126 Multi-Family Units On a Military Salary with Erika Sleger

Brandon:
This is the BiggerPockets Podcast show 456.

Erika:
I wasn’t looking for a job. I am looking for an investment. I have a full-time job, and so this was just supposed to be something that I was investing in, and it got to be too much trying to figure out were these legitimate expenses, because expenses kept going up, and I didn’t know what they were for. A lot of them were really vague in the program, and I just didn’t want to be calling them constantly, especially out of the last several years I’ve lived overseas a decent amount of it. So I was just, since I didn’t want to keep doing that, I wanted something that I didn’t have to have management on. So even though returns on commercial property is a little bit lower, it was the right thing for me.

Speaker 2:
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 my co-host one final time, Mr. David the shredder Greene. What’s up, man? Sad day today, huh?

David:
Well, it’s sad from one perspective but it’s really happy for another. They say that one door’s got to close before another can open.

Brandon:
Yeah. I hear your … So for those who don’t know, David is stepping down from the podcast to become a full-time snowboarder. They’re in California, and I’m also stepping down from the podcast to be a full-time sea turtle rescuer. It’s a volunteer position but I’m pretty excited about it. I can’t even say that with a straight face.

David:
Well, I mean, when you’ve got the level of talent.

Brandon:
Yeah, when you got this talent, you got to [crosstalk 00:01:42].

David:
It really makes the decision for you.

Brandon:
None of that is true of course, people. Somebody just had a heart attack. They’re like, “They’re leaving?” No, no, today … If you’re listening to this live anyway today is April 1st that this show comes out, that means it’s April Fools’. I’ve never actually made an April Fools’ joke I don’t think in my entire life, so I’m pretty bad at it, but no, we’re not going anywhere. We’re still here sadly, and today’s show is not a joke. It is legit and it’s exciting. We’re going to learn from Erika today. So Erika Sleger, amazing story of investing in real estate whilst working a full-time job in the military actually, the Air Force. You’re going to learn how she was able to do that, build up a portfolio, going from residential into some commercial stuff. Really inspiring stuff, you’re going to love this. So hang tight for all of that.
Before we get into that, let’s get to today’s quick tip.

David:
Quick tip.

Brandon:
Today’s quick tip is brought to you by David Greene because I didn’t prepare one. David, what you got?

David:
It’s okay, that’s why I’m here, not just because I’m great at snowboarding.

Brandon:
Ooh, I can talk about my latte maker if you want to.

David:
No, please.

Brandon:
I did get a new latte maker.

David:
Please not.

Brandon:
It’s a really good one. It makes lattes. Anyway, go ahead.

David:
Today’s quick tip is use what you got. So today’s guest was in the military and she built an incredibly impressive portfolio using the resources that she had at her disposal. As Tony Robbins says, “You don’t lack resources, you lacked resourcefulness.” So, as you listen today’s show try to apply what you’re hearing to your life and ask yourself how you could do what Erika did.

Brandon:
Look at David Greene bringing in the Tony Robbins quotes. It’s impressive.

David:
Well.

Brandon:
Hey, we should get Tony on the podcast sometime.

David:
If anybody has a Tony Robbins connection.

Brandon:
But who needs Tony Robbins when you have Erika Sleger? So Erika, we’re going to bring this show to you guys right now. So David use what you got Greene, you’re ready for this thing? Is that better than snowboarding guy, whatever I said earlier?

David:
Well, the joke is I’m a horrible snowboarder, maybe one of the worst people. I don’t know if I can call myself a snowboarder.

Brandon:
You’re not as bad as me. You’re not as bad as me, I don’t think.

David:
Have you snowboarded before?

Brandon:
Three times.

David:
Yeah.

Brandon:
I broke my arm one of them, so I got like a one third failure rate.

David:
That’s the problem.

Brandon:
Yeah.

David:
All right, well let’s hear about someone who doesn’t suck at life, let’s bring in Erika.

Brandon:
All right Erika, welcome to the BiggerPockets Podcast. Good to have you here.

Erika:
Thank you. Thanks for having me.

Brandon:
Yes. So let’s dive into your story. I know you’re in the military still, right? So, how did you get into real estate? Why real estate? What was kind of the spark to that journey?

Erika:
Yeah, so I initially joined the Guard when I was in high school to pay for some college and what not. When I decided to go to law school, and one of the classes I was able to take in law school was about real estate. Our professor brought in different people and one of our speakers said that they rented or they bought a duplex, they rented out half and they lived in the other half and it paid for their whole mortgage. I was like, “That’s genius.” And so I graduated from law school shortly thereafter and decided that I was going to buy something that I could do that as a brand-new attorney. So I bought a fourplex.
Within a couple weeks, days, after buying this fourplex my Guard unit, I was still in the Guard at that time, got deployed. So I ended up leaving really short notice, didn’t even get to cash the check for the deposits from the seller, and so I was gone about nine, 10 months. Got back and then tried to cash the check because I found it when I got home, and the bank was like, “Nope.” So I had to go back, try and get the deposits from the seller again, but then I moved into that fourplex and it was great. I had my … Well, great. It paid the mortgage and then some.

Brandon:
Yeah, yeah. Financially it was great.

Erika:
Yeah.

Brandon:
Yeah, I gotcha. I’ve been there.

Erika:
Living with your tenants is not great. Lots of different stories there. Then after that I talked both my in-laws and my parents into buying some fourplexes themselves. At one point I was managing 16 units. Then the day that I turned over management to a different party was one of the best days of my life.

Brandon:
Okay. I want to get there, but first I want to hear a little bit more about this very first deal. I’m wondering was that a VA loan? Is that what you did for that first one?

Erika:
This was in 2003, so of course prices are cheaper, but also my salary. You think maybe an attorney would make some money, I was making-

Brandon:
A quarter million dollars a year, come on.

Erika:
Yeah, right. I wish. I was making … It was very low. But so I borrowed $15,000 from my grandma, and I bought the fourplex for 88,000.

