BiggerPockets Podcast 060 with Serge Shukhat Transcript

Link to show: BP Podcast 060: From 0 to 68 Rental Units in Just Four Years with Serge Shukhat

Josh: This is the BiggerPockets podcast, show 60.

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Josh: What’s going on everybody, this is Josh Dorkin, host of the BiggerPockets podcast, here with Brandon Turner, what up Brandon?

Brandon: What up Josh? I am excited about today’s show.

Josh: I am also excited about today’s show because we pre-recorded the show and it is really fantastic.

Brandon: It is awesome. It is life changing so very very cool.

Josh: Yes, yes, yes so this show is a little bit longer than usual so we’re going to keep this front end nice and short for you guys. Before we get started really quick this is show 60 of the BiggerPockets podcast, you can check out the show notes at BiggerPockets.com/show60 and of course on the show notes, you can ask our guest any kind of questions that you’ve got for them about anything that we’ve talked about on the show so definitely be sure to check that out. Today’s Quick Tip, Today’s Quick Tip is make sure you try and get together with your business partner, your spouse or whomever you’re kind of doing your real estate business with. You want to sit down with them. What do you think Brandon? Probably about once a week.

Brandon: Yes, I’d say at least once a week, once a month, I mean whatever it takes I guess for your business.

Josh: Yes, to basically sit down and talk about your business because you’d be amazed at how much you can get out of that discussion. If you’re not already having some kind of regular meeting with your partners, I think we both definitely would encourage you to do that,

Brandon: Yes. Kind of cause here’s the truth, you spend so much time in your business like just like in the day to day operations. If you don’t take to sit down and just say okay, where are we going next? What are our problems? Let write this down. Let’s get organized. I did that this week with my wife at Starbucks for two hours. Transformed like a lot of stuff that we’re doing right now. Just having a conversation about the business so, yes.

Josh: That’s great.

Brandon: Huge, huge.

Josh: Awesome, awesome. Alright, so today’s show is going to be focusing on the buy and hold side of investing and our guest is a guy named Serge Shukhat and Serge is an investor in the Arizona area and I just got some phenomenal information to help out. He started as a single family investor, moved into multi-families and we cover the whole gamut, transition, the pros, the cons, what’s really cool, we definitely—I definitely want you guys to stick around for this all the way through Serge actually shows Brandon how he can easily increase the value of one of his multifamily properties, by $336,000.

Brandon: Yes. That’s why I’m pumped.

Josh: Yes, so. I know he’s pumped. If you’re not already pumped, definitely stay tuned, stay ‘til the end, check it out, there’s tips all the way through. With that, let’s get this thing going. Serge, welcome to the show man. Good to have you here.

Serge: Hey, Brandon, Josh, how are you guys doing?

Brandon: We’re doing well, we’re doing well.

Josh: Brandon, Josh. What about Josh, Brandon, I mean, you know? It’s the meaning.

Brandon: Yes, he understands priority, Serge.

Josh: Wow, you started this thing on the wrong foot, Serge.

Serge: Uh oh.

Josh: Alright, well listen man, we’re really happy to have you here, let’s get this thing going. How did you get started? What led to you getting into this crazy world of real investing?

Serge: Well, I’m originally from the Bay Area, California became an accidental landlord back in 2008. I was working the corporate controller role with a tech company out in Menlo Park, California and.

Brandon: Hey, what’s a corporate controller? I don’t even know.

Serge: Corporate controller is basically responsible for all financial reporting, financial budgeting, everything financial statement related for a company. Okay, rolling up income statements and balance sheets and if you’re going public, preparing an S1, pretty much everything financial related.

Brandon: Okay, anyway, so you’re working a corporate controller job at a startup?

Serge: Yes, company was growing and we had offices in Mesa, Arizona, as well as a few other regional places and we were having issues with our operations out in Arizona and my boss, the CFO at the time thought it might be a good idea for me to go out there and visit and figure out what we can do operationally to get, you know, to fix things up. I came out, spent some time in Arizona. At the time I loved it, summer was brutal but.

Josh: Oh yes.

Serge: Enjoyed my stay. It made a lot of sense for me to relocate at the time and this was probably early 2008 at the time. I accepted the role to move out to Mesa, Arizona and build a team in essence out there. At that time, I was a—owned my home in San Mateo, California and decided that it would be a good idea to rent that.

Here was a home I purchased for around $800,000. Market rent at the time was around $3,000 and I thought hey, if I’m even coming close to covering my mortgage, that’s great. Real estate only goes up in the Bay Area, great deal. We rented it pretty quickly, moved to Arizona, quickly started looking for a single family for us to move into rather than renting so we had looked for quite awhile at a bunch of houses, found a single-family that we liked. Made an offer, I purchased it early 2008. In the process of looking at single-family homes for my family, I noticed a trend that was happening out here in Arizona.

In 2008 when the market began cratering, there was a lot of inventory out here. What was happening was, all these homes were just sitting. They were just sitting. There weren’t these big price reductions and there weren’t this onslaught of foreclosures just yet. I looked and wow this is interesting, really dangerous time to rent and while my real estate agent was hauling me around town, looking at primaries for us, he said, “Hey, if you see something that makes sense cash flow wise, you know, why don’t give me a shout out.

Well, nothing really came up that was even under $200,000 at the time may be $150 so it didn’t really make much sense, we bought our single family, and then in late 2008, on my drive to work, I started noticing one after another just for sale signs, foreclosure, foreclosure, and our market really began cratering at that time. By January of 2009, there was just a glut of foreclosures on the market, and I started just tinkering, just started looking, saying, “Hey, what’s out there?” Okay so I found my first home, which was a single family four bedroom with a pool in a city adjacent to mine and it was listed for $62,000.

Josh: Nice.

Serge: Coming from the Bay Area and seeing that price, it was just.

Josh: Oh yes.

Serge: Mind boggling, it didn’t make sense. I said, “This is too good to be true.” My real estate agent said, “Hey, I’ve never even seen a house under $100,000. You know, I don’t even if this is possible. He didn’t even want to write the offer because the commission was too low at the time you know. Ran the numbers, you know, me being a CPA, I’m all about the numbers, ran the numbers, I thought I could rent it for about a $1,000, made a whole lot of sense, obviously I hadn’t been on BP yet. Didn’t know about the 50% rule, didn’t know about land lording, didn’t know about anything at the time, but the numbers looked good so borrowed a little bit of money from the family, at the time, closed this home. I think the purchase price was $52,000, found a contractor from the real estate agents referral, fixed it up for about $4,000, put it on the market for $1,095 and rented it in about a week, alright.

Josh: Nice.

Serge: This was January 2009 at the time and I did a little PML, said “Okay, here’s what I’m renting it for. Here’s what my property taxes, insurance, and maybe a repair here and there might cost and here’s my ROI.” I calculated it out to something like 25%, you know over 20%. I said, “Wow!” You know, this is something that can work.

Josh: But.

Serge: I learned pretty much within 30 days that it wasn’t all hacked up to be. I didn’t screen my tenant correctly.

Josh: Yes.

Serge: The house started falling apart.

Josh: Yes.

Serge: I didn’t fix any of the mechanicals. I didn’t even look at the air conditioning. Didn’t look at the plumbing. I just put a coat of paint on it and fixed some flooring and rented it. Yes.

Josh: Alright, so you start with this property in the Bay Area, I actually wanted to ask you a couple of questions on that before we even get to this $62,000 property. You got the property in the Bay Area, you’re this accidental landlord, you move out, you get somebody in there. How’s this going, you know I mean, were you doing any screening on that? Was that also, let me just shove somebody in there, I don’t really know much more, but I know I have a renter who’s interested and let’s go.

Serge: No, with the Bay Area house, I’ll give a lot of credit to my wife. I was a little bit desperate to find a tenant. We had—we were advertising on Criagslist and we were getting some terrible terrible applicants. I was ready to jump on the first applicant, “Hey, they have a deposit, who cares, let’s get them in. We can’t have this thing vacant.” My wife had the foresight to say, “No, let’s wait, we’ll find the right tenant.” We got really lucky, we found a professional that was moving into the Bay Area, had a stable job, moving in from Orgeon I believe. Rented it to them on a one-year lease. I had a good friend of mine form college. His father was a residential landlord in the Bay Area, had I think 12 units. Called him, got some lease templates, got some advice and got it rented and quickly made our way to Arizona.

Josh: Got you.

Serge: Never—probably that whole year they were leasing, I don’t think I heard from them once.

Josh: Wow, okay I was going to say, so who managed it? Was it your friend’s Dad helped you kind of run it or?

Serge: No, no, we managed it ourselves, they paid us—I had some friends on stand by just in case.

Josh: Yes.

Serge: You know, water heater broke or something happened, nothing major. The house was a 1960s house. We had remodeled before so it was in good shape.

Josh: Yes.

Serge: It was our primary, we took pride in it so.

Josh: Yes.

Serge: It was—no issues.

Josh: Okay, got you. Now you get this $62,000 house, the one thing that really rung out to me was you said it had a pool.

Serge: Yes.

Josh: That’s the first thing I hear and you know as a landlord, my thought always goes to liability and problems and I know that we’ve had a lot of debates on BiggerPockets about what to do with a house with a pool. At least from what I’ve seen, most landlords that—whose opinions I’ve seen or I’ve heard share, tend to say, “You know what, if it’s got a pool, burry that sucker, fill that thing in and don’t even think about keeping a pool.” I’m assuming you did not do that.

Serge: I did not do that and I was kind of learning as I went along. My friend’s dad was somewhat of a mentor to me at the time, he said, “You’re crazy. Don’t touch the pool. I wouldn’t touch the pool. It’s a—you don’t want that.” I knew in Arizona with our hot summers.

Josh: Yes.

Serge: Five months of the year, people want pools.

Josh: Yes, of course.

Serge: Very desirable. I didn’t really a have a philosophy on the type of property I was looking for at the time. This one was cheap. Before all the real cheap properties hit the market, it cash flowed. I didn’t know what it meant to maintain a pool. The pool maintenance was the responsibility of the tenant in the lease, which was another early mistake I made. I didn’t really have problems with the pool at the time. Sure, I worried about liability. They had young kids. I got an umbrella policy. It was definitely a concern and it was something that I was watching over the sea of going forward if I purchase additionally properties. Would I go with the pools or not?

Brandon: You mentioned an umbrella policy, for those people who don’t know, what is that?

Serge: An umbrella policy is basically a secondary insurance policy that’s in addition to your primary liability policy over the house that covers you above and beyond whatever your liability policy may be. It’ll say something like your liability policy, you’ll have a $100,000 liability policy. First $100,000, your regular insurance covers you. Anything after that, the umbrella kicks in and the umbrella has a wider blanket of what it covers that a regular may.

Brandon: Does somebody just go to their insurance broker and talk to them about this or are there special companies that just do umbrella policies?

Serge: Both, you can go to a special company or you can go to your regular provider. Until you have around ten properties, every provider is different, you can get into the residential insurance, it’s easy, you know. Once you get over a certain number of properties, everything becomes much more complex.

Josh: Yes and I’ll add to that, you can get an umbrella policy if you just own your home. You can just, you know, get a traditional policy and get the umbrella on top for you know x amount of additional insurance so it’s always helpful.

