why did you leave the job? Because a lot of our listeners right now are at that point where they’re like, I hate my job or I don’t like my job, or maybe they really like their job, they just want something different and they want to transition out.
So how did you make that transition?

Sam:
Interesting question. So right when I started, I got recruited by a new company right after I bought my house and I figured out in the first month that I could automate a lot of the tasks I was doing. And so in that first six months, I spent with IT every day. I don’t even know if [inaudible 00:08:07] told Ben story.
I worked with IT every day to automate a lot of my tasks and actually half of my day freed up. And so then they gave me a few more tasks, but I don’t think they fully caught on that I automated most of my day. So I actually just started analyzing deals all day, every day. And that’s what I love doing, I spent most of my time doing that. And that allowed me to really learn the market and local market in Phoenix.
And then I would [inaudible 00:08:28]. I realized that I loved looking forward to that time of my day that I can spend doing that and I wanted to do something I was more passionate about. And yes, I was making great money, climbing the corporate ladder, but I wanted to do something I loved.
We had just gotten married and my wife and I knew that if we didn’t take the leap of faith, then that we wouldn’t do it once we had kids. So it was a perfect time for us. We just both quit our jobs at pretty much the same time, about a month apart and started flipping. And yeah, never looked back.

Brandon:
I believe most people, not everybody, but a lot of people could probably jump in and flipping houses. David, I’d love to know your thoughts on this too because you’re especially getting more into flipping houses, but like flipping houses is not an impossible skill to learn.
Doing large multifamily syndication is a pretty difficult skill to learn. Not impossible. Again, I think if people really want it, they’ll find a way. And if not, they’ll find an excuse, right. To steal a Jim Rohn quote. See Dave, and I gave credit to Jim Rohn there. But like, what-

Sam:
Trademarked lawyers have targeted Brandon now and they’re circling like hawks, ready to swoop in.

Brandon:
No I’ve never stole a quote. Well, geez, this guy. All right, no. Okay. I’m going to go David first. I’m curious of what skillset do you need to quit your job and flip houses? I want to go there first and then we’ll talk about what skillsets you need to do all this.
So I’ll start with you, David. And I know we’re not interviewing you, but I’m controlling the conversation.

David:
If you want to flip houses, it’s basically running a pretty simplistic business. Now, when I say simplistic, I don’t mean it’s easy. I mean, compared to, if you were to buy a brick and mortar institution where you have like 20 employees that you have to manage, the accounts payable and accounts receivable, you have to be looking at accountants. You have to understand the margins of every single thing you’re selling. That’s what most businesses are like. And that’s very difficult, like if you wanted to open a shoe store and sold clothing or something.
House flipping, there’s a lot less variables to go into this thing. There’s what am I buying it for? What do I have to do to fix it up? What are my holding costs? What am I selling it for? When there’s less inputs, it becomes more simple, but that doesn’t mean it’s easy. It means anyone can do it. And with a business like that, the most important thing is you have to be able to find leads. If you can find deals and you can fill a bucket up with a bunch of water, which is your equity, then you can make money flipping houses.
You’ll make less money than the next guy, right. Like someone like J. Scott is going to be super systemized, he’s going to do better than you, but you can still make money if you could get enough equity in that deal. So you have to have the ability to find leads and often with that, comes the ability to negotiate. You have to be able to talk to people and be able to get something under contract and have some skills when it comes to that. Everything else can be hired out. You can hire a contractor to work on your rehabs, you can hire a book keeper to keep the books, you can have somebody who actually analyzes it for you. There’s Sam’s out there who, like Sam just said, I would look forward to that part of the day, all the time. I loved it.
We all have that one part of what we do that makes us come alive and we love to get in there. You find people that are good at those things, and you could rent a house to big business pretty simplistically compared to what most businesses are like, but you got to be able to find leads. If you’re that kind of person that doesn’t like to talk to people, doesn’t like to put yourself out there, you’re afraid of being told no or you’re afraid of having to make 99 swings before you make contact on that hundredth one, you’re going to hate house flipping. But when you realize that when you do one good one, how much money you can make, it make sense when you average it all out.

Brandon:
That makes sense. Any of you guys want to add to that?

Sam:
For me, it was just from the analyzing so many deals. You’re going to get a ton of deals. If you reached out to every wholesaler in your area and just get on all of their lists, you’re going to get more deals than most people can look at. So you need to be able to look out really quickly and know if it’s a deal or not. So when you get that address and the price that they’re asking and the ARV, and really quickly know, I know that area, I know what it’s going to cost to rehab it, I know what I’m going to be able to sell it for, is this a good deal?
And you need to be able to do that in less than a minute. And so just the more you can analyze deals, the faster that’ll go.

Brandon:
Yeah. Huge. All right. So let’s talk about how you guys met. So you’re doing your own thing, Sam, you’re doing your own thing, Ben, you’re doing your own thing. I know Ben, last time you were on the show, you were talking a lot about multifamily syndication and you kind of started entering the space, but now you’re a syndicator, right? So I want to go through that transition of how that happened, but first let’s start with how you guys met each other because I mean, you really took off once you find each other, right?

Ben:
Right.

Brandon:
All right. So how did that happen? How’d you guys?…

Ben:
So I’m letting Sam talk because he yells at me all the time because I talk all the time, right?

Sam:
This is a huge change.

Ben:
Pre-Madonna. The professor.

Brandon:
All right. Let’s hear it.

Sam:
So as I’m flipping, I started investing in multifamily syndications. All of them were local to Phoenix, all local sponsors. And actually I’m listening to a webinar that you were putting on, Brandon, and you mentioned a syndication that you’re investing in an Arizona and I thought, Oh, that’s perfect. I’d love to find out more about that. So I emailed you and you connected Ben and I,

Brandon:
I should go back and look at that email. I don’t remember that, but I must’ve. That’s good. Okay.

Ben:
And for me it was a very personal decision. You’re just sitting in Ohio, [inaudible 00:13:26] and one day you wake up, you look at yourself in the mirror and you say, you know what? I bought a duplex, I bought a triplex, I bought a fourplex, I bought a tenny. That cup is overfilled like on a very personal level. Right.
It was just like, I can’t buy another small multifamily. It’s just not me anymore. And I didn’t know what me was at that point. Just like he outgrew his cubicle, I outgrew my, Well, okay. I have 30 doors, I have 40 doors.
It’s just it was done. I was done. The guy I was, like looking in the mirror, it was not a guy that could tolerate buying another fourplex.

Brandon:
Let me ask you a question on that note. How much of that was that transition? Because again, a lot of people listening to show right now are investors who have 10, 20, 30, 40 units. How much of that transition was because you just wanted something more or did you need something more in terms of like financial because I’m assuming you would have been fine just with your properties.

Ben:
No, you don’t need more financial, you want more financially.

Brandon:
So what made you do that?

Ben:
For me, is your manhood, your impact on society, your capacity to deliver a lifestyle to your kids, those are the things we need. Money is a byproduct of growth. And I was just simply in a place personally where I was done, dude. And that happens in growth every time. It’s a hockey stick, you go up and then you hit a plateau.
And then that right there, you’re spinning around looking, who am I now? What’s next? Who is this guy now? Right. And that’s a place I was in. And so it’s very personal. It’s really all about growth, none of it is about money. Money’s nice, but it’s growth.

Brandon:
Yeah. What about you, Sam? Why did you make that jump? Like, why not just be satisfied with the flipping or the smaller stuff

Sam:
So I started learning a lot about multifamily, just going to conferences, reading books, listening to podcasts. And I noticed that my skillset related a lot more to multifamily, the financial side that’s really involved with multifamily. And I loved the real estate side and flipping and taking something and improving it, and now I just do that on a larger scale with multifamily.

Brandon:
That’s cool. Very cool.

David:
I think something about your guys’ story that I really want to highlight for the listeners is, the most successful people that Brandon and I talk to had a career growth trajectory very similar to yours. The newbies always say, Okay, tell me every single step I’m supposed to take all 150 of them. Let me line up my dominoes as perfectly as I can, so I never make a mistake. And they spend 17 years trying to do that, then they realize that real estate has tripled in value and they haven’t done anything and they’re in the same place they were.
The people who are successful say, I can see the first step, let me go take it. And then like Ben, they go build up a portfolio both of small multifamily properties, they learn the fundamentals of real estate, they learn how to manage money coming in and out, they learn how to keep books, they learn tenant laws. They just learned the basics and so there’s some confidence, and then they say, Yeah, I don’t really think I really like doing this anymore. What would I rather do? Then they find something else. And then they go do that.
And it ultimately cumulates in you ending up where you should have been because being like, this is going to sound cheesy, but your heart kind of guides you. Right? I don’t like doing this. Sam knows his heart says, I want to be analyzing stuff. When you put an Excel spreadsheet in my hand, I feel like John Wick with the Glock, this is how I like to feel. And he knows that’s where he’s supposed to be.
You don’t know that before you start, you don’t know what you’re going to like, like how you should be doing it. You have to get out there and start doing stuff and it’s okay that you change course like the stuff Ben learned doing small multifamily is the same fundamentals. He’s usually doing large multifamily, it’s just kind of on steroids now, but that’s okay because you have to learn how to do addition before you can learn how to do multiplication. If you wait until, I want to learn algebra as the very first form of math that I ever learn, most people will never actually end up learning anything.
And so this path of real estate of, charging forward, hitting a ceiling and then picking a new path to go is what your path really should look like.

Ben:
Absolutely, and it doesn’t have anything to do with real estate. Like people come to BiggerPockets thinking that real estate is the answer. Real estate is the tool. It’s just a tool.

David:
Absolutely.

Ben:
The answer is in your head. And if it’s not there, I can’t put it there. Brandon can’t put it there. David can’t put it there. I mean, you got to see the bigger picture.

Brandon:
So once, once you guys got to the point where you realized the bigger picture is multifamily syndication, tell me how you made the switch, what pieces you had to put in place, and then how you chose which market you wanted to invest in.

Sam:
So Ben and I actually, when we first connected and we knew we wanted to partner up, we spent, well, probably six months daily, 12 hours a day, underwriting and coming up with our model…

Brandon:
Literally.

Sam:
looking at markets. We looked at other markets, we went and put offers in other markets, [inaudible 00:18:19] and final.

Brandon:
You had both lived in Phoenix though at this point, right?

Sam:
Yes. Yeah. We both live in Phoenix. All this underwriting was on the phone. We were just on the phone and our wives probably thought we were crazy, 12 hours a day until eight o’clock at night.

Brandon:
It sounds like eight years ago, Josh Dorgan and I, it was the same thing every day.

Ben:
Totally, because the passion behind it.

Brandon:
Yeah, exactly.

Ben:
It didn’t have to do with apartments, it didn’t have to do with real estate. It was a tool…

Brandon:
You were growing.

Ben:
but we weren’t passionate about the tool, we were passionate about the growth. Getting from point A to point B to the next plateau.

Sam:
But I think that’s where our partnership came into play a whole lot. I mean, you’re talking six months of, we’re submitting offers and not getting deals. If you’re on your own, you’d think a lot of people would just be burnt out and give up at that point. When you have someone every day that you’re on the phone with tweaking the model, let’s look at it this a little bit differently, let’s go to it’s a different market. So just having someone push you and hold you accountable, but that got us through I think that first six months.

Brandon:
So maybe before we go into the market discussion about how you picked finding your market, let’s talk about the partnership thing for a minute. David, I know you do partnerships, I do partnerships, you guys obviously have a partnership. For those listening, what makes a good partnership? What do you think made you guys work so well together? And how can other people find a potential partner? I mean, other than just emailing me and asking for an introduction.

Ben:
I was just telling him the other day. The amount of value he added to my life, that was that. I mean, I never considered partnering with anybody before, but the amount of value he added to my life, that was it.
Like yin and the yang.

Sam:
Yeah. To that point, complimentary skill sets. I mean, we were the opposite in a lot of respects, even though we have the same views on real estate, our skill sets are completely separate and I think that helps us a lot and we balance each other out. I’m the eternal optimist, he’s the eternal pessimist.

Brandon:
Yeah, didn’t give him a book. Tell us what the book you got after your first deal.

Sam:
So after every deal, I get Ben a gift because we go out to dinner and the very first deal, I got him Chicken Little because Ben’s sky is always falling.

Ben:
It’s true.

Brandon:
But what’s great about that, you’re a hundred percent right though. Like the eternal pessimist and the optimist, I think that actually makes for a really good partnership because if you’re too far one way, you start making stupid decisions. You got to have something that’s always like pulling you back, reigning in a little bit.
I’m curious, David, real quick. You and Mario, which one of you is the pessimist of which one’s the optimist? Or do you feel like you both are one way?

