BiggerPockets Podcast 131 with Serge Shukhat Transcript

Link to show: BP Podcast 131: Investing in Multifamily Properties in a HOT Real Estate Market with Serge Shukhat

Josh: This is the BiggerPockets podcast, show 131.

Serge: It’s not about how cheap you buy it, it’s about the right asset, the right location, and the right value that you can add.

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.

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Josh: What's going on everybody? This is Josh Dorkin, host of the BiggerPockets podcast. Here with my cohost, Mr. Brandon Turner. What’s up B?

Brandon: Nah, not much, today’s a good day—today’s a good day. I am feeling amazing. I’m actually reading this book called The Magic of Thinking Big.

Josh: Oh.

Brandon: In this book, it’s really good. I’m listening to it on Audible actually and in The Magic of Thinking Big, he talks about he talks about the way you say things in life are the way that you feel so when somebody says, “How do you feel?” If you say, “I’m feeling okay.” You feel okay.

Josh: Yes.

Brandon: Instead, every time say I’m feeling amazing so I’ve been starting for the last two days I’ve been doing that. Changed my life. Like seriously like when I’m working out now in the morning, I’m doing P90x again, right and I’m like this is miserable and I go no, and yell out, like literally yell out, “I feel incredible!” I instantly feel incredible. Try it. Yes.

Josh: That’s great. I feel incredible!

Brandon: I feel incredible!

Josh: No, I do.

Brandon: No, I feel incredible!

Josh: You want to fight?

Brandon: You want to fight?

Josh: Hey, well and that works. You know, I used to—I don’t remember where I heard—like smile is the same thing.

Brandon: Yes.

Josh: If you.

Brandon: We talked about that too. Yes.

Josh: Walk around with a smile. You’re going to feel happier.

Brandon: Yes.

Josh: You’re going to influence the people around you so I used to walk around New York City when I lived there because everybody is friggin’ miserable in New York.

Brandon: Yes.

Josh: I would walk around with a smile and I think people thought I was a crazy guy so I’m this crazy dude, walking around, smiling, you know, nodding, acknowledging people and you know people are spitting in my face. Of course, I move to Denver and everybody does it because you know, who’s not going to smile in Denver, but ah.

Brandon: Yes. It’s sun shining always.

Josh: Yes, man. Yes, man, well today, we’ve got an awesome.

Brandon: Fantastic.

Josh: Awesome. Awesome show.

Brandon: Yes.

Josh: We’ve got a guy who was out guest on show 60 and it was our most popular show until we did a show with Grant Cardone, Serge Shukat and we’ll get into that in a second. Before we do, let’s get to today’s Quick Tip. Tip. Tip.

Brandon: Quick Tip. Today’s Quick Tip is an oldie. I don’t think we’ve ever talked about it, but it’s something like foundational in the site that I guess we just, I don’t think we’ve ever talked about it. You can subscribe to a forum or a particular thread in other words, if you are reading a thread and you’re like, wow, this is really good information. I’d like to keep in touch with this as more and more comments come in. You can click the little follow topic button on the top of the actual thread or if you want to follow that entire sub-forum like the multifamily sub-forum, you can subscribe to that forum and you’ll get notifications whenever a new post or a new thread is started in that sub-forum so both of those are at the top of any individual thread. Check it out. Subscribe to this forum or follow topic.

Josh: Right on, right on. Good stuff. Good stuff. Alright, cool, well let’s get to today’s rating/review. By the way, ratings and reviews, this is show 131 of the BiggerPockets podcast. You can check out the show notes at BiggerPockets.com/Show131 so ratings and reviews.

We talk about these things, getting them is really good for a podcast, it helps you grow your show. It helps expand your audience and we like to share these reviews with you so today’s review is from MamaMitNumber2 so MamaMit2 and it was five stars. Thank you MamaMit2 and the review is, “Excellent podcast. Within each one-hour episode, you will gain new information and see into many different types of real estate investing. The strategies discuss very from the beginner investor to very experienced, but if presented in the way that all can understand and follow, love listening to this podcast.” So do I.

Brandon: Thanks Mom.

Josh: It’s a blast. Thanks Mama, Mama Mama. I hope it’s my mom.

Brandon: Hey, it might be my mom. Yes.

Josh: Yes.

Brandon: My mom doesn’t use a computer.

Josh: Yes.

Brandon: Just kidding mom. Alright, let’s get on with this thing because today’s show is like we said earlier, terrific, fantastic, amazing, awesome, whatever word you want to use there. Really really in depth especially if you are somebody who is looking to acquire a lot of properties. Like if you’re just buying your first one, you’ll still learn a lot here, but you know, I think, I mean there’s so much depth to today’s podcast like so much knowledge and wisdom from Serge. You guys are going to be blown away like.

Josh: Absolutely.

Brandon: Really listen to the whole thing especially, I don’t know, it got better at like even every minute got better than the previous until the end was like mind blowing stuff so. I mean.

Josh: Yes, this one where you’ll—where you’ll—my god, I can’t talk. This is one where you’ll want a notebook handy and you’ll probably listen to it more than once.

Brandon: Yes.

Josh: Definitely one of the shows that you’re going to repeat so with that let’s bring him on. Alright Serge, man it’s been awhile. It’s good to have you back.

Serge: Josh and Brandon, good to see you.

Brandon: Thank you.

Josh: Always. Always. A pleasure. A pleasure so it’s been about a year and a quarter since we last spoke and I will tell you that you had up until our interview with Grant Cardone, you had the single most popular podcast on the BiggerPockets podcast so congratulations.

Serge: Nice. I’ll take that as a compliment. That’s awesome.

Brandon: Yes.

Josh: It is. It is.

Brandon: Today our goal is to beat Grant Cardone.

Josh: Let’s do it.

Brandon: You can have a Grant Cardone sandwich.

Serge: Let’s do it.

Brandon: You, you know in number one, number three, and he can be number two.

Serge: Nice.

Brandon: That’s what we’re shooting for.

Serge: Nice.

Josh: Let’s do it.

Brandon: Alright, so tell your friends people, tell you friends listen up. Today, we’re talking about what you’ve done since then and we’re going to talk about kind of the struggles that the new kind changes in the market have done. I think I’m kind of excited about that because obviously, the market has changed over the last year dramatically in a lot of areas including yours in the last couple of years and we’re going to talk about how to deal with that and what you’re doing to deal with this so I got kind of a list of question here, but you know, we’ll probably just figure it out as we go because.

Josh: Yes.

Brandon: You’re a good guy. It’s a good conversation so. Maybe we just start with that. I mean what—give us a history of who you are in case people did not listen to the first show, which they can find at BiggerPockets.com/Show60. If they want to go back and listen to that one, but tell us about—a little about who you are, what you—how you got into real estate, what your story is.

Serge: I have a corporate background. I’m an accountant by trade. I got CPA in the late ‘90s, was working for a tech company in the Bay Area, transferred to Arizona in late 2008, started real estate investing in January of 2009, just buying SFRs. Had a little bit of success with the single families, all around and where I was living in the east valley Mesa, Gilbert, Queen Creek suburbs of Phoenix.

Was buying nice cash flow property between $50 and a $100,000 that was renting for between a thousand and $1,500 so the numbers worked all day. Was at building the portfolio between 2009 and 2011. Was a—the market started to turn a little bit in Arizona in 2011, particularly in SFRs and jumped into multifamily at that point, saw the power in multifamily, consolidated and purchased a bunch of fourplex into a 32-unit complex and last we spoke we talked about some of the value add we did in the multifamily space and kind of the lessons learned doing that and had the property for sale at that time, looking to trade up to a larger multifamily and since we spoke last, we had a gentleman who listened to the last BP podcast and from California and he was also in my market dabbling, doing kind of the same thing I was doing with multifamilies so you know, he reached out. We got together for lunch and started talking and drove out, looked at the complex and he ended up buying the complex.

Josh: That’s awesome man, I mean BiggerPockets actually helped you sell and that a—that’s totally cool man that that pleases me.

Brandon: You can make a check payable to BiggerPockets.

Josh: Yes, I mean commissions.

Brandon: Mail is out to us.

Josh: Are welcome at any point. You know, Joshua Dorkin, just you know.

Brandon: Brandon Turner, what?

Josh: Hook a brother up you’re not blood.

Brandon: I think I was the one that invited him on the first place.

Josh: I think I was the one who said we’re going to put up a podcast together.

Brandon: I think I was the one who was.

Josh: We’ve got Serge here. Let’s kind of focus on Serge.

Brandon: Alright focus on Serge.

Josh: Alright, here’s the deal. I had a conversation with somebody yesterday who is a very very smart individual who invests in companies and what she said to me is, “Hey, I’m looking to get into the multifamily space, but I’m waiting for the market to turn and it’s going to turn and it’s going to turn soon.” You know, that wasn’t necessarily based on any kind of one fundamental. It was based on kind of the vibe and I’d been feeling the same vibe.

