Buying Non-Traditional Properties as a Rookie Real Estate Investor

Ashley:
This is Real Estate Rookie episode 89.

Matt:
And since my job is very physical, that is a big thing that I leaned on. So now that I have some “passive income” or a second strategy for income, I would say that it is just lowered my anxiety. That’s the biggest change for me.

Ashley:
Tony and I get so excited when it’s a niner episode.

Tony:
I told Ashley that I have to thank her for introducing me into the world of Tommy Boy, because I’ve never even heard of the movie before you put me on it.

Ashley:
Tony, I would not tell many people that. Even our guest today was like, “Oh, it’s a niner episode.” And he got it right away. And Tony, he had to confess like he’s never seen it and me and Matt are really like, “Everybody has seen it!” So if you haven’t watched Tommy Boy, you guys need to check it out. Anyways, today we have Matt on. Matt, I apologize. He’s already left our hall, but I forgot… I messed up during the show today. I forgot to ask him at the end where people can find out more information about him. So I’m going to pretend to be Matt and I’m going to tell you guys where you can find out more information.

Ashley:
So guys, my name is Matt and you can reach me on Instagram @Matracks13. That is M-A-T-R-A-C-K-S13, and I also have a BiggerPockets page. You can find me on the BiggerPockets page by searching my name, Matt Rackers, R-A-C-K-E-R-S. So Matt, again, I apologize.

Tony:
Well done, Matt.

Ashley:
I will own up to my mistakes, my failure as a host today.

Tony:
But you did a great job with your Matt impersonation.

Ashley:
Oh, thank you.

Tony:
I don’t think the audience, they can’t even tell the difference, you sound just like him. Matt was a great guest there. He had a lot of really good insights, a lot of good things he talked about. And what made Matt really unique was he has not one but two warehouses that he’s purchased as a real estate investment. I thought that was really cool kind of getting to hear his insight on how he picks them, how he sets up his leases, what he looks for in a tenant and why that asset class has worked so well for him.

Ashley:
Yeah. He’s our first guest that has ever come on to talk about warehouses. He talks to us about construction loans, he talks to us about triple net leases. So if you’ve been interested in either of those things, this is a great episode to listen to. So before we bring Matt on, make sure you guys are subscribed to our YouTube channel and please give us a like and leave a comment below if you also do any kind of commercial leasing such as warehouses.

Tony:
Matt, welcome to the Real Estate Rookie Podcast, brother. Super excited to have you on. Thanks for joining us today.

Matt:
Thank you. I’m really excited to be here. This a true honor for me to see you guys and be here.

Tony:
It is an honor for us as well. You got to ride the first time, man. So we’re honored for you to be here as well, man. We’ll get into your story in a bit here, but I guess just tell us a little bit about yourself, Matt, what’s your journey been like and what got you started in real estate investing?

Matt:
Sure. Short story, I am a small business owner, I’m in Missouri. Took over a family business here and it’s Sudo Construction. We build office furniture and cubicle systems. So very niche thing, but got started in real estate investing. I always say that my house is actually our first deal just because we kind of did a flip in live if you want to call it that. And then that just kind of gave me the bug. So I studied on it for three years basically almost before I finally made the first jump, ended up buying a couple of warehouses and a few other properties, residential properties now as well.

Tony:
Yeah. Can you give us an overview, Matt, of your current portfolio? How many deals, how many units?

Matt:
Yeah, sure. We’ve got the two warehouses. I live in Columbia, Missouri. My father and I own two warehouses in Jefferson city, Missouri. And then I’ve got two duplexes here in Columbia, Missouri, and I’ve just got my third duplex under contract. I got a out of market deal a couple of weeks ago under contract.

Ashley:
Awesome. Very exciting.

Matt:
It is.

Ashley:
I’m excited to learn about these warehouses. But before we get to that, what was so great about that live-in flip that made you want to keep going with real estate?

Matt:
Yeah. My wife and I were just looking for houses. We were looking for a place to live. We had been saving money for a house, living in my grandmother’s basement actually. And then that house needed to sell and we wanted to move to Columbia from Jeff city. So we were driving around looking for a place to rent actually, drove past the house that we saw had all new siding and all new windows. So we just stopped in to see what was going on because I was curious. When we walked inside, the entire interior of the home had been gutted and was mostly down to the studs and they were starting to put sheet rock back up. So we found a couple of guys that were doing a flip. We caught them halfway through and we purchased the property from them and then finished the house ourselves. So I would say we did about 95% of the labor ourselves. My lovely wife sanded all of our wood floors and I did all of our kitchen cabinets, all that kind of thing.

Ashley:
And was she always on board from day one to taking on a project like this?

Matt:
She was, yeah. We both kind of have the mentality that we wanted to buy something nice and live in something nice, but didn’t necessarily want to pay the super high price to have a brand new finished house. So whenever we saw the reality that we could purchase something and do it that way through a construction loan, she was 100% on board because she got to now have granite countertops and all the nice stuff.