Brandon:
Those were the good old days.

Erika:
Yes, I know. I know. Then yeah, I moved into the one unit and rented out the rest. I was actually still single and got married the next year, and then the next year we bought an 18-plex once I had my husband’s paycheck to add.

Brandon:
So, I want to stick on this first property, because even though it was almost 20 years ago that you bought that first one, the principle applies still today. We talk a lot about a house hacking, right? When you live with your tenants and you kind of laughed about that, and I laughed about it because we’ve all been there. I know David you’ve done it too. What worked and what didn’t work when you’re living with a tenant and you’re trying to do the house hacking thing?

Erika:
I probably did everything wrong. I mean, I hindsight probably I wouldn’t let them know that I owned it. Also, it made me feel bad with the … Collecting money from tenants made me feel bad, especially some of them had trouble making the rent and with kids and whatnot. So in hindsight I probably would’ve just gotten a PO box, had a mail stuff. Some of them were in the military. There was one above me. I lived in the bottom unit, and one of them one day I was sitting there and water started dripping down. So I went upstairs, knocked on the door a few times, no answer. Eventually I let myself in with the key and discovered water everywhere. The tenant had deployed and shut off his heat in North Dakota in the winter, so the pipes burst. So I was trying to figure out what was going on, and opened one of the closets where the pipes were and there was a marihuana growing operation there. So I had to report that because he was in the military and there was a lot of damage in the apartment.
So anyway, then once I joined the full-time military, active duty, and I was stationed at that base, he was one of the first court-martials that I participated in, so that was kind of a neat full circle.

Brandon:
Yeah, there’s a lot there. You learn these things, like when you’re house hacking. Again, we’ve all been through it with the tenant thing. Again, I love the idea of not telling your tenants that you’re the owner, of being just another tenant that lives there or just the manager, or the resident manager, whatever you can do to kind of make sure that somebody else is the one that’s the bad guy I guess in those cases.

David:
Why don’t we jump in real quickly about why that is a good idea? It’s not just because you don’t want to be the bad guy, because some people don’t mind playing that role. Some people actually excel at that role.

Brandon:
You love being the bad guy.

David:
Oh man, all the time I do that for Brandon. Just give me your phone, let me talk to this person.

Brandon:
Yeah, yeah.

David:
As weird as it is, I’d rather do that than get all the emotional touchy-feely stuff, that makes me more uncomfortable. But the point is what Brandon and I have been pounding on is the concept of leverage. Everything in life is something that you choose to do or you could hire, train, find someone, and either pay them or mentor them, or give them some form of benefit to why they would do this for you. If you don’t like collecting money, if you don’t like being, for a lack of a better phrase, the bad guy, find somebody else who wants to and listen to that feeling in your gut, like we say. Go with what goes light. So, there’s nothing wrong with Erika saying, “I don’t like that part of the job.” That’s actually your compass that’s guiding you to leverage that to somebody else.

Brandon:
Yeah, that’s a really good point. So Erika, what came next? I mean, you bought that fourplex, lived in it, went overseas, came back.

Erika:
Mm-hmm (affirmative).

Brandon:
I’m assuming you kind of stabilized it. Did you keep that one then?

Erika:
Yeah, I kept that a long time. That was in 2003, and then in 2005 we bought an 18-plex in small town North Dakota. That one I actually just sold a couple months ago, so I kept that one long-term also. I sold the fourplex in 2015 and that was after oil had hit North Dakota, so it had gone up in value. Then I did 1031 with that money.

Brandon:
What did you sell it for? You bought if for 85 you said, right?

Erika:
258, 88,000 and I sold it for 258.

Brandon:
Whoo, all right. There’s some profit there. And you 1031. For those who don’t know what a 1031 exchange is, can you explain that?

Erika:
Yeah. You take the money from your sale, and as long as you identify before the closing of what you’re selling, as long as you identify that you’re going to do that with the money, you put the money into a qualified intermediary. They hold it, you never actually get the money in your bank account, and then you identify a property that you want to buy within 45 days, close within six months, and then you don’t have to pay the tax man or the depreciation recapture. So it’s a good deal as long as you want to keep investing.

Brandon:
At some point the government wants his money back, unless of course you die and then it goes to your kids and they don’t have to pay it back either. So currently that’s how it is. But it’s such a powerful technique though because let’s just say you made $200,000 in profit that you’re going to dump into the next deal, but oh sorry, you owe the government half that in taxes, and now you can only invest 100 in the next deal. So if you’re putting 20% down you can buy a $500,000 property. But because you’re able to keep that full say 200,000 now you can buy a million dollar property. You can buy twice as much almost because you’re using the government’s money to go buy more.
Now you get all the cash flow benefits of that million dollar versus the 500,000. You get all the tax benefits of the million dollar, and then you do it again, and do it again. You’re basically using the government’s money as a partner to invest with you, and the government is like, “Hey, it’s okay. Hang onto my money for a little longer, invest in the next deal.” That’s why I think they do that. I think they do it because the government’s like, “Well, you’ve already been successful with the money now, you can probably grow it faster than we can grow it, so just go and dump it in there and pay us later.” It’s a cool strategy actually.

David:
It’s really smart, and if anybody wonders why the government does that, just ask yourself, when the government runs things, do you have a good experience at the DMV?

Brandon:
Yeah, they’ve realized they would rather have investors who have proven themselves good.

David:
Yes.

Brandon:
Investing their money rather than government bureaucrats investing their money. All right, so how did you go from that fourplex to an 18 unit? That’s a pretty big jump, bigger than most people would probably do. What was the kind of mindset that went into that?

Erika:
It was for sale, I guess. In small town North Dakota, at least at the time, and this is when I say small town I’m talking like 2,000 people, and it was an 18-plex. It was for sale from a real estate investment fund and they were selling it to invest in shopping malls and whatnot. So, the 18-plex I paid 215,000 for, which at that point between … It seemed like a lot of money at the time, but in hindsight it wasn’t, but we got that and it brought in a lot of money. For a long time we were like, this is like a golden goose, it just kept sending us money, but then we paid it off and then we started paying taxes on something paid off. That was something that I hadn’t realized I guess was a power of leverage, because once we paid it off, yeah, it was great getting those monthly checks and not sending out anything to the mortgage company, but we got hit during tax time. So then we refinanced and pulled some money out.