David:
I’m the pessimist in that relationship. Yeah. So I’ve talked to Brandon about this and I didn’t use the optimist-pessimist thing, I used the driver and the filter. So Brandon is a driver. If you put something in front of him, he will find all the ways that he could make that work. He believes he can make anything work. That’s part of why Brandon is successful. Like he just really doesn’t think that there’s anything he can’t do. Not because he’s arrogant, but because he will just throw… Like the guys have been going to jiu-jitsu with zero idea of what he’s doing is getting throttled and he keeps going back.
He’s not even asking, what do I do? He’s like, if I just keep going, I’ll just learn it. Right. Like he is the personification of the attitude we tell people you should have. Okay. But Brandon needs people in his life like Sams and Bens, that are what I call the filter. So he fills up a funnel with every single opportunity he can possibly find and he says, I want to go to all of them.
The filter picks, which one is actually worth pursuing and says, you are allowed to go in that direction and this way. So he’s just like the police dog that just wants to go and bite at anything that it can, he’s just all the time, go, go, go, go, go. Well, it needs a handler that can control it and say, all right, you are allowed to go bite that person, don’t bite David who’s right next to us, even though his leg looks really good.
You got to find that in a partnership, I’m a firm believer. I think it’s Brian that probably plays that role for Open Door Capital. He’s going to say, all right, Brandon, I know you love that deal, here’s why it’s terrible, I’m not going to let you chase it, let’s go chase this one instead.
But if all you have are filters, they never get anywhere. They sit in a circle talking about doom and gloom and why nothing will ever work and successfully avoiding ever making a mistake, but never making any money at all.
You’ve got to have both sides.

Brandon:
I’m just such an optimist when it comes to Open Door Capital that it takes an entire team of people to tell me no. Ryan’s laughing off camera right now nodding. It’s like Ryan and Brian, they have to gang up on me, like, no, we’re not building houses in Maui, Brandon. That’s a terrible idea. I’m like, but we can make so much money doing it. Yeah. It takes a lot of them.
All right. So that’s one huge part of the partnerships. How does somebody find that partner? What would you guys recommend if somebody is looking right now saying, I need that other person. Or maybe they’re asking, do I need that person? Do you need a partner? Oh, I kind of covered both those things. Maybe we can talk about…

Sam:
Well first I think, absolutely, you need a partner. I think everybody is going to go further with a partner, but how to find them, I think that’s difficult.

David:
I mean you were helpful.

Brandon:
Good show guys! It’s hard!

Sam:
Neither one of us were actually looking for a partner. We just stumbled upon a partner. So I would just put yourself out there. I mean, start going to conferences, networking with people, going to meet ups. Unless you’re interacting with people, you’re never going to find that person.

Brandon:
Conference is like BPCon 2020 in new Orleans.

Sam:
In October.

Brandon:
In October. Anyway.

Sam:
Yeah, exactly.

Brandon:
Probably sold out by this time, but anyway.

Ben:
I think you need to know your own strengths first, step one, because then you will understand what you are lacking and what you are ultimately looking for.

Brandon:
How do you do that? How do you know your own strengths?

Ben:
You don’t be stupid. You be pretty sharp about what you do, you have to know your strengths. If you don’t know your strengths, get the hell out of here. What are you doing here?

Brandon:
Yeah. I think just asking the question, what are my strengths? Is the way you figure out your strengths. If you just don’t even think about it, then you’re just going to be…

Ben:
If you have to ask yourself a question, what are my strengths? You are a dumb ass. Some things you should just know.

Brandon:
What I mean is by focusing, by putting some intention behind it.

Ben:
Listen, let me give you an example. So we talked about it in liberal arts terms, right? David did, you did and well, let’s talk about the underwriting process because with that, we’re kind of like boiling things down to real actual shit that we do.

Brandon:
Okay.

Ben:
I look at things in the more… I’m a violin player. So I see the imagery, I see the pictures. I’ve been doing real estate since 2006. I know how people act. I know what they do when their alternative breaks in their car. I know what that call sounds like. I know what the call sounds like when their kids sticks a toy in the flapper, in the toilet and it leaks from downstairs. I know what that sounds like. I know how that interaction impacts property. Because I can look at the trailing financials, I know how it impacts the building. I know how that works. Okay.
Sam didn’t, because as smart as he was, he wasn’t wise because wise happens from experience from being in the trenches.

Brandon:
Do you agree?

Ben:
Perspective on stuff, right. So that’s a good marriage because I never reported to SCC and I never helped another company set up a thing with the SCC, so I have no idea, classically speaking, accounting wise or anything else, what that’s supposed to look like. All I know is this is what’s economic loss. This is why it happens.
People are people and I’ve experienced it for 15 years. And because of that, here’s the number we’re going to put in the underwriting because it’s going to represent that. So I start with that picture and then I boil it down to numbers. He goes straight to numbers. So every time we underwrite a deal, we’re doing it together. Like if it’s remotely interesting to me, I send it to him and he starts underwriting, vice versa. We underwrite every deal together and we start from the opposite point of view. Like I’m more liberal arts, he’s more just straight to the numbers, and what happens is we massage those two things together to arrive at what I think is our competitive advantage because we’re able to dial it in more so than either I could by myself or he could by himself. But I’m very liberalized. He’s very like, stiff, just numbers.

Sam:
So when he says we start from two different places, we actually have separate underwriting. So I have one underwriting and he has another. Now we can come up with the exact same, if we use the same rent, same unit mix, same capex, we come up with the exact same returns, but they’re built completely different.

Ben:
And if we don’t, then we go to the underwriting and I say, Sam, fix mine.
So what you’re saying here is Ben, you’re taking more of a qualitative approach to the real estate side and Sam, you start from more of a quantitative and you guys meet in the middle and then you convince each other either for or agist
Convince each other. Exactly. And that back and forth is hugely helpful because I’m too much of a pessimist to capitalize on the opportunity and he’s too much the other way to recognize the risk, but having those two perspectives married together works for us.

Brandon:
Really, really good point. I like that a lot.

David:
I think it’s similar to what Brandon and I do with ideas. So we’ll each have an idea and I’ll typically look at it from the perspective of, how much knowledge are we sharing with people if we do this? How does it fit into the rest of the world that we have? Can I make it efficient? Can it be synergistic? I’m looking at it from that and then Brandon would just be like, yeah, but would anybody care?
And I have to never even think to ask the question of like, would anybody want this when I’m looking at it probably more like from Sam’s perspective, and Brandon’s looking at it from like, is there demand for this? Would anybody do any of the stuff that we told them? Would they even have fun? Or would they like it? Do people want this? And we’re both looking at it, like you guys said the same thing, same ideas from different angles and it’s only when it passes both of our little internal underwriting systems that we say, yes, this is an idea we should implement for the podcast or whatever we’re doing.

Ben:
Sam goes straight to the price per square foot, right. We’re looking at an apartment and I’m asking myself, who’s going to be interested in it and why? And so he goes straight to the price per square foot, where’s that land in the market. I walk into that apartment and I see an extra piece of countertop, which is almost like a desk in the corner, and I’m going, who wouldn’t love this? I don’t even care what price it’s [inaudible 00:28:32]. So now we have to marry that and figure out the price per square foot, because there’s an emotional value in why this apartment is going to be preferable to another apartment in the marketplace.

Brandon:
So this actually brings up a point for a lot of new investors that maybe people who aren’t at this level at all of buying apartments, but I bought a house one time for $45,000. I approached it from the numbers standpoint, the Sam standpoint, we’ll call it. And I said, $45,000 in rent for $800 a month, that is a hot deal. And all the numbers, I could run the analysis all day long, it worked out perfect. That property cost me, on average, $200 in lost rent every single month I owned it for eight years. And then I sold it at basically a loss or maybe a break even of what I had into it.
Why? Because I didn’t look at the more qualitative of, this is a freaking weird house and weird houses attract weird people, right. So like, it was a weird house, a strange layout, it had been remodeled by some guy who’s just a tinker and so he just did weird things everywhere.

Ben:
Are we talking about a Waldo here? What are we talking about? Or a pig?

Brandon:
Yeah, it was basically a pig with lipstick on it. And I should have approached it from both sides, but I didn’t. I got caught up in just one angle. Now other people could have done the opposite, been like, That house, look, did you see the kitchen? It was beautiful and blah, blah, blah, and then they don’t actually run the numbers and they’re like, Oh yeah, that deal sucks.
So no matter what type of real estate you’re going into, whether it’s your first single family deal, or you’re trying to buy this 400 unit apartment, you got to-

Ben:
You’re selling a product. Somebody is going to want to buy that product in order for you to succeed. I don’t care what the numbers are. Who is going to be buying that product and why would they choose this product as opposed to the other? And with that, we can get into location, we can get into the scope of renovation and all of that is on the list if we want to talk about it. But it’s a huge, like a huge topic with… It’s like a bottomless pit. We can talk about that. And when you’ve got millions of investor capital, you have to think about all of it.

Sam:
Yeah.

David:
Yeah. And I think a good principal to pull out of this is, pick a partner that sees your blind spots. That they look at the world from a different angle as you. You have the same goal, you have the same values, you have the same ethics, you want to get to the same place, you’re going the same direction, but they’re looking at things from the way you missed and you often look at things from the way that they miss.

Sam:
Yeah. That makes all lot sense.

Ben:
And it’s natural. Like what makes a good partnership, we don’t have to do what David just…

Brandon:
Like what makes a good partnership. We don’t have to do what David just said. We don’t have to sit down there and check the… It’s just natural. That’s the way it happened. That’s why the partnership works so well.

David:
Yes. That makes a lot of sense. We’ve talked about this on numerous other shows, but this is why Ryan, and I have worked so well together, I think we just kind of became a natural like…

Brandon:
Well, he’s also so good-looking.

David:
He’s a good-looking gentleman.

Brandon:
Looking at him all day long, it’s no brainer.

David:
Let’s go back to picking a market. We talked a little bit about that, but you guys ultimately decided on Phoenix. Now, this show is not about men vested in Phoenix, but I want to know what drew you to Phoenix, and how do you decide on a market? How does somebody listening to this right now decide where to go, and focus their investing? Especially a lot of people listening to are in LA, in New York and Seattle, and they’re just like, “I got to invest somewhere else”.

Brandon:
Well, they’re all coming to Phoenix.

David:
They are coming to-

Brandon:
But that’s beside the point. I mean, that’s why the cap rates are four and a half.

David:
So how do you decide on a market?

Brandon:
Can I start us off?

David:
Yes.

Brandon:
Because it’s the same, continuation of the same, “here’s the liberal arts and here’s the numbers”. I moved to Phoenix three years ago. All I have to do is ask myself, “Why?” I want the weather. I want the blue skies. I want the low property taxes. I want the low insurance costs, property insurance. I want to never see snow as long as I live. I want opportunity for my kids. I have those things in Phoenix.

David:
Yes.

Brandon:
If I like something, and that’s really like a good entrepreneurial way of looking at things. Like how do you get your ideas? Well, if I want something, other people probably want something. If I want to be here, other people probably want to be here for probably the same reason. If I want to figure out how to do something better, or faster, or more efficient, other people probably do.
That kind of perspective on life, if it’s good for me, it’s probably going to be good for other people. So, that’s my kind of very liberal arts of looking at what’s a good market. Well, it’s good for me for reasons: X, Y, Z. Therefore, I imagine it would also be good for other people for the same reasons, because we’re all humans and we all basically want the same thing.

David:
But this is where the whole idea of like you start from the qualitative side, the liberal art side.

Brandon:
That’s right.

David:
But if you just made a choice based on that, you might make a horrible decision. So, that’s where you have to back it up with data-

Brandon:
That’s right.

David:
..and that’s where Sam comes in, right?

Brandon:
That’s right.

Ben:
[crosstalk 00:33:26] That’s right.

David:
So then you come in and-

Sam:
So, we actually have six factors that we use when considering when to decide on the market.

David:
Okay.

Sam:
The first one competitive advantage. For most people, this is proximity, but it could be I’m getting deal flow in a certain area, or I know where a new path of progress is headed in this area. Can you think about some other competitors?

Brandon:
I know somebody on the city board, and I know regulation that’s coming that’s going to create opportunity, probably not on a large scale like for multifamily. But if you’re going to run a bed and breakfast, and you know that there’s regulation coming that’s going to limit that or help that then you buy an eight bedroom house, and you subdivide it and put locks on every… That kind of thing. So being local is just an advantage.

David:
It’s huge. Right now, I tell people a lot that if I was to invest in another market, I’m just going to build a small multifamily portfolio again, let’s say in another market, I’d probably choose Minnesota. They’re like, “Well, why Minnesota?” I’m like, “Because that’s where my family lives.” So, my competitive advantage is I have 10 people I could call at any moment and be like, “Hey, can you go check this out?” I grew up there. So, I kind of understand the market.

Brandon:
Yes, except I know your family. Every 10 of them is going to be like, “Who is this?”

David:
Yes. Oh now you want to talk to us, Mr. Maui.

Brandon:
That’s classic. Who are you? You want me to do what?

David:
All right. The competitive advantage is that you either know something about the market, or you have something in there. Being local is like the best competitive advantage.

Brandon:
I’ll give you a real example. So, we’re in Phoenix, and I think IPA just came out with their study of 2019 rents, and I think Phoenix grew rents by 8.3%.

Ben:
Whoa. That’s one of our numbers.

Brandon:
Well, we’ll talk about that later. But the whole point is, if you are looking at data, if you’re approaching this institutionally, and you are looking at some kind of market data, by the time it’s collected, organized, and put before your eyes that’s six months have come, and gone and you’re about 4% off on trying to figure out where your rent needing to be in order to underwrite this.
So, it makes it very inefficient, very difficult to be competitive in a good market. So, being local, and knowing exactly, “Hey, here’s my competition. I’m just going to [inaudible 00:35:39] I’m going to hold Sam’s hand. We’re going to pretend like we’re a couple. We’re going to go in there, and look and see if they have a washer and dryer.

