After working in corporate America for 1 year, LA native Josh Gorokhovsky found his investing niche of built-to-rent real estate. Learning from a local developer as his mentor, he narrowed down his ideal buyer and got to work. Josh talks about scoring good deals on land, how to keep construction costs low, and cultivating a good team to keep construction running smoothly.
Josh Gorokhovsky Real Estate Background:
- Runs Telos Properties, a vertically integrated development firm
- 5 years of real estate investing experience
- Portfolio consists of 20 projects completed, 6 stabilized units under management, and 24 under construction
- Based in Los Angeles, CA
- Say hi to him at: www.telosproperties.com
- Best Ever Book: Real Estate Titans
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TRANSCRIPTION
Joe Fairless: Best Ever listeners, how are you doing? Welcome to the Best Real Estate Investing Advice Ever Show. I’m Joe Fairless. This is the world’s longest-running daily real estate investing podcast, where we only talk about the best advice ever. We don’t get into any of the fluffy stuff. With us today, Josh Gorokhovsky.
How are you doing, Josh?
Josh Gorokhovsky: I’m doing well. How are you doing?
Joe Fairless: Well, I’m glad to hear that and I’m doing well also. A little bit about Josh. He runs Telos Properties, which is a vertically integrated development firm. He’s got five years of real estate investing experience. His portfolio consists of 20 completed projects and six stabilized units under management and 24 currently under construction. Based in Los Angeles, California.
With that being said, Josh, do you want to give the Best Ever Listeners a little bit more about your background and your current focus?
Josh Gorokhovsky: Yes, I would love to. And thank you for having me on, first and foremost. My background – I come from very humble beginnings. In college, I dabbled around in a few different things. I was studying business, was trying to figure out if I was going to go into sports or entertainment… And just like many people, I stumbled upon the book Rich Dad Poor Dad, and reached out to a mentor of mine at the time, family friend, and asked him if he knew anybody that was successfully working in real estate mentor.
So he introduced me to my now mentor, who is a local real estate investor and developer here in Los Angeles. I work at his office now. I started learning under his wing, took a corporate job while still learning under him, and did that for about a year before I quit that corporate job and dived into real estate full-time. So fast forward five years, like you mentioned, to today, I now have quite a few projects going on, and have been slowly growing the business ever since.
Joe Fairless: Well, we have a lot to talk about and to unpack there. And thank you for the introduction. What was your corporate job that you left after a year?
Josh Gorokhovsky: I worked for Oracle here in Los Angeles, which is a large tech company.
Joe Fairless: What were you doing specifically?
Josh Gorokhovsky: I was doing tech sales, which is my background. I’ve been doing sales since I was 15 and a half years old; it’s what I knew.
Joe Fairless: What was your first sales’ job?
Josh Gorokhovsky: I worked as a telemarketer for my uncle’s Home Improvement company when I was 15 and a half.
Joe Fairless: Wow. What was that experience like?
Josh Gorokhovsky: It was bittersweet. Looking back on it, it was an awesome foundation for me; in this industry and in life, to be honest, you deal with a lot of rejection, but you build a backbone and you realize how to communicate with different types of personalities, different types of people… So overall is a great experience. I recommend it to a lot of people.
Joe Fairless: By build a backbone, can you give us an example?
Josh Gorokhovsky: Yes. Like I said, first and foremost dealing with rejection. 99% of that job is getting cursed out and getting rejected on the phone. So you’ve got to deal with that on a daily basis. And then once you start getting a little momentum and start building a little bit of rapport with these people online, it kind of teaches you how to transition a conversation, transition through a sales funnel, how to stay organized, how to be on top of your daily routines to be more successful… So it’s a really good foundation for any type of sales job, or even running your own business one day.
Joe Fairless: Absolutely, I can only imagine. How do you mentally and emotionally stay sharp and on a high level whenever you’re getting rejected 99% of the time?