You know, across we’re getting, you know, kind of tippy, pricey. You know, it’s starting to feel kind of like 2000 stock markets, starting to feel like ’06, ’07 housing, just a little bit. You’re starting to feel the you know, people that shouldn’t be thinking about real estate. You know, in general or like kind of hyped up about it and when you start to see, you know, hype I start to kind of get—not nervous, but you know, a little leery so are you seeing that in the multifamily space. Are you noticing that you know, it feels kind of toppy? It’s kind of hard to find a deal based on good fundamentals. What are you experiencing?

Serge: Yes, I—it’s clearly harder to find a value add deal. Pretty much everything on the market today is going to be somebody else’s value add so you look at the tax roll on any property you’re looking at and what you’re going to see is a similar story. You’re going to see the guy bought it in 2011, 2012. He bought it for whatever $30-$40-$50,000 a door, whatever he bought it for. He performed the value adds so you slapped a coat of paint on it. He got the rent roll up and now he’s trying to sell it so you’re the guy buying somebody else’s value add so the big question is what value add does that leave for you if you’re a value add investor?

Josh: Right.

Serge: Every investor is different, you know, if you’re looking for syndication and you’re trying to drive IRIR through cash flow, it’s probably not going to happen because you’re buying at such a low cap rate.

Brandon: Can you explain real quick what that means like?

Josh: Syndication, IRIR.

Brandon: Yes.

Josh: Cap rate, just knock those things really quick for the.

Serge: Sure so syndication is a method that, call it sophisticated investors use to buy real estate so you’ll have a sponsor who’s the person that’s putting it together and what he’ll do is he’ll search for a multifamily. He’ll find the project and he’ll do a what’s called a regulation D offering, which is a—basically a document that he gives his investors that says, “Here is what I’m promising. I’m promising 15% return over the whole period. We’re going to hold five years. You’re going to get a guaranteed, preferred rate of return whether the property cash flows or not and then when we sell it, that’s going drive your final return on investment and you’re going to make over the whole period x percent.”

Okay and so a passive investor, a corporate guy that’s sitting at his desk, that can’t do a value add or can’t seek out the deals, but wants to be in real estate, he can invest with an experienced syndicator and that’s syndicator makes his promises and in his document, he’ll tell you, you know, there’s a lot of risks here. You’ve got to be crazy to invest, you could lose all of your money. Blab bla bla and you got to have you know, the guts to get in, to make your investment and it’s a truly passive way for the investor to invest. On the sponsor side, he makes money from the fees on the front end, for finding, for managing, for all his work on the front end and then he makes a cut of all returns over the promised return so it can be a real win-win on all sides.

Where I see the problems happen is with inexperienced sponsors, people jumping into the market that don’t know what a good project looks like. I had debates with brokers all of the time. They tell that you can syndicate and drive returns off cash flows alone and most experienced syndicators know that cash flows alone are not going to drive your return and you can look at it as you know, you can simplify it to a single family residence. You’re very rarely going to get returns that you think you’re going to get on paper. Where you’re going to get the return is when you sell the property. When you make money on the back end and that over the whole period is what’s going to drive your returns and really make real estate look compelling, but to just drive off cash flows, it’s very rare that I see that situation play out.

Josh: Can I ask a stupid question?

Serge: Sure.

Josh: Well, I’ve got a couple of stupid questions.

Serge: Yes.

Josh: First off if I’ve gone and I’ve done the value add and you’re selling to me, you know, and I can’t make any money on the value add, why would I buy the property?

Serge: Well, remember Josh, not everybody is a value add investor. A lot of people want something turnkey, right? A lot of guys don’t have time to sit there and figure out, time or experience to figure out hey, I can do sub-metering or you know, looking at the market and say population growth is here and I think that can drive rents to that. That’s a lot of hard work and that takes time and that takes knowledge and a lot of people, you know, just cashed out, you know, guys sitting in the Silicon Valley just went public, cashed out $10 million, wants to diversify, doesn’t want to be in stock. Wants to use leverage to his advantage. Wants to put $2 million down on a $6 million complex, commercial lending right now is probably the frothiest, the easiest, it is easier. I got a loan on a commercial property. I didn’t even provide my tax returns. I got it on a phone call. Literally.

Josh: Wow.

Serge: Yes, if I want to get a 30-year fix on a single-family home, I’m out.

Josh: By the way, is that a sign? I mean because we were talking about is the market looking a little silly? Is that a sign of the silliness of the market that they’re just jumping on it?

Serge: You know, it’s certainly, it’s certainly a sign with how easy it is to get loans. I don’t want to say it’s always been easier outside of the crisis though, it’s always been a loan that’s based on the asset. They’ll always look at the asset rather than you know, everything else that they look at on a Fannie Mae, 30-year fixed loan so it has been easier, but right now there’s many players in the market that want to lend to that because cash is so you know, money is so cheap right and interest rates are so low. The one thing that I will say, remember it’s never been easy to source multifamilies.

It’s always been competitive. The risks were just different and the spreads were different. You’re always going to have a spread of cap rate versus the ongoing interest rates so when interest rates are higher, you’re going to have higher cap rates and they’re going to look like better deals, but your interest rate is higher. It’s always been difficult where it’s a little bit more difficult today is it’s just more difficult to source that value add. It feels like all the value adds out of the market, there aren’t as many foreclosures because we have frankly been on a tare with rents. Rents have risen in most MSAs in the United States and as long as rents continue to rise and investors feel like rents will continue to rise then a lot of people feel like, hey, I don’t need to do a value add. I just need to buy and let rents do the rest.

Josh: Yes, yes. Hey quick question, I’m going to roll back to you were talking about the syndications and I don’t want to focus exclusively on it, but I have one last question that I think a lot of people might ask is, “Hey, okay, well I’ve got some money and that sounds kind of interesting. You know, I mean I’m not rich, but can I invest ten-$20,000 into a syndication or do I need to be an accredited investor, somebody who the government deems to be smarter, wealthier, yada-yada-yada.” Can you answer that for us?

Serge: Yes, you generally do have to be an accredited investor, that there are new platforms that are trying to get rid of that requirement online as far as crowdsourcing money.

Josh: Yes.

Serge: At the moment, generally, yes you have to be an accredited investor and I think you want to be an accredited investor, you know if you’re a mom and pop with $20,000 in your bank account, syndication is not the way to go. You invest in your knowledge first, cut your teeth of some local real estate, learn the tricks of the trade, buy a small multifamily, the principles at the end of the day are the same, you’re still managing tenants. You’re managing or managing a property manager, learn how to do it first with your own money and then if you do want to do a syndication, make sure you find a syndicator that is experienced. It’s all about the sponsor.

Josh: I love that man. I love that. I think it’s so easy for people to get kind of excited and you know, new people to come in and say, “Oh, I’m going to become a syndicator and you know, I’m a smart business school guy, who’s going to get into this business.” They’ve never dealt with you know, actual real estate and they come in and you know, they don’t an exceptionally great job and those folks who kind of fall for the pitch and listen, I mean it’s not hard to pitch a deal are going to get burned so yes, I mean experience is really going to be key and that’s great man. That’s really great. I appreciate you sharing that. Last time we talked to you, you talked about the 32-unit property and had another 36-units so you had 68 total units at that point. You had just mentioned kind of a seller financing one of these deals, what else has happened kind of since then?

Serge: I seller financed the 32-unit. It was a great deal on both sides. It was a win-win all around. The person I sold to I felt comfortable doing an owner financing because he had a lot of experience both in syndications as well as owning similar class multifamily property.

I was lucky enough to be able to source a 56-unit complex, which was in the same county, different city, but the city had quite a bit of different economic things going for it that the city that I was trading out of did not. Some better, some worse so I was able to take that down payment from the 32-unit sale so it was standard owner finance. It was about 20% down. I carried the rest, the first deed, the first position deed of trust.

You know, with competitive interest rate. It wasn’t one of those deals where you know, where—typically I’m leery of owner financed deals because it’s a complex or it’s a property that can’t sell regular means. I could have sold it on regular means for me it just made a lot of sense, you know, I wanted the interest income. I wanted to get into notes.

I’ve been dabbling in notes so it made a lot of sense, but I was able to 1031 that project into a 56-unit, which was an actual value add. Maybe one of the last value adds I’ve seen in my market the past couple of years at least. This was exciting for me because this was a higher-class project. It was class B, 56-units.

It was a condo project so each—all 56 units were set up to be condos they were all over a thousand square feet so there was a lot of unique characteristics that I look for. On the last podcast, we talked about finding your competitive advantage and I’m a real big believer in that—that if you cannot articulate what you’re competitive advantage is going be on any specific project, in particularly a multifamily, if you can’t say how am I going to stand out in the market, your recipe for success is limited for sure. On this project, it was very clear from the onset what my recipe for success was going to be. I had a lot unique characteristics.

All my units were two and three bedrooms. They were all over a thousand square feet. It had washer, dryer hookups. I had late ‘80s class B property. A lot of lush landscaping, it was a property that I knew people would want to live.

You know, so I saw the value add was going to be backing up a little bit. When I looked for multifamily, I need three components. The three components that I looked for in purchasing multifamily are cash flow, equity, and value add, okay. I talked to brokers today and they tell me Serge, you’re crazy, you’re not finding a complex with all three components.