Brandon:
Okay. Yeah, that makes a lot of sense. I know there’s a debate in the investment community of should you pay off your properties or not, and that’s one of them. When you pay them off you don’t get as many tax benefits, which means you pay a lot more money. So from a financial standpoint it usually doesn’t make sense to pay off properties, but from an emotional standpoint some people really like it and it works for them.

Erika:
Yeah. When we pulled that money out that’s what we used in part for when we bought in 2014, we bought a 64 units.

Brandon:
Wow, in one shot, like one apartment building?

Erika:
Yes, yeah. It was four 16-plexes.

Brandon:
Wow, okay. So let’s walk through that one. How did you find that thing? How did you put together that deal?

Erika:
So we decided once that we wanted to … like I enjoy this. My husband’s totally hands-off, he doesn’t … In fact, he never saw any of our properties except the [crosstalk 00:13:29].

Brandon:
That [crosstalk 00:13:29].

Erika:
The ones that we just sold, yeah, the 126 multi-families that we just sold he never saw any of them. So, but I enjoy it. So I called around. I didn’t have a market that I really was biased towards. So I just called around, and honestly I ended up investing in Winston-Salem because that’s where I found a realtor that was really great. So, he returned my calls, he took it seriously. So I ended up investing there, and it was good. It’s been good. I still have several properties there.

Brandon:
So this is a really good topic I want to make sure we dig on a little bit. When you’re trying to find a market to invest in, like a lot of people are just stuck with … They have no idea even where to look. Do I go to North Carolina? Do I go to Florida? Do I buy in Ohio? What do I do? And you mentioned, and I love that you actually said that, is you just found a realtor there. That was the main driver. It wasn’t like you were looking at the data going, “Oh, it looks like population trends are moving in this direction.” And maybe you did some research there, but it goes to David’s point in long-distance real estate investing about having your team is the most important piece of where you invest, or at least one of the … It’s probably the most important part. David, would you agree with that?

David:
Yeah, absolutely. The team, and I’m sure Erika would support this concept, it determines whether you’re successful or you’re not successful, whether the mission gets done or the mission doesn’t get done. The team is pretty much everything. When I wrote the book what I noticed is the question everyone asked is where do I invest. It’s a mindset that comes from stock trading. Where can I buy low and sell high? That’s how they’re looking at this thing, but when you’re buying a stock there’s already a company in place that’s got a team of people that are either doing a good job or they’re not doing a good job. You got to build that team when you’re investing. So while the location does matter, and Erika I want to ask you what your thoughts are on buying where you are or buying in a place you think makes more sense, there’s another layer of complexity to this which is how you build the team or how you operate this business that you’re buying.

Erika:
Yeah, the hardest part, other than in North Dakota that was the only time I’ve ever lived near my properties. The hardest part in my opinion is finding management. It’s really, really hard to get good management. Once you get good management it seems to slip, and that’s why I ended up selling all the multi-families. I had good management and they were good, but I just didn’t have the time to manage the management. They use these huge programs, and I would try and go in and see what the expenses were, but when you have 126 units I wasn’t looking for a job, I am looking for an investment. I have a full-time job, and so this was just supposed to be something that I was investing in, and it got to be too much trying to figure out were these legitimate expenses, because expenses kept going up and I didn’t know what they were for. A lot of them were really vague in the program, and I just didn’t want to be calling them constantly, especially out of the last several years I’ve lived overseas a decent amount of it. So, since I didn’t want to keep doing that, I wanted something that I didn’t have to have management on. So even though returns on commercial property is a little bit lower, it was the right thing for me.

Brandon:
Yeah, that makes a lot of sense. So let’s go into that a little bit deeper into the … you said 126 units, is that what you were up to?

Erika:
Yes.

Brandon:
The big apartment complex, how did you find it? How did you finance it? The 60 something unit that you got there, what was that about?

Erika:
The initial 64 unit was just when we had the money I just was like I said, calling around to different honestly states.

Brandon:
Yeah.

Erika:
I was calling realtors in California, and this was this one particular realtor called me back, and so that’s where I ended up buying. It was also driving distance. We were stationed in the D.C. area, and so I could drive down and look at it, which I did several times. Then after we bought it, it was … I mean, there’s a little bit of foolishness too. When you buy something big there’s just that leap of faith, but a lot of it is just being like, “All right, I’m just going to do it and jump in.” There’s a lot of things that I missed then that I would know now.
I didn’t really realize that a lot of owners when they’re going to sell they prep for a couple of years and they quick doing capital improvements, and they lower the expenses a lot, and they will fill the empty apartments with whoever just to try and get the income out, because then with the cap rate you pay more. I didn’t realize that, and so yeah, I bought it and then I started realizing okay, this roof even though it passed the inspection it’s going to need a new roof in a couple of years, and these are $50,000 roofs. So that was one thing I wish I would’ve been smarter on. I always think at least I’m in it to make the mistakes, better than sitting on the sidelines and not doing anything. So I’ve learned a lot, but it’s been great.

Brandon:
When people are trying to sell a property, what you’re getting at there, and correct me if I get any of this wrong for what you’re saying. When people are trying to sell a property, especially a multifamily or commercial property, they want the profit, the net operating income to be as high as possible. They want to make that property look really, really good from a financial standpoint because the value of a property is based on how much profit it makes when you get into that larger deals.
So, as a result they stop working on a lot of the stuff, the regular repairs and maintenance for several years so they can keep the numbers artificially low, it’s very common. So, because of that you may get a lot of differed maintenance. That’s what you’re saying, right?

Erika:
Yes.