Tony:
Matt, I just want to make sure that I’m understanding the story here. You were driving by a house that was in the middle of being rehabbed and you said, “Can I buy this house from you before you’ve finished the rehab?”

Matt:
Yeah, pretty much. It didn’t happen exactly that quickly, but we got in touch with them and just asked him if that would even be an option for him. And the guy said, “Yeah, absolutely.” They shot us a price. I think we negotiated a little bit, but it was over a few thousand dollars, not a lot.

Tony:
Okay. We need to break this down a little bit because I don’t think I’ve ever heard of anyone doing that before. What was your initial communication like to this person? Did you say, “Hey, I’m looking to do a flip, but I don’t want to do the whole thing. I kind of like yours because it’s already halfway there.” Like what did the communication look like?

Matt:
It’s a long process because, again, this was our first deal. We hadn’t looked into real estate really much at all. Wherever we walked into the house, my wife and I saw their contractor who was actually doing some of their sheet rock work. Got the number of the guys that were doing the flip, got in touch with them just to ask them if they’d be open to it and said, “We’re looking for a place to live. We would love to buy a home. And with my construction background, I probably have the ability to finish this out.” I felt comfortable with that. And the guy said, “Yeah, we’d be happy to. We just we have to make our profit that we were going to make on the flip anyway.” And I think they had gotten the house incredibly cheap. I know when they bought it, the roof was caving in, most of the plumbing was shot. It was in rough repair whenever they bought it. But I think they made their profit and we were able to get a house way nicer than what we were going to get otherwise.

Ashley:
So Matt, you mentioned you used a construction loan for this property. Can you kind of go through that, what a construction loan is and what kind of process to actually get one?

Matt:
Happily yeah. Actually I have a friend in my hometown who I had been talking to about buying a house. He was going to be our lender for purchasing our home. I had told him I wanted to get something that maybe I could fix up a little bit and eventually, over the 20 years we lived in it, gained some equity. Brad is his name. He told me that, “Hey, this is one way you can do it. You can buy a house that needs a lot of work. You can do the work yourself and for the term when it’s under construction.” So we get an initial construction loan. During that time while it’s under construction, we are only paying the interest on the loan and then we essentially refinance and whatever the ARV is after the refinance, you can use that against your loan. So for us, our target was to have over 20% equity in the property when we refinanced because then we could do it zero cash down. And so for no money, we bought our first house essentially.

Ashley:
Wow. That is so awesome. Just being able to not even have to put money up front for the rehab and to have it all covered. Did that construction loan cover the purchase price too and the rehab?

Matt:
Yeah, it would cover anything. We just had to go back to them if we had a major purchase like kitchen cabinets, that sort of thing. That we would bring the bill to them and say, “Hey, we need a cashier’s check for this.” And they would write us the cashier’s check and put it onto the loan and we would build it up over that time.

Ashley:
Well, so it was almost like a line of credit. Usually you see when you’re working with a contractor, they have the contractors draw where they haven’t written up ahead of time. So when the plumbing is done and the electric is wired, you get this amount. And then when drywall and paint are done, you get this amount. But you could actually just go at any time, hand your receipt in and get a check.

Matt:
And we didn’t have to have the receipt. For our kitchen cabinets, for example, we went to Lowe’s or home Depot, one of the two, I don’t even remember anymore, but we got the order, placed the order and then brought the amount to the bank. So we didn’t have to pay for them out of pocket or anything. They just wrote the check upfront.

Ashley:
Wow. That’s awesome. That’s really interesting. And what kind of bank did you use for this? Was this a small local bank, was this a large nationwide bank? If someone wanted to find this loan, where should they go and look?

Matt:
Yeah, it’s a regional bank. Central Bank I think is what it is, just Central Bank. But yeah, that’s who we used for that. They were great to work with through the entire refinance process and everything. I couldn’t say enough about that initial deal.

Tony:
I want to clarify because again, you’re dropping all these really ninja things that you’re doing and I feel like you’re glossing over them, so we got to take it back a little bit. So just to clarify, you’re saying that this bank, this regional bank that you used, they funded 100% of the purchase price of this property, plus 100% of the rehab as long as you were able to reach, like your total costs didn’t exceed 80% of the after repair value. Is that correct?

Matt:
Yes, that’s correct. Just to kind of give you the quick overview, we purchased it for 200. Upfront before we did the renovation, they had an appraiser come out and give us what I had to walk through with the appraiser and say this is where we’re going to put kitchen, we’re going to use granite countertops, all that kind of thing, where we finished all of our floors and concrete, told them what that was and they gave us an ARV appraisal to basically say, yes, as long as you are under this number. So we purchased for 200 and our ARV appraisal came in at 310, I believe. I think we ended up using another $20,000 on the rental. So we had a ton of equity as soon as we closed on the property.

Tony:
Matt, I just also want to clarify, when did this happen? Was this like in 2004 when it was the Wild Wild West of lending?

Matt:
No, I wish. This was five years ago. So what does that put us at now? Yeah, 2016.