Ben:
For those of you that you can’t see this video, Sam is a remarkably handsome man. I don’t know what it is when I look at you Sam.

Sam:
Thanks David.

Brandon:
This is what I’m saying.

Ben:
Something about your look.

Brandon:
He’s my Ryan, okay.

David:
And for those who can’t see this video, David Green, and Sam look identical, you could be confused for the same person.
All right, so, you look to number one is that competitive advantage? What else do look for.

Brandon:
Number two diversified economy.

David:
Okay.

Brandon:
If you go back to 2006, one in six jobs in Phoenix was construction related, but only one in 14 are now related to construction. So, Phoenix is really diversified. We’re now in tech, health services, education…

Ben:
That’s smart, yeah.

Brandon:
So you want a diversified economy. You don’t want something that related on a Navy base or only… So, that Navy base loses funding, I mean…

David:
That doesn’t mean…

Ben:
Or perhaps an area that is dependent on the auto industry as the only source of employment for everybody that lives there.

Brandon:
Right, and it doesn’t mean that you can’t buy a fourplex, and do very well in an area that’s not diversified, but you’re not taking $20 million of investor capital, and buying $50 million a multifamily in a market that doesn’t have good fundamentals.

David:
I think that’s a great point to make here as we go through these six things. This doesn’t mean that you can’t invest in those markets. There are plenty of ways to do. I made my living in Grays Harbor, Washington, like the armpit of Washington state, like that’s where I built most of my portfolio wealth. So, it’s doable everywhere, but I had the competitive advantage in that market, because I knew ever… and people, I love when people come into that market from Seattle, and be like, I’m going to start buying some of these properties. I’m like, good luck. Like you are competing with me, and I live here and I know everything about this market. So, competitive advantage, diversified economy.

Brandon:
Going back to, we’re doing large multifamily. We want to buy hundreds of millions of dollars of property. We want a population of at least a million people.

Sam:
Okay. So population, yeah.

Brandon:
So that’s huge.

Sam:
We look at that as well for the mobile home park stuff.

Ben:
Can I jump in real quick? As far as something you guys mentioned that you said you want to be in the path of progress, and you want it, that is an absolute yes. You want to be in the path of progress. We typically look at that from a give me a formula for how I can find the path of progress, our brains, really like that. But the better way to look at it is to understand the principle of a path of progress. Because Phoenix itself is in a path of progress.
If you consider where I live in California with a massive exodus of everybody who is tired of how expensive everything is. So, just you choosing a market that is where people that are sick of California want to go, you’re already in a path of progress, right? Like, think about like all the water that’s like overflowing out of California, and it’s spilling.
If you look at the States that are around us, Idaho, Nevada, Arizona, Colorado, all of those markets have done super, Oregon. They’re all doing really good because people are leaving California for what appears to be super cheap prices. Now, you guys understand where you live, that doesn’t seem cheap, but to other people it does. I just wanted to kind of highlight. I know that’s part of what you guys considered when you chose Phoenix, as you looked at, okay, all the people from the cold places want to go somewhere warm, and all the people from the crazy expensive places, or maybe politically kind of weird places want to go somewhere that to them feels normal and is cheap, and they’re all going to end up in Phoenix.

Brandon:
So, you don’t have our lists, but that’s actually number four.

Ben:
Sorry.

Brandon:
No, it was perfect, perfect intro. So, number four, population growth. So, Phoenix is number one in the country in population growth.

Ben:
Wow.

David:
That’s cool.

Brandon:
Because of all those things you said David, yeah, it’s number one because people from cold places want to come where it’s warm, people from crazy high taxes places want to come where it’s lower, people from California, which is just crazy, want to come to someplace that’s not California, and it’s not crazy. So, it’s just ultimate melting pot, a confluence of all of the things that, all of the reasons like Ben moved from Ohio to Phoenix. Well, he had his reasons. What other kind of reasons would people have to move to a place like Phoenix? Well, that’s it right there.

Sam:
Yeah.

David:
All right, so population, yeah. We were looking at a mobile home park collection, a bunch of them, out in Illinois, like kind of in rural Illinois. We decided when we looked at, everything that was good. Everything was great, like the numbers all felt great, except for population trends was like negative 8% per year. I was like, “Oh, people are fleeing this area.” We didn’t want to get caught with something in an area where population is declining. So, we decided not to. So, population growth.

Ben:
Huge that’s right.

Sam:
So next job growth, are jobs coming? Phoenix is number two in the country in job growth. So, you need jobs to be able to support that population obviously?

Brandon:
Yeah. [crosstalk 00:09:30].

David:
Population growth and job growth.

Brandon:
If people are coming, they’re not coming because there’s no jobs. So, obviously the companies are relocating the jobs and that’s part of the reason people are coming.

Ben:
Yeah.

Sam:
So, those two lead in to the last one, which is rent growth, number six. That’s the one that’s really important, especially with multifamily. How much can I grow rents every year? If I’m holding this for 10 years, and Phoenix is number one in rent growth, obviously because if you’re number one in population growth, number two in job growth, it’s pushing up rents. Like last year, Phoenix has been about 9%, the year before that 8%. So, we’re actually still having job growth, whereas a lot of the country’s a bit flat or negative in rent growth. So, I mean, obviously you don’t want to underwrite that projected to continue.

David:
Sure.

Sam:
But just to have the extra appreciation in your back pocket.

Brandon:
Yeah. That’s great.

David:
All right. So let’s review that list real quick. Just read them off all six again, just so people can, if they’re taking notes, they can get that one, and we’ll move on.

Brandon:
So number one, competitive advantage. Why are you going to be better at something than someone else in that market? Number two, diversified economy, not relying on one industry. Number three, minimum population of a million. Four population growth, five job growth, and six rent growth.

Ben:
Oh, perfect.

David:
Perfect. What I want to point out, we mentioned this before and I want to retouch on it. Does it mean you can’t invest in an area without a million people, right? This worked exactly for your guy’s business plan.

Brandon:
Right.

David:
Your strategy. So, let’s talk about that for a minute. What is your plan? What is your strategy and then I want to go into, what have you done in the last few years since partnering? What kind of deals have you got?

Brandon:
So, it’s interesting because most people see multifamily real estate as a cashflow asset, you buy it, you get the rents, you pay the expenses, you get the money in the pocket, and that’s that. We talked about flipping houses, and what I invite people to do is conceive, and I learned this from buying BRRRR, conceive of multifamily as a longterm flip. q
Because if you are talking about flipping, what you are necessarily talking about is equity. When you talk about equity, that’s safety. Because if you have equity, you can refinance, you can sell, you can get out of a deal. You have options. So, I think part of that growth that happened, Ben going from small multifamily portfolio to syndication is, hey, if Ben is going to take $10 million of people’s money, Ben wants to know how the hell he’s going to get it back out, and what the safety margins are going to be.
All of that comes down to equity, but Ben doesn’t want to trust the market growing, it helps. You certainly want it to help you, but I don’t want to trust the market to do it for me. Which means I do extreme value adds, I improve this property. This is where in a environment where rents are scaling up. If you’re going to come in, and do your renovation and hike the rent, that’s the environment in which you can do it. If population is leaving, who is going to be willing to pay you even for a very nice apartment, right?
So, we look at multifamily as a flip. We may come out of it in two years, we may come out of it in three years, in five years, in seven years, in 10 years. But ultimately after repaired value is where it starts, minus the cost of getting there, minus the profit margin, minus the holding costs that are in multifamily built into the NOI, of course. That’s how much we can afford to pay it. But basically it’s a flip.
We think of it as a flip that’s removed several years apart. So, you’re coming in today, and you’re going to exit five years, seven years, 10 years from now, but it’s a flip and you are thinking exit.

David:
So, you’re thinking you’re buying value add stuff, which is like a fixer upper.

Brandon:
Exactly.

David:
How bad are these properties you’re looking at? I mean, you’re talking like completely dilapidated, a hundred percent empty, or are you talking…

Brandon:
So, Phoenix has what, 4% vacancy.

David:
Okay.

Brandon:
That’s across the board. So, we’re buying places completely full. In fact, I have to discount that because I can’t underwrite 4% vacancy for the next 10 years. So, I’m actually hurting myself in my underwriting, and I have to actually do extra value add to make up for that in a market like Phoenix. Which is where our business plan comes in.
So, we’re spending 12,000 per unit on the interior of each unit to completely renovate that unit. New flooring, new cabinets, granite countertops, stainless steel appliances, new lighting fixtures.

Sam:
All new boxes.

Brandon:
Yep, everything new in that apartment, but we’re getting $400 rent bumps sometimes. So, and when you’re starting at from 600, and going to a thousand. That’s a huge percentage increase.

David:
That’s huge. And because the value of a property is based upon how much profit it makes, essentially when you can bump rents from 600 to a thousand, that dramatically increases the value of the property. That long flip, like you said…

Brandon:
Well, and it actually does two things, two separate things, equally important things, maybe one more important than the other. Yes, right now we’re getting the rent bump. Tomorrow when there’s a down cycle, there’s always a flight to quality in down cycle. I don’t want to be holding resurfaced countertops and we refaced drawers like everyone else, I want to have quality because that’s hopefully going to give us staying power if we’re caught in a down cycle in this property.

Sam:
And reduces our expenses. [crosstalk 00:00:45:53].

Brandon:
Cap ex because everything is new, right? All the faucets are new, the shower heads are new. There’s a couple of different angles on why we do what we do. But like as an entrepreneur, this is what I want. I want safety. This is what I have to do for safety. What market is going to allow me to do that? Well, I think Phoenix was going to be liable to do that. So I will do this in Phoenix.
Can I do this in Ohio? No. On many different levels, no. The business plan is sound. It still makes sense, but the market won’t let you.

Sam:
Yeah. So, the thing you do has to match with the market you choose has to match with the business plan. Which is why, if you live in San Diego, maybe house hacking will work really well for you. House hacking kind of works everywhere, but maybe like BRRRR investing isn’t going to be a great option there, but house hacking is, or maybe small multi isn’t going to work there because you just can’t get cash for, single family houses, right?
Most markets, competitive markets, single family houses, it’s hard to get any cashflow. So, you have a choice. You can either change your business plan, or you can change your market to accommodate your business plan. The two have to go together.
Again, whether you’re trying to buy your very first deal because too many times people are trying to fight for a business plan that just does not work in their market. Or they’re trying to fight for a market that just… They have to go to [crosstalk 00:47:12].

Ben:
Doesn’t reward a particular business plan, does it? Yeah.

Brandon:
So, like you can make apartment very nice and spend $12,000 interior, and 10 more on the exterior. But if you’re in Ohio, nobody makes any fucking money. Who’s going to let you raise your rent $400.

Ben:
Yeah.

Brandon:
Okay. I mean, that’s [crosstalk 00:47:29].

David:
But you make a good point there. A good example of that, we interviewed a guy named Joe Asamoah on the podcast recently, he’s in Washington D C, very expensive market, hard to make single family houses worked there, but he’s doing it. If you guys want to learn how, go back, and check out his episode, it was really good. I can’t remember, like maybe in the three sixties, Joe Asamoah.
But he changed his strategy to work in that market. Now, his strategy might not work in Ohio, or in Florida or in Phoenix. But it works really well in D C because of some things like how much Section Eight will rent for there. He does like a certain level of rehabbing.
So, speaking of rehab, I want to go back to that. So, rehabbing these properties is a tremendous amount of work. Now, I have some mobile home parks, apartment complexes, especially when I deal with the property manager, like, “Hey, property manager, you just go, and handle this rehab.” It’s always a disaster. How do you guys overcoming that?

Sam:
Well, originally we were relying on our property managers. They have 20,000 plus units under management. We had them doing the renovations, but our renovations are really intensive. Not many value add investors in Phoenix are doing what we’re doing with everything new inside. They’re resurfacing the countertops, painting the cabinets.

David:
So, now you got to go find a bunch of contractors and that’s hell as well.

Sam:
We actually took that over three, or four months ago, just because the process was a little bit too much for them, especially as with how much we’re buying last year, we haven’t talked about it, but about almost 400 units last year.

David:
So, you guys put on tool belts and started doing the work yourself.

Sam:
Exactly. So, we hired a crew, we started our own construction company, hired our own crew coordinator and now we run the whole thing from beginning to end.

David:
Like employees. So, you actually started at construction, that’s awesome?

Sam:
So, we have five full time employees renovating across our properties, right now.

David:
Wow.

Sam:
Yep, but we’re now turning them in, like one third of the time that they were prior, quality’s better, and our prices are better. So, worked out really well. It’s difficult.

David:
Yeah, it’s not easy to go start off brand new business.

Brandon:
There’s a critical mass. You’re not doing this for a hundred units. You can’t afford to. There’s just not, there’s not enough money. Same as you know, we always talk about PM, right? How much PM do you underwrite? Well, let’s just take 10%. But if your building is too small, and your income on the building is too small, you could end up paying a lot more than 10%.
It’s all about dollars. There’s a critical mass, there’s a number of units. There’s a number of magnitude of number of apartments. You can’t hire one guy because then there’s no redundancy. Like if you have a hundred units, and you hire one guy, you start a construction company, hire one guy. A, you can’t hire a coordinator. Which means now you’ve bought yourself a job of coordinating this one guy that you hired. B, if he happens to be sick, nothing gets done.
So, you can’t have one guy, you got to have two guys, but you can’t have two guys for 30 units because you can’t afford them. So, now you have more units, right. So, it’s all like we grew into it very naturally, and then it was like no brainer.