Brandon:
Yeah. So definitely something if you’re getting into larger deals, be aware what is the seller not doing. Do you have any recommendations for how to discover that? How do you know what a good … If they’re cutting back there, how do you know if they’re trimming their expenses and not doing a good job?

Erika:
The two things I would look at is how long the tenants have been there. If you see a bunch of tenants that were just installed right before it went on the market, they’re probably going to be evicted here shortly and it’s going to be your problem. The other thing is to check when things were repaired. I mean, visually look at it, you can see if the parking lot has potholes and whatnot, but how long ago was the roofs replaced, and the railings replaced, and the flooring and all those things. If you can see a lot of that, if you just have your eyes open, but I was just really excited. I was like, “Oh my gosh 64 units. This is amazing.” So it’s like I had blinders on a lot of that stuff that I was like, “Oh, I can totally overcome that.” And then pretty soon the bills start coming in for those things.

Brandon:
What was kind of the end result of that deal then? I mean, do you still own it today? Did you sell that thing eventually?

Erika:
So I bought that in 2014. The next year in 2015 I bought an additional 16-plex in that unit, so I had 80 units in that little complex. Then I also bought 46 units across town, and then I just sold all of them as a package in August and did another 1031.

Brandon:
How were you able to finance all these properties on a military salary? I mean, you were saving up for it? Is there any creative strategies in there?

Erika:
Yeah, so of course we sold that fourplex, so we got some money out of that. Then the 18-plex we refinanced that a couple times and pulled money out. I actually just sold that one for 450 a couple months ago. So we pulled money out of that. Then with the military you keep going up at rank, and then longer you get paid for longevity too. So at this point my husband and I have both been in … I’ve been in close to 20, he’s been in 20. So at this point we make a salary, a decent salary, but of course with four kids we also pay a lot.

Brandon:
Yes, you do. Four kids. Well, so here’s what I love about your story, is it illustrates something powerful and that is, I teach this on BiggerPockets webinars a lot, is the concept of a stack. When people are getting started they see somebody with like 100 units and they’re like, “Oh, how could I ever buy 100 units? That would take me 100 years, right? If I bought one a year.” But the idea is you started with that fourplex, and then you bought the 18-unit, right? It was outside your comfort zone but not in the realm of impossibility. It was just like oh, that’s a stretch. Then you took profit you made from the early deals and dumped it into bigger deals later. You bought a 60-unit, and then over time you make more money, and you keep on some type of budget hopefully in life so that you have extra cash to invest. So people I think oftentimes look at the idea of a portfolio, like 100 and some units and think that would be impossible, I would never be able to have the money to do that. But your story perfectly illustrates over time you’re going to be fine. You’ll figure out as you go, as long as you invest outside your comfort zone, which is exactly what I feel like you’ve been doing, is investing outside your comfort zone. That’s awesome.

Erika:
Yeah, the whole time it’s been outside my comfort zone, and same with the most recent stuff I bought, it’s something totally different once I got out of the multi-families.

David:
What you’re basically getting at was when a seller provides information you don’t just take it at face value when you’re buying a property. I’m going to let you explain to us some of the other things that happens. What I’ve noticed is when people first get into multifamily investing they really get excited by the spreadsheets, and the numbers, and the math behind them because they’re powerful, but it’s easy to assume that what you’re looking at is accurate. This was something Annie Duke talked about when we interviewed her, that we tend to read something and just take it at face value and then move forward. So our analysis is based off a bad facts.

Brandon:
Thinking in Bets is the book title, by the way.

David:
Thank you, in Annie Duke’s book Thinking in Bets. So our analysis is based on bad information, which means if you had a foundation and you build on it as you’re analyzing this property for foundation was bad, the whole thing ends up being bad. I wanted to ask you, what are some other things that you found that investors have to be very careful that they analyze correctly and they don’t take the seller’s words for it, because like Brandon said, they’re going to hype those numbers up to make them look better, that people can avoid some mistakes that would really hurt them.

Erika:
So you have to try and look a little bit in the future too. Is your insurance going to be the same as the person who is selling it? Is your taxes, the property taxes can go up, because once you get into these bigger properties you’re looking at $30,000 in property taxes. If they sold it to you for a lot more than what they had into it, it might jump up. Also, due diligence was kind of just a word before, but once you dig into it. I had, like I said, I have a really great realtor, and so he would do things like send me, he would even ask for copies of the seller’s bank accounts to show the deposits instead of just taking their word for it on some things. So just verify.
I was surprised, I mean, in the military of course we try … Lying, that’s the worst of all things. So I was surprised at how easy some people will stretch the truth on that stuff.

David:
Well, I feel like that’s really the game. When you’re analyzing multifamily properties, the people I know like Andrew Cushman is a guy I invest with and he’s taught me a lot, is they’re telling you something and then you’re investigating it to find out if it’s true, and that is literally what due diligence is. I just want to highlight that because many people would just-

Brandon:
I never thought of that, it’s exactly what it is. You just try to find out how much they’re lying. That’s what due diligence is, is like a lie detector.

David:
Yeah, it’s like a polygraph that you’re running somebody through, and you’re looking up evidence to support it. Erika, you said a great thing, I don’t want it to get overlooked, it doesn’t matter what the lease says the person is paying. That’s just what they’re legally obligated to pay. If they haven’t paid it for six months you still bought yourself a problem. Look for the deposits, show where the landlord deposited the rent into the account and you can see this person’s been caught up to speed, because it’s very easy to grab somebody, throw them in there. Now they show that there’s no vacancy, their NOI increases, they’ve made the property worth more. The multiple is different when you’re figuring out the value and they just made this thing look great, and you buy it, and you basically are taking over this poison pill that somebody else had swallowed.

Erika:
Exactly. Their problems become your problems.