Serge: That’s right.

Josh: Well so on the $62,000 property, we go ahead, the property has now—had some of these issues and you had mentioned this 50% rule that we talk about. You know, to you and the reason I’m bringing this up before I kind of even get there is I think a lot of our listeners are new real estate investors who will probably do the exact same thing that you did and the exact same thing that I did and I’ll probably speak for Brandon and everyone else who jumps into real estate without really knowing everything.

Brandon: No, I was perfect when I started.

Josh: Yes, clearly so I mean we don’t account for all of these stuff so the surprises to you above and beyond, you had already mentioned you didn’t really investigate the cut backs right? The need to—whether it’s the roof, the AC, the ventilation or any of that capital expenses, what other kind of surprises whacked you on this thing?

Serge: Certainly being in the world—being the landlord and being responsible for everything you know I was getting here I am sitting at a corporate job in you know meetings with CFOs and clients and my phone’s ringing off the hook and telling me that the door doesn’t close. You know, and I’m sitting here thinking, the door doesn’t close so what. Doors don’t close. I’ve got doors that don’t close in my house. Why do I have to fix that? I don’t fix that in my own house. My wife’s got a honey do list that… Not a big deal. Why do I—why is that my responsibility?

Josh: Yet, he’s still married by the way.

Serge: Yes. Very understanding wife so you know trying to figure out what’s really my responsibility and what’s not my responsibility. At first I was somewhat standoffish thinking hey none of this stuff is a big deal. You know, fix it yourself. You know, change the light bulb yourself type deal. Then I realized, hey a lot of this stuff is my responsibility. If I’m going to do this, I better get a network. I better figure out how to get this stuffed fixed right and keep these relationships with my tenants.

Brandon: Yes, yes that’s true. You know, that’s a little bit different than and that’s pretty much my philosophy now is the idea of I need to fix these things for my tenants and kind of in a opposite way of looking at it. We had a show a few months back with Darren Sager and he talked about, he makes his tenants do everything I mean like, if there’s a door, they got to fix the door because you know, they’re the ones living there. I’d never really, I don’t know it’s just kind of a different perspective and I think a lot of it goes to his tenant base, which are higher income. You know, they are renting $3-$4,000 properties. It’s much different than renting a $7-$800 apartment. I think a lot of it comes down to that. I’m always exploring that issue. Even today, I’ve been doing this what? Seven years now and everyday, I have a conversation on should I fix this or not? Is it my responsibility to fix this and do I charge the tenant or not. I mean for example, I just want to get your opinion this. I had a tenant a few—I don’t know a couple of months back and he broke a shower door, just shattered it somehow.

Josh: Was this one of those plexiglass shower doors?

Brandon: Yes, like those. Yes those like glass shower doors on just a shower unit not on a like bath tub shower. I mean he shatters the thing. Whose responsibility is it? Now he says in the middle of the night, it fell off.

Serge: Yes, of course.

Brandon: Shattered.

Josh: That’s what he says.

Brandon: That’s what he says.

Serge: Yes, of course.

Brandon: I can’t prove it one way or another. What would you do? Do you pay for that? I think I might have even asked that on a show awhile ago, but I don’t know. What would you do?

Serge: You know it’s going to depend on my relationship with the tenant. If I have the tenant in there, you know, on a long-term lease, two years, it’s been three months. They pay on time. They tell me in advance if there’s issues.

If there’s a good working relationship with the tenant, I’ll probably bend over backwards and I will fix it. You know and write it off to good will right. I know that they broke it. I had this exact same situation with a sliding glass door. She said, “It just cracked.” Right, it just cracked and broke in the middle of the night.

You don’t know the real truth, but what you don’t want to do is you don’t want to get into a brickering match over a $500 repair. Does that $500 hurt? Sure it does, but at the end of the day, you want the long-term tenant. You want them to be happy and what I found is particularly in the beginning of the lease, you got a good—what you think is a good screen tenant that’s going to be there a long time.

Show them that you’re a good landlord. Show them that you’re going to go out of your way. Show them that you’re going to make the repairs and it’ll buy you peace for the remainder of the lease is what I’ve found. After that, what seems to be the most difficult and complex tenant in the beginning. If you go out of your way and show them that you’re serious about the business, you’re serious about land lording, you respect your tenants, you respect getting stuff fixed in a timely manner, they back off after that.

Josh: Yes.

Serge: You know it goes along with training your tenants. You can train them in a good way as well.

Brandon: Yes.

Josh: Wow, I have nothing else to ask because he pretty much nailed everything that I was going to ask in that singular statement right there.

Serge: There you go.

Brandon: That’s good.

Josh: No, it’s true, I mean you know ultimately the idea is you know if you’re respectful to people and kind of take care of them that they’re mostly going to become good tenants and that’s not always true of course.

Brandon: It might be the “if you give a mouse a cookie kind of tenant” I talk about sometimes. Yes, if you do something nice for them they’re going to demand the next thing and the next and the next.

Josh: Yes.

Brandon: I hate those.

Serge: There’s a fine line.

Josh: Yes.

Serge: There’s a fine and you can see if that’s coming. You can see if you know if that’s the type of tenant that’s bickering and you fix something and then there’s now thank you, no respect. You know, they just move on to the next thing that they want and they stand demanding and demanding. Then I’ll put a line in the sand and say, “Hey, this was not part of your lease when you viewed the property.

This fence or whatever you’re asking for was not there.” I’m always playing the role, you know, I’m a property manager. I’m not the owner of the property and so I’m the middle guy. I always say, “Hey, you know, I’d love to this for you. I totally understand. You know, if I were in your shoes, maybe I’d want the same thing, but the owner just doesn’t see this as a reasonable request and here’s why. You know.

Brandon: Yes, Yes.

Serge: It’s a lot easier than me being you know, this rich, mean landlord that’s trying to save money on their backs, you know. It’s hey this owner isn’t really making much money. After paying the mortgage, he’s lucky to break even so every request you make, this owner is losing money so you know, there’s a fine line that I got to play being in the middle of both of you. I want them to keep you happy as a tenant, but I also have to be reasonable for this owner.

Josh: Yes, yes and so that’s one of those techniques that a lot of landlords will follow. It actually has stirred up quite the debate on BiggerPockets.

Brandon: Yes.

Josh: I know Brandon’s on the same side as yours where and I formerly was not and then I switched over to that side where you know, I—you know I’m the manager, I’m not the landlord because in the end I mean, people want to hate on the landlord. They really really want to hate on the landlord and if you’re the manager like you said, you’re the middleman. Now is there a fuzzy line somewhere in between?

Well it depends who owns the property. Do you own the property? Does your company own the property? I was going to kind of ask about that. You know, we’ll get into kind of what’s going on after this second rental of yours, but presumably, you’re buying your properties not in your own name. Is that correct?

Serge: My first properties were in my name. When I kind of wrote a more detailed goals and business plan to expand this business, I quickly started opening LLCs with the state of Arizona and putting all of the properties in LLCs. Also, got a property management company and doing business as on a separate LLC where the property management company runs all of the properties, all of leases are in the name of the property management company. I have really two shells, an LLC that owns the property and then a property management company that has an agreement with the LLCs to manage the property.

Josh: Interesting.

Serge: The face of the property to the tenant is the property management company.

Josh: Aha.

Brandon: That’s almost identical to how I have mine set up as well. I’ve got the LLCs and I’ve got a property management LLC that everyone knows—everybody knows opened our properties. That’s the owner I guess is what everyone thinks. That’s the manager so it works out well for me.

Josh: Are you using the—are you doing an LLC for each individual property?

Serge: You know I was and then it got to the point where I was you know spending a lot of time opening these LLCs and it got to right now, the way it is, is I probably have two to three properties in each LLC.

Josh: Okay.

Brandon: Can I ask, how many total like units now do you have then or properties or?

Serge: Right, now 68 units and we’re managing about 85.

Brandon: Nice and that’s just in the last what—four years right?

Serge: Four years. Yes.

Brandon: Yes, that’s awesome, that’s awesome.

Serge: Since 2009.

Brandon: Nice.

Josh: You’ve got your own properties and you’re managing some properties for other folks as well.

Serge: Yes so while I was quickly expanding, I had a couple of friends in the Bay Area, one of which was my boss in the corporate world, and he had dabbled in real estate back in 2006. He bought a condo in Scottsdale. I think it was, I don’t want to give his information, but it was $350 or $400,000, two-bedroom condo with an atrocious HOA and he was underwater on it.

They were all selling for about $100,000 come 2009 and every time he would come down to Arizona for meetings or whatever, he would always you know, complain, “Oh you know this property it’s so bad, I’m losing money. Why did I get into it? What should I do? Should I short sale?” I said, “You know, why do you keep complaining? Why don’t you double down so you got you know, you’re losing 10%, your ROI is minus 10% on this property, buy another five that are kicking out 15%-20% ROI. You won’t even notice that property’s losing money.”

Brandon: Yes.

Serge: He had kind of this “aha moment.” He’s like, “Wow, you’re right.” I sat him down in front of my computer, showed him the properties that I had, what I was renting them for, what I bought them for, and it was kind of this light bulb went off and he was just one after another, he was ready to buy and he expanded his portfolio pretty quick and I would source these homes for him. Most of the houses he bought were properties that I bought in my what I call first generation of purchases.

He bought them off me, probably a whole tail price. At the time it was more than I bought it for, but less than retail. They were quick cash deals and I would come to him, basically, I would find a property that I would like, one or two that had higher ROI or meta-profile that I was targeting and in order to raise funds, I would sell one of my older properties to him for cash and then quickly either 1031 or buy the second property so we were both building on each other. Utilizing each other’s, we didn’t have a partnership or anything like that, but I was getting out of one property giving it to him and moving into you know, selling one, buying two type deal.

Brandon: You know, you mentioned the concept of doubling down and that’s something that I love—I love that concept of—you know a lot of people buy a bad property. A lot of people got into real estate during the height of the market and they screwed up just like your boss may have and you know a lot of people use that fear to never get into real estate again. That’s kind of like the person in the stock market right where the stock market crashes and they get scared and they sell off all their property. It’s like.

Serge: That’s right.

Brandon: The smart ones, they’re like, “Oh the stock market crashed, I’m going to buy up a whole bunch more that way when it goes up, everything—you know a rising tide lifts all ships, same thing with real estate.”

Josh: My question on that whole double down was did you have him—did you recommend that he hold to that property, that loser property and get other properties to off set it or were you telling him dump that sucker and get it on some other better properties at a cheaper price?

Serge: No, my recommendation was to absolutely keep this property, he would have lost money on paper.

Josh: Yes.

Serge: It’s clear that this was not a time to be selling. Remember, this was 2009-2010, the sky was falling. All you heard on the news was how bad of an investment real estate was. All you heard was how you know nobody is building, there’s ghost towns everywhere, stay out of Arizona. Our population is no longer growing. It was doom and gloom everywhere.

Josh: Sure.