David:
Yeah, that makes a lot of sense. Yeah, taking it in house is interesting. I’ve done both on the smaller scale. I hired at once, a gentleman just to run the rehab. Because I had like five rehabs going on at once I hired one guy, brought him in house, employee everything, and it was fine. But then the jobs ran out, and then I didn’t have a use for him anymore. So, like that kind of fell apart. So, that’s the danger of going in house, maybe it’s not a big deal. I’ve hired temp workers. That was a disaster.

Sam:
I think we hired really good workers. We got people with had specialties in what they were doing, but they can do everything else as well. But we also paid more than what the market. The prior team, they were paying $13 an hour. You had high turnover. People just not showing up. We’re paying $20 an hour, plus health insurance. Yeah, and we’re guaranteeing them 40 hours a week. Even if there’s some downtime, because it’s it fluctuate.
So, we get, say you get 10 units on the first of the month, and then you install cabinets, and then the countertop vendor needs to come in. They’re in there for a little bit, and so what are the guys doing? You guys might have some downtime, but we guarantee you’re going to work 40 hours a week. So, you get quality people when you can do that.

Brandon:
Yeah, and health insurance.

David:
That’s helpful, because then you get way better people. Even though you’re paying them more dollar per hour, you’re paying actually less money because before there were so many people in the overhead of that, of those contractors taking a piece.

Sam:
Well, and not only that, they were taking sometimes 90 days to renovate a unit that’s a lot of vacancy. So sure, I’ll pay someone more, but if I can estimate that I know I’m going to be done in 30 days, and that cuts me out a couple thousand dollars a vacancy.

Ben:
Yeah. That’s smart, very smart.

David:
All right. So, let’s go to where you’re at today. I mean, so what have you guys done now since being partners? What have you guys bought, and what have you done?

Sam:
So, in the last, what has it been 18 months now? Since we bought, almost 18 months, 17 months, we bought 500 units.

David:
Wow.

Sam:
50 million of acquisitions. We raised about 20 million.

David:
Wow.

Sam:
Yeah, and that’s spread across four properties.

Brandon:
Just a walk in the park.

David:
Yeah. Easy stuff.

Brandon:
Walk in the park [inaudible 00:00:52:20].

David:
How do you find these deals?

Brandon:
They just fall in our lap.

David:
I was going to say driving for dollars for these things.

Brandon:
Yeah, driving them dollars, yeah.

Sam:
It’s a mix. It’s a mix. So, sometimes you’re going on market, you’re going through like what’s called a best, and final for multifamily, getting through a bidding process. Some of them completely unsolicited offers go off market. But now actually I’ve pushed Ben at the very beginning, and he hated me for this, but I pushed him to close in like 30 to 40 days where contractually, I had 60 days, but I just wanted to be able to close really early and have that.
Because when you go through a best and final, you get what’s called a questionnaire and they ask you your last few closings, or transaction history. So, when I can say that I’ve closed 30 to 40 days on average, even though the contract gives me 60, they love hearing that.
So, actually we had our last property, it was already being sold. It was under contracts and it fell out of contract. We got a call because they knew we could close quickly. Hey, can you guys come in, and get this? So, you don’t get opportunities like that if you don’t close early. So, it’s a bit been a mix, actually all four properties I think we’re a different acquisition like that. But actually funny enough, they’re all from the same broker so far.

David:
Oh fun. So, the one guy is like your-

Sam:
Well, one firm.

David:
One firm.

Ben:
One firm.

David:
Okay. So, that’s cool. So, you are getting these, these are not, you’re not getting like direct mail marketing, or anything like that at this level. At the large apartments, you’re not doing…

Brandon:
Especially in a place like Phoenix, you can’t find an owner who is unaware that he’s sitting on a pile of gold.

David:
Yeah.

Brandon:
Period. Everything’s trading at under five cap, and condition doesn’t matter. To think that we can compete with brokers, whose job it is to communicate with each and every owner in town, and who know everybody.

Sam:
And most big markets like Phoenix, there’s four big, very large brokerages. They handle all of the volume. I mean, nothing really gets traded at this level outside of those brokerages.

Brandon:
They’re very protective, and they spend decades building relationships with all of these owners. Yeah. So you’re really not going to go around them through direct mail marketing.

David:
Yeah. Again, this goes to the strategy. Some things work better in different markets for different types of properties for different levels. So, you guys are just doing what’s working there. You’re working with the brokers.
I really, really love that tip. I just want to emphasize that because I don’t want to gloss over it. That idea of like closing quick so you can tell people in the future what you’ve done. Something we do in Open door Capital is we’re always trying to find like, what’s that one thing. When you’re competing, what’s that competitive advantage you have?
We fly in, no matter what, we’ll jump on a plane, and go anywhere anytime, immediately. Even if it’s just like well this one might be coming on the market soon. Like we want to be like to show them that we are willing to jump on a plane, and go look at the property.

Ben:
What’s he talking about, open door? Didn’t he mean to say White Haven [crosstalk 00:55:12] is he confused? [crosstalk 00:55:15]

Sam:
We don’t have to fly, but actually we go to our property, we show up with our entire team. We’re not even under contract yet, or somebody in LOI, but we show up with our property manager, the VP’s of construction.

Brandon:
Again goes to that location that we talked about. One of the kind of competitive advantage, number one being local. Our HVAC, our electrical, our everything, got people on the roof, with permission.

David:
Yeah, of course.

Sam:
Yeah. We’re inspecting the entire property, when we’re just doing an average tour and they’re not used to that.

Brandon:
[crosstalk 00:55:46] That brings up an interesting point, everybody wants to go through every apartment. If I’m going to rip everything out of every apartment, do I really care what the kitchen looked like? No, all I need to know is foundation solid? Am I having to replace the roof within a year, or within seven years? Is the electrical good? Well, how are we doing in HVAC? That’s it because I’m going in there with a business plan that says 10 to $12,000 a unit on the interior. Plus we’re going to paint the building, build this, build this, build that. It’s easy to work with us, but it works for us, because that’s part of the business plan. We’re not being inconvenienced by having to make these grandiose plans. That’s part of the chosen business plan.

Sam:
Another way we stand out is we never re-trade, which you don’t want to have that reputation, especially in a small market.

David:
What do you mean by re-trade? Explain that.

Sam:
So, you get it under contract.

Ben:
You’re not talking to professional real estate offices.

Sam:
So you get under contract, you have your inspection period. I go in and I say, “Oh, I didn’t know that the roof was in such bad condition. I’m going to need a hundred thousand dollar discount to replace the roof.” And that’s called re-trading. When we get that questionnaire that we talked about earlier in best in final, they ask you, have you re-traded ever.
They want to know all the details. They’re going to talk to your broker, and the lender on what the circumstances were on that re-trade. So, we never re-trade. We go in almost always, I’m going to replace the entire roof. Last summer, we bought 164 unit, they put on a brand new roof while we’re in escrow. We still had it in our budget. I’m going to replace the roof, because that we just automatically, I’m just going to assume that I have to replace it so that I never have to re-trade later on.

Brandon:
And then the reserves for capital expense, and for other things, there are cells in the underwriting that never changed. They just are. They’re there, and we don’t touch them.

David:
What does somebody look for in multifamily? What do you guys typically look at for capex in terms of like if you had a hundred units?

Brandon:
So we’re kind of nuts about [inaudible 00:58:03] . Like we want to be really well capitalized, right? So we go overboard. So of course we’re going to have the roof. We’re obviously going to have the paint. We’re going to have whatever project specific we’re going to do.
Are we remodeling this office or are we building a new office? And we do both. Okay, or say for the gym. Are we doing that? Side for that, are we taking 35% of the HVAC just to replace 35% of the HVAC, and to have the money in the bank. It’s supposed to come out of the cashflow, but we want to have the first 35% of the units replacements. Same for the water heater. Same for a plumbing contingency. Same for electrical. Then you have these unnamed items, okay, this is a hundred units. We’re going to take X number of dollars per unit. Then on top of it, we want X number of dollars.

Sam:
We basically have like nine months what we call working capital, nine months of debt service, the building. So, if something happened catastrophic, I could pay for nine months of the property before we’d run out of working capital.
I guess. So, we own a $4 to $5 million equity raise about a million, to a million and a half of that is what we call our margin of safety. So, it’s made between working capital, contingencies on the construction reserves.

Brandon:
Floats.

Sam:
Yeah. Construction floats. The lender pays for our construction. So, we actually have to pay for it upfront, and then get reimbursed. You need a pretty large construction float to manage that. So, about a million dollars of that is just going to those extra reserves, and our margin of safety.

David:
That makes a lot of sense. By the way, if people aren’t familiar with what I’m talking about, when I say like, we’re talking with capex, what we mean is?

Sam:
Capital expenditures. So, anything that I’m spending to improve the property beyond just your…

Brandon:
Anything that’s a depreciatable item. So, it’s going to last more than 30 seconds. You’re replacing a pipe that goes from the street to the building. You’re going to put it in the ground, and it’s going to last for 25 years. That’s cap ex.

David:
Okay. Yeah. That kind of thing. So, a tenent punches a hole in the wall. That’s a repair.

Brandon:
That’s a repair. That’s why on the Bigger Pockets calculators, which I wouldn’t recommend doing for a 200 unit apartment complex. There’s a level of sophistication when you’re getting to the large, large multifamily that you’ve really got to underwrite a lot of stuff. That’s why even on a simple calculation, like you’re kind of a duplex, like capex is a real number.
This is something actually, I learned a lot from Ben here years ago, is you went through this blog post where you said, look like capes is a real thing. You took the price of a roof, the price of like windows, the price of everything, and you said, “Look, here’s all this stuff. And this is the life it lasts. And here’s how much it cost.” So, if you run all those numbers on the basic, like 20 items in your property, it’s like a couple hundred dollars a month on a house that you’re just losing in potential capex.

Ben:
That you should be setting aside.

Brandon:
That you should be setting aside.

Ben:
So you have the money to deploy. That goes back to like depreciation that we get on our taxes. Well, everybody thinks that’s just the gift. It’s not a gift. It’s the IRS saying to us, don’t be stupid. We know you’ll have to spend some money later. So, we’ll make it less painful for you, and we’ll give you some savings today. Don’t be stupid. Set it aside. So, tomorrow or day after tomorrow, five days after tomorrow, you have the money to spend on this stuff. It’s not an if you’re going to spend it, it’s a when you are going to spend it.

Sam:
The lender, they want to protect themselves. So, they actually calculate the same thing for you, and they give you that number. Whatever, it’s like usually around $250 per unit per year. They just want to hold that aside in case…

David:
By the way, I would not do $250 per unit per year for like a duplex. You capex is going to have to be way higher for a smaller unit, because like you have the efficiency.

Brandon:
I would only do $250 per unit per year, if I have 35% of the HVACs replaces in my capex.

Sam:
The interiors getting repainted.

Brandon:
The interiors, all brand new and all that stuff because it’s really more [crosstalk 01:01:54].

Sam:
Yeah capex CAN completely kill it. Like here’s the example, I give people a lot. Let’s say you bought a single family house, and you’re making a hundred dollars a month in cashflow. Good for you. Like you’ve really feel good about that. And the whole.

Brandon:
That was a month in cash flow. Good for you, you really feel good about that. And the whole first year you’ve made $1,200 in cash flow, and you feel great. 10 years later now, you’ve made now $12,000 in cash flow, and then you have to put a new roof on, and the new roof costs $15,000. Where you thought you were making money for 10 years, you actually lost $3,000 over that time period. And then five years later, you put a new fridge in, and then

Ben:
That’s exactly-

Brandon:
That’s another $2,000.

Ben:
And we’re not even talking about tenants trashing your place.

Brandon:
Trashing the place, yeah. We’re just talking about just the fact that things wear out. If you don’t account for those things, you will have to pay that piper eventually. And so that’s why I always put in like… Typically, on a single family, I’m like a hundred to $200 a month, a lot based on what numbers you came and just what I’ve seen in my own life. And then on the larger multifamily like that, you know that again, the 250 per-

Ben:
Again it depends. If you have a boiler-

Brandon:
Yep.

Ben:
… You’re going to set aside more if you’re not stupid.

Brandon:
Yeah. And if you have a lot of HVAC stuff because you’re in Phoenix or if you’re in Minnesota, you’re going to have a lot more expensive than if you were in-

Ben:
Right.

Brandon:
…You know, South Carolina.

Ben:
And if you’re in Minnesota, you’ve got to replace the windows.

Brandon:
Yeah, things like.

Ben:
Because it gets uncomfortably cold.

Brandon:
Yeah, so CapEx changes per area.

Ben:
Absolutely, it does.

Brandon:
So here’s one of the hardest questions in all of real estate and there’s not a really good answer, but how do you know CapEx? If you’re just getting started, you’re trying to buy that Fourplex. Like what do you even assume for CapEx?

Ben:
I’ve got an answer for you.

Brandon:
You don’t buy a Fourplex.

Ben:
No, no, you don’t assume. You think of it as a flip.

Brandon:
Okay.