Brandon:
Well, let’s dig into what came next then. So you said you sold all these properties in a big bulk. Was that to one person or you just sold them in-

Erika:
No, it was a private equity firm that bought them all. I started probably about a couple years ago getting phone calls, multiple phone calls a week about trying to sell, people that wanted to buy these. So I hadn’t paid that much attention because I was living in Germany, and then I got back to the US, and then I deployed. So I just kind of blew them all off, but then I finally just got kind of fed up with managing managers. I knew that I wasn’t giving it the attention that it deserved. I wasn’t doing that good a job at it. A lot of things were just escaping my notice, because like I said, this was just an investment to me, not a job. So when I decided to sell I was surprised at how much they said, the agent said that I could sell them for. So we did a 1031 and then bought a different type, a different asset class.

Brandon:
What did you end up buying?

Erika:
I bought commercial. I wanted what they call mailbox money. So I bought two Starbucks, a daycare, and a Quick Lube and a medical office building.

Brandon:
You just buy a Starbucks, like the building, right?

Erika:
Yeah, yeah. Yeah.

Brandon:
Why that asset class? Why commercial real estate like that? What brought that on?

Erika:
So the whole idea was that I could just manage it myself, because once you get it purchased and you get your mortgage auto paid, you get the rent is auto paid into your account, and so the whole idea is that you know your expenses because in triple net the tenants pay your year insurance and your taxes and everything. So the whole idea was that it would be truly, truly hands-off. My negligent management, looking at the monthly spreadsheets and whatnot, that would be fine because it’s really just automated.

Brandon:
Yeah, and I’m assuming you don’t need a property manager at that point then because it’s …

Erika:
Yeah. I don’t have a property managed. Ironically, right after I bought one of the Starbuckses in Arkansas where they got the snowstorm, and so I was getting phone calls about snow in the parking lot, and nobody knows what to do with snow in Arkansas. They’re like, “We don’t have plows.” So I’ve actually had more phone calls about maintenance than I ever did with multi-families, but I think it was just kind of a freak thing.

David:
So you mentioned triple net leases. Can you describe for the audience what that is?

Erika:
Yeah. So when you buy these commercial properties you’re almost buying the lease really instead of the building because the building itself wouldn’t go nearly for as much as it does once you have a long-term lease. So the thing I found out is that the longer the lease and the better the credit of the tenant. So if it’s a nationally traded tenant like let’s say Walgreens, or CVS, or Starbucks, or one of those, you get more favorable financing terms. The banks will a lot of times fight over financing those for you, and you don’t have to worry about it. So, but then of course your return goes down too because it’s a lot more safe. If you get maybe a franchise, that you’ll get a better return, but it’s a little bit more risky and your financing won’t be quite as good. So it’s a trade-off of what you’re comfortable with.

David:
That is such a great definition that you just gave. I love what you said. You are buying the lease, not the building. Because I’ve often looked at what people pay for commercial buildings and you could build a new one for a whole lot cheaper than what people are paying. You’re buying the income stream, which is the lease. Oh, that’s so good, because that opens your due diligence up into how long is the lease for. Is it at below market rent and it could raise? How stable is this tenant? Is this a tenant that could go bankrupt in a couple months or is this someone who’s been here for 15 years? Those are such good points.

Erika:
Yeah. It’s kind of scary because these are nationally sold too. They’re not on a local level. So you can buy anywhere, and that is exactly how they’re advertised. So it’s a little bit scary not knowing exactly where they’re at when you’re buying them, but I guess the benefit was the financing was much easier, even with COVID. Which that also threw a wrench into things because day cares. Day cares all of a sudden were selling at a bit of a discount because who knows. Are we all going to go back to work and need them again or are they all going to go under? So I took a risk on a daycare but then also got some things that are doing pretty well with COVID.

Brandon:
To kind of sum up your story as we’ve gotten so far, you started small by this fourplex, I mean, basically just house hacking a fourplex. You then used the next level you supercharged an 18 unit, bought a 60 some unit and a bunch of more units. You sold all of that over this 20 year period or whatever it is, 15 years period. Took all the profits that you make over time, dump them into a real estate that’s way more passive, and long-term, just easy to manage, and you have this big portfolio now of these commercial properties that are fairly easy to manage. That sounds like a good summary of your career.

Erika:
It is. Yep. Yeah.

Brandon:
It is that perfect picture of how awesome real estate is, because it just gets better, and better and better and it compounds upon itself. I’m not saying it’s like there’s never any problems when you own the larger properties, but at this phase of your life now you’re probably not looking to deal with tenants who are growing weed in their closet and you’re dealing with the water leak. You’re past that now.

Erika:
That’s a young person’s game. Yeah.

David:
Well Brandon, you’re making a good point here too because a lot of the reasons people either don’t start in real estate, they fail, give up, or never get started, or they never continue to go through is they think that the problems that you have when you’re new will just become compounded when you’re bigger. If it sucks this bad with my one duplex and single family, it will be 10 times as bad if I had 10 of them. But what Erika you’re describing here is no, you actually graduate out of that stuff. That that’s sort of how you pay your dues to get started, but the more successful you get, the more equity that you build, the better you get at this. You get into asset classes that remove a lot of those hurdles that people don’t want to face. So I think that’s a really good point to highlight that encourages the newbies.

Erika:
Yeah. So real estate, I just feel like you can go more in or pull back, depending on what your current goals are. I might get back into that stuff later. I have three years left before retirement eligible. So this just seemed right for me right now. Then once I retire maybe I’ll get bored and I’ll want to be more active, but right now I just really wanted something passive. It’s just what your goals are at a certain time, but it’s not a permanent decision, which is the beauty of it.

David:
So for others looking to buy triple net leases, what have you learned that would benefit them?

Erika:
Get a good attorney. I’m an attorney myself but I’m not a real estate attorney, and so that was vital. Read as much books as you can and just think about things that I didn’t think about, like drive-throughs are very valuable. If you have a drive-through it can be repurposed, a bank, a restaurant, a Starbucks, a bunch of different things. The length of the lease is awesome. Also look at how long it’s going to be until the next increase in their rent, because something might look good right now, but if their rent doesn’t go up for five years and then it’s only 1%, really it’s almost going down with inflation. Then look at options. The other thing that I learned was options are mostly to protect the tenant, not you, because I mean, I guess that was probably obvious, but I hadn’t thought about it. I had just been like, “Oh, options, that’s great.” I have-

Brandon:
What do you mean by options? Can you explain that?