Serge: It was really kind of a contrarian play, but my advice was, “Hey, keep this. Your value will increase eventually, but double down to the point where your negative return, as an entire portfolio will turn into a positive because the returns out there were so great.” You know, he was someone has hesitant—you know following, being in the Bay Area, not seeing what was going on in the ground, but all it took was you know, a couple local drives. Here’s some of the properties I own. You know, here’s—I’d show him one that I’m remodeling, one that’s rented, I’d show him kind of exactly what I’m doing and he was a numbers guy as well, another CPA. He saw exactly what it was and it was common sense. It’s common sense so.

Josh: What about the argument of taking the capital and even though you lose some of your money, but taking that, selling it, then using that cash to reapply towards other properties? It sounds like you had other cash available so it was kind of irrelevant.

Serge: Well, he had other cash available and there was no capital out of that property so he bought it on a conventional loan. His down payment, any equity he had in it was long gone.

Josh: Okay.

Serge: He would have sold it, he would have lost it. He would have damaged his credit, and you know, for a mid-forties year old guy, with a lot of assets, your credit is gold. Last thing you’re going to do is damage your credit to get out of deal that’s very small.

Josh: Got you.

Serge: To your bottom line networth.

Josh: I got you. I got you. Alright, cool so you’ve clearly built up a pretty nice portfolio. You started with this—we’ll call it this 62K pool property, what happened next? You know, you suddenly got the fever and you’re like okay, you know what I don’t want to flip. I want to start building a buy and hold portfolio for long term cash and what was you know, how did you kind of build up this criteria that you have what other criteria that you currently use and how did things start to grow from there because I think a lot of our listeners are like, “Okay, cool. I can buy one property, but then what? How do I start building this? How do I plan it?”

Serge: Sure, sure so after that first one and I started seeing real returns, real rent checks, I got the fever at that point. I said, “Okay and this would have been probably, February, March 2009, our inventory was sky rocketing. I was actively looking at the market, what were properties selling for? What were properties renting for?” I said, “Okay, looking at the analytics and the pure metrics of the real estate market in Metro Phoenix.” I looked at the—I still remember this one graph that showed income as a proportion—income to real estate prices. The ratio of income for the Metro Phoenix area to the cost of real estate and the relationship over the past 30 years and that real estate always, Arizona is a cyclical market, very ups, very fast downs.

It would always fall at a very specific ratio, which was defined as equilibrium, okay. Over the 30 years, it was always, homes were always trading at that equilibrium price. Low and behold by the end of Q1 2009, we were probable 70% below that equilibrium price. What I saw was that we were—that the market had over corrected to a point where it was just—it was a no brainer—it was a no brainer.

I said, “Okay, how long does this window going to last? How long am I going to be able to buy property? Can I buy enough property?” After that first house, I realized, “Hey, this is nice. This thousand dollar paycheck coming in every single month.”

It’s a nice little supplement to what I’m doing, but at the end of the day, I don’t want to work nine to five until I’m either sick or have to be retired or get corporate downsized which was all that—all I saw around me growing up. I said, “ How do I get to critical mass and how many houses is critical mass and what’s the profile of homes that’s going to get me there.” I didn’t really know what that profile was at the time, but I knew I wanted to stand out in the market so I did research you know just periphery, Craigslist, what are other people renting? Everybody was renting the same profile of property. It was a three-two, newer property renting in my east valley region that I was focused on from $900 to a $1,000. I said, “Okay, if could—if I buy this type of house and I got to compete with everybody else on the market that’s so desperate to rent their house because they can’t sell it. How long is it going to take me to rent? What’s going to be my competitive advantage?”

Brandon: Yes.

Serge: I quickly came to the determination that my sweet spot was going to be a minimum of four bedrooms. I wanted a four-bedroom because I didn’t see the amount of inventory in the four-bedroom segment as I did the three-bedroom segment and then small things that would attract tenants. Things like—things that people like in Arizona, RV gates, pools, in law units. Different things that would make my house stand apart that wouldn’t be a part of that mass, okay. The second step I made was to bail out of California. I said, “Makes absolutely zero sense for me to hold this house that’s a—I bought for $800,000.” I still had equity in it. The California market, hadn’t cratered yet and I realized that my risk of holding that house compared to my potential gains of moving that money into Arizona real estate, simply didn’t make sense. I quickly sold my California house, captured about $100,000 of equity that I had in that. Now I had a small bankroll to move forward on purchasing quickly on the Arizona market.

Josh: Nice.

Brandon: Hey will you. Sorry, we’re you still working your job at this point?

Serge: Yes so I was working my job. Worked my job all the way until the end of 2012 so at that point I’m property managing, I got one house at this point. I’m property managing that house. I’m on talking to real estate agents.

You know, contractors, brokers, I’m kind of in the real estate game at this point and working a pretty demanding job. You know, there were a lot of detractors around me. I had the—my best friend who was hired at the company was at an office next to saying, “You’re going to lose your job dude. You’re risking a good high paying job for what? For a lot of risk.”

My parents kept saying, you know, “Don’t risk your job. Don’t risk your job.” To me, I saw it completely different. I saw it as an opportunity of a lifetime that prices are so low right now and the return is so high and you know, I come from an economic mindset where you know, at the end of the day, all profits fall to nothing. I knew if I’m able to get 20% returns right now that that’s not going to last long. I don’t care how much inventory is coming. I don’t care how many foreclosures are on the market or scheduled to come on the market, as soon as others see that I’m getting 20%, they’re all going to jump in, be it hedge funds, be it anybody else. Hedge funds weren’t in our market yet.

Josh: Yes.

Serge: Nobody was in our market. Everybody was kind of licking their wounds at the time the real estate investors that were active in 2004 to 2007, they were wiped out.

Josh: Yes.

Serge: They were just kind of like, “Whoa what happened?” They were out of it so there were investors competing, but I kind of had the market to myself or this small window and I saw my biggest risk at that point wasn’t losing my corporate job. My biggest risk was not buying enough properties to get to critical mass while this window was open for me.

Josh: You saw an opportunity.

Serge: I was that window was pleading.

Josh: Yes, yes.

Brandon: You know I just talked about that with a friend of mine who’s kind of like my real estate mentor out here. We talked about you know one of the reasons sometimes I feel like my business is a little bit chaotic is because we—and he feels the same way. Sometimes it feels like there was such opportunities at that time, all I could concentrate was we’ve got this window that I’ll never see again for the rest of my life. Buy whatever I can and like both of us just went on this buying spree and you kind of did the same thing. You’re like—that was the focus was—was buying it. We can figure out how to manage it. Now I’ve moved into that phase of my kind of career, but interesting hearing somebody say that as well.

Josh: I’ve got a couple questions that come out of the past few things that you’re talking about. The first thing is you had mentioned your competitive advantage and I think that’s something we don’t probably talk about enough on the podcasts. I don’t really see us talk about enough on the site. You said, you had focused on you know four-twos, you had focused on RV gates, and you know kind of looking at what’s a demographic of the average person who’s going to buy, who’s going to rent a property in a this kind of area that nobody’s kind of renting to right now. You found this hole and I want—you know I guess I just want to dig in on that a little bit and see you know what kind of advice do you have for other people who you know, yes everyone’s like the three-twos are pretty much—pretty bread and butter investor properties, but you want a different approach. You said, “Well, yes, that’s great, but everybody’s there. Where is everybody not?” How do people go and find where everybody isn’t?

Serge: Yes, I think that’s absolutely critical. You start by looking at what’s on the market. What are your competitors renting? What are they renting it for and then you work backwards and say are these landlords even profitable? You know, so they’ve got newer inventory. They’ve got stuff built in 2000, you know about what that sells for. You know that they spend say $120,000 and you know they’re renting it for a $1,000 bucks and they’re saying okay, are they making money? Probably not, okay, is that the model that I wan to follow? Probably not, you know, then there was a different mindset back then. Their model was, “Hey, the cost of construction in $200,000. I’m buying for $120. I’m getting a fabulous deal right?”

Josh: Right.

Serge: That’s not what I wanted to do. I wanted cash flow to replace my corporate income. I was very focused on that.

Josh: Yes.

Serge: That’s what I had do so I had to have the highest ROI, okay. I had to use the leverage while I had it and I had to have a competitive advantage that would allow my properties to rent for the top dollar. What I was doing, I was buying my first round of purchases, ended up being somewhat older properties. I’d say early ‘70s, maybe the late ‘60’s, mid ‘70s type deal, but they had things that people wanted. Like I mentioned the RV gate, that there would be a pool. What that would allow me to do is to rent that home that maybe older, maybe not in as a desirable neighborhood as all of my competitors, but I was getting the same price.

Josh: Yes.

Serge: I was renting for $1,200 or $1,300 where I was buying for $60-$70 because I had features, you know I was in non-HOA community which was also very important.

Josh: Yes.

Serge: To not have HOAs. I was in a non-HOA community and I had.

Josh: That’s rare in Arizona too, isn’t?

Serge: Very rare.

Josh: Arizona is flushed with HOAs. Almost everything right?

Serge: Absolutely.

Josh: Yes.

Serge: Absolutely. Very rare and at the time, having hindsight you know, I was able to build a profile and go after that profile because there was so much inventory and there was so—you know, you’re able to do this today, you take kind of what’s given to you.

Josh: Yes.

Serge: What I ended up with was these properties that had these features that you know, like one property had an in law suite. You know, while no one else on the market had that so a property probably without that in law suite, with that age, in that neighborhood, may have rented for $900, but I was getting $1,250.

Josh: Yes.

Serge: You know, which was similar to a 2000 what someone might get for a four bedroom, 2,000 square feet built in 2000 that he had to pay $180 for.

Josh: Yes.

Serge: I only had to pay $50 for mine, but because I had that feature, I was able to really squeeze ROI out of these properties.

Josh: That’s great.

Serge: The problem I had after this kind of first generation of purchases that I found was yes, I was getting higher rents, but I wasn’t attracting the tenants necessarily that were—that I wanted, okay. I’d have a house that may have been bigger, but it was bigger because it had two or three unlicensed editions. Yes, that’s one of the reasons I got it so cheap, but low and behold, these additions started falling apart. You know, these houses started, these tenants started moving in second and third families. Kind of this first generation of purchases and what I did was I went back and said, okay, my goal after the first purchase was to acquire unique, desirable properties, maximize my ROI and buy them as fast as possible. I had gotten to about four or five at that point and I looked at my short-term goals and said am I reaching them? On an ROI perspective I was, but over the long run I could start seeing these capital improvements, these issues starting to eat away at me and I knew that over the long run perhaps this wasn’t the exact profile of property that I needed.

Josh: Got you.

Serge: With the help of my wife, we kind sat down and said, “Hey, are we buying the right profile of property?" Is this buying the cheapest property at this point really the smartest thing to do considering, you know, how much equity we’re buying into and how bullish we were that three-four years down the road these properties were to be worth so much more. We kind of took a 180 at that point and this was probably by mid to late 2009, after we kind of acquired our first batch of properties. We said, “Hey, this profile, you know, we like that we’re buying properties that are unique. We liked that we’re getting this kind of ROI, but we want to buy newer conforming standard type properties that still have some features, but don’t have all the unlicensed additions, or what I call functional obsolescence, right?”

Josh: Of course.