Ben:
I’ll give you this example. If you buy a Fourplex for $140,000 and you go through ownership of that Fourplex, and in four years you say the Fourplex is worth $200,000. Even if you have to spend money on CapEx you feel okay about it because why? Because you can get it back. Because the thing is worth $200,000 now, so you have an exit. You can refinance and recapitalize yourself. You can sell and recapitalize yourself. However, if you bought a Fourplex for $140,000, you’re still going to have CapEx, but it’s only worth $140,000 still five years from now. Guess what you’ve done with the CapEx. You’ve thrown good money after bad. This is why I advise people, and I’ve learned this myself, it’s all about the equity. Cashflow allows you to stay in the game long enough to execute the business plan, which is about the equity.

Brandon:
Can you explain that a little bit more? I think is a really good point. A lot of people think you’re just going to get rich off cashflow and cashflow is not really-

Ben:
And you can in a specific window of opportunity during a cycle.

Brandon:
Mm-hmm (affirmative).

Ben:
If you are buying rent of $900 today, but you managed to buy them in 2011 for $30,000 a door, you’re going to be making a lot of cashflow. And that applies. However, 2009, 2010, 2011 was an anomaly. There was a very wide discrepancy between what the price of that unit was versus what the rent on that unit is and will be. That was an anomaly. It’s never going to happen again. So going forward, you just have to be careful to understand that Warren Buffett says the diversification is protection against ignorance. I say growth and equity is protection against ignorance in income-producing assets. Because income comes in, income goes out, but if you have an exit, and you can make money by exiting, then at least you are not losing money.

Brandon:
Yeah.

Ben:
You know, income is a fickle thing.

Brandon:
Yeah. So to put that in my own language, if I buy a property, I want it to cashflow, because if it doesn’t cashflow, I lose money every month. Now I might just lose it the property because I can’t afford to keep it. But if I can make some good cashflow every single month, ideally, then even when I get hit with a CapEx and stuff… Even if I held it for 10 years, what if I didn’t make a ton of… I didn’t make a ton of money in cashflow, but I own a property for 10 years that’s hopefully worth way more than what I paid for it. The loans gotten paid down a bunch. I’ve gotten a bunch of tax benefits. And that’s where that equity, the difference between what now it’s worth, which is now worth let’s say 500 grand, and now I only owe 200 grand, that 300 grand now that’s a chunk of money. I sell the property and I can dump it.
Now, some people just want to buy properties. A few of them pay them all off to zero and just live on that cashflow. That’s fine too, because then you still have equity because you just paid out the property. So, but the point is the wealth is built from equity. The cashflow just helps us maintain-

Ben:
That’s exactly it.

Brandon:
… Helps us pay some bills in the meantime.

Ben:
And you discover that when it happens to you.

Brandon:
Mm-hmm (affirmative).

Ben:
And it happened to us. It’s like, it’s nice that this things cashflowing $500 a month, but this $80,000 in my pocket from selling it is a whole lot nicer.

Brandon:
Yeah, that’s real money.

Ben:
Not to mention that now I can reinvest it, and double, triple, quadruple it. Right.

Brandon:
Yeah.

Ben:
So, and that actually happens. And then you go like, “Cashflow?”

Brandon:
Yeah.

Ben:
Like, it’s almost heresy, right, to talk bad about cashflow where you and I came from. I mean like back in the day, you and I-

Brandon:
Well that’s because we came out of the recession where everyone in ’06, ’07, they didn’t care any… They were like, “Yeah, lose $500 a month. Who cares? I’m going to double next year.” Because everyone was only focused on appreciation and-

Ben:
Right, and then everybody lost their job.

Brandon:
Yep.

Ben:
And then we were like, “Oh dude, I don’t want to work for the man because I don’t want it to happen to me. I need the cash flow because that cash flow means I don’t have to punch the clock.”

Brandon:
Yeah.

Ben:
So we swung completely the other way. And the truth is always somewhere in the middle. You need both. You need cash flow or you can’t stay in the game. You need equity or you can’t get rich. And that’s just all there is to it.

Brandon:
Yeah. Smart. Anything you want to add, before I move on.

Sam:
So we actually… We underwrite, so we have lot of flexibility. So cashflow gives you that flexibility to exit whenever you want. That’s what I think Ben’s main point was. So if I want to sell in three years, if I want to hold it for 10 years, cashflow is a thing that allows me to hold onto it for that long without being forced to sell. So we actually, we underwrite like three, five tenure exits. We structure our debt that allows us to access it when we want. So, you have to know that from the beginning, when you’re doing a deal and underwriting, what is that going to look like? And what am I, different points and options, and what’s going to allow me to get to each one of those points?

Ben:
Yeah. And flexibility to choose. Like we have two deals going on right now, and one of them we’re going to exit. Another one is basically a fancy BRRR because we’re going to refinance it. Because of what it is, where it is and how it’s doing, we’re going to do better for ourselves because we can pull basically all our money out, all our investment capital out, and still sit in a deal and cashflow it and-

Brandon:
Yeah, BRRR investing in apartments is a phenomenal strategy as well, because yeah, you can get your investors their money back that you raised… For those not sure what I’m talking about, a BRRR is you buy a property, you rehab that property, you rent that property out. Now, usually we do it on small deals, but it works on big stuff. And then you, once it’s all fixed up and nice whatever, instead of selling it like a flip, you’d just go and refinance it. Go to a bank, get a whole new loan, pay back all the money you put into it, and now you have a lot less money. Maybe no money, but maybe just less money that’s actually left in the deal.

Ben:
Right.

Brandon:
When you have no money into a deal, and you’re still making cashflow, that means your return is just through the roof-

Sam:
Right.

Brandon:
…And you know, ideally… And so that’s where you can get stupid good, like even infinite returns, by doing that.

Ben:
Right. And you’re de-risking. There’s no risk.

Brandon:
Yeah.

Ben:
I mean, you’re risking the equity that you’ve built, but you’re not risking your money. You’re playing with the bank money.

Brandon:
Yes, because you already pulled your cash. You got your money back out. Yeah. All right, so let’s move on to the next segment of the show where we learn more about specifics about one of your guys’ deals. So this is time for the “Deal Deep Dive”
All right. This is the “Deal Deep Dive” where we’re going to dive into one deal. So you got something in mind that we can tear apart.

Sam:
Sure. Actually, can we do… Do we have enough time for two deals? Because Ben mentioned that we’re doing a flip and then a BRRRR basically on tour two recent deals. So I think it would be nice to talk about both.

Brandon:
We’ve never done a double deal deep dive, but today we’re doing the double deal deep dive.

Ben:
Well, there’s two of use.

Brandon:
There’s two of you, okay.

Ben:
It’s only fair.

Brandon:
All right, let’s do it. So we’ll go through one through eight questions on the first one, and then go one through eight on the next one. All right. Number one. Let’s go to the first one. What kind of property is this?

Sam:
Well, if you’ve listened to the last hour, you probably know that it’s a hundred-unit multiplex multifamily. This one’s actually 98 units-

Brandon:
Oh. Way to [crosstalk 01:10:41]

Ben:
Yeah. Do you remember Josh Dorkin’s response-

Brandon:
Yeah what was it?

Ben:
…When he found out, “It’s not over a hundred units Benjamin.”

Brandon:
Yeah. How did you find this property?

Sam:
This one was actually our first property.

Brandon:
Okay.

Sam:
Got it from the broker on market. They were actually going to go to call for offers, and then the best and final. While we’re on our tour, we asked the broker, will he be willing to sell and to skip all of that if we give him the price he wants. And we had that number and we got an offer, so we got to bypass the best and final, so that way I’m not competing against big companies that are… I’m not going to look great against when it’s our first property.

Brandon:
Yeah. That makes sense. I like it. Number-

Ben:
I would’ve look great, because I always look great.

Sam:
I didn’t mean physically. On paper

Brandon:
Okay. Number three. How much was the property?

Sam:
We bought it for $8.2 million.

Brandon:
$8.2 million. How did you negotiate this property?

Sam:
Well, Phoenix is a really hot market, a seller’s market. They kind of just say, this is my price. And actually, we were able to underwrite even higher than that. So [crosstalk 01:11:47] they asked for.

Brandon:
You feel like you actually got a good enough deal. All next one. How did you fund this property?

Sam:
I don’t know if we’ve talked about this, but we’re actually syndicators.

Brandon:
Okay, good.

Ben:
We pull [crosstalk 01:11:57] all together, and then we’ll get a loan for the rest.

Brandon:
And you guys usually do 506-

Sam:
506B.

Brandon:
…B.

Sam:
Yep. So we have a sophisticated and accredited, but we get… And then for the financing, we do a bridge loan, three plus one plus one.

Brandon:
What does that mean?

Sam:
So three year initial bridge loan, but we have two one-year extension options.

Brandon:
Okay.

Ben:
Well we need to talk about that, because you know we need to talk about that, right? So, that’s actually one of our safety triggers. Now, why is it safe, Ben? You have to refinance in three years because it’s only a three plus one [inaudible 01:12:33]. What’s safe about that? Well, and then everybody else, you go on Facebook and there’s nothing but syndicators there in 2020, and everybody gets these 10-year fixed interest rate deals. What people don’t understand oftentimes, is that ability to exit is probably the greatest safety trigger that you can have with any real estate. You just need to be able to exit your position. That ability is very limited by your prepayment penalty-

Brandon:
Mm-hmm (affirmative) Yeah.

Ben:
… And the privilege of a low-fixed interest rate for a very long period of time is you pay for that privilege, both Freddie Mac and Fannie Mae, in exchange for the benefit of that fixed interest rate. You potentially could look at millions of dollars of prepayment penalty, which of course very significantly hampers your exit.

Brandon:
Yeah.

Ben:
Because it could completely destroy your returns on that exit.

Sam:
That’s tied to fixed rate, but what you could do is variable rate, and they’re a little bit higher interest rates, but I don’t have that huge prepayment penalty. It’s 1% usually, or they have sometimes a step-down.

Brandon:
But when I think variable, I think 2007 where my rate-

Sam:
Exactly.

Brandon:
… Went from 2% to 29% overnight, and now I’m bankrupt.

Sam:
Right, and so that’s why most people don’t do it. So what we do is we buy an interest rate cap. And so we actually cap it at-

Ben:
Which is an insurance product.

Sam:
…So we hedge the interest rate. So basically say, if the rate goes above today’s rate, a third-party insurance company pays that increase, not us.

Brandon:
Oh, fascinating. I didn’t even know that exists.

Sam:
So, we just factor that into our closing costs every time. And we just calculate what that interest rate cap is going to be-

Ben:
I mean, that’s a whole another conversation because if you look at the market today, and you see what the Fed is doing, what are the chances the interest rates are going up any time soon. But with that aside, once you contractually cap your rate-

Brandon:
Yeah.

Ben:
… You have three years now to figure out how to refinance or how to exit, if you want two plus one plus one. So you’ve got five years, really, to figure out what to do. So if the rest of your business plan and your underwriting is intact, then there’s a lot more risk with having to pay defeasance than risk of not being able to roll the debt.

Brandon:
Defeasance, meaning like prepayment.

Sam:
Yeah, that’s just one type of prepayment.

Brandon:
Yeah. Okay. So I’m curious just on the last thing on the funding thing, do you remember how many people like… To raise money for that deal, $8 million, you would have-

Ben:
About 60.

Sam:
I think there’s about 60 investors on the first-

Brandon:
About 60 investors. How much did you raise then versus how much was the loan? Do you remember?

Sam:
The loan includes 75% of the purchase and 100% of the CapEx. It was about $7.3 million. We raised $3.571 million.

Brandon:
Okay. I think I’m in that one.

Sam:
Yes you are.

Brandon:
All right. Good. All right.

Ben:
You’re in everything. There’s like one-

Brandon:
So what did you do with it?

Sam:
So, like we talked about, we completely renovated.

Brandon:
Okay.

Sam:
We do a lot of common area amenities too. So, we add a fitness center, we redo the clubhouse, the office. So actually we just finished all of that. We’re about halfway done with the unit renovations, and we’re actually going to sell for almost our full exit price only halfway renovated. It’s actually on the market right now. We don’t have a sales price, it’s probably going to go between $13 and 14 million.

Brandon:
Wow. That’s great.

Sam:
Yeah. So that’d be nice flip. It was about 30% IRR where we underwrote 14 and 15%.

Brandon:
Yeah. That’s crazy. Congratulations guys. That’s very cool. All right.

Ben:
So it sounds to me like you’ll be making some money.

Brandon:
Sounds like I might be making some money. What lessons did you learn from this deal?

Ben:
We’ve gotten even more conservative with our underwriting. We’ve got more liquidity and we’ve discounted our cash flows even more-

Brandon:
That’s cool.

Ben:
… With every deal we did.

Brandon:
Very cool. And on the syndication, was it 70/30? Is that how that syndications work usually?

Sam:
Yep. Ours [inaudible 01:16:36] 70/30 split.

Brandon:
Yeah. Very cool. Very cool. So at the end of the day, and we don’t have to necessarily talk about this by the way… What I mean by 70/30 is that the investors, so like people like myself and others who invested their money, they get 70% of, generally, the deal and you guys, as the sponsors, get 30%. Even though you’re not putting up all the money for this thing.

Sam:
Right.

Brandon:
The investors are putting the money in, you’re managing the deal. So at the end of the day, you’ll get a big paycheck at the end of the day for making this thing work.

Sam:
And that’s after you got the first 8%.

Brandon:
Correct.

Sam:
Yeah.

Brandon:
So I got the 8%, and then we split things 70/30-

Sam:
… Every everything after that.