Erika:
So at the end of their lease, let’s say they have a 10 years lease at 2.5% increases every two years. At the end of the 10 years they have the option to renew for maybe four options of five years each. It lays out what their rent will be for the next 20 years and it would be after that. They can exercise that option, but if rent has gone up greatly in your area and you exercise it, you would lose that.

David:
The landlord doesn’t have the option, the tenant has the option, and however has the options has the control.

Erika:
Exactly.

Brandon:
Is commercial real estate like this? Is it just as competitive as we’re seeing in everything else right now in terms of apartments, and mobile home parks? I mean, is it crazy out there and everyone is just creating crazy prices?

Erika:
I don’t think it … Well, the cap rates are low, yeah, compared to how they have been. I don’t think it is as cutthroat. The multi-families I was getting so many calls, and I feel like that was really, really ultra popular. There’s less people that are probably buying in the … Commercial properties are often more expensive too. You can get into a multifamily, a smaller multifamily for maybe a couple 100,000.

Brandon:
That makes a lot of sense. The players maybe are more sophisticated at that level and they’re okay with a smaller return, but this is a whole lot less of them out there. You’re not competing with every one of the 250,000 listeners of the BiggerPockets Podcast.

Erika:
Yeah. There’s other things I wish I would’ve known before I bought these because I would’ve set up a virtual mailbox because a lot of people when they deal with me they think I’m maybe the secretary for a real estate firm. I wish I would’ve just kind of gone like that instead … When I deal with the Starbucks manager, or the day care owner, manager that I would’ve just been like I’m reaching out as the manager of the company instead of saying I own it, because then there’s just a … It kind of adds a level of unprofessionalism I think.

Brandon:
Yeah, that makes sense. What about the types of properties? I mean, you kind of mentioned things like drive-throughs are really good because it can be repurposed. The big national chains are nice, but you can get a lower thing. Anything else you can say there? I mean, because one of the things I worry about the commercial is what happens if Amazon takes over, or what happens … More and more that’s happening, right? Or what happens if the world shifts in a way that we didn’t project?

Erika:
Yeah. That was something I thought about, and somebody told me try to invest in things that Amazon can’t ship. So they had said maybe collision centers, the car accident type things. So one of the things I bought was a Quick Lube and then a day care. Amazon can’t send that. Medical will be difficult. But yeah, a lot of the things that can be shipped through the mail or tele-worked will probably, who knows.

Brandon:
I remember we had an episode of the podcast, I wish I remembered the guy’s name, I can look it up later and put it in the show notes, but he buys strip malls, like strolls, and I remember him saying basically the same thing, is I invest in services that you can’t buy online. So the nail salon, or the car repair shop, things like that, which is really nice, because people are going to need their hair done no matter what. Well, I mean, pandemics kind of slow that down for a little while. We all got a little bit ugly, but they’re going to need that stuff done, their nails, their hair. They’re still going to need to go shop for some stuff that you just have to get, like you’re not going to buy cigarettes online.

David:
The service-based industries more so than goods based.

Brandon:
Yeah, which is fascinating.

David:
So Erika I want to ask you, why are you not wanting Amazon to be taking over? Wouldn’t Amazon be a potential tenant for your property?

Erika:
That would be great if I could get something like that, but I’m not exactly sure what Amazon is looking for. I’m assuming it’s a lot bigger than I could ever get.

David:
When you say an industry Amazon don’t take over, you don’t mean a building Amazon would not want, you mean tenants that could not be replaced by Amazon’s services.

Erika:
Right.

David:
Okay.

Erika:
Yeah.

Brandon:
Yeah. It makes a lot of sense. Very cool. So you mentioned that in a few years you plan to retire from the military. Do you plan to keep your real estate going or just planning to sail off in the sunset? What do you want to do?

Erika:
So, our plan is to move probably overseas, Portugal, something like that and for a while just drift. We’ve gotten to go a lot of places with the military, but you don’t get to see things when you’re there, you’re working. So we’re going to pull the kids out of school and just probably go do that for a while. So I wanted something that could be very automated. Then after a little bit we’ll probably settle down, and I can’t imagine not doing anything. So I would think at that point I’ll probably get back into more active real estate. I tried to open a property management company a few years ago and that was a whopping failure, so maybe I’ll try that again.

Brandon:
We got to dig on on that then. Why was that a failure?

Erika:
After we bought that, the multi units. So I had the 64 and there was another owner in the complex, and he was like, “Let’s open this property management company together. I know this great lady. She’s been working for me helping me with the renovations. She can manage it for us.” So we did. It was a ton of work. We did the operating agreement, the LLC, we got a desk, we leased a car. We were all in, and then I moved to Germany a couple months after that because we were just sure that this would work out. So moved there, and then after about six months hadn’t gotten a check, a cashflow check, which was odd because it had been cash flowing. Then she was basically a stockpiler. When there was money at the end of the month she would go to Sherwin-Williams and spend $5,000 on paint to put in the store room just in case we needed it later, or window air conditioners and just put them in the store room just in case somebody needed them. So we had tens of $1,000 worth of supplies just sitting there. In fact, they had to vacate one of the apartments just to use as a storage room.
So the only smart thing I did with that whole thing was pull the plug on it after six months instead of waiting longer, but it was a disaster. I mean, we had to terminate the lease of the car, and all the property, the desk, the computers, I have no idea where it ended up. It disappeared.

David:
You know, you are the second guest today that told us that they didn’t like paying property management, they didn’t like the service they were getting and so they started their own company and then immediately regretted it.

Erika:
It’s terrible, yeah. You have to really … That’s something you have to, in my opinion, that’s the one thing you really need to be local for, to get the employees and the processes. I can see that eventually it would work, but it’s not one of those things like real estate that you can just start up long distance and expect that to be a success.