Tony:
Yeah. Like 2016. So I asked that question because the loan products that you used to get your first deal done is essentially the same exact way that I got my first two deals done. I was able to go to a local regional bank in Louisiana. They gave me all of the money for the purchase price, all of the money for the rehab. My numbers are a little bit tighter. I think I had to come in at 72 and a half percent of the ARV. So I had to find a slightly better deal, but same thing. They fronted everything. And when you hear people saying that you need a lot of capital to get that first deal done, you really don’t. What you need is a really good deal and a really good lending partner. If you can put those two things together, you can get started as a real estate investor for very, very little capital out of pocket.

Matt:
Absolutely. Yeah. It’s out there. You just have to be somewhat creative and think outside the box.

Ashley:
Matt, even though you did no money out of pocket, did you have reserves in place? Did you have savings and what amount was that? When someone goes to do a loan like this, what would you recommend for them to be comfortable with having an amount of reserves?

Matt:
Yeah. My wife and I had been saving up for a couple of years to buy a house, not knowing that this even existed. So we had, I think, $20,000 and we were looking at that as a potential down payment for us. We were just excited to be able to essentially use that. So we used some of that during the rehab and we saved I think 10 to $15,000 of it just as reserves because it was a fresh flip, so we knew that something could potentially go wrong.

Tony:
It’s good to always have those reserves in place and I’m glad you brought that up, Ashley, because you’re right. Even if you don’t have a lot of money to get started, you want to have a little bit of cushion to make sure in case things go wrong. Matt, one more follow up on the bank that you used. You said this one was a regional bank. What was your relationship like with the banker? Did you had to call +1 800 number and you had to hit a bunch of buttons to get through to somebody? What was the relationship like?

Matt:
That banker I actually went to high school with. So I would text him really about other things even including baseball games and that sort of thing. So I did not have to call +1 800 number. Anytime I called, I just talked to him directly. Like I said, most of the time, I’d just text him and say, “Hey, can we talk this afternoon?”

Tony:
And that’s the beauty of working with a smaller, regional, more personal bank. It was the same thing for me with my first few properties as well. I would text the loan officer at that bank and say, “Hey, here’s what’s happening next?” We had a very kind of comfortable and casual relationship with each other. You don’t get that per se when you go to Bank of America or Chase or some of these other big national lenders. So for the real estate rookies that are looking to break into the world of real estate investing and want something that’s a little bit more flexible in terms of loan products, you’re usually going to find something better if you go with like a local credit union or the kind of local regional banks.

Ashley:
I have a story that kind of go along with that. I’ve only used small local banks in the Buffalo area and my one business partner when he built his house, he did a construction loan for a new build and he went with a larger bank in the area that kind of goes along the East Coast and during their loan process, their point person, the loan officer changed four times and each time this new person came into the position, that person would be lost on the file, asked for the same information over again. I mean, it took them like six months, I think, just to get to the first closing just because it changed hands so many times. So that’s something to, when you’re going and finding lenders, even ask what’s your turnover rate here and will I be working with the same person because it makes it so much easier when you have that relationship with that person and you’re on the same page and everybody knows what’s going on.

Ashley:
Matt, what about these warehouses? I am very intrigued. These are your first investment properties besides your primary residence. What made you go after warehouses? How did this whole thing start?

Matt:
Sure. I mentioned that my primary income is my small business where we install office furniture. Furniture takes up a lot of room and we take up a lot of warehouse space. So I was actually starting to look a warehouse for my business to move into. I was renting at the time and just thinking this could be a way for me to break into owning and just building more equity for myself. I started looking around and they ended up finding a couple of very dilapidated warehouses. It was two buildings on a single property, but we ended up finding them. The large building had no plumbing and no electrical in it anymore because I guess someone needed some money, so they stripped all of them.

Matt:
Yeah. Very kindly. I guess the previous owner, I don’t know, there’s a whole story I’m sure for him. But by the time we got to it, it was in very much disrepair. Yeah, we had to put all new electrical and all new plumbing into it. But yeah, we bought those two warehouses on that property. The small warehouse had a tenant in it already. And after I realized what I was going to be able to get in rent, just really didn’t make sense for me to move my own business into it. I would actually have been losing money by moving my business into it.

Tony:
Can we talk a little bit, Matt, about how you analyze a warehouse? I have no idea on where to start with something like that. So hopefully you can educate us on what that due diligence process looks like.

Matt:
I will try. Obviously I’ve got a little bit of background in renting my own warehouse that I operate out of. So I was using that just as a buffer. It’s right down the street. The two are, I think, two miles apart roughly. So I use the square footage. That’s primarily what warehousing is based off of whenever you look at rental value. You have a couple of different aspects as far as quality if you want to say like A, B and C quality warehousing. A quality would be completely conditioned as far as air conditioned, heated, insulated and that sort of thing. B class would be maybe insulated but not air conditioned. And then C class would just be a metal building that keeps the rain and snow off of things. And all three of those come at different rental values per square foot and different purchase values per square foot.