Brandon:
Yeah. This is what’s so cool about syndications is that basically… You guys have… Obviously you make some fees in the meantime. You get property management fees or asset management fees and stuff, but at the end of the day, you do a good job, I’m happy because I make a good return on my money. [inaudible 01:17:22] partners are happy, but then you guys make a good chunk of money at the end, again, the equity. Now you can dump it into future deals of your own and like… Yeah, syndication’s a cool business model, but it’s not an easy process. I mean, you guys have been working this for years, learning how to perfect these models and stuff. So, very cool.
All right, let’s move on to the next “Deal Deep Dive” because we wanted to do two. What was another property? What was this one?

Sam:
So this one was just a few months later. 117 units.

Brandon:
Okay.

Sam:
A different part of town, still in Phoenix.

Brandon:
All right. How’d you find it?

Sam:
So this one was actually completely off market. We submitted an offer. We had our broker help us look for properties. Someone who had a relationship with submitted an offer and they countered, but it was still well under below what we had. I think we paid… Well, I guess we can talk about price, but it was like 91 a door or something which was really awesome.

Ben:
Yeah. I think 93.

Brandon:
Yeah, that the next question then is, how much was it?

Sam:
It was $10.8 million, $10.75 million.

Brandon:
Okay. And any negotiation tactics in there? Anything you learned from-

Sam:
We submitted a really low-ball offer and they… So they came up a little bit, but not too much, but it was well with underneath what we underwrited, we could pay for the property.

Brandon:
That’s cool.

Ben:
Well, this was a very big seller. This was an institutional seller. So I don’t want to hear comments about-

Sam:
Billions of assets.

Ben:
… You know, “Hey, you found mom and pop and you took advantage of them and lied a lot.” These guys have been around for years. They’re huge, like really, really a big… One of the biggest owners in Phoenix, which is a 5 million population place. It’s not really a small place. To say that you’re one of the biggest owners there is something.

Brandon:
Yeah.

Ben:
So this was very legit. Arm’s length transaction, but they had a circumstance which had nothing to do with performance of this property. They just had a reason to get out and they had a reason to do it quickly and quietly. And we just happened to come along and we were a known commodity, somewhat, by then. And so they did it.

Sam:
And I’m convinced… So they had billions in assets, or a half billion in assets. And I’m convinced that they didn’t realize what was happening around this property. A lot of new construction development going around this property where a few months after we closed… So we bought it at low nineties a door, a few months after we closed, stuff’s in the high 130s per door.

Brandon:
Wow.

Sam:
And very similar properties. I just think that they had bought at the bottom of the market. They had so much appreciation. It didn’t make sense to keep tabs on it. They weren’t really raising rents too much. They just didn’t know what they had.

Ben:
Well they didn’t need to. That was a different cycle, different business plan. But this property, because of where it is, it’s like two months after we bought, there were things selling for 135. A month and a half ago, something sold for almost $200,000 a door.

Brandon:
Wow.

Ben:
So that’s what makes this a BRRRR, because all in renovation, escrows, deposits, CapEx, everything, we’re into this 115 the door. So, knowing that things are already trading at almost double it’s like, “Why don’t we refinance and hold on,” because with what’s going on in this location, nothing but good things can happen. So, that’s what makes it a nice BRRR.

Brandon:
So that was my next two questions is yeah, what’d you do with it? And what was the outcome? So you did refinance it, or you’re going to refinance?

Ben:
We’re going to refinance.

Sam:
So we’re about halfway done renovating all of the units. We just finished, as of I think tomorrow, our new signage goes in, we’re rebranding the property. Or maybe today.

Ben:
Today.

Sam:
And so we’re done with all of that and later this year, in about six months-

Ben:
Because we have people. We can be out here talking to you-

Brandon:
You can be out here now-

Ben:
… And we have signage go in. See, we got people. We’re big.

Brandon:
You’re not strapping on tool belts-

Ben:
We’re very good looking, and very big.

Sam:
And so later this year we’ll hit the numbers that we need to, to be able to pull out most of, if not all, of the equity.

Brandon:
That’s cool. And so just to confirm, so when you guys… When you pull up…Let’s say you’re doing a BRRRR on a large multifamily, when you pull out the equity, and that lets you pay back all your limited partners, like they get their money back-

Ben:
They remain their standing in the deal.

Brandon:
Okay. They’re still in the deal. So it’s not that you’re paying them and be like, “All right, you guys are off now.”

Sam:
No.

Brandon:
Yeah, they’re still owners. So, now they’re owners of the deal getting cashflow from a deal with no money, or little money in the deal, which is awesome from an investor standpoint.

Ben:
Which is ridiculous.

Brandon:
Yeah. We’ve been talking about the exact same thing with Open Door Capital-

Sam:
And if we don’t sell it, then there’s no capital gains. They don’t have to worry about-

Brandon:
Very, very cool. Yeah. You’re right. That’s awesome. Last question. What lessons did you learn from this deal?

Sam:
There’s been a lot of unsolicited offers, I guess. It’s our best deal that we’ve-

Ben:
Actually listen to your broker. You know he brought this deal to us a couple of months prior, and we kind of looked at this location, and I think we kind of felt about it the same as the seller felt about it. Just like, nothing there, and we didn’t really take a closer look. Well, the broker went and looked at the property and I get this call from him, and I’m on my way in the car coming back from another property Sam and I looked at, and he said, “You guys are nuts. You need to come down here and take a look at this. There’s like 24 hour fitness across the street. There’s like all these offices,” [inaudible 01:22:34] says. I didn’t remember any of this being here. This gated community with homes selling for 400 to $600,000. And this all came up in the last three, four, five years. So I went and I was like, “Sam holy shit. We should make an offer.”

Brandon:
That’s how it happened. All right. That’s good. Those are, that was a good double deal deep dive today. Now we’re going to skip the fire round today because this has been a long show and move right into the world famous “Famous Four.”
All right, time for the “Famous Four,” this is the part of the show where we ask the same four questions that we ask every guest, every week. I know we’ve asked Ben before, and you have not had a chance, Sam, to answer this one. So, we’ll go for both of you though. Question number one, each of you. What are the current, or a previous, or somehow in your life important, most important, favorite, however you want to call it, real estate related book. Other than your own. I don’t know. Ben, you wrote some.

Sam:
One of the first ones I read when learning about multifamily was the complete, I’m sure everybody’s said it, but “The Complete Guide to Buying and Selling Apartment Buildings.” It’s the-

Brandon:
Steve Burgess. Yeah. Great book. Ben?

Ben:
“How I Turned a Thousand” into what? A million or 5 million?

Brandon:
There was one, and then three, then five. He just kept getting richer.

Ben:
Yeah. I don’t think it’s in print anymore.

Brandon:
Yeah.

Ben:
But it is the formula. At the time I was like, “Well dude, I don’t want to flip houses.” He was actually discussing BRRRR-

Brandon:
Yeah, basically.

Ben:
… Basically, because he was renting most of them, but it’s like, what do we do with apartments.

Brandon:
Yeah.

Ben:
I didn’t have the intellectual worth to compartmentalize it that way, but that book tells you everything you need to know about real estate.

Brandon:
Yeah. That’s true. All right. Number two. Business book.

Sam:
One I’m reading right now is “The Checklist Manifesto.”

Brandon:
Oh, a great book. Yeah. I can see you liking that book.

Sam:
Yeah. Well, actually, coming from the CPA world, they live on checklists. There’s checklists everywhere. So yeah, just getting back into that habit with real estate.

Brandon:
There you go.

Ben:
So the last one I listened to, I can’t remember the name of it, but the dude hired a Navy SEAL.

Brandon:
Oh Jesse Itzler, “Living With a SEAL”?

Ben:
Yeah, Jesse Itzler. I loved it.

Brandon:
Yeah, that was a great book.

Ben:
Just like every morning I get in the shower and wash myself, of course I wouldn’t do any pushups or anything because that’s too much work, but I do get in the shower and I turn the thing on and-

Brandon:
Yeah.

Ben:
His wife is so successful. That’s the most… Spandex. What’s her name?

Sam:
Oh yeah.

Brandon:
Spanx. Yeah. Shoot. Jesse Itzler.

Sam:
She was on “Shark Tank.”

Brandon:
Yeah. What’s her name?

Ben:
She’s fantastic.

Brandon:
Yeah, I don’t remember her name. Anyway, –

Sam:
Sarah Blakely.

Ben:
Blakely, yeah. Especially with the chapters he talked about her, because talk about nothing to blow up.

Brandon:
Yeah, she’s pretty awesome. Yeah she is… Or, Jesse was a podcast guest of ours on the “BiggerPockets” podcast, episode 313, if you guys want to listen to the author of that book, Jesse, he tells us the story about living with a SEAL. It was a great book. Yeah. Phenomenal book. Number three, hobbies. What do you guys do for fun?

Sam:
We traveled to Maui and visit Brandon.

Brandon:
That’s true. That’s exactly what we do for fun. And we hang out in the pool and, you guys, have you been to the beach yet?

Ben:
No.

Sam:
Should we go right after this. Should we just end this interview right now and go to the beach?

Brandon:
Go to the beach. Yeah, you’ve got to get to the beach in Maui. Maybe Ryan will take you to go see some hammerhead sharks or something.

Sam:
I like traveling. Canyoneering’s one thing, I don’t know if you’ve heard of that.

Brandon:
Canyoneering?

Sam:
Yeah. So you should actually start at the top of a Canyon, and you traverse your way down whether it’s rappelling, climbing.

Brandon:
I’ve always wanted to do that. I didn’t know that’s what it’s called, but-

Sam:
Yeah, pretty awesome. Actually, we’re [inaudible 01:26:10] Southern Utah in Zion National Park.

Brandon:
But you’ve not done it at the Grand Canyon, have you?

Sam:
No, not at the Grand Canyon. I’ve done it in Arizona and Southern Utah on both sides-

Brandon:
Didn’t your wife tell me she’s never been to the Grand Canyon and you live in Phoenix.

Sam:
That’s correct.

Brandon:
You’ve got a vacation to take.

Ben:
Yeah, so-

Brandon:
Have you been to the grand Canyon?

Ben:
I’m old and rich. So I pay people to do canyoneering for me, and to play with sharks. I pay them for that and tell me all about it.

Brandon:
Yeah, there you go.

Sam:
You live vicariously-

Ben:
Make some movies, take some pictures.

Brandon:
There you go.

Ben:
I’m spending a fortune on my children.

Brandon:
Yeah. They’re talented kids.

Ben:
My girl is always gone doing auditions and this and that with her mom. So I’m home with my son. That was them calling and saying, “Honey, you’ve been gone for too long.”

Brandon:
That’s pretty much what that was. What separates successful real estate investors from those who give up, fail, or never get started? Let’s start with Ben.

Ben:
First of all, I don’t think real estate investing is right for everyone.

Brandon:
Okay.

Ben:
Can we just acknowledge that right?

Brandon:
All right, Sam, what do you think?

Ben:
It’s not right for everyone. I think in life you have to have an unfair, competitive advantage, unfair being the key to competitive advantage. And if you don’t have an unfair, competitive advantage to be in real estate, don’t do real estate. Find something that you will have an unfair competitive advantage in, and do that. Life is too short to play somebody else’s game. You got to play your own game. So what separates, and that’s God’s honest truth as far as I’m concerned, is that in some way, shape or form, we have an unfair, competitive advantage.
Mine was that I had MS. I didn’t have any other options. So my advantage was it was either this or fail at life. His is that his relationship with numbers are such that just flat out gives him an unfair competitive edge. So in my estimation, you have to know yourself, and you have to not try to shove a square peg in a round hole. And if this was the right thing for you to do, you’ll know it. You don’t need me to tell you, you don’t need Brandon to tell you. You’ll know it. You just… It has to be the right thing for you to do.

Brandon:
Very good. What do you think?

Sam:
Consistency for me. Going back to when we first started in that six months that we spent looking for deals, putting offers on deals, just not giving up and not getting swayed into going and doing something else. Just doing consistent, and underwriting every day, putting offers on deals, and eventually you’re going to break through.

Brandon:
Yeah. So true. Very good. All right guys, we’ve got to get out of here, but this has been fantastic. Thank you guys for joining me in the sea shed today, out here in Maui, now get to the beach.
All right. That was our show with Ben and Sam. Two wicked smart guys, but remember, as I said in the introduction, we are actually going to tack on an extra 45 minutes show, give or take a little bit, here at the end. So right now we’re going to it. And this was recorded after, or at least it was recorded the day after Mother’s Day 2020. And so you’re going to hear the first thing we just talked about for the last couple hours was really all about before the COVID thing really came down, social distancing came down. Now we’re going to talk about a little bit about after.
And again, just like before, there’s some high level stuff here, but this stuff is super important. I want you guys to pull out the stuff, just the golden nuggets from this episode, and we’ll kind of summarize at the end in case you get lost throughout it because again, we are covering a lot and it’s very high level. We’ll summarize at the end a little bit, all of these important points that are going to change your real estate investing life forever. So without further ado, let’s jump over to our second interview, post-crazy social distancing, or at least during, with Ben and Sam.
All right, Ben and Sam, it’s been a whole six seconds since we left you on the podcast and we’re coming back in for kind of an outro. A secondary outro. We’ve got to have a better name for this. It’s a reprisal. A reprise? Is that a name? Your kid’s in theater, Ben, isn’t that what it’s called when they come back on? Encore?