Serge: It’s got to have a garage, it’s got to have two bathrooms, and so the sweet spot that we found was early to mid ‘80s, which was before the prevalence of HOAs, established neighborhoods that were close to job centers, that had again four bedrooms, had the garage, most of them had pools, corner lots, RV gates, and kind of those features. They cost a little bit more. Instead of buying them for $50 to $60 like the first generation of properties, these were costing $65 to maybe $85, okay. The ROI on paper didn’t look as good, but what I quickly realized that in reality, the ROI was through the roof.

Josh: Well, you were plotting over 30 years at this point or 20 or whatever it is.

Serge: Exactly.

Josh: Yes.

Brandon: You know, this reminds me of that post that Ben Leybovich wrote on the blog, what a week ago called like.

Josh: Don’t bring that one up.

Brandon: Called like, “Newbies Take Note, Don’t Buy $30,000 Houses,” and that was exactly his point was by buying these cheap, cheap, crappy houses, you are effectively setting yourself up for failure later on because of all the weird things that come along with them.

Josh: Yes.

Brandon: Yes, that—I think it has almost 200 comments now and that article just tons and tons of debate on whether or not that’s good or bad idea or not. I’ll link to that obviously in the show notes at BiggerPockets.com/show60, but.

Josh: Yes, no it was a good article and I think you bring up a good point, but I mean the whole premise of it is you know, again I think about the newer investors and the newer investors like—well they’re always thinking short term. Most don’t really see the light ten years out, 15 years out, 20 years out, but you know, when you’re buying and holding, the word is buying and holding. You’re holding and you have to put that into the picture and you really have to run the numbers 20 or 30 years out to see what you’re holding on to. If you’re buying a crappy property and not fixing it up immediately, you know not putting new roofs on, not replacing you know boilers and water heaters and all that stuff. You’re going to have to do it at some point.

Serge: Yes.

Josh: It’s all going to come back down the line. No, that’s great. Hey, so I wanted to jump back to something you had mentioned earlier. You had said something about the real estate agents that you work with and you know, I think it’s a big question that a lot of real estate investors have is you know, “How do I find these properties? What do I do? Do I go find one agent? Do I go find 15 agents in 15 different areas? Do I set them to compete against each other?” What are you doing on that front? Clearly, you’re using more than one agent by your use of the word agents. Or maybe I.

Serge: My advice is—no my advice is simple, get you license, get your license. It’s easy, it’s—it doesn’t take a lot of time. It’s cheap. My wife who is a big partner with me in this, she got her real estate agent license early in the process, I think by 2010.

Josh: Okay.

Serge: At the end of the day, for—real estate agent—I personal don’t think is an investor’s best friend. It’s just a lot of work, particularly then making—I’m making ten offers a day. I’m making a lot of offers, silencing, I simply didn’t have time to go and look at every single on of these properties especially since it was multiple offers situations. It was highly competitive even back then so last thing I could was to drive around town look at 40 houses so I’m having send out offers, silencing, and low and behold one of these offers sticks, I go look at the house and it’s not—it doesn’t fit what I’m trying to do. The agent’s upset, you know. I got to wait for the agent to get the lock to get into the house and I was losing a lot of agents. It was kind of a revolving door. You know, houses would come up on the MLS or wherever it was and it was you know, you couldn’t make an offer ‘til tomorrow, by then, the house was gone so it wasn’t advantageous to us. It was at the end of the day—we had to control our own deals.

Josh: Were you doing any marketing to find deals outside of the MLS or were you finding most of your properties from MLS or maybe even auctions.

Serge: You know, I was never did any yellow letters or any marketing or anything like that. We got our deals—in the beginning, from the MLS and as we built relationships later on in the community, deals would come to us. Also had relationships with a couple early—they weren’t even hedge funds, it was just a group of guys from Texas who had a deal with Fannie Mae. They were buying basically one million dollars for 30 properties.

These were Fannie Mae properties that were on the market for probably you know 90 to 180 days, some were bad, some were good. They were buying blind packages throughout Arizona, 30 houses for a million dollars. They would get their houses and their exit strategy was land contracts so they wouldn’t touch them, they wouldn’t fix them, they would simply put up signs that say own to rent and they would get tenants in there. I built a relationship with them and what they would do is every package they would buy, they would send me their list. They would let me cherry pick three or four of these and so pretty you know they’d buy them for 30 each. They’d let me cherry, I’d buy them for $40, you know something along those lines, but they were still you know last MLS price was probably $60 or $70 so I was still getting it way below what I thought was retail at the price and it was kind of a win-win scenario for both of us. It was a nice way to get some wholesale property.

Josh: Nice, nice so what I’m hearing is not only are you not marketing, you’re literally, the way you’re finding deals, is by having relationships with people. I mean, that sounds crazy, isn’t it? I mean how could you find properties just through relationships?

Serge: That’s how it works in real estate especially now when the inventory is so hard to find. You got to leverage those properties, you know and the guys—the days of just buying on the MLS are over.

Josh: How do you build those relationships? How does somebody who’s a new investor, who’s like you know what? Okay, I’m looking at the MLS there’s not a lot of stuff out there. I’ve got a property or two or none and I want to build the relationships so I could kind of get this so called funnel of potential properties coming my way. How do you do that?

Serge: You know, it’s difficult and everybody will give you a different answer of how they get it. I personally don’t think I was the best at doing that. I didn’t have time, you know with the corporate job. I didn’t have time to go to all my local REA meetings and work, call around a bunch of brokers and it was the natural relationships that I built along the way, the portfolio lender that got me to the tenth lawn, the people that they knew that may have been selling properties. It was a real estate agent that had purchased, that had helped another investor purchase property or sell property that connected me.

Josh: Got you.

Serge: It’s contractor that works for another investor. It’s kind of people you meet along the way, keeping your ears open, being respectful, you know finding what people have and horse trading at the end of the day.

Josh: Got you. Got you. Alright, you had mentioned critical mass. Your whole goal here is this mad rush to pick up these properties before you know you’re priced out of the market. How did you do it? I mean you know, either you made a hell of a lot of money and I’m going to tell my kids to go be a CPA or you use other people’s money or loans or borrowed or begged or stole, I don’t know what you did, but how did you get the cash to buy up all of these units and all of these properties? How did you do it?

Serge: Well, it was really a confluence of events. My first four were standard, conventional Fannie Mae, you know, Blackstar, G Max type of loans, no issue at all there. I had good credit, good high paying job. Contrary to popular belief, people with credit and income were able to get loans back then so I got my first four there. Then at that point I had discovered BP and the whole concept of [Inaudible][49:00].

Josh: What is that? What’s BP?

Serge: BiggerPockets.

Josh: Oh back at BiggerPockets. Sorry.

Serge: I think my first post at that time was you know, how do you get past this four property wall? You know, I had lenders telling me you’re—we can’t lend to you. You got four loans, you’re a pariah so it was I think Joel Owens said, “You know, call around. Call regional banks.

You’ll find somebody. Somebody—you’ll find somebody to lend.” I found a regional bank that happened to be literally across the street from my office. Built a relationship with their broker.

Explained to them exactly what I do, what kind of investor I am, what my goals are, what I’m trying to get to and they said, “Hey, we’ll fund you as many as you need. You know as long as these properties cash flow and you’re buying them well under appraisal—appraised value, we don’t have a limit, okay.” At that point, then you know my eyes just opened and I said okay now, now I can take this to another level so the first batch of properties, I purchased with the equity from my California sale. Then the cash flow started building and I had a good corporate income. I didn’t have a lot of expenses. My home in Arizona wasn’t multimillion-dollar mansion with the big mortgage payment. I didn’t have a lot of expenses and so I had a little bit of a bankroll at that time combined with the 35% down loans that the portfolio lender was getting me.

Josh: How much was it? You said 35% down.

Serge: It was 35% down. Yes.

Josh: Okay.

Serge: Well it was 35% of purchase price plus the repair so if I spent another $10,000 on repair, whatever they’d give me 35% of that as long as I could prove the repair.

Josh: Okay.

Brandon: Okay cool so if you have 68 units total then. I mean that was the second round. How many did you pick up in that second round and are you—are we just doing single family homes all the way to 68 or what happens?

Serge: No, no, that would be pretty tough. That would be pretty tough.

Brandon: Yes.

Serge: The first ten got me to was through the portfolio lender. I think the first 12 and then once I got to 12, the portfolio lender gave me a call and said, “Hey, I’m sorry our rules changed. We can’t fund you more than ten now. Ten—even though we keep all these on our balance sheet, ten is our limit so you’re basically cut off.” I called around another bunch of banks and no go. I couldn’t find any more lenders at that point and I hadn’t had real estate on my tax returns for more than two years at that point in time so again, I was back to pariah status with the banks.

I was pretty much cut off. Luckily at that time, the company I was working for got an offer to purchase—to basically sell the company so large public concern, basically started negotiations with our management to buy out our company and I was—I’d been with the company for eight years. I was an equity holder with some stock options and I saw the writing on the wall. I said, “Hey, if we sell this company, you know, I’ll get a nice little check out of this and I could really take real estate to the next level at that point.” We—about eight months later, we sold the company and I got that check.

Brandon: Nice.

Josh: You didn’t have to quit your fulltime job. Your fulltime quit you and left you with a nice fat paycheck to go with it.

Serge: It left me with a paycheck. They said all the right things, “Hey we want to keep you.” No problem. I knew the writing was on the wall. I didn’t care.

Again, I was in a rush for time. It was a land grab. I knew even if we didn’t sell the company that my days would be limited one way or the other. At that time, we sold the company and that’s when, this was—so what happened in our market, once I got to about 12 SFRs, we had that tax credit that Obama, I think it was $7,500 owner occupant tax credit. That really had an effect on our market.

All of the sudden you saw primary buyers jump right back. All these deals that I was getting for $60-$70,000 renting for $1,400 bucks, they just appeared literally over night. There was probably three-four months stretch where I’m like, “Whoa, this window closed on me this fast?” What happened at that time, the single family window closed and this was another pivot point. I talk about pivot points all of the time is that having goals is important and having long term goals is important, but looking at them.

For me my goals are one sheet of paper—a one sheet paper has strategic comparatives that says what am I going after? What asset class am I targeting, what’s the price range? You know, how am I going to get there? You know, how am I going to pay for them? How am I going to buy them?

How many do I want to buy? I look at it and I say, “Okay, if that window has closed and I’m not able to purchase these? What am I going to purchase or am I going to completely refocus and maybe get out of real estate, you know.” At that time, the SFR game was quickly closing and I didn’t know if it would come back after the tax credit or it was gone forever. The multifamily had opened.

What you saw was an on—was a flood of now fourplexes, duplexes, you know, 16 unit, 18 unit, 32 unit, complexes coming on the market that had generally lagged the for—it takes a little bit longer to foreclose on those for whatever reason. They got tied up, but now those started hitting the market. I made a pivot point. Even though I hadn’t been a multifamily investor at the time. I educated myself on what does it mean to be a multifamily investor? What is a you know, what’s going to be my competitive advantage in this market? Kind of took everything I learned from the SFR game and applied it to the multifamily and said, “Okay, this is going to be the year that I’m going to start acquiring multifamily and kind of put single-family behind me.”

Brandon: Nice, nice so how did that happen, I guess what came first?