Matt:
In all honesty I didn’t know a ton about warehousing whenever I purchased this. My father and I bought these warehouses together, and I have another friend in my hometown who owns a lot more warehousing than I do. So I just reached out to him and said, “Hey, can you educate me some? Can we get together?” I even walked him through a couple of the different warehouses we were looking at and he told me, “This is the different types. This is how much you can rent it for per square foot and this is what you could potentially sell it for per square foot too.”

Tony:
Kind of say it was the like rent per square foot was the main metric that you looked at in order to analyze these deals. Now, what about the expenses. When you’re renting to a typical long-term tenant and single family, duplex, triplex, you as the owner are responsible for most of the repairs that need to be completed. But I know in my old W2 job, I was actually a warehouse manager. I ran a network of warehouses across North America, so I know that we as the tenants were responsible for most of our maintenance and repairs in relations to the property. It’s called the triple net lease. So I’m curious, how are you handling that for your tenants in the warehouses?

Matt:
I would absolutely love to have a triple net lease. We’re looking for another tenant who will do a triple net lease. Right now we’ve got a single net lease on the large building. When I say that, they are covering the utilities but they are not covering the taxes, insurance or upkeep of the building. That all falls on us as the owner. I think triple net lease is probably where I’m looking to move into next. But right now, yeah, we’ve just got single net leases and trying to continue to build that.

Ashley:
Just to recap for everyone, a triple net lease is where the tenant pays the insurance, the property taxes and does the repairs and maintenance on the property. Sometimes though this can exclude the exterior maintenance. I have one property that I manage that the roof or the siding or the parking lot, that’s still the property owner’s responsibility. But for triple net lease, it would be those three things, and your rent is pretty much is kind of prorated to work that in. So someone who does have a triple net lease, they’re going to be getting less rent but also you don’t have to worry about paying those other things too.

Matt:
It’s interesting to me that the parking lot seems to be the thing. On the triple net leases that I’m finding, they don’t want to keep the parking lot.

Ashley:
They don’t want to fill potholes.

Matt:
Yeah, exactly.

Ashley:
There’s one time for that property I had to stripe the parking lot. Me and my friend went and we actually did the striping because we were getting ridiculous quotes. So we bought this I think like $80 push gadget off of Amazon and we put this spray paint can in it and then you just push it along and we’d stripe the whole parking lot. It was actually pretty satisfying drawing the lines.

Tony:
All of our real estate rookies, now you know. If you ever need a parking lot striped, Ashley’s the person to call. Just send her a message on Instagram and she will be at your parking lot in due time.

Ashley:
Just go on Amazon and pay $80 for the kit.

Tony:
Matt, I’ve got one follow-up question. Another thing that you see with the kind of industrial real estate is longer-term leases as well. Like I know, again, in my W2 life, we signed five-year leases for a lot of our properties. Is that typical to what you’re seeing with your warehouses or is it something different in your specific market?

Matt:
It is. That’s primarily what we’re going after. We will sign a three-year lease and like with our current tenant in that large building, they are doing just eight month lease or seven month lease. They’re just kind of extending and until we get somebody who’s signing a five-year lease, we’re just allowing it because it’s nice to not have a vacant property. But yeah, the five-year leases are one of the big reasons I’m still looking heavily into commercial investment properties just because I’m looking at this as a passive income strategy for me. I do still have my primary business and that passive thing as far as a five-year lease makes it just perfect for me.

Ashley:
Now, I want to ask about the partnership with your dad. Can you kind of go into detail of what that looks like? What’s the ownership percentage? How do you guys work things out?

Matt:
Sure. My dad and I are an interesting group. As I said, I own a family business. I bought that business from my dad. He started the business. Now it’s been 22 years ago and whenever I came back and started working for him, that is an interesting dynamic. For anyone that has worked with family before, it is not always the easiest thing. But my dad and I work pretty well together. We have no problem getting into a fight and then going and having a beer after work together. But as far as that partnership, he sold me the business. I bought him out. He was going to retire and can’t stop himself from working. He wanted to also look into having some passive income as well as something to do, and he likes to have something to do. So we looked at some warehouses together and started a new LLC that we are each 50% owner of. So there is no one of us having leverage over the other. Everything is a 50/50 decision.

Ashley:
And that includes the cashflow that comes out of it split 50/50 and any money that goes into it? And then what about purchasing the property? How is that handled in the LLC?

Matt:
Sure. Whenever we were purchasing, it was really kind of a mutual decision. At this point, we have kind of separated duties. Those warehouses are close to him, so he is doing more of the hands-on, meeting contractors when we need them to meet, mowing the grass out in front of the warehouse, spraying weeds, that kind of thing. And then I handle more of the backend stuff as far as writing leases, getting leases signed, negotiating with potential tenants and making sure that all of our taxes, insurance, all that kind of stuff is paid up and ready to go.