They—just doesn’t exist. Maybe you’ll find something with cash flow, but you’re not going to find something where the basis is low enough where you’re going to be able to add equity and the value add is what’s going to add equity right? This project had all three. From the onset, the value add, that I saw was going to be three fold.

The first thing was property tax was way over valuated. When I came in—they had a property tax of $48,000 on the property. The owner was a second-generation owner who inherited it. She was sitting in southern California, visited the property maybe once every two years, was completely disconnected from the property.

Her rents were probably average 10% below value so she had on a $35,000 gross operating income rent roll. She had about $5,000 in loss to lease, okay and what that means is based on market rents on that complex, she was underpriced by $5,000, okay so just on the loss to lease, if you extrapolate that $5,000, over 12 months, that’s $60,000 in value add just bringing market—just bringing rents to market, okay. At a 10% cap rate, you’re adding $600,000 in value at 5% cap rate you’re adding $1.2 million in value.

Josh: Hey, really quickly for those people who don’t do that math for us, I mean, you know, to those of us who get it, it’s obvious, but for those people who don’t understand how this works, you’re adding value, you’ve increased income and now you’re using the cap rate as multiplier is that correct?

Serge: That’s right so the cap rates going to tell you so your exit cap rate, what you think your market cap rate’s going to be, you’re just going to divide by that number, right. You’re going to take the income that you added after you bought the project and you’re going to divide that by your exit cap rate. Your exit cap rate is going to be determined at what other complexes are trading at in your geographic region. In my geographic region and this is exactly why you know, people post on BP and talk about all the time, well I bought this project at a nine cap or a seven cap.

End of the day, kind of doesn’t matter what your purchase cap rate. It’s what is your exit cap rate going to be and what is your net operating income going to look like when you sell the property, right? For every value add, you look at what are you value adds going to be and you just break them down into line items and you say, what is it going be and how long is it going to take to get there and how much value can I add to this complex?

Josh: For you, what kind of value adds, you talked about increasing rent, what other value adds do you typically find on multifamily properties?

Serge: The ones love loss to lease is my favorite. It’s a difficult one to do and takes time. It could take a year. It could take two.

You’re not going to come in typically unless it’s a complete dump. Kick everybody out and start fresh. I mean those kind of deals are rare these days. They’re nice.

You can get them at big discounts, but there’s a lot of work involved and they’re very rare and they’re typically in very run down projects. I don’t want to deal with C class, D class tenants anymore so loss to lease is one where you have an owner that’s been there for quite awhile. They’re happy to have very little turn over. They don’t want to spend money turning over the units.

They don’t want to—they don’t want to maximize the rent of each unit because that’s going to take some capital expenditures to do that, okay. Loss to lease is one. Sub-metering utilities is another, also very difficult, where the owner has not transferred any of the costs, the utilities, back to the tenants. That’s one I had a lot of success on in the 32-units and I was able to capitalize a lot of value doing that and there’s smaller ones that a lot of investors don’t see, things like where are—where is the last owner paying too much. In my case it was property taxes so she had a $48,000 assessment, which was absolutely absurd. I knew that that should have been somewhere in the ballpark of $30,000 or less, okay.

Brandon: Is that per month or per year?

Serge: This is per year.

Brandon: Okay.

Serge: Per year so it doesn’t sound like that much, but $20,000 per year again, capitalize that value at a five cap, that’s $400,000, right? Every little bit of savings on your expenses equals a pretty large chunk on the exit.

Brandon: Yes.

Serge: Right and then you add up your loss to lease. You add your utilities sub-metering or however you’re going to do that. You add up your expense savings and for me, another big one is I property manage myself. You know, that’s so—through a property management company, I have operations people that work for me and so where somebody else coming in to buy a project is looking at buying at a 7% cap and he’s budgeting a 10% for property management.

It’s not going to cost me that much to property manage so there’s a lot of competitive advantages for me and my market where if I can find local multifamily, I can drive cap rates to near 10% even if I’m buying at a 6% cap. As long as I see that I’m buying on actuals and not some pie in the sky proforma, right, where they’re trying to sell on a value add that hasn’t been implemented yet, right? That’s what you definitely want to avoid because there’s too many question marks.

Josh: Can you explain that like—give us like a potential like what that might be if somebody were giving one of these pie in the sky proformas like can you give us a hypothetical.

Serge: Sure, so brokers love to present financials on what they should be and then extrapolate a cap rate on those financials and then you look at actuals and you say, “Hey, this owner’s been losing money for three years, right and he bought it for half of what he’s trying to sell it for so how am I going to make?” The way the broker spins it is saying well, if you brought rents to what they should be, which is this number, if you did utilities sub-metering, you’ll add an extra $30 per unit. If you fix up the units you can get even more money on the rent and voila, 7% or 6% cap rate on what it could be and here it is, that the reality is that none of those happen overnight, all of those take time to do. There’s question marks on all of them and example is on my 56-unit I thought I would do some of the utilities sub-metering as well. It didn’t work. It did not work. I took everything I learned in the 32-unit, applied to the 56-unit and it was a failure, frankly.

Brandon: I want to talk more about that because last time, I remember I was like shocked by that idea of sub-metering and I was really excited about it and then I tried to do it on mine like and I talked to like five different companies and nobody could do it and nobody wanted to come to my area so that was open my own, but I still haven’t done it right? Like why did it not work for you? What does that even mean by it—you failed at it.

Serge: Well, the first thing I did is I took the company that used in the 32-unit and brought them out to the 56-unit and said okay, I absolutely want to sub-meter here. I had a different situation on the—shut offs so I had one shut off for two units, for the downstairs and the upstairs. For me, when I sub-meter water, I want the ability to shut off the water. Otherwise, you’re just going to run into big, bad debt issues and the only that’s going to get paid is going to be the sub-metering company.

As soon as tenants know you can’t shut off the water, good luck collecting. Then it becomes the whole debate of well, I paid rent, but I didn’t pay water. Are you going to kick somebody out just because they didn’t pay $30 in water bill right? They didn’t want to get into that debate so the sub-metering company said, “Hey we got a great plumber. He’ll come out and will just separate the—we’ll just separate the—we’ll just separate the meters.”

I did a plan in Arizona, you got to give tenants 90 days notice. I gave the tenants 90 days notice that we’re going to sub-meter the water. Here’s what we expect it to cost. We’re going to sub-meter the water.

We’re going to sub-meter the sewer and the trash, right so this is going to be a nice win fall of about $40-$45 per unit and I was looking at a 100% bill back. It was fabulous, okay. What I miss was two things the first was that all my competition in the city did not bill that way. They did a flat $32—$30, either $30 or $32 per unit and I was kind of cocky saying well, hey I did in my last project.

I was successful, tenants paid, they didn’t pay I shut off the water, I beat the trend, didn’t matter, okay. I was going to go forward anyways. I sent the letters, tenants freaked out, okay so as soon as I sent the letters, I started getting, you know, our office was inundated, how much is it going to cost? How do we know, nobody else is charging, you know, we like that we know we can manage our expenses. I had a lot of retirees in the complex so I overlooked my demographic, okay.

I overlooked my demographic, I overlooked my competition, then the—and I was still going to go forward. I was still saying, “I don’t care, you know, if I lose tenants. It doesn’t matter, I have to capitalize this value.” You know, I was just being—just being hard headed on it.

Then the sub-metering company brought out the plumbers, plumbers made me put a hefty deposit down on the project. I put the 50% of the cost, which was something like $4,000-$8,000 project to sub-meter the main so I had to shut off in front of each unit. They open—more their first wall and they said, this can’t be done. This can’t be done. Half the plumbing goes upstairs, half the plumbing goes downstairs, if some of your tenants are going to be charged for the downstairs guy’s dishwasher, as soon as my tenants found that out, it was going to be a scandal, right? I didn’t want to deal with that. I said, “Well, you know, call off the project, it’s going to work. I need to think this through.” Of course, the plumbing company decided to keep my deposit even though that for about one days worth of work, they.

Brandon: Yes.

Serge: That was worth $4,000 so I had the whole headache and the debate of trying to get that money back, which didn’t work?

Brandon: Did you get it? You never got it?

Serge: No.

Josh: Wow.

Serge: I filed to the Arizona ROC, they said it was a civil complaint so I—maybe I’ll sue them, maybe I won’t I don’t know, but ended up in the—while all of this was playing out, I ended up losing four or five tenants, who were good tenants, who went to the competition, and I said, “You know, what? What’s the point at the end of the day?” You know, I’m paying about $35. I can drive rents. I can $30-$32 just like my competition, build into rents. They don’t pay the total amount. I can—I have all the levers to evict, why not do what the competition’s doing? It just didn’t make sense. You know so I kind of called it off and moved on.

Josh: Listen man, I love—I hate that you experienced that, but I love that you’re so forth coming about it. I think hearing that should show people, I mean, you’ve been doing this, you know, you’re not a, you know, un-savvy individual, you’re on it and seeing that you’ve kind of you know, it’s easy for anybody to screw up, right, and I don’t think this is a screw up. I think it was kind of one of those like you know, hey it’s easy to overlook something and you may not be able to do everything that you think you can do and that goes back to the proformas and everything on paper right, which is it may not turn out the way that you expected it turn out so keep that in mind and hopefully all the listeners like—this to me, this is gold, what you’re talking about, right now. It doesn’t matter it has nothing to do with sub-meters to me. It has to do with you know, it’s really easy to overlook stuff and it’s really to plan for things to happen. Just because you planned for them to happen, that doesn’t mean they’re going to in the way that you want them to.