Serge: What came first, there was a fourplex or no, it was a fiveplex that came on the market through I think one of the auction sites. That was—it was five units and what I like about it is it was very similar to what I was doing with SFR. With multifamily what I didn’t want is I didn’t want the standard, you know, 1960 built owner pays for all the utilities, all one bedrooms, you know, that—I don’t want to say tenant class, but that’s where I’m competing against every single multifamily owner so I was again looking for something somewhat unique where how am I going to keep my units filled. What I liked about this specific fourplex was that it had a great mix of units. It had two large three bedrooms. It had a two bedroom and two one bedrooms so it was a diverse mix. There was some things I didn’t like about it. There was a lot of risk there. It was in a complex of ten fiveplexes where one owner had owned eight of the buildings and two owners owned the other two and all the owners were in some stage of foreclosure because their—they had purchased during the height—between $200-$250,000 per fourplex.

Brandon: Whoa. That sounds like a mess.

Serge: Or per fiveplex. It was a mess so I’m looking at the first—the first one of these ten that came to the market and I think it was prized at $60,000 or $55,000.

Josh: For this $55K or $60K for the five units?

Serge: Five units.

Josh: For all five units, $60,000?

Serge: All five units now.

Josh: These are—are these like I mean, are there walls inside these properties?

Serge: Yes, remember this is 2010 now.

Josh: I don’t care what year it is. Hold on $60,000 five units? We’re not in Detroit now are we?

Serge: No, no. That’s what was so great about our market.

Josh: Wow! Oh my!

Serge: I will say this wasn’t—it’s not like this was you know class A downtown Phoenix. This was Pinal County, which was one county over from Maricopa County. It was in a—economically depressed at the time area. It was.

Josh: $60,000 for five units?

Serge: Well six—I bought it—I ended up buying it I think for $42,000.

Brandon: Wow.

Josh: Wait, wait, wait so $42,000 for five units?

Serge: $42,000.

Brandon: I can hear your New York accent coming through there, Josh.

Josh: Is it anger? It’s not anger?

Brandon: It’s like the angry guy at the street, yelling, like throwing hot dogs.

Josh: Hold on. Wow! Unbelievable.

Serge: That’s what I was thinking, but there was a ton of risk there.

Josh: Oh sure, sure.

Serge: I tried to get partnered and say, “Hey, let’s try to buy all ten of these buildings.” No one would touch it.

Josh: Yes.

Serge: Even at those prices, you know. My gross rents, I calculated would be close to $2,500 bucks, $2,300 to $2,500 bucks, but there was a ton of risk there. There were nine other buildings that were decrepit. That were some state in foreclosure, 100% unoccupied, there wasn’t one tenant in there. Each unit needed work, needed roofs, plumbing, I mean it was—it was just wasn’t maintained for the past five years.

There were weeds so there needed to be an HOA set up, you know. For whoever ends up buying other buildings, there needed to be an HOA to pay for common area maintenance. There was a common area pool, a common area office, 4.4 acres of land so as you can imagine, buying one fiveplex in a community of ten of them, where you just don’t know what’s going to happen to the other nine, that’s—there’s a lot of risk there even though it’s $60,000.

Josh: Yes. Well, I’m going to jump in because I had that exact experience and so I had four families and what happened was it was in these areas that I paid nowhere close to as little as you paid; however, these properties were decrepit. They were falling apart, people were moving out and what was happening was I was being surrounded. This property I had was being surrounded by properties that didn’t—that were vacant, that were becoming problem properties. You had people you know sitting on the stoop all day doing drugs, you know. In the end, I said, you know what, I don’t have the fortitude or the intestinal fortitude to stick around. I wasn’t going buy all the other properties. I wasn’t interested at this point. I was like, I could either buy everybody else and you know, clean up the whole area around it or I got to get the hell out of here. I just—I ran, I was like, this doesn’t make sense before it goes, you know—before it can even attract a single tenant. I got to go.

Serge: That’s right.

Josh: It is a challenge.

Serge: There is a risk there.

Josh: Yes.

Serge: The risk there, it doesn’t matter if you’re buying for $40,000 or you get it for free right?

Josh: Yes, yes.

Serge: If you can’t make money, who cares how cheap you buy it?

Josh: Well and that’s why I rip on Detroit and you know I take some of it back. You know, but in the end, that’s exactly why we warn people. It’s not about how cheap the property is. Those numbers are awesome. I was busting chops about it, but like in the end, it doesn’t matter. If you get a $60,000 property and you can’t fill it then you’re got a loser.

Serge: Yes or if it falls apart on you, you know, constantly because it’s so old and run down.

Josh: Yes.

Serge: Yes, that was the challenge and I didn’t know. I mean I—it was—I didn’t know. Do I want to get into multi-families? Do I want this class of tenant? Can I handle you know the HOA? There’s just so many question marks, but in the end of the day, I jumped in got it fixed, got it remodeled, and got it filled pretty quick. You know, sat down with the lawyer, wrote up new HOA documents became the defector president of the HOA, and mind you I’m the only owner now. There’s still nine empty buildings. I own one of them.

Josh: Yes.

Serge: Now I have the HOA and I have control and any new owner that’s going buy over there has to go through me. I knew the other nine would be coming up so it was kind of like an experiment.

Josh: Just like a mob boss.

Serge: Yes, pretty much, pretty much right? It’s a, “Hey, you know can I do this? Can I do this fourplex, can I deal with this with this class of tenant? Can I really realize this gross $2,500 income and what’s that going to net out to at the end of the day?”

Josh: Yes.

Serge: You know?

Josh: Did you buy the other nine? I’m guessing you started to accumulate some of the other properties or maybe I’m wrong.

Serge: It’s actually a funny story.

Josh: Disappoint me.

Serge: I was telling Brandon about this awhile back. I actually—in this complex I bought and sold these buildings, four times now.

Brandon: Wow.

Josh: All of them or?

Serge: I bought the first building. I fixed it and I rented it. Then a second building came up. I bought that one even cheaper. I think I bought that one for $38 and it was in worse condition. Fixed it and rented it, right. Now I’m managing it all at the same time with my SFRs and holding down the job and these—I got to tell you—these units and these tenants were driving me absolutely crazy at that point, right.

Josh: Oh sure, sure.

Serge: Now, I’m all in right? My chips are in, I got two of the buildings, now it’s like each time one comes up, it’s like I got to buy it as a defensive move right? I don’t want someone else coming in that’s going to ruin my investment so I bought my third building. Here I am on 15 units right? Seven more that are going to be coming up and had a lot of money into these—into these complexes because of the repairs and everything else. The tenants were driving me absolutely crazy. At that time, an older gentleman who was working with his church group came in and bought the fourth one that came on market and so now he’s paying into my HOA. I’m sharing kind of—the HOA I’m sharing the common area maintenance to hold mine. He bought the first one. He bought the fourth one that came one, he bought. Then he bought the fifth one that came on. Then he bought the sixth so after about six months in, he owned three and I owned three, okay.

Josh: Yes.

Serge: He kept telling me, “Hey.”

Brandon: Hey you said, sorry, you said that was a church group right?

Serge: It was a church group.

Brandon: That was like—that was a charity kind of like—some kind of ministry thing going on there. Or what was that?

Serge: Yes, it was convoluted so he was kind of shady. He was trying to take—he was trying to.

Josh: The church guy was kind of shady?

Serge: The church guy, yes, believe it or not.

Josh: Nice. Was it a youth minister named Brandon Turner? I’m just checking.

Brandon: I’m not shady.

Serge: No, what he was doing. He was doing—he was doing—they wanted to place a you know, single moms, rehabilitated drug addicts that kind of stuff in these units. To me, that was just a red flag.

Brandon: It never—that never works.

Serge: That scared.

Brandon: That never works.

Serge: It never works.

Josh: That doesn’t go well.

Serge: What he did—he was just running a train wreck over there. I can see everything was falling so what he said is, “Hey Serge, I’d love to buy those three building off you and consolidate and eventually own the entire complex for our church.” He was raising money from the church group to buy these units and he was trying to use it as kind of trying to make all of his side income so he didn’t have the unit that wasn’t church related and he could make the income off of that.

Josh: Ooh. Slick. Shady, shady, shady.

Serge: That’s right, that’s right so I said okay, you want to them fabulous. You can have all of them so I sold the three to him. I think sold them, each one for $70,000. I was into each probably for $55, maybe $60 so I didn’t make out, but I tell you what, driving home, with like the last time I had visited the property, I was just the excitement of being out of that project. Wow! That was great! I’m glad I sold, right?

Josh: Yes.

Serge: I took that money and said, “Okay, I didn’t really like that multifamily experience that much, but I see the writing on the wall, I see that multifamily could be profitable. It could work. I like the—that you can take a multifamily, you can get it cash flowing and it’s going to be worth what you know a function of that cash flow. I like that principle.” I found another project, which was three fourplexes in a row in a somewhat rural area.

Josh: What kind of area, Brandon?

Brandon: Rural.

Serge: I saw that coming. It was three fourplexes in a row. What’s fabulous about it again, each units was 1,400 square feet and three bedrooms. Again, you know kind of something different where I could compete with the SFR class because of the size, these were all individually parceled and these were all townhomes. I bought, you’re going to love these numbers Josh. I bought the first one, it was again they all came up in separate times, no HOA. I bought the first one for $29,000.

Josh: This was a fourplex?

Serge: A fourplex, yes and these were I mean flat roofs.

Josh: When you say fourplex, you’re not talking about like a single house with four rooms, you’re talking about a building with four individual properties that could be rented out. It’s not.

Serge: This was a 5,500 square feet total with twelve bedrooms.

Josh: Was it made of legos?

Serge: No, no, stucco 1979 built, all separately metered for water, all separately—all utilities separate, nice curb appeal in a rural neighborhood, right off the freeway, halfway to [Inaudible][1:05:50].

Josh: Who was selling it, I mean was this owned by the bank at this point or was it just somebody out of their luck or stupid? I mean who sells this?

Serge: One was Fannie Mae.

Josh: Oh, well there you go.

Serge: Yes, these were all foreclosures. One was Fannie Mae, I bought one from Fannie Mae, I bought one at auction and I bought one at trustee auction, one from Fannie Mae and one at—one from my quasi-hedge fund from Texas.

Josh: The Fannie Mae, how do you buy property from Fannie Mae? Just for those people who don’t know.

Serge: There’s a number of ways. Now you just go to HomePath, you can see what they’re selling, what foreclosures they have.

Josh: HomePath.com right?

Serge: Yes, HomePath.com and then just put in an offer through a regular agent. I think at that time, HomePath didn’t even exist. I was just coming online, but what was happening at that time was a lot of this inventory was getting stale for Fannie Mae and after it would sit—sit on the MLS for whatever, six months, they would off load it to one of the auction companies through Auction.com, Hudson and Marshall, Williams and Williams.

Josh: Yes.

Serge: There’s a number of them and what they would do is they would basically run it through and sometimes you get lucky, but Fannie Mae at that point was taking pretty much any offer they could get. Once it got to that point, once it sat on the market for a long time. Any offer they can get and it was—listing price was I think $99,000.

Josh: Yes.

Brandon: You offered them, what did you say, $20?

Serge: $29.

Brandon: $29, wow.

Serge: We got it for $29, yes.