Tony:
Matt, was that the initial kind of division of responsibilities or did it take you guys some time to kind of find your rhythm in terms of who handles what?

Matt:
I think initially it was close to that. There’s been some items where we had to just kind of change it up. A lot of the times is just because if he’s busy or out of town or if I’m busy and can’t handle something, that is where we’re fortunate that I can call him and say, “Hey, I just need you to cover for this because I’ve got a big project going on at work,” or vice versa. We have a painter painting one of the buildings right now and I needed to go meet him the other day. So dad just called me and said, “Hey, I can’t get there this afternoon. I’ve got something going on. Can you swing by?” But yeah, the initial division of responsibilities was pretty close along these lines. We’ve stuck to it better than I thought we would.

Tony:
Do you feel that you’re doing something specific to make this partnership successful? I think a lot of people are afraid to partner, and especially to partner with family. I’ve got two LLCs and both of those LLCs I’m joint owners with family. So for me, I see a lot of value in working with people that you already know, like, and trust that you know you can count on. but I guess, what do you feel you and your dad are doing to make your partnership successful?

Matt:
I think it’s that our values and our goals with the property aligned very well. My dad is looking for passive income with… I say passive. He’s obviously doing some of the groundwork, but I think we set that up upfront before we did it because we put a large capital deposit down on these buildings. And before I did that, I wanted to make sure that there wasn’t going to be a big riff or a fight or some kind of issue that would come to Thanksgiving dinner.

Matt:
So we set up. I went through and even wrote out a, not an org chart but just a documents for setting up that LLC and put in some different things as far as like one of them was joking and our lawyer got a good kick out of it. I added that if either one of us dies and the other one is a suspect, that… I don’t even know how I worded it. Because we have been known to fight from time to time and both of us were very bullheaded. But yeah, we set it up and try to make it so that it’s fun for us still. It’s something that the two of us can get together and enjoy together rather than just being something we might fight about.

Ashley:
I think that a lot of people get hung up on putting into the operating agreement the duties and responsibilities, which you should, you definitely should do that, but you should be flexible. Just like how you said you and your dad help each other with their tasks. And that’s the same with my one partner and I where if I can’t go to a property, I just call him. You don’t get mad that you don’t say, “Ah, I’ve been doing so much more of the work than my partner,” as you work together. That’s why you really want to find a great partner. They’re not going to be like, “Nope, my job is bookkeeping. That’s all I do. I can’t go and meet a contractor.” So when you are finding that right partner, make sure they are willing to do other tasks if you need to and let them know that you’re willing to do some of their tasks if you need them to.

Matt:
I think the flexibility is super important.

Tony:
Matt, I want to add one thing because you kind of touched on this as well is that you kind of put together an org chart. I think that is a great way for any partnership to kind of get off on the right foot. Like even if it’s just the two of you, there are still multiple hats that each of you will need to wear. And as we were building Alpha Geek Capital, which is our team for all of our short-term rentals, that was one of the first things that I did. We had a marketing function, we had an operations function and we had a finance function and there are different hats that each of us had to wear within this three different functions. And there was only three of us so each of us had like our names next to like four or five different positions.

Tony:
But it was very clear for us on who was responsible for what actions in the business and it really reduced a lot of the friction and any potential tension because we all signed up for at the beginning these specific duties and responsibilities. And now, as we’re starting to scale, it’s easier for us to start plugging other people into these positions because we’ve clearly defined what the expectations were upfront. So I’m glad that you mentioned that for you and your dad as well.

Ashley:
And Tony, you use a software that’s similar to Asana. I don’t remember what you use, but you have it set up so that everybody’s in contact and they know what their job duties are and you can go through and you can see who’s completed what. What is the one you use?

Tony:
It’s called Wrike, W-R-I-K-E. So yeah, very similar to like Asana or Monday.com, but that’s what we use to kind of keep everyone on the same page.

Ashley:
So Matt, tell me about… You hear tenant horror stories, tenant plugged the toilet and there was a kid’s toy stuffed down there or whatever. Are there any kind of horror stories that come with warehouses? I mean, are you ever worried about what people are actually storing in there?

Matt:
Not for the most part. There are some aspects of it where we’re concerned about when you get a call from a tenant and you have a gas leak. We’ve got three large propane heaters that pump out an incredible amount of heat. So if there’s a gas leak, we will… Not yet, but when there was a gas leak, we were really concerned about it. But as far as people storing stuff in there, we make it pretty clear up front. We’ve had a few different tenants kind of come and go, and before they’re going to store anything in there, we have an item in our lease, what are you going to use the property for, and we make them fill that out. So we kind of check on the business before they move in so we don’t end up with somebody trying to store liquid fuel or anything wild like that in there.

Ashley:
What about any awful maintenance calls or anything like that? Like what would be a bad maintenance call on a warehouse?