Brandon:
I really feel like property management is one of those like it gets easy, you have to achieve a certain level of scale before it becomes a good business, even like … It’s kind of like Airbnb too. It sucks to have one, or two, or three Airbnbs because you’re doing everything. You don’t have the infrastructure to be able to handle outsourcing everything, but if you had 100 of them, man, you’d hire people, you got a CEO, you got a finance person that handles all the stuff. Now you got a business, but yeah.

David:
It also has low profit margins, high turnover with the people that they hire. I mean, if you think about all of your investing, both of you, I bet you’d agree you rarely ever have a good experience with property management, but there’s nowhere better to go to. It’s the hardest component I think of real estate investing, it’s kind of like your offensive line on a football team. When they’re not doing their job it’s very obvious that everything is going terrible. When they are doing their job you just don’t notice that they’re there.

Erika:
Exactly, yeah.

David:
Well, thank you for sharing that, because I think a lot of people, Erika, also want to … Like I should just do this myself, and I would caution [crosstalk 00:40:35].

Erika:
It’s tempting. It’s tempting because you see what you’re paying. In these bigger properties, you not only pay the percentage, but you pay all the expenses. I mean, I was paying the lady to sit at the front desk, and then her 401(k), and her health insurance, and then every expense, the property management programs that those can be a 1,000 plus a month. So you’re like, gol, couldn’t I just buy or hire somebody to work for 50,000 a year and a maintenance person for 50,000 a year, and it seems like that would just save a ton of money, but I’m sure somebody can pull it off, but I could not.

Brandon:
All right, so my last question before we get to the deal deep dive is about what you’ve learned about franchise versus corporate guarantees. Do you mind breaking that down for us?

Erika:
Yeah. The franchise, and it does depend on the size too, so you can have a franchisee who has a 100 stores and they’re probably very secure, but as far as financing the banks have their certain standards that they want, and corporate is the way to go, then a corporate guarantee. Then within the corporate guarantees they’re rated with these Moody’s letters, and there’s like the best of the best, and then it goes down from there. If it gets too low, it’s kind of the equivalent of franchisee, they don’t really want to lend on it.
The other thing that I found out is that different lenders are looking for different things at different times. I had multiple banks tell me, “Oh, we were looking to lend on that type of property earlier this year but we’ve tapped out our funds on that for this year. Next year it’ll be different.” So I guess that was one of the things I learned, was I just thought if I send out my credit score and the financing or the income and everything for these stores that every bank would be the same. It’s vastly different on what they’re looking for. So you got to send it out a lot.

Brandon:
All right. Well, we got to begin to move this thing towards our end, so let’s head over to the next segment of the show. It’s time for our deal deep dive.

David:
Deal deep dive.

Brandon:
All right. Time for our deal deep dive. This is the part of the show where we dive deep into a deal that you’ve done. So, Erika, why don’t we start with the first question? Do you have a property in mind, by the way?

Erika:
I do, yes.

Brandon:
Number one then, what kind of property is it and where is it located?

Erika:
It was a 46 unit multifamily in Winston-Salem.

Brandon:
46 unit multi. All right. And how did you find it?

Erika:
When we sold our fourplex in Minot and got the 1031 funds I reached out to an agent that I had worked with in Winston-Salem and asked if he knew of any properties that I could buy.

Brandon:
All right. Was it listed officially or was it a kind of an off market thing?

Erika:
It was off market. He had just found out about it. In fact, I just was going through my emails from him back then and it said, “I just found out about this and I don’t think it’ll last long. So if you’re interested, let me know.” It was a property that the … It was the contractor had bought it and he was flipping it, basically flipping a multifamily.

Brandon:
So you bought it from them. So how much was the property? What were they asking for it?

Erika:
1.25 million.

David:
And then what price did you negotiate?

Erika:
That was about what we paid for it.

Brandon:
Okay. Any negotiation strategies in there or not really?

Erika:
Yeah, because he had bought it for like 600,000 three months earlier, but he owned his own construction company. So he had his team go through and remodel a bunch of things and fix things. So, as part of the negotiation we had him fix a few more things. So instead of reducing the price, that’s how we got some more, like laundry machine, washing machines, which I’m a huge fan of owning your own coin operated machines. Those are cash cows.

David:
That’s smart though because you saved your own capital that you now don’t have to put into the deal because they’re doing it, and you sort of increase your NOI before you even bought it by having additional revenue put in by the seller.

Erika:
Yeah, and there was really nothing to repair. Even when I sold it a few months ago I had very little expense in changing things out.

David:
Yeah, because we often just focus on price, that’s what everyone says, is what price did you pay? But the price isn’t as important when you … What was your interest rate on this deal?

Erika:
3.99.

David:
Yeah, that’s not very expensive money to be borrowing, but if you had to dump big amounts of capital into making repairs or adding those laundry machines, that would’ve had a significant impact on your IRR. So I think that’s really smart you did that. Don’t want to overlook it. Okay, how did you fund this deal?

Erika:
The same loan officer that I had worked with the year before. I reached out to him and a few others, but he ended up, we developed a relationship, and so I still work with him a lot.

David:
You just put down the 1031 money you said, right?

Erika:
Yeah, the 1031 money. I think you can’t get it right now, but it was only 15% down at that time.

Brandon:
And then the question, what did you with it, meaning long term? You held it I’m assuming, you rented it out, did you fix it up more? What was the kind of the process like the next few years?

Erika:
That one just kind of sat. I mean, we cash flowed it, it was professionally managed, but it cash flowed. We did refinance it once, pulled some money out, and then we sold it last August.

Brandon:
So that was the outcome basically. What was the outcome I guess in terms of like … Sorry, David. I’m stealing your question here. But dollar amount or what kind of profit did you make, if any?

Erika:
We sold it for 1.75.

Brandon:
That’s a little bit of profit then and there.