Josh: It was listed for $99, you put in an offer at $29?

Serge: No, no, no I think I got tied up at $36 and then I was actually having reservations at $36. I was like I don’t want this big remodel. I don’t want to have to fix the roof. It was insane. I mean the roof was caved in.

Brandon: Yes.

Serge: The windows were broken. It was vandalized. It was a wreck, but I saw the potential and I was actually going to. I was actually—I remember, I was in Disney World with my family and I was supposed to close and I’m telling my wife, I’m not even going to answer the phone.

I’m not going to close this. I’m going to lose my thousand dollar deposit. I don’t want to do this. I don’t want this remodel. I don’t want to deal with this.

I’m getting tired of real estate and the agent kept calling me, calling me, I wasn’t taking her call. She left me a message, “Serge, this is the last call, Fannie Mae’s willing to sell it to you for $29,000. They want to take $7,000 off closed by the end of the month. If you close by the 31st, which was like tomorrow.”

I’m like, “Ugh.” I call her back, I’m like, “Fine. I’ll take it, $29,000.” Let’s do it. Now that it turned up. I still hold all three fourplexes and those turned out to be the best investment out of everything I’ve made.

They’ve been—I’ve been able to attract elderly retirees, primarily from out of state. Average rental is $700. I pay zero utilities. I fixed them up with tile and made them very rent—rent long term friendly so I’m not constantly doing remodels. They’re always, you know, 95% occupancy, always occupied and they’re just a cash cow for me. They’re fabulous.

Josh: Fantastic.

Brandon: That’s awesome.

Josh: That’s awesome. Alright, so we’re now in these mid sized units and rumor has it there’s kind of a pop up so all of a sudden, you decide, I don’t know this story goes, but I’ve got in my notes here, there’s a unit in the—was it—30s. That sounds right?

Serge: That right so I was finishing my—the twelve units—finishing that getting it loaded and I’m saying okay I can see the potential of multifamily. At that the time, the older man that back to the complex where I had three buildings that I sold to the church group. That was a complete failure at that point right. He had consolidated seven of the ten buildings for 32 units and he had you know, drug addicts in and out. He had.

Josh: Of course.

Serge: Everybody was taking advantage of him right.

Josh: He was taking advantage of everybody.

Serge: Yes.

Josh: It was a mutual.

Serge: It was terrible.

Josh: Yes, yes.

Serge: It was terrible.

Josh: Yes.

Serge: He said, “Hey, come down to the complex. Meet me in the office. Let’s talk.” I said, “Alright.” I came down to the complex and it was a wreck. I mean feral cats everywhere, probably two hundreds cats.

Josh: That’s Brandon’s house.

Serge: It’s Brandon’s dream house. Yes.

Brandon: I have like three of my own and like seven outside. That’s not two hundred.

Serge: I mean this guy he was quick to tell me that he been investing for 40 years and he knows everything and bla bla bla, but he was making every mistake in the book. I mean trading rent for HVAC repair, trading rent for flooring repair to people that weren’t qualified to do it. I mean just every mistake in the book. He said, “Listen, I can’t do this anymore.

Let me sell these back to you.” I said, “You know, I’m not interested. I’m not interested in you know in taking 32 units. I don’t have the money to do all these repairs, to do all this.” He said, “Well, what would it take? You know, how much can I sell these to you for to be able to sell it to you?”

I gave him a number and he laughed. He said, “Absolutely no way. You know, that’s so much. I have to take such a big loss and my investors would have to take such a big loss.” I said, “Well, I understand. You know, if you want we’ll list for you on the market. You know, we can strap a coat of paint on it and see what we can get.”

The market was still bad at that time. It was slowly starting to recover and hadn’t heard from him since and I maintain the relationship. I call him, see how he’s doing, how can I help you know, can I get you, I have an extra bucket of paint. Here I can help you. It’s kind of donation. Everything was through donations. He was using the church, you know getting donated carpet, donated paint, donated everything.

Josh: Wow, wow.

Serge: You know, I maintain contact with him and then out of the blue. I get a phone call you know in my office Stanley Corporate America, the guy says, “Hey, remember that number that you told me? If you can come to close on Friday, this was a Monday, with that number, I will—I’ll sell them to you.” My eyes got wide open and I said, “Well, that comes out to really low number per unit, I don’t really want to talk numbers at this moment because.”

Josh: Sure.

Serge: “This complex is for sale.” He agreed to it. He was having health problems. He tried to sell it somehow through a broker and some of the deals fell through and he needed the money quick. He had investors at his throat. He had to pay back some of his investors. I said, “Okay.” When I told him okay, I didn’t have that money in my bank account.

Josh: Right.

Serge: I’m sitting here. I hung up the phone and said, “Okay, how am I going to come up with this amount by Friday?” I called my friend that I had been selling some property to in the Bay Area that I spoke about before. I said, “Hey, I have this opportunity, seven buildings, 32 units, how would you feel about buying two of the buildings? I’ll buy five, you buy two, that’ll bridge me to what I need and maybe if you don’t like the experience. I’ll buy them back from you at a later point in time. We’ll figure it out. “It’s cheap enough,” he said. At that point, we had the relationship where he didn’t even need to look at stuff. He said, “Hey, if you say it’s a good deal, Serge, I’m on board. Let’s do this.” He kicked down a big portion for it. I paid for the rest. I still was running the HOA so even though I sold him the three buildings, I was running the HOA.

Josh: You were an absentee HOA president.

Serge: Yes, because he couldn’t do it. I had the system. I had the accounting software and everything so I was doing it.

Josh: Nice. Nice.

Serge: It was a natural transition. I purchased the 32 units from him. Ten of the units were held by my investor friend and I quickly set to turning around. I said, “Okay, you know, I’m going to meet the kick out, the classic turn around plan.”

You know, I just put it all on paper. What do I got to do? What—in order for me, I knew that 32 units should be worth well over a million dollars, maybe not in that market, at that point in time, but clearly, that’s what it should be worth. I said, “Okay, working backwards. If my exit is going to be say a million dollars, where does my net operating income need to be.” I need operating to be in that location, investors I knew would command around a ten percent cap so I knew my net operating income needed to be around $10,000 meaning I knew my gross income needed to be in the $20,000 range, which it wasn’t even close to at that time.

Josh: Yes.

Serge: I said, “Okay, to get into the $20,000 range, what are my rents need to be? What are my big expenses that I need to contain? What capital improvements do I need to make? What kind of tenants am I going to be able to get in here? I realize it would be a one to two year project. Now, about two—over two years into it and I’m just about there. I’m at 100% occupancy.

Josh: Wow.

Serge: I set up a—one of the first things I did was I contracted with a company that sub-metered all the utilities. What they did is they came in, they installed sub-meters on every single unit, okay. They took the town bill for water as well as trash and sewer and they basically sub-divided. What they did is they said, “Okay, here’s what it costs.” Transitioned to bill the tenant so what they do is they bill the tenant for actual water usage and a rubs base system for the sewer and trash, all on one bill. I continued to pay the town for the water usage and they go after the tenant for the water, trash, and sewer. I’m basically in essence getting a 100% reimbursement from the tenants.

Josh: Wow.

Brandon: Wow.

Josh: Wow. On the you know, first thing that comes to mind really quick is that you know, investors get a bad wrap and you’re looking you see this guy Serge here who’s basically taking this property 32 units, that have been dilapidated, filled with junkies and you know, and people who aren’t taking care of it and he’s putting all of this money to improve the neighborhood. You know like I don’t know, it—I just like, it constantly hits me that like—why do investors—there’s some bad ones, but like look at what were doing, look at what investors are doing to improve neighborhoods and you’re the classic story of just that with this. It’s you know, I wish more people would look at investors in a different light like just hearing these kinds of stories. Like, you know, you’re putting a lot of money to fix things up and improve things, you know.

Serge: I’ll tell you, it’s been an incredibly rewarding—when I’m on site, I have police officers that I’ve built relationships with that say, “Wow, what you’ve done with this place and with this complex has done for the community.”

Josh: Yes.

Serge: For five years, you know, it attracted so much drug use and activity that now, you know, I’m screening tenants. I’ve got good tenants in there. I got nice green grass, swimming pool, families.

Josh: Yes.

Serge: It’s just the dramatic change to a community has been tremendous and very rewarding.

Josh: Then really really quickly you had 32 units. I’m guessing some around 32 of them were occupied by somebody who probably wasn’t paying rent. How was the process of throwing all those folks out? I’m guessing you threw them all out or had to evict or something and you know when you’re evicting that many people, units, was that just like you know. I could see that—there being kind of riots in the street.

Serge: Well, no, you know what. I was actually pretty easy. When I got it, it was about 30% maybe 40% occupied, the church group was occupying one building and I told them day one, hey beat it. You know, this isn’t.

Josh: That’s very ungodly of you by the way.

Serge: You’re not living for free, 15 people in the units, supposedly you know, feel sorry for me. That wasn’t happening so that was quick. One of the first moves I made was I had—there was resident manager who had lived there in the past before we kind of—my first round with the complex who was working, who was part of the church group, who was part of the church, who the church got to be the resident manager, but she was fabulous. She was like the only person there that was very responsible, understood it.

She had moved. She couldn’t stand to working with the older guy who was the previous owner and she had moved with her husband to Montana and so one of the first things I did was reach out to her, get in touch, and say, “Hey, you know, I—if I’m getting these 32 units back, I want you there, I want you on site.” She was a resident of the town, born and raised there, knew everybody in the town, knew all the bad players, all the good players, had—knew the police officers, knew the church, knew the high school teachers, knew everybody. For me, that was a huge advantage in, you know screening these people. Everybody is going to come and tell you, “Hey, I’m great. I have a job, etcetera.” She knows if this person says they’re working at Subway. She knows if they’re working at Subway.

Josh: Yes.

Serge: If this person’s a drug addict. She knows they are drug addicts so I got her back. I gave her a free unit and I paid her what she was worth. You know, you get a lot of these people that say, “Hey, well it’s only 32 units, you can’t really afford, you know you don’t have the economies of scale, you can’t afford to have a resident manager, you can’t afford to have someone living in a free unit.” My response is always, “I can’t afford not to.”

Brandon: Yes.

Serge: I can’t afford not to have somebody on site. Eyes and ears for me, that can tell me what’s happening at my property at all times. Just little things like trash. You know, you talk about trash. You can’t have trash on the floor.

Josh: Yes.

Serge: You know, and who’s going to watch over that for you? It’s not going to be your tenants.

Brandon: Yes.

Serge: It’s got to be somebody that has your best interest in mind and if you’re not paying them right, that’s not going to happen.

Josh: Yes.

Brandon: Yes, that’s really good advice. I want to touch on that and I want to go back. Actually, I need to go back and talk to you about the rubs system. You talked about sub-metering your water, I mean that—if what I’m thinking of what you’re talking about, you’re taking about each tenant then pays their water, which means you don’t have a water bill or a garbage bill anymore. Is that correct?

Serge: No, that’s not correct so me as the owner.

Josh: Ouch.