Matt:
The roof is leaking. We’ve had a lot of roof issues with one of the buildings in particular. We have a funny story. We had a big hail storm come through. And when I say big, it was grapefruit sized hail, like over softball size. It was massive. It’s the largest I’ve ever seen. And for about six months after the storm, you could still see dents in the, like gravel and dirt around the buildings where the hail had hit. That was a big one. We had to do an entirely new roof. And like I said, my business is located about two miles down the road. So it knocked out the roof on where I keep all of my stuff as well as all eight of my vehicles parked outside got completely demolished. That was not a fun moment when we first found out about that big hail storm.

Ashley:
Yeah. I can imagine.

Matt:
Yeah. It turned into a good thing. We had a large insurance claim on it and ended up getting an entirely new roof out of it. So it turned into a great thing, but yeah, that was a scary morning.

Ashley:
Matt, let’s transition here to your duplexes then. You’ve done live-in flip, you’ve done commercial property, now you’re to residential duplexes. How did they come about?

Matt:
I was looking at residential throughout. My dad and I had purchased the commercial buildings and they’re great, but I always just felt like residential was something I wanted to test the waters with. I’ve been listening to BiggerPockets, like I mentioned early on, for a long time. I’ve heard every episode of the Rookie Show, a few of them more than once. And then I’ve also listened to, I think, 98% of the OD Podcast as well. So obviously a lot of what you guys talk about is residential properties and I felt like that was something I needed to touch into and just get to know. So yeah, I started in that at the very end of 2020, very beginning of 2021.

Ashley:
Great. And how did you find your first deal then? Kind of walk us through the whole purchase. Give us some of the numbers on that duplex.

Matt:
Sure. The first one I bought, I actually bought on an auction. It was on an auction site, a local auction company selling it. I had just been touring a few of their properties and saw this first one, thought it was going to be great. It was kind of a unique duplex being that each side of the duplex is a little over 3,000 square feet. So yeah, the whole building’s about 6,000 square feet. It’s huge. It had a tenant living in it at the time on one side and then the owner was living in the other side. She had it set up so each side has two kitchens upstairs and downstairs.

Matt:
Anyway, I found it through this auction company who was watching the auction and I was actually bidding on the property itself. My wife may not like to hear this. While we were at the hospital and she was having our first son, I was actually watching the auction. Like in between him sleeping, I would get on my phone and be like, “Okay, it’s still under 200,000.” So I placed a couple of bids while we were there. I think the auction actually closed after we left the hospital, but I did end up winning that auction and the sellers didn’t agree to my price. So we had to go through and negotiate that after the fact.

Ashley:
What was that negotiation like? They say we’re not taking that bid and then they give you a chance to go even higher?

Matt:
Yeah. I was super disappointed. When I saw I won it, I got super excited. As far as to give you some of the numbers if you want to go through that, each side of that duplex I knew I could comfortably rent for $1,500 a piece. I was pretty confident that I could raise that after doing a little bit of renovation because it still had carpet in the kitchens and bathrooms. Yeah, it was not the prettiest. So I saw the value of the property being well over $300,000 and I closed the auction at $210,000. That was my winning bid. They did not accept it. We went back and forth a few times. They wanted $300,000, I wanted closer to 250 and we ended up settling it at 270 was my purchase price.

Ashley:
And the numbers still worked for you obviously at that price?

Matt:
Yeah. The numbers worked great for me at that. I knew I could renovate it and up the rent pretty significantly, which we now have done and we’re now getting $1,800 per side with the renovation. Yeah, I saw the value there. The appraiser didn’t exactly see the same value, but I think after a little bit, now my bank is all on board. They think it’s great.

Ashley:
Well, go into that for us, so please elaborate.

Matt:
Okay. So my appraiser, not my appraiser, the bank’s appraiser, they send this appraiser out to the property to tell us what it’s worth. Like I mentioned, there’s not a lot of duplexes that are 3,000 square feet per side. So he had a really hard time actually finding comps in the area. So he ended up giving me an appraised value and after renovation appraised value, because I was going to do a construction loan on this one as well, his ARV was 270, exactly what I had purchased that. So I went back to the bank and was like, “Obviously this isn’t going to work. You guys are going to want 20% down. And at that, I can’t do that. I don’t think this is valid.”

Matt:
I actually got a chance to speak with the appraiser and he said, “Mainly, I had nothing to compare it to.” So I had to request a second appraisal and I got to speak to that appraiser while she was doing the process of it. I saw the value of the property coming in at $340,000. She didn’t feel comfortable with comps, but we did end up getting a $318,000 valuation after she went through and actually saw mainly the rent value coming through. That was what actually gave me the valuation that I needed.

Tony:
That’s a really illustrative point, Matt. I’m glad you brought that up about challenging an appraisal. Appraisals are part art, part science. It’s not like there’s some machine scan that goes over the house and spits out this automated number. It’s someone who’s living, breathing person that has subjective beliefs that’s providing this appraisal and sometimes they get it wrong. So kudos to you for having the courage as a relatively new investor to say, “Hey, I know that the market can support a higher ARV,” and then going back and pushing for it. I guess one question, I want to take you back a little bit, your process for analyzing the warehouse, you kind of told us what that was, it was kind of based on the price per square foot. How does that compare with your process for analyzing this duplex? I know you said you saw the potential, but what numbers, what data did you look to to say, okay, this is a good deal for me.