Erika:
It was funny. When I was looking through some of my old emails to prep for this, cap rates back then, they were selling it at I think nine and a half cap rate, but we thought maybe we could get it at 11 cap rate, which is crazy because I think we sold it at six and a half. So it’s just cap rates are really compressed right now with the low interest rates.

David:
What did you learn from this deal?

Erika:
So I was hung up on this deal about the guy I bought it from had bought it so low and was selling it for like double the price a few months later, and I really got hung up over that. But the thing I learned was there’s meat on the bone even if you didn’t get the deal of the century. If you keep things, it’s not always a … Don’t get hung up on what the other guy paid. As long as there’s still room for you to make some money, just worry about yourself.

Brandon:
All right, well thank you for sharing that. That sounds like an awesome deal. Again, just shows the power of you buy real estate, you hang onto it for a few years, it goes up in value, you take that profit, you dump into a larger deal to make it more passive, get your systems better, and just over time it just gets better, and better, and better. I love it. I love your whole story. It’s like I want everyone to listen to this show and be like, “This is what a career in real estate investing looks like.” And you’re going to experience some fruits of that here as you retire and sail off into the sunset, which is awesome. So, with that said, let’s get to our last segment of the show, it’s time for our …

Speaker 5:
(singing)

Brandon:
These are the same four questions we ask every guest, every week, here on the BiggerPockets Podcast, now we’re going to throw them at you. So number one, Erika, favorite either long-term favorite or maybe recent favorite, real estate related book?

Erika:
My recent favorite is The Due Diligence Handbook For Commercial Real Estate by Brian Hennessey. It was very helpful because due diligence is different with commercial.

Brandon:
All right, awesome. I’ve not read that one but that’s definitely one I should probably read.

David:
What about your favorite business book?

Brandon:
Free to Focus by Michael Hyatt.

David:
Michael Hyatt. I love Michael Hyatt.

Erika:
Mm-hmm (affirmative), it’s good.

Brandon:
Yeah, he’s coming back on our show. I don’t know if it’s already aired by the time this show comes out. I think it’s already aired probably by the time this show comes out, but yeah, Michael Hyatt, super good dude, and Free to Focus, great book.

David:
All right. What are some of your hobbies?

Erika:
I like reading Louis L’Amour Westerns and gardening. We move every couple years for the military, and if I could have all the money back that I spent on gardening at each house, I probably could’ve bought another multifamily, but I love it.

Brandon:
Louis L’Amour, how many books has he written, do you know? You go to the library and there’s shelves of his books.

Erika:
Hundreds.

Brandon:
Yeah.

Erika:
I have probably over 100 myself.

Brandon:
Is he still alive?

Erika:
No, he’s dead.

Brandon:
Oh, because that’d be a great interview. To find out how do you pull out that many books? What’s that process look like? That’d be fascinating to hear. All right, then last question from me. What do you think separates successful real estate investors from those who give up, fail, or just never get started?

Erika:
I think it’s passion. If you love it, I think you’ll keep trying no matter how many times you might fail. If it’s not your passion and you quit, there’s no shame in that. Find something you love. You get one life, enjoy it. Might not be your thing.

Brandon:
Very cool. That’s such a good answer. That’s such a good … because if you don’t love and if you don’t have a passion for it, you’re not going to continue. Even real estate, some people say like, “Well, I don’t love real estate.” Well, you might not love real estate but you might love, be passionate about managing people, or about … Fine, you could put that to use in real estate and make them do the real estate. You’re more of like a CEO type that runs your business. So there’s different ways to approach it, even if you don’t love changing toilets and batteries in smoke alarms. So lots of ways to make that happen. Very cool.
Well, Erika, this has been fantastic. Really, really good stuff today. I love your story and I can’t wait to see kind of where you head off in the future with more of these deals. I’m definitely inspired to check out more commercial. I really should dig into that a little bit more. We’ve got a couple guests lately that have been crushing it in commercial world. So, I’m excited. Yeah, keep doing it.

Erika:
Thank you. Yeah. It’s a good thing for right now, and then maybe in a few years I’ll be back to multi-families.

Brandon:
Yeah, maybe. Well, very cool. Anyway, thank you for joining us. David, if you want to get us out of here, that would be a good next step.

David:
Erika, where can people find out more about you?

Erika:
I have Facebook. I’m not selling anything or I don’t have a professional website or anything, but I am on Facebook.

David:
Very cool. Do you know your Facebook name on there? Is it just-

Erika:
Erika Miller Sleger, yep.

Brandon:
Okay. We will also link to that of course in the show notes. You can get it at BiggerPockets.com/show456. BiggerPockets.com/show456. You can also of course go to there everybody and ask your questions in the comment section of that page. You can ask questions there. You can also if you’re watching this on YouTube you can put comments below, please do. Don’t forget to like if you’re watching this on YouTube, like, thumbs up, or whatever so that YouTube knows it’s a good video and they show it to more people with the message of portfolio building and the amazing power of real estate investing. So Erika, thank you.

Erika:
Thank you. I appreciate you having me on.

David:
Thank you for sharing your story, it was awesome. Also, thank you for your service. I’m a huge fan of hiring people in the military. By the way Erika, have you heard of the SkillsBridge program before?

Erika:
I have, yeah.

David:
I share that with everybody who is in the military. The military will basically pay you to learn a industry outside of the military. So I have people that intern for me that are in the military through the SkillsBridge program.

Erika:
Oh, awesome.

David:
So if you’re looking to grow your business, Erika, that might be something you could consider when you’re out. I’m definitely doing the same if people are looking to learn of real estate while they’re still in the military. So thank you. All of those that are in the military listening to this right now, thank you for what you do, and do not believe the lie that you can’t get wealthy while you’re in the military or while you’re a first responder, or while you’re a teacher. Let real estate do all the heavy lifting. Just learn how real estate works and it can make you wealthy. So, thank you Erika.

Erika:
Thank you.

David:
This is David Greene for Brandon, the Louis L’Amour of real estate investing books, Turner. Signing off.

Speaker 2:
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