Serge: Here’s how it works. As the owner I set up a water. There’s one main meter right? That main meter goes to each and every unit and each and every unit has a shut off in the front, okay. The city comes and they do a meter read on that one main and they bill me for that water, okay. What I found was happening was, my utilities, my water usage ate up all my cash flow. Every single month with that many buildings there was always a leak in one of the buildings or if a tenant was mad, they’d leave the water running and it would equal literally $700 to a $900 bill every single month. One of the building would have that. God forbid two or three of the buildings, you know.

Josh: Yes.

Serge: It mainly was terrible. I looked at it and I said, “This just can’t continue.” The city continues billing me, okay. The company that I engaged went over there. They set up a sub-meter on each and every one of the shut offs in front of each unit.

That meters the water usage per unit. I incorporated it into my lease that the tenants are responsible through his company to call the company upon. We shut off the water before the tenant moves in. The tenant moves in, in order for them to get their water turned on, they have to call this company and say, “Hey, this is my, this is the meter read out as it is today, this is when I moved in, set up me with water.” The tenant thinks they’re dealing with a city or a municipality or a utility right?

They don’t know that it’s just kind of a passer so then my resident manager goes, turns on the water, unlocks the key. At the end of the month, the company sends their representative, reads their meters, and send out a professional bill with the water usage, plus allocation of this sewer and trash to the tenant. The tenant then has 30 days to pay and if they don’t pay they call my resident manager and we shut off the water.

Brandon: Wow.

Serge: Simple as that.

Josh: You still—now you’re still on the line for the water if at that point they fail to pay correct?

Serge: If they fail to pay then I’m on the line for the water. That’s right so for example, a tenant gets into you know, gets in economic difficulty, doesn’t pay rent, you know, midnight move out. They leave a water bill. I’m paying that water bill regardless. That’s just back then.

Josh: Okay.

Brandon: Well.

Josh: Okay, so it doesn’t follow them. It’s not tied to them or their credit report.

Serge: Theoretically it is. I’m—I know what water consumption they use so I add it to their final tenant statement so say they booked in the middle of the night. They didn’t pay me last month’s rent and give me 30 day notice. They owe me $700, I’ll tack on the $100 in utility, hopefully they have a job. If I screen right they have a job and so I’ll get a judgment and I’ll hand over the files to my collection attorney who will go after them for the $700 plus the $100 utility, garnish wages and eventually, hopefully get some of that back.

Brandon: Wow so here’s what excites me about that in—I mean I have my water bill in my apartment complex is about $1,800 a month. My garbage bill is a thousand. That’s $2,800 a month. I’m going to get really nerdy here so people might want to, you know, ignore me for a second, but $2,800 a month times 12 months is $33,000 a year. I’m paying $33,600 a year, I’m paying. If I could transfer that to my tenants, not only does that give me an extra $33,000 a year in cash flow at a 10% cap rate, that increases the value of my property $333,000 right?

Serge: Absolutely, absolutely.

Brandon: What’s the downside? Why doesn’t everybody do this?

Serge: I’ll tell you what. You know and you can look in the forums.

Josh: It’s got to be expensive to do right?

Serge: Well, the contract I got didn’t cost me a dime so the way it works with the company that I’m using, they have their own meters. They came, they did all the installations for free. They sign me to a four-year contract. They charged $5.45 as a rental per meter and $5.95 per unit for the read sheet, but here’s the greatest part about it.

Josh: That’s nothing.

Serge: Well that gets added onto the tenant’s bill. The tenant pays it so the owner basically pays—mainly it’s a no brainer.

Josh: Oh yes. Wow.

Serge: The downside and you’ll see the debate is if you’re in a competitive environment, if you’re in a city where there’s a lot of multi-families and all of your competitors are paying for water, sewer, and trash then you’re—theoretically your tenants are going to say, “Why would I be on the hook for utilities when I can go across the street and not be on the hook for utilities.

Josh: Yes.

Serge: That was my main concern. It had a lot of debate. I didn’t know if I wanted to do this. I had a lot of debate, you know, would I lose tenants. Would my occupancy rate go down? How would the tenants react and here’s what I found. I’ve had zero impact so what I did is in essence, I did market research on their—in this town, there’s really two other large multifamily players. I got their list of prices on their three bedroom, two bedroom, and one bedroom so which I offer. I was already cheaper than them so what I did is I still raised my prices, but I made sure my prices were about $10-$25 cheaper than them, okay. I advertised it, said nothing about utilities. I just advertised it as $25 bucks cheaper than them.

Josh: Yes.

Serge: We get a lot of people calling, you know, look at the units. I made my units marketable. I made sure my units were clean, showed well, that’s always important, you know.

Josh: Yes.

Serge: You don’t want to rent trash. Then they’d show up and then they’d ask questions you know, what does the owner pay for? What not? My resident manager was doing the showings. I trained her. I said, “This is exactly what you say. You say tenant pays for all utilities just as is standard for every single single family home.” No different and if they give you kick back and say, “Hey, you know, well, ABC apartment next door doesn’t make you pay for that.” You say, “Well, hey, that’s why we’re able to keep our prices low and that’s why we’re able to offer the most competitive amenities, units, square footage. What we offer is the best in town and being able to conserve utilities. Hey, we’re conservationist here. We care about water. We’re in Arizona.” You know what I mean?

Josh: Nice.

Serge: We care about that.

Josh: Yes.

Serge: We found that allows us to have the best offer and tenants say, “Hey, okay, that’s fine.”

Josh: Yes.

Serge: For whatever reason, I can’t tell you why, you know, but they just don’t notice.

Josh: Yes.

Serge: When they’re shopping for an apartment, all they care about is what is the rent?

Josh: Well.

Serge: What is the rent? What is the move in cost?

Josh: Let me ask you this. You know on multis, I would never buy a multifamily where I was responsible for water ever ever ever again. I’ve lost so much blood and money—thanks to tenants just turning the tap on.

Serge: Yes.

Josh: Or you know leaving the hose on or whatever it is. The only thing that I could imagine would be a sticker shock and you know, ultimately, it’s not really your problem or responsibility. Oh my god, I had no idea water costs this much money. I’ve got my sink on all day. I’ve got my tub filled. I got to get out of here. Has that resulted, just out of curiosity, in you having any minor headaches. I mean it’s not your headache, again, because it’s your—their problem.

Serge: Honestly, maybe, that where—I don’t even know about it, but in—I’ve never had a tenant tell me I’m leaving because the water bill is too high.

Josh: Yes.

Serge: Or I’m leaving because somebody else pays for utilities and I don’t.

Josh: Yes.

Serge: I tell my resident manager at move in, you know, I’m a follower of that book Land Lording on Autopilot.

Brandon: Yes.

Serge: You know you train your tenants right up front. You show them, I’m a resident manager, sit them down and say, “You need to budget for utilities. Your water bill on moderate usage is going to be $30 to $40 a month. Your sewer and trash is going to be another $20 to $30. You need to budget for that. During the summer, air conditioning costs are very very high. Don’t come complaining to us that your air conditioner is broke because your bill is $400 bucks. If you run your air conditioner at 72 degrees, it’s going to be $400 to $500 so you need to budget that.” We tell them that up front. Then it comes down to screening appropriately and making sure they have a job and can pay for it.

Josh: Yes.

Brandon: Yes. That’s awesome.

Josh: Definitely. Alright so you got this 32 unit. It sounds like you’re putting it up for sale. What—tell us really quickly and we’re going to kind of move onto the next section of the show here. What’s the plan here forward? You know, you’ve got all these units. You got this one big building that you’ve turned around. You’re selling, you know hopefully, good luck on that of course. Do you continue add multi-families, for turn around where do you go next?

Serge: You know, our multifamily market has become so saturated and the returns are—or the cap rates are ridiculous. The stuff I’m seeing selling is just you know, it.

Josh: What are you seeing?

Serge: Three or four—I’m seeing fourplexes that I probably I wouldn’t have bought for $40,000, selling for a quarter a million dollars. Ben Leybovich wrote about this in his syndication as well. You know, kind of the stake numbers out there in the multifamily segment. It’s just so pervasive. You really have to be an owner/operator to know what the real numbers are.

If you’re going into this blind, you’ve never owned a multifamily, particularly an older one. There’s going to be people that get hurt. There’s going to be people that get really really hurt so I’m not seeing anything in multifamily and I’ve been an opportunistic investor. I’ll take what’s given to me so I’m again on a pivot point right now.

Where I’m looking for—to get out of my market as far as the counties that I work in. The cap rates just aren’t available anymore. We’ve had such tremendous appreciation out here. I’ve taken my network, built a small network of contractors and agents and such in a county that’s south—southern Arizona where there’s still are some deals on newer single families, again rural areas, there’s a military base down there so I did my research on the demographics, the growth.

I’m starting to purchase some single families down there. At the end of the day though, I’m really at an inflection point where it’s—do I grow this business and systemize it and hire employees and get to the next level or do I slow it down. You know, figure out the management aspect of it and be happy with the cash flow.

Josh: Got you.

Brandon: Yes, got you. Got you. Wow, I mean this probably our longest show yet, but I still have like 500 notes that I want to get to so we’re going to probably have to you know wrap it up fairly soon, but let me ask you a couple more questions that I really wanted to get to specifically because I’m selfish and I like to know things that help me. How do you actually—the specifics of your business. You mentioned a resident manager and then your property management company, do you also have employees, handymen on staff or do you hire them out? How does kind of the actual functionality of your business work?

Serge: The first thing I did was buy a property management software, I use Buildium.

Brandon: What’s that?

Serge: It’s been fantastic. I couldn’t imagine life without it. That was the first thing. The second thing, I set up the legal framework for a Propifer, a legitimate management company. I have my resident manager that manages the 32 units and I also pay her on top of that to be basically my operational manager for the single families and so what she does is she’s basically the call center so if a tenant has a problem with a maintenance request or whatever, has an issue, wants to yell at somebody, they call her. They don’t even know I exist at this point. She also does all the turns and all the movements, all the moving, all the tenant walk throughs, the tenant inspections so what I did was I kind of work backwards and said, “Okay, what are the touch points in this business that need me, that I’m spending a lot of my time in and how do I get out of those?” I narrowed it down to tenant showing, which I absolutely can’t stand. That’s the worst part of the business in my mind.

Brandon: Yes.

Serge: I can’t stand showing units. That’s tenant showings, tenant phone calls, maintenance requests, basically all tenant contact so I offloaded all.

Josh: You don’t like people?

Serge: I love people. I just don’t like hearing complaints. I don’t like showings. Showing drive me crazy.

That’s a whole another tangent right? What she’s allowed me to do is offload the touch points that can’t be automated, okay. Everything else that could be automated, I automated so tenants—or all my tenants are trained do not call me, do not call my operational manager, emergency or not all tenant request are filled out online so they fill out the tenant request online. They fill out their tenant request online, emails me, emails her, and in some cases, it emails my vendors.

I have a list of specific vendors that I have for each regional area that I’m in, gets the email and my operational manager will either just simply forward that email to the vendor for that. Maybe it’s an HVAC repair. I specifically got this list of vendors that are pre-authorized. I got price lists that are agreed upon. She’ll simply forward that to them. The vendor will call the tenant, schedule, get it done, invoice me. I’ll do it so for me right now, the remaining touch points of the business are really accounts payable, accounting, journal entries, and managing my operational manager so really one employee.