Ben:
It’s called a reprise. [crosstalk 01:30:18] intelligentsia. It’s called a reprise. Now you wouldn’t know about intelligentsia, okay, so-

Brandon:
I just go to my reprising and we’re going to talk about real estate right now. Fellas. So we had you on the show just a few minutes ago, but in reality, we recorded this obviously a couple of months ago, right before… As COVID, social distancing was being enacted. In fact, you guys were staying next door to me here in Maui. And you came over, you trekked through the woods, you got to my see shad. We recorded the episode and then you went home and you were like the last person to stay in that house before they shut down all vacation rentals and the entire world went nuts.
So we thought, let’s talk to you guys about what’s changed in the past couple months since this happened. I mean, we had a lot of conversation about what if and what could happen in the world, and then now we’ve seen what happened. So, let’s go through a little bit of… Obviously we don’t need to like recap much because we just talked about it, but I’m curious, what have you guys seen in the past couple of months in regards to your real estate properties?

Sam:
Yeah, so we’ve actually seen pretty good collections. So, if you look at national multi-housing council, every week they’ve been publishing rent trackers and showing what percentage of the country is paying their rent on time, and they’re comparing that to… This is starting in April, so they’re turning it to March, and then as well as last year. And we’ve tracked pretty well ahead of that the entire time. I think a couple of our properties are at the end of the month at 99%, 98% collections. The lowest we had was 96% collections at one of our properties and it was the most recent one we purchased, and we can talk about why that is, but we’ve seen pretty good collections. And actually, May is doing a lot better than April.

Brandon:
Interesting.

Sam:
I think we’re 15% ahead of where we were in April.

Brandon:
Yeah, that’s cool. So here’s what I find funny. I’ve seen a number of articles come out over the past couple of months of like, “All the tenants are not paying rent, and this problem, and this problem.” In reality, everybody I’ve talked to has been fine. I don’t think I’ve talked to anybody who’s like, “Nobody’s paying rent.” It’s not happening. So I do wonder a little bit about this whole… I wonder a bit about where these studies they’re coming from? Does that mean most of the landlords we associate with just know what they’re doing and they’re being weighted down by people who just have no idea what they’re doing?

Ben:
You and I taught them. They ought to know what they’re doing, right.

Brandon:
They’ve got to know what they’re doing.

Ben:
We’ve been at this for a decade, for crying out loud.

Brandon:
Yeah, I guess. We’ll pat ourselves on the back. Clearly that’s why this is going well. Yeah. I find it funny. If we’re all above average, that means a lot of people that are below average, and I don’t know where those people are, but they must be out there somewhere. Or I don’t know.

Ben:
There’s… We’re-

Brandon:
… or I don’t know.

Ben:
We’re stuck in today, right? So let’s give people credit because there’s a lot of pessimistic people and a lot of people are saying, “Oh, there’s trouble coming down the pike,” and all that, so we need to separate those two conversations. The fed has pumped, what is it, David, $5 trillion into the economy?

Sam:
And counting.

Brandon:
It’s a couple trillion, right?

Ben:
All in, between the stimulus and their operations-

David:
A lot of money.

Ben:
It’s not surprising that collections are doing fine. The real question, macro economically, as it relates to real estate is going to be, how are those collections priced? In other words, what’s going to happen to the market is a function of how investors value these collections. So your NOI stays the same, or even does better. At Canyon 35, we now know that we collected $82,000.00 in revenue in March, which was the highest March to date. It looks like about $85,000.00. We don’t have those numbers yet, but somewhere between $84,000.00 and $85,000.00 in April. We’re supposed to be down in April. April just set a new high at Canyon. That’s a 98 unit property. It had two residents that didn’t pay.
We have South Mountain. We talked about South Mountain, 117 unit property. There was one resident that didn’t pay. Now, this is fantastic. We can tap ourselves on the shoulder. Now the people that have been around for a long time though, understand that valuations are a function of how you premium the revenues. What are these revenues worth adjusted to risk? Because that’s really the question and the conversation. When you buy an asset that is an income producing asset, whether it be a multifamily or a storage facility or what you do, what’s the revenue worth? How much am I willing to pay for that revenue? A lot of the voices that you hear right now are people being very pessimistic in that investors are going to want to discount the validity of this revenue.
Because why? Because fed pumped in $5 trillion dollars because the stimulus, because the unemployment. People are making more money on unemployment than when they worked. And clearly we don’t have visibility in that, but interestingly, if you’re going to be logical about this, you as an investor who needs to deploy capital, you have choices to make. So it’s not like real estate exists in vacuum without anything else. What are you going to do, bonds? For your income? Are you going to go buy a business? What is it that you were going to buy? And so the very interesting conversation to me right now, the most interesting, because we already know what the operations look like. Operations are fine. We’re fine. Okay?
I don’t know what happened six months from now. Personally, I think class A is going to take it on the chin, because right now, they’re fine, but four months down the road when those cupcakes, their parents are telling them they’re not going to pay for their fancy apartment in downtown while they play guitar in the bar around the corner in Denver. When that happens, maybe the situation changes in class A, but class C already took it on the chin. But conversation around operations, we already have it priced in. Like you said, you talk to everybody. Everybody knows, and nationally they track it. The real question is, does that bring us to a standstill? Will Sam and I buy a property right now? Do we know how to underwrite a property going forward? Or do we need to sit and wait and see what the risk premium really is and price that in and understand how that [inaudible 01:36:52]?

Brandon:
So when you say risk premium, just to summarize a little bit, what we’re talking about here is essentially, and you can correct me if I’m summarizing wrong, but essentially we’re talking cap rates, right? So a cap rate is essentially a way of looking at how the market values income. Right? That property makes a lot of income. That’s more risky. That’s less risky. I’m going to pay a higher cap or lower cap. My question then is, what do you think? Do you think cap rates are then going up-

Ben:
No.

Brandon:
… Across the industry?

Ben:
I don’t think they’re going up.

Brandon:
Or do you think they’re going to stay where they’re at?

Ben:
And even if they are going up, if you got 10 years, you can stay in the deal. You don’t have to sell when the cap rates go up. You can wait it out. You can cashflow the property and sell when the cap rates come down to where you need them to come down. That’s a very interesting question, because look, let’s compare Phoenix and Indianapolis. Okay? Or whatever, Cincinnati. Let’s just compare those. Yeah, you could buy a nine cap deal in Phoenix in 2011 that was completely destabilized and all of that, but by and large, stabilized property that was not in distress was still selling for six and a half cap in Phoenix.
Now, what does that mean for my exit cap rate? Do I think it’s going to be higher than it was in 2009? No, I really don’t. Do I think it’s probably prudent to assume it’ll be higher than it is today? Yeah. Probably prudent. But the whole reason you’re assuming a higher cap rate is so that you can stay in, so you don’t have to exercise a sale at a higher cap rate, which brings us to Canyon 35. We were talking about Canyon 35, right? And we put it on the market and then COVID broke out.
And all of a sudden nobody’s buying. We didn’t even have an opportunity to call for offers. People were just starting to look okay?

Brandon:
You’re talking about selling. Are you not going to pursue that anymore? Or are you still pursuing that?

Ben:
There’s a clear disconnect right now, buyers all think for some reason, that they deserve a huge discount. None of the sellers who are cash flowing just fine, such as us, are even remotely willing to consider it that type of a discount. So-

Sam:
Ben, can I jump in? We need to clarify a couple of concepts. And when we talk about cap rate, it’s basically an evaluation. That metric that’s used to determine how much the property is worth. And for purposes of this conversation, the lower the cap rate, the more a property is worth. So if cap rates are rising, in a sense that means there is less demand for this product. And so the property itself becomes worth less. And when you’re using a metric like that, Ben’s argument is it’s more or less a newbie way of looking at what a property’s worth, because there’s so many more metrics that go into it. But you do need to consider that when you’re thinking about selling, because the person who’s buying your property might look at that.

Ben:
So, cap rate really measures demand. It really isn’t a good investment return metric. It’s just a demand metric. So generally speaking, people will be willing to deploy capital at higher price points if they feel safer in that marketplace. Maybe there’s job growth, maybe there’s population growth, maybe there’s whatever. Maybe there is a supply demand issue that suggested longterm price is going to stay, whatever the reason is. That’s why you have a market over here with a low cap rate, which means people are paying high dollars. And you have a market over there with a very high cap rate, which means people are paying lower amount for the same revenue stream.

Brandon:
And part of the point that you’re making is that buyers are expecting cap rates to go up. So property should be worth less and they should get a deal. But sellers are saying, “No, it’s still worth the same to me because the cash flow hasn’t actually stopped. I don’t know what you’re smoking.”

Ben:
Yeah, that’s exactly it.

Brandon:
We’re in this weird dynamic right now where the market’s sort of stalling because each side’s expectations aren’t being met.

Ben:
Right. Right. And so now you have these two camps of people who are buyers like, “Well, we’re going to just wait and see until you guys run into trouble.” And us, as sellers, are like, “Why should we run into trouble? We had April rent collections higher than March. And now May collections are on track to be just fine. And yeah, it’s because of the fed and yeah, it may be artificial, but guess what? Fed’s on my side. Do you really think in an election year, there’s not going to be another stimulus, if my tenants can’t pay rent? Do you really think that’s going to happen?”
So, that answers into this whole and other political conversation and everything else. So you have this environment where potentially buyers sit over here and sellers sit over there. And that goes on for nine months for all I know through November, through the election and everything else.

Brandon:
Yeah. So the question is, and I like the way of looking at it this way, because David, you brought this exact point up a few weeks ago on the podcast, about single family houses and small deals. The same thing applies here. David, I think you said prices won’t drop super fast because sellers are going to hang on to it. Because they still remember the good old days. And the buyers are all thinking immediately, this is 2008, let’s get a 20% discount. And so what happens is there’s this lag that happens.

Sam:
There’s another layer of this that I just realized maybe yesterday as I was going back and forth in my head with a lot of what Ben is talking about. And it has to do with a lot of the really successful, wealthy people that I know and that Brandon knows, I’m sure you guys know some of them too, that have been telling people, “Preserve capital, sit on the sidelines, wait for a good deal.” And then the newbie, the amateur, the less successful person hears that and goes, “Oh, if Warren Buffett’s doing that, then I’m going to do that too, because I want to follow Warren buffet.” And I was trying to reconcile all this in my mind because I’m not waiting for this huge crash before I would actually take action. But I also don’t think that that’s stupid.
And I think that the guys who were saying, “Wait,” would agree with me if they looked at the deal. And what I realized is a lot of those people giving that advice, are not in the same position as the guy who doesn’t own a property, or owns one or two, who is actually looking to work and manage and learn the business and make money on a deal. They are running companies and they want a completely passive investment. They don’t need to invest in anything. They have plenty of income coming in. They’re in no rush. They’re happy to wait for the bottom. And if it takes 12 years, well then they’ll wait 12 years. Because if they go buy a property, that’s work they necessarily don’t want to do. The people listening to this podcast? They’re looking for work. They want a property. They want a deal.
They want something that cash flows. They want to learn the business. They want to plant a seed that will grow into a tree over the next 40 years, that’s going to be huge. And when you’re listening to the guy who’s worth $150 million and has other people managing his assets, he doesn’t even do it himself, and he doesn’t know, or she doesn’t know what’s happening with that deal they buy? Their advice is going to be much different. They can pass up on 80 good deals to get one great one because they don’t want to be bothered from the other stuff they’re doing. I can’t pass up on 80 good deals at this stage in my career. If I see 80 good deals, I want to buy them. And that’s an important thing to keep in mind. When you hear that Twitter quote from Mark Cuban or somebody telling you, “No, no, no, wait. It could crash more. I’m waiting.” Right? That doesn’t mean that he’s in the same position with his capital that people like us are, that are actively looking to build our portfolios.

Ben:
Agree. Completely.

David:
Yeah, that’s a good point.

Brandon:
All right. So here’s a question then. So in the way you’re analyzing deals now, especially in what you’re looking at, are you estimating rents going up the same amount that you were before? Do you think rents are going to stay op? Or have you stopped Sam, your rent growth or your predictions there? Where are you at with that?

David:
In our underwriting, we are not projecting rent growth for the next two years. I think that’s very conservative. I think we will have rent growth. Phoenix is still supposed to have top population growth in the country for this year. Likely going to continue next year and construction has slowed down. So we’re going to probably even see higher rent growth than what we were seeing before.

Brandon:
But just to be safe.

David:
But to be safe, yeah. And investors, it’s hard to have that in depth conversation and justify it, be conservative. Yeah, we’ve stopped for the first two years, no rent growth. But there’s two different types of rent growth for us. We’re still renovating properties and we’re still seeing $400 increase in rents on the ones that we’re renovating, where a lot of people they’re stopped renovations. But, not that I don’t believe in that, we’re actually delivering a different product through our renovations and someone’s willing to pay for completely different products.
We get a different tenant in there that’s willing to pay that. Whereas a lot of other type of renovations where you’re just putting lipstick in there, light remodel, and you’re just trying to squeeze more dollars out of the existing tenant? That would be probably stopping right now. You’re not going to get to squeeze more dollars out of that existing tenant. But if I’m completely moving up a class of product and getting a different type of tenant in there, I’m still going to get that rent premium. There’s still a difference between a B and a C class.