Brandon: Yes, I mean had four people not left, if people not complained, right now, we’d be sitting here talking about how successful that was right?

Serge: Yes.

Brandon: If the plumbing wasn’t hooked up weird like it was, so like you would have never known that had you not taken those steps forward. I think a lot of people are paralyzed by fear of well what if this happens? Or I can’t see all the situations that possibly could happen, but I—I don’t know, I think you just kind of go with it and you know, like be cognizant of what’s happening as you’re going with whatever action you’re trying to do like you did and re-evaluate if you need to and adjust and pivot.

Josh: Agree. Agree.

Serge: I’ll tell you what there’s unforeseen positives as well so I thought it would be the sub-meters, it would be the loss to lease and it would be expenses and I would be able to decrease expenses. What it turned out is my expenses actually ended up higher than I thought I’d make and even with the property tax decrease—I a—it just cost me more to run this complex correctly then it didn’t bill the last owner and the last owner was lying on their income statement as always.

Brandon: Sure.

Serge: What I didn’t budget for is that I would have demand for furnished units. I was able to, yes, I had so—had no office in the complex. Our friend, Ben Leybovich came out and visited Arizona, we were looking at a syndication deal and I brought him to the complex. I showed him how we were wasting one unit in an office and he said, “Hey, take this one unit. Take one bedroom, wall it off. Make the one bedroom a unit and make the—turn it from a two bedroom into a one bedroom, do a furnished one bedroom and convert a lost unit into a—in essence a vacation rental.” Right?

Brandon: Yes.

Serge: He said, “That’s a fabulous idea. I never even thought about it.” Right? I did that. I did that. I transformed one bedroom into an office. I did the other furnished the other one and I thought, hey who in this city is ever going to want a furnished rental, you know, it’s kind of a pie in the sky idea, but I’ll try. I tried it, low and behold, I had—out of the last year, ten months booked.

Brandon: That’s the hustle.

Serge: Well, bookings. Turns out there’s a Cancer Center right around the corner. Doctor is—has people flying in from all around the United States, made a relationship with him and he’s booking me out all year, okay.

Brandon: That’s awesome.

Josh: That’s great.

Serge: Now.

Brandon: What do you rent them for compared to?

Serge: To another business model.

Brandon: What do you rent that for compared to an normal rental? I mean like, what do you?

Serge: My average two bedroom rents for about $650 to $670 and I’m renting these for $100 a night.

Brandon: Wow.

Serge: Yes.

Josh: You’re—I mean so you’re not telling me that you’re booked 30 days.

Serge: I’m booked literally, booked out—my October through March is booked solid, okay.

Josh: Everyday? Holy smokes.

Serge: Everyday, literally I get long term renters from Canada, you know, elderly folks that want to enjoy the weather that want to play golf or people in for cancer treatment and they all stay for anywhere between one month and two months. They book out six months in advance, book out solid and then the rest of the months, I get you know, between one to three weeks with in between and because it’s all in the complex, it’s super easy to manage because I already have the infrastructure there. I already have my resident manager doing the intake. I already have my cleaning lady who’s already there doing unit turns so I’m you know, I could be a hundred miles away sipping coffee and I can have people in and out no problem.

Brandon: That’s amazing.

Josh: I was going to say it.

Brandon: I want to talk about the—well, alright so a couple of things I want to address here, first, the idea of you have people on staff there. I want to talk about that like who you have in that infrastructure, but also, how many units do you have? Is it just that one right now or do you have multiple ones that are all furnished now?

Serge: I have two now so that after the success of the first one, I put another online—I had a 100% occupancy this entire year. The market’s been fantastic, there’s a lot of economic growth and population growth so every new turn I do, rents been going up, $10-$15 bucks and we’re not even scratching the surface I mean the growth has been fantastic.

Josh: Wow.

Serge: I got finally, have somebody leaving next month so I’m going to put a third online and the goal here is probably I’m going to have 10% to 15% of the complex is going to be furnished in vacation rentals so during the summer, it’s going to be primarily construction workers, people visiting hospitals during the winter, it’s going to be winter visitors.

Brandon: That’s cool. That’s very cool. It makes me really.

Josh: That’s awesome.

Brandon: Yes, I have a couple properties of mine that are you know, fairly difficult to keep rented all of the time like there’s small like what—I have a one bedroom house. Like that—it’s like a studio house, right? It’s like awkward like, but it’s beautiful. It’s brand new, ground up, I built everything in it. I’m thinking now, like why don’t I just try that out next time it goes vacant, which it will because people don’t stay in a studio house for long. You know, I’ll try on—not on a nightly rental. I mean I only $450 bucks a month anyway off of it so if I even did $50 bucks a night and got it ten nights, I’m still better than I was as a rental, you know.

Serge: Those are the perfect candidates for that. What I got to say though is there’s a lot of costs involved and since I’ve stumbled upon that model. I’m looking at my, you know, my SFRs and some of my other assets and saying, “Well, hey, why not try rental vacation on that?” There’s a lot of cost involved, a lot of front end costs and I’m very hesitant to do that, you know, you have—you’re paying for all utilities. You’re paying for all the furniture. They’re very very picky. It’s a very competitive market. It requires a lot of handholding, a lot of convincing. They want to talk to you. They want to talk to the owner, you know, they want to talk to—they want to know about, you know, where to go in town. How is it an—you know how—they want a travel guide.

Josh: You’re an innkeeper.

Brandon: Yes.

Josh: I mean you’re not.

Serge: Yes.

Josh: You’re an innkeeper when you’re doing that.

Serge: That’s right. That’s right so to do it on a specific house, unless it’s next door to you know, it’s hard to build the infrastructure. Change the sheets, keep it clean, and then what and then in the winter, you know, you have a plumbing leak. You’re not even going to know about because it’s not occupied, right? Your air conditioner goes out between stage, you don’t know about it. Tenant moves in, you’re air conditioner’s out on a four day stay, that’s a big problem right so it’s—I really like how it works on—in a larger multifamily if that larger multifamily needs to be a specific class of property. It needs to picture well. It needs to fit.

Brandon: Sure.

Josh: How do your tenants feel, I mean do they know, do they not know, does it matter? Does it affect them at all? Is there any kind of interaction, I’m just curious about that?

Serge: On a big enough complex, it doesn’t matter. If it was you know, a ten unit, everybody knows each other and people are coming in and out it would be a problem I think. On a bigger complex, all the tenants don’t know each other anyways. I’ve stuck all the units next to each other so they’re all next door to each other on one specific end of the complex so they’re not spread out and my vacation renters are fantastic, right?

Josh: Yes.

Serge: They’re typically elderly, the have disposable income, right? They are willing to spend, they want an experience better than a hotel. They’re traveling, they’re not fly by night kids, you know, that are going to tear up your place they take care of your place.

Josh: Yes.

Serge: They add value to the complex, you know they’re hanging out at the pool they’re talking to people. They’re on vacation, they’re happy they’re in a good mood. They’re barbecuing so no, there’s no—there’s no down side.

Josh: That’s so awesome.

Brandon: Yes, I love that.

Josh: It’s so awesome.

Brandon: Hey.

Josh: Go ahead Brandon.

Brandon: Oh, I was going to talk about the infrastructure we talked about. You know, like how—do you have a dedicated staff just for this property? Does a 56—does it support fulltime people? Or is this—I don’t remember what you said how close this is to your other properties, but like how do you run the infrastructure of your business.

Serge: For me, this boils down to my competitive advantage in my market. This is where I can excel, right? I bought this complex smack dab in the middle of where I have probably 50% of my SFRs, right? They’re all like literally within a mile and a half so I inherited when I bought the complex a fabulous resident manager.

She’s just absolutely fantastic. I trained her on my system. I trained my tenants right away so I went from tenants paying with money orders and cash and partial pay and not collecting late fee and all of that. Within two months, I had 90% of my tenants paying online, 90% of my tenants doing maintenance requests online.

Made the job of the resident manager so much easier. You know, she showed a bunch of appreciation that hey, it went from what we were doing to what you know, what it is now. It’s amazing that it can be run like this so she does the entire 56-unit and she manages all of the SFRs around so I get—I get maintenance request come directly online, they cue to her. She sees them.

She knows who to call. We use the same the vendors for the multifamilies we use for the single family. I have a handy guy, older guy who great with his hands. He shows up daily, he looks at the maintenance requests, he goes to the units.

He fixes them and he bills me at the end of the month. We have plumbing vendors. We are vendors all around town that I had already built relationships with. I already have pricing lists, HVAC lenders, and it’s the same process.

It just fits right in—the multifamily process fits right in with the single family process. For me, it’s all about—it’s plug and play. You know, I can manage the portfolio from pretty much anywhere. I drive out, I make sure everything is great.