Matt:
I would say that are very separate. I think when I’m looking at residential properties, I’m looking at that and trying to look in the area of what people can rent for. I know my market pretty well here in Columbia. Like I said, I’ve been studying it for about three years just because I wanted to be comfortable. And I knew looking at what else was out there, there was really nothing else out there that had that kind of square footage and a secondary kitchen. So I’m able to rent to with that property people who have multiple families living in the same home. Due to zoning, it can’t be unrelated people. But if we have somebody who has their parent that wants to live with them, they can live in the basement and their parent can live upstairs or vice versa, and both of them have a kitchen. So I knew that that value was going to be there because there are just a couple other properties in the area that had that same kind of opportunity for people and the rent value just dictates it based on those other properties.

Tony:
Yeah. I love using the surrounding market as a way to inform your decisions as a real estate investor. One of the best things a new Rookie can do is exactly what you did, is spend a lot of time getting to know your market. And once you analyze enough deals and your chosen city and your chosen neighborhood and your chosen zip code, you start to get a really good kind of natural familiarity with the market to know, okay, hey, a house at this size with this many bedrooms is going to rent for this much, or a house in this condition with these features is going to rent for this much. And it gives you a little bit more confidence as you start to go out there and make deals. So thank you for sharing that, Matt. I love that approach.

Tony:
I want to take us to our next segment, which is the mind set segment. Now, you mentioned that you were in education mode for about three years. What were some of the expectations you had about becoming a real estate investor that turned out to be untrue, that just didn’t quite match up with what the reality is of being a real estate investor?

Matt:
I would say my initial look at being a real estate investor was I was under the impression that it was just 100% passive. You give somebody a few thousand dollars, you give that to a bank, you hand it off and you forget it exist and you just get a check every month. That’s obviously not the case. I have a property manager and she does a wonderful job, but there are still aspects that I need to be involved in. It’s certainly not as time consuming as my day in day out at work. But as far as thinking that it is 100% passive and just hands-off is that was definitely false.

Ashley:
I can really relate to that because I thought the same thing when I gave everything over to property management company and I was like, wow, this is great. And then it was like, okay, I get these emails. Like they need my approval on lists or they need to know where this water shutoff is or all these different questions that came in. It’s probably been a little over a year now and still I don’t feel like it’s passive, but definitely a lot better than being the hands-on property manager. But that was eye opening to me too because I expected it to be a lot more passive.

Matt:
I was going to ask you, so you’ve made the switch. I haven’t ever actually managed my own properties, but I’m buying in my own area specifically so that in the future if something goes wrong with my property manager or if the market tanks and I need to be able to take over it, I could do that. Would you ever go back to managing your own properties?

Ashley:
I did try that. I thought, you know what? I can do this again. Like I took a year off. So last September I purchased a property and I hired a property manager to work under me. Well, the tenant we got in there was the worst tenants I’ve ever had in my whole life. I was like, “Nope, not doing this again.” And it was like me and my business partner was so gun-ho like, “Yeah, we want to do this again. We’ll start with this one property. And then as we buy more and then we’ll take it back from the property management company.” But just that one property was like, nope. Yeah, you get used to also like it is really nice having the property manager be the bad guy and to take those maintenance calls and stuff like that. So for me, I learned my lesson. I tried once to go back, but I like being behind the computer screen I guess.

Matt:
Okay. I was curious.

Ashley:
So I’m going to take us to the Rookie request line now. You can reach us anytime at +1-888-5-ROOKIE and leave us a voicemail with a question that you would like us to answer on the show. Matt, are you ready to hear today’s questions?

Matt:
Super excited, yeah.

Dakota Buyer:
Hi, my name is Dakota Buyer. I have few rental properties and a flip property at Cedar Rapids, Iowa, and I’ve been thinking about getting out and selling them to gather some funding together to start getting into some multifamily. I just want a little bit of pointers on if that’s something you would recommend, like it would be a good time to liquidate and then have my taxes sitting for a bigger deal. Thank you.

Matt:
Yeah. I would say I definitely understand the mentality of trying to get into multi-family, but I would think that you could probably look at a different avenue as far as instead of selling out your properties. You could potentially just refinance your properties and try to draw some capital out of them that way. I know there’s a lot opportunities with syndications and multi-families out there if that’s where he’s looking to go. If he was looking to purchase some of his own, I still think the opportunity to maintain ownership of those properties and just refinance to draw the capital out is probably the best avenue.