Ben:
Right. And that’s become such a cliche. “We’re going to buy a class C property and we’re going to put some lipstick on that pig and we’re going to make it into a class B property.” Guys, property class is not exact science. So they look at the age of property. They look at the vintage, they also look at the amenity package. They also look at the unit layout. So a class A property would be something that’s not only new, but it’s trendy, okay? You can build class A, that’s not really class A, believe it or not.

Brandon:
Yeah, you can build low income housing at class A.

Ben:
Thank you.

Brandon:
And brand new, it doesn’t mean it’s nice.

Ben:
And then, unless you are on the coast in New York or in San Francisco, where if you are overlooking the water, it doesn’t matter if you are 150 years old, you’re still class A. In majority of the country, class A is newer construction. So can you take a 1985 building, no matter what you do with it, you can put gold plated toilets in it, can you really intellectually honestly call it class B? When class B could be 1998, which looks different, the layouts are different. The amenity packaging is very different and you may not be able to replicate it or compete with it.
So I see a lot of disingenuousness in all of this. What Sam and I do, is at best we create a subclass. So we take a class C property, when we go into this location and we’re saying to people basically, “Hey, we know it’s not for all of you, but are there 90 of you, 160 of you in this two mile radius that have pulled yourself by the bootstrap and make that $50,000 a year. And you’re willing to spend a few extra bucks to live nice?
You would have done it already, but nobody came in to give you that product. Well, now we’re coming in to give you that product.” But that’s been our business plan from the get go. We’re saying, “Hey, we’re going to spend more than anybody else on improvements.” We’re going to create a subclass of product that tenants literally don’t have any other choice. If they make enough money and they want something a little nicer, we are it. Everybody else is resurfacing the countertops and refacing the drawers, we’re putting in brand new stuff with granite and stainless. Nobody else is doing it. We’re it. So-

Brandon:
Just to make a point, this applies by the way, just for people listening, not just to the big apartment complexes, but I found this in my single families, my duplexes, I like to say that, you guys heard me say it before probably, is C and D class tenants still watch Chip and Joanna Gaines. They still want that beautiful look. Nobody’s given it to them. In a lot of markets, especially like B minus C class, even D class. Those tenants can’t find that thing, but you go to Starbucks and you pay $5 for a cup of coffee. Why? Because of the experience and because of the ambience and because the coffee is maybe good and it feels good in your hand. People are willing to pay a premium. Even people who don’t have a lot of money for a premium, they’re willing to pay a premium for a premium product. [crosstalk 01:49:16] You guys are providing premium.

Ben:
It’s a class A within that ecosystem. Right? It’s not real class A class A, but it’s class A of that location.

Brandon:
Yeah, I have this [Rosie’s 01:49:26] fourplex. Average rents were like $425, $450 and up. They were all vacant except for one garbage hoarder. But that’s what they were getting, they’re worth around $450, %500, maybe. Nice, $650 maybe I could push it to. I’m getting $800 a month for each of the four. So even though it’s in a pretty bad location. It’s the worst location of any property I own. Yet, I’m getting upwards of 800 bucks for it. Why? Because it’s just a better product than anything else in that market. And there are people, I don’t need all of them, this is the point you just made Ben, I just need 90. Or for me, I needed five. I need four or five people in that market who are willing to pay a premium to go to Starbucks instead of going to 7-Eleven for their coffee.

Ben:
Right, and it’s silly of us to assume that everybody wants to live like everybody else. If you grew up here and your grandparents live here and your kids go to school here, you want to stay here. You don’t want to drive to that other part of town, no matter how nice it is, and then drive 57 minutes to get to work and pick your kids up at school and all of that. You just want something a little nicer. Now, you got to be careful. You have to have the right product, the right unit mix, the right unit layout, the right amenity package, the right location. It’s not as simple as you go buy a piece of [inaudible 01:50:47] in a piece of [inaudible 01:50:48] location and you can put granite in it and it’s fantastic. That’s the fastest way to lose money. So there’s-

David:
So the strategy, Ben, in this case is going to be “Look at your market and try to be the best option compared to what you have next to you.” Don’t just take this random blanket strategy of, “If I build it, they will come,” right? Which ties into your earlier point that not all revenue streams are the same, because it’s a very good point that you made. When you’re buying investment property, what you’re really doing at its base is buying a revenue stream. You don’t really care how pretty it is or what it looks like other than how those things will affect your NOI at the end of the day.

Ben:
Correct.

David:
And some revenue streams, for instance, hypothetically, a complex in Beverly Hills where 95% of your tenants are doctors who are never home, versus Detroit at the peak of its misery. Those revenue streams are completely different. They require complete different amounts of work to maintain them. It’s a completely different experience. So that’s why in theory, some cap rates are lower than others because the money comes easier in some places.

Ben:
Right.

David:
In last week’s episode, we interviewed Josiah Smelser and he went over how he had 10 Bird properties going on at one time. The bottom dropped out on financing and he had a heck of a time and had to get really creative with how he was going to refinance them. Can you share, I think you’re 118 unit building, how you guys are currently planning on refinancing that thing with, you’re still getting rents coming in, but a lot of lenders at this time have halted giving out loans. Has that been your experience?

Sam:
So no, we’re refinancing into agency debt. So your Fannie and Freddie products, while their terms have changed, they’re still lending and you can still get mid 70, 75% LTV. They’re making you come in with an extra reserves. So now between nine and 12 months of mortgage payments, you have to have on hand at closing that they hold in escrow basically, for you. And so we already had that, so that doesn’t really affect us too much. We underwrite and I think we talked about that two months ago when we were recording. So it didn’t affect us too much. You just have to have a little bit extra reserves on the refinance, but you can still get great product. I think float rates are still all time lows on Frannie Freddie. So it’s a great time to refinance, even with that extra reserves.

Ben:
Well, if I could add a couple of points. That’s not a small thing. If you are used to going into a closing with two months of interest reserves, and now all of a sudden you have to have nine or 12. It’s not a small thing on a 4 million, $6 million raise for an acquisition. You could be $700,000 off, which will drastically change your projections on returns, which is why deals fell out of escrow. Now it doesn’t have an impact on us because I am a neurotic Jew, afraid of everything. And I want reserves and we’ve always had nine months of reserves. And that’s just how it is. And I won’t close a deal without it. So nothing has had to change in our underwriting to accommodate this.

David:
So for the deal you guys currently have on the market, what’s the plan with that?

Ben:
Sam, you want to take it?

Sam:
Yep. So we’re still on the market, but we are moving forward with the refinance on that one. I’m going to put longterm debt on it. And actually our debt service will go down quite a bit. We’ll have an extra $10,000 a month in cashflow, it looks like, from refinancing.

David:
That’s cool.

Brandon:
So either way, it’s a win win.

Ben:
Which actually brings us to very interesting conversation about exit plans. How in every deal, the way you need to underwrite. So you have option A, option B, option C, option D. So typically we would wait. We would either sell it as a proven value add, which is what we try to do. We put it on the market to show them, “Listen, we started with $58,000 of revenue. Now we’re at $85,000 of revenue with half of the units renovated. Do you want to buy this thing and finish the project? We’ve proven it to you. All you got to do is finish it, take it and finish it. So we’re going to sell it to you for less than we would if it was fully complete. Because we didn’t complete it. So we’re going to split the profits with you. So that was the business plan to try to exit early. But if you don’t exit early, you finish it and you sell it as a turnkey.

Sam:
We didn’t underwrite that early exit. That was very opportunistic.

Ben:
Correct.

Sam:
The market was hot. People really wanted a product. And we said, “Sure, if you’re willing to pay still under a four and a half cap for our revenue, take it.”

Ben:
Yeah.

Brandon:
So how has that changed, Sam, since COVID? What do you expect? Put on your crystal ball.

Sam:
Well, like we talked about earlier, everybody’s just so far apart, right?

Brandon:
Yeah. Do you think it’s probably shot at this point or…?

Sam:
So I think when people [crosstalk 01:55:47] are just waiting for the good news, right? So a little bit less uncertainty out there. So I think what May numbers, a lot of people are waiting on May numbers and we just started getting them right before the weekend. I think a couple of weeks from now, if this keeps continuing and you still get good news on the pandemic side, I think you could still see an exit. So we still might have a chance of selling before we do the refinance. But once we have April numbers here in about a week, we’re going to move forward with the refinance. If we sell it before then, that’s fine. But the debt we’re putting onto it, there’s no big, large prepayment penalty. So I can still sell it a year from now and get the exit. It’s not like I need to hold onto it for a long time now, even though we’re refinancing it.

Ben:
So literally, it’s just option A, option B, option C. Right now, this money might as well be free. It’s 3.2%. Last quote I saw was 3.2% from Freddie Mac. It might as well be zero.

David:
Yeah.

Brandon:
All right. I want to summarize everything we just talked about in the last 45 minutes in a couple of quick points. And then I’m going to ask you guys your final advice for people right now that are listening. But first thing, number one, rents seem to be fine. That’s good. I’m seeing the same thing. David’s seeing the same thing. Rents to me to be fine. Second point is, and this is going to summarize everything else we said, when you buy a good deal and when you have adequate reserves, you can do what you guys are doing, which is weather storms. Because you have the reserves, you had a good deal going into it. You had a plan and you’re still working that plan. And this applies to anybody, whether you’re buying a first house, a hundred unit or anything in between, is underwrite deals well, be conservative and have reserves. And you’re going to be fine. A good summary of why you guys are doing okay through all this?

Sam:
Exactly.

David:
We can throw in cap rates can be misleading. There a [crosstalk 01:57:36] metric that you can’t necessarily lean on. I like to look at them like the 40 yard dash time of a player that you’re looking to bring into the NFL. It’s a good starting point. “Oh, that person’s fast. Let’s let’s look at this one.” But you would never draft a player just because they have the best 40 yard dash time.

Brandon:
That’s a good analogy.

David:
Right? Thank you for that.

Brandon:
That’s good.

David:
And there’s a hack that can be found if you use class A principles in class C and B properties, that might be a good way to sum it up. It doesn’t have to be class A money that you’re throwing at it. But if you can make your property, the class A of its area, you may attract the cream of the crop people, give yourself an easier revenue stream to manufacturer as well as a higher [inaudible 01:58:15] revenue stream when everybody else is marching to the same drum. That’s another thing that we talked about. And the whole, “Well, what if this happens? What if there’s a black swan event? I don’t want to own real estate.” Like you mentioned, Brandon.
Then you just keep collecting rent and you refinance and you make money that way, or you run your property better. And at a certain point you can get out of it. And so there’s a lot of similarities between this story and Josiah’s that we did last week where, the worst case scenario in some cases happened, or at least we were prepared for it. And it wasn’t that bad. Rents actually didn’t stop coming in. Now, if we had a shelter in place for another seven months in a row, I’m sure this would be a different story. But as Ben pointed out, the government, while they cut us open and we started to bleed, they then came in and gave us a blood transfusion, more or less, at the same time.
So, people were getting money. There’s a stimulus package that was prevented. It’s not as good as if we kept working, but it’s certainly a lot better than we bled out in three months and the entire economy went into a depression because of it. That isn’t what happened and so for the people that were running around screaming, “The sky is falling,” keep this in mind the next time that there’s a big problem. Don’t let your fears get ahead of the facts. “Okay, I think that this could happen, so I’m going to assume it’s going to happen,” and stick to the fundamentals.
You have strong reserves, you’re in a really good market. You understand what you’re doing. You don’t have to get in and get out in five years where you have one way to hit the bullseye and if you miss it, you’re going to lose money. And real estate is freaking awesome. People who bought stocks really say the same thing as us talking on this podcast.

Ben:
Think about how much [crosstalk 01:59:47] control we have. We’ve been talking about doing X, Y, and Z and being proactive. And that gives us control. So much control to respond to even a black swan event, such as this.

Brandon:
So Sam, final point from you then, what would you leave people with?

Sam:
I had two points. So, reserves and cash flow, they allow you to exit when you want to exit, not when the market tells you how to exit. I’d always go in with a lot of extra reserves. Especially if you’re low on cash flow at the beginning. And then the second point, and it basically approves what you just said, the properties that we’ve had most renovations completed, so we’re over 50% of the property renovated, had the highest collections the last two months. And even if they were in a worse location. And we’re not surprised by that at all. That was our assumption going in. And it was validated over the last two months.

Brandon:
All right. Good deal guys. Well, we don’t need to do the famous four or five round or any of that because we already did it. People can listen back if for some reason they skipped that part. But with that, we’ll just get out of here. David Green, you want to close up shop?

David:
Yeah. Thank you guys very much for coming on. Sam, I feel like you probably could have made your points a lot quicker and you just droned on and on and on the entire episode, hopefully we can edit you down a little bit. Because you’re the ball hog of this podcast, for sure. But, thank you for coming, as it is.

Ben:
[crosstalk 02:01:05] Hey guys, he’s talking to me. You guys listening, this is a very thinly veiled-

David:
And yet you still took the mic from him. [crosstalk 02:01:14] That’s the hilarious part of it. That’s the hilarious part of it. Fell right in my trap there, Ben. All right, guys. Thank you very much. It’s not always fun coming on to talk about when things go wrong and I appreciate you doing that. And we got a lot of very, very good and interesting stuff out of this.

Brandon:
Yeah. Thank you.

Ben:
Thanks.

David:
Thanks guys.

Speaker 4:
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