Where I’m holding hands is if I buy an SFR, that’s where it start to get you know, that’s where I spend a lot of time where I got to go out, I got to say how I want the remodel. I got to manage the remodel. I got to pay the vendors so for me right now, SFR in this market doesn’t make a lot of sense anymore. You know, I can spend as much time on one single family as I can trying to source and buy larger multifamily and in this market, it’s so—I see so much risk in single family. We talked about Brandon, kind of how you change strategy in a market like this at this point of the cycle.

Brandon: Yes.

Serge: It’s dangerous. It’s a dangerous time to start.

Josh: Hey Serge, I’m curious so it sounds like you’ve got this infrastructure locally, right? What happens as far as the first vacation is concerned for you. You know, clearly, you get to a certain point and you’re like hey, you know, what if there’s an economic downturn in this area? What if this area has an issue? When do you start to consider—I’m too tied up in this one market. It’s time for me to start looking at other markets as well to plan, build up infrastructure there so that I’m at least diversified.

Serge: You know, I’ve thought about that Josh, it’s—I’m in general not a big believer in diversification.

Josh: Okay.

Serge: I think you diversify to not lose money, but you don’t make either, you know. I’m all about figuring out where I can compete and pushing that to the limit, you know. I have—it’s going to be very very difficult, I’ll tell you what. I know my market so well, street to street.

I know what every house can rent for to the dollar. I know what every multifamily can rent for to the dollar. I know what I can push it to. I know where the population’s going to be next year, in two years, I know every company that’s moving into town, okay.

For me to think I’m going to go to Chicago and compete with Wendel DeGuzman, you know or I’m going to go to Lima and compete Ben Leybovich, it’s not going to happen. It’s foolish. It’s just foolish and to chock it up for the sake of diversification, that hey now, I’m in this market or that market where I have zero competitive advantage where I have to build a new infrastructure from scratch where it’s going to take me twice as much work, time, effort, money as it would in my own backyard where I’ve already built this, diversification doesn’t make sense where it does makes sense and what I’ve started to do is instead of buying particularly on the SFR, instead of buying SFR outright, what I’m doing is I’m buying smaller homes that investors primarily only investors like. I’m buying those with a solo 401K or with my own funds and I’m doing owner financing.

I’m, just turning around before you even fixing them up. Turning them around to other investors I know. They’re putting down nice down payments and I’m owner financing them with you know, interest rates that are probably a little bit higher than it would be in the open market, but probably debt that they couldn’t get on that type of property and I’m converting into notes. You know, so now that’s my diversification.

I really like notes. It’s—but I’m doing it a little different. Instead of going and you know, there’s a lot of operators that’ll sell you non-performing, that will sell you performing notes, different markets. I think that’s good. It’s a little bit more for the passive investor and that’s all great, but that doesn’t fit what I’m doing.

What I’m doing is I’m choosing the property. I’m buying the property. I’m selling the property and thereby mitigating all of my risk. If I’ve got to take the property back, I don’t care. I know the property. I know the person that I sold to. I know that person well. I know that he could fix it up. I know the quality of remodel he does. I know he manages his tenants and if it turns on him, I’ll be glad to take it back and then I’ll just spit it right back into my portfolio.

Josh: There you go, there you go. That’s awesome.

Serge: I’m not buying a non-performing note that I’m going to have to call a buyer and try to figure out how to get re-performing or I’m going to have to take back the property somewhere in Toledo, Ohio that I don’t even know what that property is. It might be a tear down. If I have to—if there is a chance that I’ve got to fly out to Toledo. I’m probably at the—I don’t want that note.

Josh: Yes. Alright so I love that and I really do—I really do. I love your philosophy. I think it’s awesome. What would you tell a new investor who maybe not super new, but somebody who’s saying well you know, I want to diversify. I—you know, I’m seeing all of these, you know, cool deals in Toledo, Ohio or you know, I don’t know Milwaukee or wherever they are, Rochester, New York.

Brandon: You’re not going to go there, Josh?

Josh: I’m not going to go there?

Brandon: You’re not going to say Detroit? Nothing?

Josh: I don’t know what you’re talking about.

Brandon: I’ll say it. I’ll say it.

Josh: I don’t know what you’re talking about.

Brandon: I said it.

Josh: You know, I mean and there’s opportunities there. They’ve got portfolios in their areas. I mean, I guess you kind of said it, but you know it sounds like you know, for you personally it just doesn’t make sense to do something like that.

Serge: You know, for me personally, no. I have looked at it. I’ve thought about it. I have friends in those markets so make a little bit more sense.

Josh: Yes.

Serge: This is a really controversial topic all over BP, right. A lot of people are talking about this especially now that it’s so much harder to find properties in your area, right? In California, there is no cash flow property right so what does that guy with money and a portfolio in California to do, right.

Josh: Right.

Serge: I understand that debate, you know, it is controversial, you got guys like Ben that are writing you know, about the $30,000 pigs and other people that sell these turnkey pigs that tell you it’s the best thing since sliced bread. What I would do first and foremost is I would talk to people that have invested in that specific market long term and just ask them. You know, the investors will tell you whatever you want to hear. They love to talk real estate.

I’ve got guys from BP calling me from around the nation and I’ll spend an hour just talking, you know and I’ll give them whatever they want so they’ll give you this information and ask them. Do you bid in this market? Buying this segment of property right? $30,000 property in wherever, right, Ohio.

Tell me about what your financials look like after five years of owning this property, after three years of owning this property, after one year of owning this property right because long term, it looks very different than it does short term. I learned this lesson. It took me three years to learn this lesson because I didn’t have an investor that showed me financial statements. They look very different so that’s what you got to know so you go in and say, “Okay, your $30,000 property and just think about it, what is it going to cash flow at best case scenario?”

Whatever it may be, $100, $200, whatever it may be and then say is it worth it? Can that $100 of cash flow accrued over one, two, three years how does that work when you’re tenant moves out and you have $10,000 in cap x. How does it work and how does that cash flow drive your returns when you have no chance of appreciation and then just think about is it worth it? Is it going to make you rich?

This game honestly today isn’t about cash flow. It just isn’t. You’re not going to get rich off cash flow. There aren’t cash flow opportunities, aren’t sitting and waiting for you.

You’re going to get rich off two ways, off of building a competitive advantage in some market in some way and some means. If that means your, you know, I love the all of the above strategy. You want to get into real estate today? Become a broker. Become a turnkey guy. Sell knowledge. Sell whatever it is, sell everything you know what I mean because you’re not just going to jump into a market. Start buying—buy a portfolio of ten $30,000 properties and think you’re going to quit your day job. It’s not happening today. Those opportunities are gone and nobody’s leaving equity on the table like they were in 2009.

Brandon: Yes, I definitely, I mean 100% would say it’s so much difficult. I think like there’s always one off stuff, like hey you got an amazing deal like and suddenly you found that one property, but it’s hard to build up that portfolio, now so I’ve kind of shifted my strategy a lot over the last couple of years as well to now I’m looking at a lot more how do I find these nice value add. Like I’ve been doing nice value add houses lately. You know, trying to find properties that I can add $40-$50, like basically flipping and then I’ll hold them as a rental for the market to climb more and then someday, I’ll sell them off, maybe even sell them you know, seller financing or a lease option or whatever because I know that $100 a month I might get off of the cash flow. Isn’t—that’s not going to make me a multi-multi millionaire someday and so I’ve—you know, I’ve—there’s a fine line between changing and acting stupid in a market like people did in 2006-2007 and trying to change your strategy to be smart within that market. I think.

Serge: That’s right.

Brandon: I think you’re doing it well. I know one thing that—I mean really the thing that changed my entire like outlook was the article that you and Ben wrote awhile back together about the cap x, about—you guys took, if listening haven’t read this, we’ll put a link in the show notes. They basically took this list of all the things that could go wrong in—I mean that will go wrong in a property from a new roof to a new driveway, to a new HVAC, to you know, paint, new carpet, the refrigerator. I mean they listed everything. They divided each by the cost and the amount of time that it will live—like last for and it worked out to what was it? Like $250 month, every single month or something like that.

Serge: It was almost I think it was a little over $200.

Brandon: Yes.

Serge: They—the—your readers, the BP, you know, nation, ripped our asses out right? They would just like you guys are crazy. It doesn’t cost this much and to give you some background what we did is we just took the FHA, if you buy a large multifamily property and you use long term financing. I think it’s called a 203B.

I don’t remember, but you can get long term 30 year fix financing through the FHA. What they do and a lot of investors don’t like using that because what they do is they do cap x hold backs, right. Every single month, they do a front-end inspection and this can be on a hundred unit complex okay. They do a front-end inspection.

They have inspector come out and he inspects all the systems of your building. All your mechanicals, your plumbing, your flooring, your roofing, and they assign a useful life based on that condition and they say this is what it cost in this geographic region, average cost to get this thing replaced and they just divide it by what’s left in the useful light and they do that by for every single component and it—at the bottom of the spreadsheet, it equals what the holdback is and what they’re saying, what FHA is saying is basically or it’s not FHA, I think it’s HUD, they’re saying this is what we’re going to hold back from your income every single month to make a 100% sure that you can afford your cap x when it comes because on a 100-unit complex when you’ve got to replace the roof, that could be $400,000 hit, right and if you’re not capitalized, you’re done. We need to say, boil that down is the government that stupid that they make you do that?