Ashley:
Yeah, I would agree. Look at the different options you have besides selling, but also if you do have those problem properties that you don’t want to deal with anymore and that’s part of the reason you want to go into maybe a different property, now is the time to sell them, to dump them and get rid of them. I just put a property up for sale that I got in a portfolio deal. I bought it for $17,000 and the seller told me I couldn’t get the golden goose unless I took this other property with it. And so I held it for three, four years and it just sold. It’s sold within three days for $10,000 over asking. I had four offers, yeah. So if you do have a problem property and you want to get rid of it, now is the time to do that. But just to sell to upgrade your properties, and if you do decide to do that, look into a 1031 exchange too so that you’re not paying taxes on that gain from the sale and you’re rolling it over into a new property.

Tony:
I guess I can take us down to our Rookie Rockstar. So again, for those of you that aren’t in the Real Estate Rookie Facebook group, make sure you join. We’re at like 30,000 people in the Facebook group now and lots of active and engaged members in the group, but today’s Real Estate Rookie Rockstar is Cal Delaney. I’ve actually spoken to Cal a couple of times, but he closed on not one but two cabins in the Smoky Mountains in Tennessee. Both of them will be short term rentals. He actually kind of picked up on the idea from listening to the Real Estate Rookie Podcast and hearing a bit of my journey and educated himself outside of that.

Tony:
So it’s always cool to kind of see someone listen to the podcast and take massive action. But he says since January, 2020, to now, I went from one single family rental to now having a $2.1 million portfolio of three long-term rentals and four short-term rentals. So he is absolutely killing it. So big, big kudos to Cal for making a lot of progress there. You guys in the Facebook group, make sure you guys give him some love as well.

Ashley:
That is awesome, Cal. Congratulations. Before we end the show, we’re going to ask you each a random question, not necessarily about real estate, but today for my question, since you’ve become a real estate investor, what is the best habit you have formed or is there anything about your life that you have changed because of real estate?

Matt:
I would say my life has changed a lot in the last six months because we just had our first baby boy. That has changed everything I do anyway. But as far as what I’ve changed with real estate, it has definitely lowered some of my anxieties because we have kind of a secondary income. I listened to the OG Podcast with the self-storage guru as I call him.

Ashley:
AJ Osborne?

Matt:
Yes.

Ashley:
Yeah, he’s the man.

Matt:
Yeah. His story is just incredible. So whenever I listen to that, I don’t want to say it scared me into it, but it definitely got me to look at this and say I know he leaned on his rental portfolio while he was incapable of providing his normal W2 income. And since my job is very physical, that is a big thing that I leaned on. So now that I have some “passive income” or a second strategy for income, I would say that it has just lowered my anxiety. That’s the biggest change for me.

Tony:
Matt, you made a really good comment that you were kind of scared into real estate investing by hearing about how some people don’t have enough financial security from their main source of income. And that is like such a good way to look at it because that’s always what’s kind of motivated me as well. I think I’ve shared on the podcast before that my dad worked 20 years for this company when I was younger. The company ends up going bankrupt. My dad and so many other people end up losing their job. That was kind of the moment for him that made him realize that he needed to always have more than one source of revenue. And he’s always preached that to me because when you have a family, when you have a mortgage, when you have responsibilities, you want to make sure that if one source of income goes away, you’ve still got a way to feed yourself, to provide for your family and to feel secure. So I love kind of the fear of not having that is what’s driven you into taking action.

Matt:
Absolutely, yeah. It’s a fallback I think whenever you look at people that everybody wants to become a millionaire through real estate, and that’s a great goal. I share the same one. But I think whenever you look at a lot of the people that become millionaires, they have multiple forms of income and they’re not completely reliant on one. That’s kind of how I looked at this is that it is another option for me if something were to happen or even if something doesn’t, it gives me another way to build wealth, really substantial wealth.

Ashley:
I think a lot of people saw that during COVID too that they needed multiple income streams because my husband, he’s a dairy farmer and I had our rental properties in case something happened with the farm or even he became disabled and couldn’t work the farm anymore. But then when COVID happened, the farm continued to operate as usual. Like nothing changed on there, but the rental property is like, wow, people may not pay their rent and we won’t have that. So it was very eye-opening to me to have those different kinds of income streams. So yeah, if anyone wants to hear more about AJ Osborne story, you guys can find it on the BiggerPockets Real Estate Podcast. Well, Matt, thank you so much for joining us today. We’ve really loved having you on and hearing your story.

Matt:
Thank you guys. I am sincerely honored. Like I said earlier, you guys are celebrities in my world and I am just honored to be able to meet with you guys and talk with you a little bit.

Ashley:
Well, Matt, hopefully we’ll get to meet someday. Maybe if the BiggerPockets Conference comes back this fall, we can get you down there.

Matt:
I hope so. I think they ought to do it in Hawaii or something.

Tony:
That’s a good idea. Scott, Mr. Turner, hope you’re listening to that. A lot of idea.

Ashley:
Well, I’m Ashley @wealthfromrentals and he’s Tony @tonyjrobinson on Instagram. Make sure you guys check out our new YouTube channel, the Real Estate Rookie. We’ll upload new videos each week and you can see the recordings of the podcast videos. Thank you guys for joining us and we’ll see you next time.