Brandon: Okay, alright. That’s awesome. That’s actually really really helpful so.

Josh: Yes, fantastic.

Brandon: Cool.

Josh: Alright, well Serge, I mean this is fantastic so far. Really really great information. We are going to.

Announcer: It’s time for the Fire Round.

Josh: That’s where I get interrupted by our angry guy.

Brandon: Yes.

Josh: Actually, yes it is the Fire Round so Brandon.

Brandon: The Fire Round is the part of the show where and you know this. We ask everyone questions directly from the forums so we’re going to fire these at you and you can fire them right back. Question number one, for a buy and hold investor, does it make more sense to sell when the market seem s to be peaking and then buy again when it drops or just to hold continually and ignore the market.

Serge: You know what I’m a believer that you hold your best properties. That you look at the performance of each property, every single year and when the markets are high, you use it as an opportunity to basically sell your worst performing properties, lock in the gains and perhaps buy better performing properties or buy a different asset class altogether or invest out of state or invest where it makes sense for whatever you’re doing, but to just blindly say, I’m going to buy and hold. Sometimes, it doesn’t make sense. You sell your dogs, you keep your best properties, but you’re always got to be looking because it never works out how you thought it would when you bought it on paper.

Brandon: Yes.

Josh: Tweetable topic right there.

Brandon: Yes, nice, nice.

Josh: Alright, how can I estimate how much expenses will be on a multifamily property.

Serge: Oh my god. I started 60%, water or no water. I mean people talk about the 50% rule. I haven’t seen less than 60%.

Josh: Wait, wait, wait. Hold on. Hold on Serge because you know, because a lot of really experience real estate investor say that’s crazy you know, I get 20% on my properties. I got 10%. Your 60% is not an unreasonable number to see.

Serge: Here’s the thing, it’s not unreasonable. The problem with multifamily you have pros and cons. People always talk about the pros. One roof—people under all in one place, easier to manage, etcetera etcetera, but what you don’t hear when your average rental is $500 bucks, well guess what there’s still two sinks. There’s still two toilets, there’s still all the components in there are there. When you’re only making $500 per unit, the repairs still need to happen.

Brandon: Yes.

Serge: You know what I mean so there is something—depreciation is real. These things do fall apart.

Josh: Yes.

Serge: These things do need to be repaired when you’re only making $500, your expenses add up. Now you have a lot of other expenses that you just don’t have on single family. You don’t have trash, water, sewer, landscaping, ground maintenance, the million of things. You know, bed bugs, I’ve never had bed bugs in a single family house, but in a multifamily.

Josh: Guys don’t move into Serge’s properties.

Serge: It just happens.

Josh: It is dirty.

Serge: It happens right.

Brandon: I’m at like, I think I hit 62% I think for last year for my expenses before taking in the mortgage so yes, I mean definitely the 50% rule wasn’t enough for my property. Especially with that $33,000 a year you know utility payment, but.

Serge: You probably did well at that 62%, you know.

Brandon: Well, look. I’m happy.

Josh: Well let me ask you the two of you then. I mean on these larger multis, I mean what would say would be a safe assumption for a new multifamily investor. You know, we say 50% on single families. Generally, if you can find a 50% property, you know, you’re in really good shape. You know, odds are it’s going to be great, but you’re still going to do the due diligence. What kind of screen would you set for a big multi, I mean would it be 60%, would it be 55%-70% what do you think?

Serge: You know, I think it would depend on the class of the asset. You know, certainly a class A asset that’s less than ten years old, that’s sub-metered for everything. Probably 50%, may be reasonable, you know. There are other multi-families. This is what multifamily investors just really need to grasp. There are certain multifamily properties that simply will not make money and I don’t care how cheap you buy them for. I don’t care what they are. If they’re in the wrong location, they’re the wrong age, they’re built the wrong way, you can get them for free and you will lose money every single year. You just got to understand that because everyone wants that crazy screaming bargain and in this game, there’s so many traps. Half of these multi-families I look at, I say, “Wow. I wouldn’t take that for free. Literally. I wouldn’t it’s a liability, not an asset.”

Brandon: Yes.

Serge: A lot of these building are liabilities.

Brandon: There was a wise investor I once heard say, “That you can go broke buying good deals.” I thought that was very I guess, fundamental in my education growing up. It’s a real estate investor so. Very true. Alright, let’s go on to the next question. Is—would you invest in an area that had a slow population decline?

Serge: You know what, I probably wouldn’t. That’s one of the big things and that’s one of the reasons I love Arizona. Our population has been continuously growing. We had a blip during the recession where we didn’t—our population did not grow, but to me, population, income, and jobs, drives real estate. Simple as that. You got to look at other factors obviously. You know, is there new building going on? How are you meeting the demand of the population growth? If you have population growth and you have job growth, that’s music to a buy and hold investor’s ears. That’s the first thing that I look at and I’ve never invested out of state. I have been stuck on Arizona. I love the combination of low property taxes, cheap insurance.

Josh: Scorpions.

Serge: Yes, scorpions are a problem, but you know it’s got a fabulous combination for the real estate investor. You know, no snow storms, no freezing pipes, no none sense. No none sense with 3% tax, 2% tax like in Texas. I mean every state I look at, I just can’t get over some of these factors.

Josh: You know what, you don’t want to buy property in New Jersey.

Serge: New Jersey, oh man.

Josh: Imagine that, yes. Alright so sorry Jersey I had to pick on you at some point. Do you think there’s a way to do some major—minor renovations to a unit that’s occupied and do you have any tips on that? Last question.

Serge: Minor renovations to a unit that’s already occupied?

Josh: Yes sir.

Serge: If it’s occupied why renovate it?

Josh: That’s a good point.

Serge: If they’re paying, I mean, I see no point. You rented it as is why would you renovate it to have your tenant destroy it?

Josh: Hey, don’t get mad at me. I’m just reading what the guy wrote. Geez.

Serge: I know. I’ve never done it. I guess there is, but it’s just that—it sounds like a big headache.

Josh: I tell you, I had a unit that was rented out and the unit was fine and at some point there in between, there was giant hole in the kitchen floor. Like I mean, straight up like the thing had to be the size of a big garbage bin, garbage can and like how do these happen? How does that happen?

Serge: Oh my god.

Josh: Well, you know, I just fell through. You didn’t fall through, dude. What did you do? Like jack hammer that sucker? I mean like that doesn’t just kind of happen so.

Serge: Yes, I had a tenant leave a boat in one of my pools. It was a midnight move out. I go to the backyard.

Josh: A boat.

Serge: I got a big boat just floating my pool.

Josh: Like a 15 foot boat? Like a real boat?

Serge: Like a real boat? I’m like are you kidding me?

Brandon: That’s funny.

Josh: No you go spinning on the beach on that thing right?

Serge: Oh god.

Josh: That’s crazy.

Brandon: That’s crazy.

Josh: Alright, cool, well listen, so we’re going to move on to the last section of the show here which is the.

Announcer: Famous Four.

Josh: The Famous Four, we’ve got these same four questions that we like to ask everybody and I will start. What is you favorite real estate book and I think I know what it is?

Serge: No, I like that Land Lording on Autopilot.

Josh: Yes.

Brandon: Yes.

Serge: It was a good one. You know, just a good kind of reality check. Also, there’s one of the Kiyosaki books, The Real Book Of Real Estate where he’s got his advisors talking about. In the beginning of my career, that was nice because very broad, a lot of different types of real estate and the CPA talking and the lawyer talking and kind of the all asset. I liked both of those.

Brandon: Yes.

Josh: Right on.

Brandon: I don’t think anybody has that one, but that was a good one. It was different than most real estate books I’ve read because it was much bigger picture so cool.

Serge: Yes.

Brandon: What about your favorite business book, non-real estate?

Serge: You know what I liked the Jim Collins, From Good to Great.

Brandon: Okay, yes.

Serge: it’s kind of about what sets apart different leaders. Also, the Seven Habits of High Successful People, Covey.

Josh: Yes, good stuff. Right on.

Brandon: Cool. Alright, Josh.

Josh: Yes, that’s me. This is hobbies, what kind of hobbies? What do you do for fun?

Serge: I’m big on hiking. I got a house on northern Arizona area, in the woods, about an hour and half out. We go hiking, there’s lakes out there. I’ve got a nine-month old baby so I’m kind of a homebody right now. You know and spending with the family.

Josh: Right on.

Brandon: Cool.

Josh: Excellent. Excellent.

Brandon: Alright, final question from me. What do you believe sets apart successful investors from those who fail?

Serge: You know, starting. You know starting. You know, I hear about this analysis paralysis, thinking, waiting for the right deal. It doesn’t matter if the first deal is bad. At least you learned. Starting is the big one and then I’m not big on getting too caught up in a big ten-page business plan. Lay out five bullet points on what you want to achieve on your first round. Then be quick to pivot. Pivot every time.

Brandon: Yes.

Serge: Take the market what the market gives you. You know what I mean. Don’t try to force a strategy on a market that’s not receptive to that strategy. Take what the market gives you.

Josh: That’s great.

Brandon: Are you a?

Serge: Get out of that if it doesn’t work.

Brandon: Are you a Lien Start Up fan? The book Lien Start Up?

Serge: Yes.

Brandon: I was going to say, you sound like a Lien Start Up guy. I love the Lien Start Up. Amazing book.

Josh: Take what the market gives you, yet another quotable topic here.

Serge: Yes.

Josh: For sure. For sure. Alright, Serge it was awesome. Listen so before we let you go. How can people find out more information about you?

Serge: You know what, I’m on BP. That’s the big one. BP, I’m on Facebook, all the social media. Just holler. Holler at me.

Josh: Yes.

Brandon: Awesome.

Josh: We’ll point to all the links in the show notes to your profile at BiggerPockets.com/show60 and for everybody listening if you any questions for Serge, definitely make sure to hit him up in those show notes at BiggerPockets.com/show60. Serge, thank you so much. It’s been a pleasure and we’ll look forward to seeing you around on BiggerPockets.

Serge: Nice. Thanks for having me guys.

Brandon: Alright, thank you.

Josh: Alright, everybody that was Serge Shukhat, real estate investor in Arizona who has hopefully blown your minds about single family and multifamily buy and hold real estate investing. There is enough information in there to, I don’t know. If you haven’t taken notes or if you didn’t get anything from the show you are a—I think you’re probably well on your way to doing very well so.

Brandon: Cool, yes, great show. I mean—I have like a whole like two pages of notes here. Just while we were recording it, note after note after note of things that I need to go look into and I already looked into the sub-metering thing. Already hitting just Google and I found there’s a company in Seattle that will do it so I will be calling them as soon as I hang up the phone here.

Josh: Awesome. Good stuff. Alright guys, well listen, we hope you enjoyed the show, BiggerPockets.com/show60 and that’s BiggerPockets.com/show60 where you can reach out to Serge, ask him any questions. Otherwise jump on the site, get active, get involved, invite your friends, tell them about the podcast, help people that you know who are trying to build their wealth and improve their lives by introducing them to BiggerPockets and helping them learn how to be successful. Let everybody know who we are and what were doing and hopefully we will see you again on the next show, Show 61. Thanks for listening. I’m Josh Dorkin, signing off.

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