You know, have they not had experience over 50 years? 150 years of doing these loans that this is the part that gets investors in trouble every single time so just did the exact same approach on a house, look at all of the components and you can argue that maybe in Arizona it costs $3,000 to do an HVAC, but in California, it costs $25, that’s irrelevant. That’s irrelevant, the bottom line is there’s a cost to it and the lower price you’re rental is, the less you’re chances to absorb that cost. Meaning the less profitable your rental is going to be.

What the bottom line is if you’re cap x is going to be—even if you want debate the $200 plus number, call it $150, call it whatever you want it to be. If you’re average rents are $600 and you have the added bonus by the way of zero appreciation chance because as soon your tenant leaves. You’re going to have to spend another $5 to $10,000 to get a retail ready again so if you put all of those costs, line them up, one by one by one and then calculate what—how much money you’re going to get when you sell the house, you’ll that your returns are very small and on top of that, you’re not building a balance sheet, you’re not getting rich. You’re managing C class tenants. You’re buying yourself a low paying job right? Just cut to the chase, go buy yourself a 711 and work behind the counter. You know, what I mean, same.

Josh: Tweetable topic right there.

Serge: Why are you even getting into real estate? Why are you even getting into real estate? You get into real estate for one reason as far as I’m concerned and that’s to build a balance sheet, build a networth, and you do that with a property that has a chance of appreciation. You do that with B class tenants. You do with assets that people want, not assets that you got cheap because nobody else wanted it because guess what, when you go to sell it, nobody is going to want either.

Josh: There you go. There you go and.

Serge: It’s very true.

Josh: I love it and I—you know, okay you opened the door, Brandon, but that’s you know, that’s always obviously been my story here on the Detroit riff, but you know, who knows, maybe things will change. I actually—when I was in New York a couple weeks ago, I had somebody come up to me and tell me about how they had a property in Detroit. You know, I forget what they spent. It was like $12,000 or $20 or something and like hey, you know, what do you think about this? You know, I know you rip on it, but no really, what do you think and I said, “I think it’s probably not the best idea. I think at some point, of you held that for 20-30 years, maybe Quicken loans guy buying over—taking over Detroit and trying to improve the economy single handedly can do it, but you know, there’s a lot of time an you’ve got to be able to hold out through a lot of that and that’s not just for Detroit. That’s for a lot of these areas in the rust Belt where, this you know, the chances of appreciation aren’t very good and the economies aren’t great and growth isn’t there and you know, whether you live there or you don’t, they may not be the best properties for building wealth.

Serge: Well, the one caveat I would say would be the local operator where this model is competitive advantage okay. If you’re on the ground, you live in that city.

Josh: Sure.

Serge: You know, street to street, then there’s other business models then you become the turnkey, then you become the property manger, then you become the real estate agent. Now you’re making money in a lot of different ways combined with your cash flow. Now you know the handyman maybe you can control that cap x number isn’t $220. Maybe it can be $100 a month instead so when you’re the ground and you can control all of those, but that guy, all the power to you. That’s great, but for the guy sitting in San Francisco, you know, thinking he’s going to get rich in Toledo or in Lima.

Josh: Ouch.

Serge: I just don’t see it. I just don’t see it.

Josh: A lot of digs on Lima for some reason. I’m not quite sure, but.

Serge: Just an example. Just.

Josh: Hey, yes, I mean there’s no you know, if somebody is listening and thinks that this is a dig it might be. Hey Serge, I—this show by the way, I mean this is an amazing show right now. I’m like my—Brandon and I have been taking more and more notes and we want to keep asking questions and on—I want to kind of circle back a little bit on a few things so the first show was zero to 68 units, how many units do you have now?

Serge: I just—just over a hundred.

Josh: Okay so over a hundred. How big is your organization today?

Serge: You will laugh, it’s me, my wife, and two contractors, two 1099 employees.

Josh: Wow.

Serge: Yes.

Josh: Wow. That’s very impressive.

Brandon: Can I ask how many hours a week, I mean like.

Josh: I was about to there.

Brandon: Yes. Do you consider yourself fulltime? Your working 40-50 hours a week or you’re more relaxing at?

Serge: Well, I spend my summers in the mountains to escape the heat so I’m probably about 200 miles away from my rentals all summer for two and a half, three months. My wife is a fulltime mom. We have two young kids. Anything, but fulltime, I mean I probably spend two to five hours, I still maintain the books. I still have a hand on accounting. I’m just—it’s just a—the guy the I am, I’m just—I’m an accountant so I want to do my own journal entries. I—you know—that’s I’ll always do that so I close my books. I’ll reconcile, you know, reconcile cash, I’ll do that, I’ll take some phone calls, but other than that, it’s that’s about all I do at this point.

Josh: What is your—I mean, you do that, but what is your job? I mean I would say your job is probably finding opportunities.

Serge: Yes.

Josh: Finding deals so I want to kind of go to that.

Serge: That’s my job.

Josh: Okay so earlier in the show, I mentioned this woman and she had asked, she like, Josh, well, so how do I find these properties? I’m going to just pass that on to you. How does somebody go about finding deals? How do you find, you know, okay today there’s not as many value adds, but whatever, how do you go about finding opportunities. Obviously, in your market because that is what you do, what is your method for doing it?

Serge: For me today, I’ve kind of come full circle. I’m over the late night searches on LoopNet, forget it. What I do is, I first define exactly what kind of complex I’m in a position to buy and that means what kind of down payment can I bring to the table right? If I say okay, if I can bring $500,000 down, I know that I’m probably going to have to put 25% minimum down and I know that that’ll be buy me a $2 million dollar complex so I figure out first and foremost how much can I buy and that’ll also dictate how many units I can buy.

If I know that I want to buy a $2 million complex, I know that I’ll be able to buy anywhere between a 30 and 60 unit complex so that kind of defines the size of the complex. Then I say, working backwards, what class of complex and I let the tenants define that. I say I know that if my average rents are going $500 bucks. I know the type of tenant that that’s going to bring and I know I either want it or I don’t want it.

In my case, I don’t want it so for me, I want average rents of $650 or higher okay. Now I know that I want average rent of $650 or higher, I know that I can afford to buy say a 50 to 100 unit and based on the average rents it’s also going to define the class of building that that’s going to buy me and in my situation I’m looking for a nicer class B typically, you know $80s to $90s, but I let the tenant define that and I let how much I can buy define that so I’m not a pie in the sky searching everything then I say I refine it even further and say what market do I have a competitive advantage in and that’s key. I’m not looking at properties in Texas. I’m not looking at properties in Ohio or Florida.

I’m not on LoopNet spinning my wheels all night because there’s a lot of complex. I wouldn’t know what a good deal look like in Florida. I wouldn’t know that location I wouldn’t know what average rents are. I wouldn’t know so I know my market so I’ve expanded my market to two or three areas that I’m now comfortable in.

I know the demographics. I know what’s going to happen. I know where the economic shocks are going to come from and what you’ll find is that there aren’t that many complexes typically in those areas unless you’re looking in a big downtown city or whatever, which I’m not. I love secondary markets. I only operate in secondary markets and I’m a big believer in secondary markets because that’s—it’s that much easier to get a competitive advantage in a secondary market. It’s that much easier to learn that market and it’s that much easier to predict shocks, track economic growth than it is a big MSA like downtown Phoenix, right.

Josh: Yes.

Serge: Also in secondary markets, I’m not competing with every other 1031 exchange buyer from Los Angeles that wants to be in Phoenix because they don’t know a lot of these secondary markets and it’s scary to them. They can’t fly in the Sky Harbor Airport and drive ten minutes and see it. They got to drive two hours, right they don’t want to do that so specific figure out where I want invest and then I just drive it. I’ll go to the complex. I’ll drive that complex I’ll go to that complex. I’ll meet with the resident manager. I’ll send my resident manager to go meet with that resident manager, figure out, talk to them. What’s your occupancy, what kind of tenants, how are you guys doing? What are your, you know.

Josh: You’re just checking in with them, right? You’re just like, hey I’m a.

Serge: I’m just checking in with them.

Josh: Okay.

Serge: That’s right. I’m building a relationship and then eventually, I’ll figure out who the owner is and I’ll figure out a way, I like to call the owner and I’ll say, “Hey, I’m in your market, let’s talk.” Typically, that owner owns one or two of those buildings and I’m just going to talk to that owner and I’m going to stick to those buildings and kind of shut out everything else around me because I’m—I know, I only want that asset and because I have a competitive advantage in that asset, I can pay a market rate for that asset. You know, I can pay what you know, two-three years ago I would have thrown up on $50,000 a door for example and I would have said, “You got to be crazy to pay that.” Well, today, maybe I can pay that because I know that in a year, I know what development’s coming to that city. I know what rents are today. I know what they should and I know what they will be so I can be competitive and I can do a competitive offer. It’s not just throwing out stupid lowball offer where they’re not going to take you seriously. It’s building the relationships first and it’s identifying that three, four, five buildings that fit your profile that fit your competitive advantage and just being persistent and going after them. You know, some of this.

Josh: What does that conversation look like? I mean like so you find the three buildings and you know, you forge a relationship, “Hey, I’m a local owner as well. It’s great to meet you.” Like what does that look like? How do I even spark that conversation and what am I say—you know, what are we saying?

What are we talking about here? You know, it looks very different depending on the complex so it’s going to look different on a complex that’s owned by an out of state owner with a property manager than it is with a local guy that’s on site. I like building relationships with resident managers. They’re on the ground they know everything about the property, right.

They’ll tell you everything. You go and spend ten minutes in their office. They’ll tell you everything that’s great, everything that’s bad. They’ll tell you how the owner’s a cheap ass.

They’ll tell you how he does this and he does that and once you build that relationship, once you’ve built that trust, then it’s like, “Hey, next time the owner comes to town or comes to visit the property. Give me a call. Tell him there’s a guy that also invests in multifamily that just wants to have lunch. That just wants to talk.”

It’s slow—it’s slow to build that relationship because remember this isn’t a property that’s on the market and I don’t want something necessarily that’s on the market. I don’t want to compete with five other LoopNet buyers, you know for highest and best. That’s not what I’m trying to do. I’m trying to buy something of very specific asset and if it’s not that specific asset, I don’t want it so I’ll wait as long as I can. I’m not in a rush. I don’t care if I buy it in a year, in two years or five years. I’m not in a rush to buy that asset. You know, I’m fine. I’m not, you know, it gives more time to look at the market to see what’s going on with that specific complex to see what’s going with the city. Time is your—it’s not your enemy in real estate. Time is your friend.

Josh: I want to follow up on that really quick and then we’ll kind of move on here. To me, if I’m listening to you, I’m going to extrapolate that you probably have a number of deals in the works right now. Deals that may not be deals. Deals where you’re not actually having negotiations, but deals that you’re starting to kind of work it. How many of those do you have going on?

Serge: Right now, probably two that are in an advanced. That are in the advanced stage where I’m actually face to face within one situation an owner, another situation a broker that knows the owner, that’s kind of knows me and knows the owner that’s helping to do this and probably another three more that kind of working through the pipeline.

Josh: Okay.

Serge: I consider myself very lucky if I’ll be able to buy one of them and that’ll be within the next 24 months.

Josh: Got it.

Serge: You know and will it be a homerun deal? Probably not to be honest. Nobody’s going to leave a million dollars of equity on the table. I’m not looking for that homerun deal. I’m not looking to low ball, everybody knows no one’s stupid. Everyone knows the multifamily market is hot. Everyone knows their asset has value, right so it’s just a matter of can you get—is there value left in the project? I’ve already done that work. I’ve already looked at the project and determined that there is value left so I can pay him a fair market value of the business he’s doing today, knowing that there’s still value in the business I’m going to do tomorrow.

Josh: Yes, I love that.

Brandon: Yes.

Josh: Yes, awesome.

Brandon: Very cool. I feel like we could probably talk for like the next five hours with you.

Josh: I think we can.

Brandon: Or longer, but we’ll start to wrap this thing up because I’m sure people got a you know all that.

Josh: I think we may have to have Serge back.

Brandon: Yes, we’ll get you back.

Josh: For another show at some point.

Brandon: Someday, what we need to do is probably get Brian Burke, Ben, and Serge all on a round table and a.

Josh: That would be great.

Brandon: That would be a fascinating show.

Serge: Oh man, it’ll be—it’ll turn into a debate of why not to buy real estate with that.

Josh: There you go. There you go.

Brandon: I love it. Alright so let’s go to the Fire Round now.

Announcer: It’s time for the Fire Round.

Brandon: Alright, the Fire Round these questions come directly out of the BiggerPockets forums and I pulled all of them from the actual like sub-forum of multifamily properties so we’re kind of talking about that today. Number one and I know we covered a lot of this stuff today, but we’ll rehash it quickly here. How do you find motivated sellers in an apartment building or for an apartment building?

Serge: You know, kind of the way I’m doing it. It’s not about motivated sellers, you know. It’s about buying the right assets. It’s different than SFR. It’s the—you’re not doing a 30-60 day flip, right where it’s all about the bases, how cheap you buy it. There are multifamily projects that you can get for free that you will never turn a profit on. It’s not about how cheap you buy it. It’s about the right asset. The right location and the right value that you can add and in that case you can pay a market price. I’m okay paying a market price. I’m okay paying a 6%-7% cap. It’s not about motivated sellers. It’s about realistic sellers and it’s about the right assets. Start with the right asset and go from there.

Josh: Right on. Right on. Alright, how can a small multifamily owner compete, you know, with large multifamily holding companies that offer ridiculous amenities.

Brandon: I think that’s for attracting tenants like.

Josh: Yes.

Brandon: You compete to attract tenants if you’re a small guy.

Josh: Yes. Yes, furnished and loaded and free this and free that and you know, dog walking services and you know.

Serge: The answer to that question is you don’t compete. If you go to compete with 500 other units on your street, you probably don’t have a competitive advantage. You can’t control your price. You can’t set your price. This why I like secondary markets where my units are in an area that are typically surrounded by single family and there’s going to be your competitive. You’re in a location that people want to be so in that case, you don’t have to compete on amenities. You don’t have to give them free wifi and a pool and a spa. They came to you because they want to be in that location. It’s close to their job. It’s close to their work. There’s your competitive advantage. If you have a ten unit surrounded by 500 other units, you have no competitive advantage, you don’t control your price. You’re going to have high turnover, I don’t buy that project. I stay away from that. There’s plenty of product out there to pick and choose.

Brandon: Love it.

Josh: Cool. Cool.

Brandon: Alright. I want to buy a duplex or triplex and I’m choosing either San Diego or Phoenix, which do I choose?

Josh: Oh, today? It would depend on the project. I mean I’d do San Diego. I would do San Diego because you’re not going to cash flow in Phoenix. You’re not going to cash flow in San Diego, right? San Diego, if you can find the right deal, you can—you have a lot of exits. You have—you can vacation rental through the roof right if you have the right location. If you have the down payment, I think a duplex at the end of the day today it’s not going to necessarily be a cash flow place. It’s going to be more of a store of value so in five years, ten years down the road, would I rather have that San Diego duplex on my balance sheet or downtown Phoenix, you know, air conditioning, breaking 1960, I’d be in San Diego all day.

Brandon: Okay, good to know.

Josh: There you go.

Brandon: I like that.

Josh: Nice. Alright, last question of the Fire Round. If you had a $900,000 in cash to invest in real estate, what would you do?

Serge: Today? I would.

Josh: Today.

Serge: First and foremost I’d—it depends on what my skill set was, right. If I had never touched multifamily, I wouldn’t go into multifamily. If I had never touched single family, I wouldn’t go into single family. I would look to hard moneylending. I would look towards buying notes, originating notes, owner-finance. I would look around real estate. I would look around the bubble of the asset itself. If I had experience first and foremost, I would use that as down payment to leverage on a nice multifamily that I can add value on, but only if that was what I’d do and that’s what my competitive advantage is. I can tell you what I wouldn’t do. I wouldn’t move that money out of state and give it to a turnkey operator. I’m sorry turnkey operators, like the model, but I just wouldn’t blindly do that.

Brandon: Sure.

Serge: It’s just too much—it’s too much money to lose and you’re taking $900,000 from one line item on your balance sheet, moving it to another. That’s not growing.

Brandon: Yes, I love that.

Josh: Interesting.

Brandon: I love that you use accounting terms, you know, to talk about real estate. I think that’s actually cool.

Josh: That’s great.

Brandon: I like to use the analogy when I’m talking about with money. I say—I think it’s more dangerous to invest with a lot of money than it is without almost because it’s like walking around with a loaded shotgun without any training. You’re just like what does this button do? You know, you shoot people because like, yes, people don’t know what they’re doing and when you have a lot of money, people just buy terrible deals because they’re like, well, you know, whatever, I don’t need to get a great deal.

Serge: Everybody’s pitching you right?

Brandon: Yes.

Serge: Everybody’s pitching you, everyone’s got the story about their friend that made a killing in real estate, right and it’s just—they go from those anecdotes and when they’re ready to do something, you know, find a buyer knowledge. Find people that are doing it and pick their brain, become friends with them. Ask them what their long-term numbers look like. They’ll tell you the truth. They’ll the truth. Nobody’s in this, nobody’s lying just to be an asshole, you know, they’re trying—they want to help.

Brandon: Yes.

Serge: Take those opinions and do it with people that have done it long term, not the one year operator, not the six month guy, not the guy that looks to be rich because he’s doing this or that, but the guy that’s done it for five years.

Josh: Yes, I hear you.

Brandon: You know earlier, I meant to say this earlier and we moved on and I never got to say it, but that point you made earlier, you just remade now, but you know, talking with experienced people in the market you want to invest that have been there for five plus years. I think that’s one of the single best like pieces of advice anybody has ever given on this podcast. Like, it’s so true and it’s so realistic like people often think like competitive, but like you said, we’re—I’ve never met a real estate investor who didn’t want to brag about everything. It wasn’t wide open. I mean almost everybody’s like this is what I do. This is how I’ve done it and this is what you shouldn’t do.

Serge: Yes.

Brandon: Here’s all of my mistakes right here, lined up.

Serge: You’d be shocked at how easy it is to get in here with a lot of these guys, right.

Josh: Right.

Serge: It’s easy to sit down, most of them want to talk about it and you know what? They’ve been in the market long enough, they’ll tell you in two seconds if the path you’re on is junk or if it’s you’re onto something.

Brandon: Yes.

Serge: Or—you know, they’ll and they’ll tell you why, you know so don’t go at it alone.

Brandon: Yes.

Serge: That’s what BP is for.

Brandon: Yes.

Serge: That’s what BP is for, you know, I get people that are starting to call me and they say you know how do I do this? How do I break in? I say, first thing I say is figure out BP members that are active in your market and sometimes I’ll tell them if I know it’s Chicago or I know it’s the Bay Area, I know some of these guys that are active. I say call this guy, take him to lunch. That’s the first thing you do. Listen to this guy’s podcast. You know, spend $200 on some education, you know what I mean? Get it for free first. Figure out who’s in the niche you’re in, you can figure it out. Spend the money. Spend the time. Buy people lunch. It’s so easy. People don’t want to do it.

Josh: Yes.

Serge: People don’t want to—they just want. I want to do what you did.

Josh: Yes.

Brandon: Yes.

Josh: I was at a this New York meet up was it two weeks—a couple of weeks ago and that was the thing I told them. I was like you know, pull through them I said, “Hey, who’s new here, who’s experienced here? Okay, new guys, before you leave, I want you to at least have met two of the experienced guys in the room and I want you to ask them to go to lunch, get out there and sit down with these people because they’re more than happy to work with you and they’re going to help you out. You may be their partner down the line so you know, it’s an advantage to all sides. You learn, they learn, you guys potentially do deals. It’s a beautiful thing. There’s no down side whatsoever except time and frankly time is on your side for all parties because that’s what you do. That’s your job.”

Serge: That’s right.

Brandon: Yes. I love it.

Serge: That’s right. What surprised me is you know, people want the riches, they want the wealth, they want to do what other people did, but they just don’t want to do the minimal steps.

Josh: Yes.

Serge: It’s not. Come on guys. You know, it’s not that difficult. Start there and you’ll be just shocked at where it leads.

Brandon: Yes.

Josh: Awesome.

Brandon: Love it. Alright, moving on, even though I don’t really want to, but we’re going to move on to the world famous.

Announcer: Famous Four.

Brandon: Alright, these questions, we ask every guest including we asked you on the last show on show number 60, which of course, people can listen to at BiggerPockets.com/Show60, but we’re going to ask you again today just in case anything has changed so number one, what is your favorite real estate related book?

Serge: Oh, I got to say something different than last time and I don’t remember what it was last time.

Brandon: I don’t either.

Serge: Oh man, I’d hate to say Rich Dad, Poor Dad. I hate to say it, but I think the one that I really liked was we talked about Landlording on Autopilot last time.

Brandon: Yes.

Josh: Yes, you did and you talked about The Real Book of Real Estate and good to get.

Serge: I recommend those to.

Josh: The Seven Habits so give us something new here. Come on. Open up.

Serge: You know I stopped reading real estate books like I felt like I read all of them. They’re just getting so old. I love all of McElroy’s stuff. Read all of McElroy’s stuff.

Brandon: Yes.

Serge: I just a—honestly, I’m not reading real estate book any more.

Brandon: I think there’s a point where people shift to business books more often.

Josh: Yes, yes.

Brandon: Or at least like the idea of you know other ways of learning, not just about how to buy rental property or whatever. That’s alright.

Josh: Let’s move to that then. What about business books? What’s you know—what’s on your table these days.

Serge: God, I just reread the E-Myth.

Josh: Yes.

Brandon: Yes, I just went to lunch with somebody yesterday, actually a BP member who asked me to go to lunch and so we went to lunch together and he bought me a—I mean like Lucas, so shout out to Lucas. What’s up and on there I told him, I was like go home and read the E-Myth. I was like first you do, go read the E-Myth. I was like and then go read some real estate books, but read the E-Myth first.

Serge: I like the E-Myth. I just reread The One Thing. I like that.

Brandon: My favorite business book.

Josh: I’m reading that right now actually.

Brandon: Nice.

Serge: It’s fantastic. It’s fantastic and then that oldie, but goodie, I like the Carnegie books, How to Win Friend and Influence people.

Josh: Win friends.

Serge: I typically read that about once every two years just as a refresher.

Josh: Right on.

Serge: Just had—how to treat people and be positive—stay positive.

Josh: That’s fantastic, alright well you got the two kids. What else are you doing for fun? You’re out there and you’re—you got a mountain home. What do you do up there in the mountains for fun?

Serge: Man, it’s fabulous, just swim during the day. Play with the kids. Pickle ball, Speedminton.

Josh: Wait, wait, wait.

Brandon: I don’t even know what.

Josh: Yes what is that?

Brandon: Is that Arizona things?

Serge: Speedminton is like a mix between tennis and badminton, just speeded up. It’s fantastic.

Brandon: Okay.

Josh: Interesting.

Serge: We stumbled upon it my wife and I enjoy it, hanging out with friends here at the club. It’s fantastic. It’s just a get away. It’s a 110 degrees in Arizona and out here it’s in the low 90s, high 80s so it’s just getting away from the heat, Come August it’ll be back to the grind.

Josh: I want to know what pickle ball is before we move on.

Serge: Look it up Josh. Look it up.

Josh: Because I’m not the only one who doesn’t know so you got a captive audience of tens of thousands of people. Tell us.

Serge: It’s played on tennis court. Look it up, you’ll see the details. It’s fun. Youtube it, you’ll laugh.

Josh: Alright, alright.

Brandon: I’m there now, it’s a sport, which two-three or four players use solid paddles made of wood or composite material to hit a perforated polymer ball. Awesome, alright. I’m playing. You and me Serge, I’m coming to your house. We’re going to play.

Serge: You got it.

Josh: Challenge.

Serge: Open invite.

Brandon: Alright, good.

Josh: That doesn’t sound good or promising for you Brandon.

Brandon: It doesn’t. Alright, final question from me, what do you believe sets apart successful investors from those who give up, fail, or never get started?

Serge: Undying search for knowledge, man. Undying search for knowledge. I will talk to anybody in this business, hear opinions, change opinions, change strategies. You can never, you can never stop. You can never rest, you’re it’s a dynamic business, the cycles change, the strategies change you cannot rest on your laurels. You cannot sit in one position. You always got to move. You always got to buy. You always got to sell no matter how successful you are. You got to keep moving forward.

Brandon: Love it.

Josh: Perfect.

Brandon: Love it.

Josh: Amazing, amazing. Alright man, where can we find out more about you? Where can we find you?

Serge: Contact me on BP. That’s where it’s at.

Josh: What is BP?

Serge: BiggerPockets.

Josh: Oh that.

Serge: Start there. Start there.

Josh: Awesome, awesome. Serge, what a great show, really really enjoyed it, pleasure to have you back and I know without a doubt that as long as we’re still doing shows in a year or two. We’re going to have you back so thank you for the time and we’ll look forward to seeing you back on the site.

Serge: Guys, my pleasure, thank you for having me.

Josh: Right.

Brandon: Thank you.

Josh: Thanks. Alright guys. That was show 131 of the BiggerPockets podcast, you can check out the show notes at BiggerPockets.com/Show131 and on those show notes, not only do you get notes and highlights and links to anything that we talked about, but you can also interact with Serge so please jump in there. Get into a conversation. Ask him any questions you’ve got. He’s going to jump in and help out and so we definitely encourage you to do that.

As we mentioned in the upfront, please jump on iTunes. Leave us a rating or review even if you listen on Stitcher or somewhere else, it definitely helps us, Soundcloud, however you absorb the show. Please leave us ratings, reviews and beyond that this guy Serge is active on BiggerPockets. This guys is sharing the wisdom that he has with you on our forums. I don’t know if it’s everyday, but on a regular basis and there’s tons of guys just like him, experienced, kicking back side and they’re there helping out. Obviously, they’re doing it for you know, to help out and they’re doing it because it helps them out so jump on, interact with them. If you haven’t jumped on our forums, if you’re not participating, you are missing the opportunity to get to know guys like Serge.

Brandon: Yes.

Josh: To potentially work with guys like Serge so get in there, do it today. If you haven’t already, post one post. That’s all you got to do, start with one and then do the next and the next, but start with one and do it now. Otherwise, follow us on Facebook, Twitter, G+, Pinterest, wherever we are, Instagram, we’re all over the place. You know, follow us, interact with us, share BiggerPockets with the world. Help us spread the word. We are helping investors change lives and we need your help to get the word out. Tell your local newspaper. Tell your local TV station about us. Tell the magazine editors. Tell everybody that you know about BiggerPockets. Tell your mom, tell your grandma, tell everybody. Get the word out. We appreciate it more than you have any idea so thank you for listening. I’m Josh Dorkin.

Brandon: Signing off.

Josh: Signing off.

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