Josh Gorokhovsky: A lot of coffee. And besides that, it’s a lot of self-coaching. It’s not taking it personal. It’s just a part of the business; every no is one step closer to a yes. And that’s true in real estate as well. Every deal you analyze is not going to be a deal. Every property you put a bid in on is not going to end up being yours. So it’s just telling yourself that it’s part of the game, and it’s one step closer to getting to where you need to be.
Joe Fairless: Mm-hmm. Okay, so you quit that job after—well, we’re talking about telemarketing, but I’m fast-forwarding now to Oracle. You quit the tech sales job after a year, you decided to focus on development full time. What specifically are you developing and where?
Josh Gorokhovsky: So it’s all in Los Angeles, and I’m focusing specifically on ground-up duplex and double-duplex developments. So two to four units, and most of these that are being built are built to rent, so I’m trying to keep as many of them as I can. And also do some smaller single-family rehab and flip them whenever I can get my hands on them.
Joe Fairless: As an outsider who does not live in Los Angeles, but there’s a stereotype that I had in my mind that there’s no way someone could build and rent out and make money on that, because of the cost to acquire and the cost of construction… But clearly, I was wrong. So can you talk about some specific numbers on a project?
Josh Gorokhovsky: Yes. So the way that I’m able to make these work is my building costs are very inexpensive. And I’m also getting good deals, relatively, on the land. So I can give you an example on one that I recently finished up in the North Hollywood area of Los Angeles. We purchased the land for just under $700,000.
Joe Fairless: How much land is it? Maybe like a quarter acre, or what?
Josh Gorokhovsky: It’s almost 7,000 square feet. It was a 6750 to be exact.
Joe Fairless: Right.
Josh Gorokhovsky: Yeah, so just big enough to fit some nice-sized units on there. So we built two duplexes, two standalone buildings, three storeys each, townhouse style, with their own garages. And the hard construction costs, not including any soft costs, like plans, permits, demolition, so on and so forth, it was about $850,000, which came out to roughly around 100 bucks a square foot for the buildable square footage; throw in some more soft costs in there, as well as my holding costs for my construction loan, and we brought it in at just about $1.8 million, all in.
Joe Fairless: Okay.
Josh Gorokhovsky: The property appraised for just over $2.2 million. And that one, I did end up selling for $2.235 million. But I’m doing two similar projects right next door; those are same scope, and I will be keeping those. So we’ll be refinancing those once I’m done, and then cash-flowing them.
Joe Fairless: What do they rent for?
Josh Gorokhovsky: There were two four-bedroom units and two three-bedroom units. The three-bedroom units went for about $3,100, and then the four-bedroom units went for $3,700.
Joe Fairless: Does that cash flow on a property that’s purchased for 2.235?
Josh Gorokhovsky: Well, for the end-user, no—
Joe Fairless: For them maybe not?
Josh Gorokhovsky: Yes, whoever ended up buying… It does cash flow; it’s not going to be your greatest cash-flowing asset, but it is brand new, and you get a lot of depreciation on it, obviously. And then there’s not going to be much maintenance on it. And then you don’t have upside on it, unfortunately, but I think whoever bought it is more just trying to place their money in something that’s newer, rather than—
Joe Fairless: Okay.
Josh Gorokhovsky: —being so hands on and trying to turn the units, fix it up and so on and so forth.
Break: [07:50] to [09:51]
Joe Fairless: Who is the buyer type? Can you describe who buys that from you?
Josh Gorokhovsky: It’s on the market, so it wasn’t anybody that I knew specifically, but I think it was a gentleman who was a lawyer, who lived in the area, and just like I said, he wanted to park his money somewhere. But I think it’d be a lot of these lawyers, doctors that are not trying to spend a lot of time with these assets, just kind of somewhere to park their money and let it grow. Or somebody perhaps that’s 1031-ing into something, so their back’s a little bit against the wall. So I think those are the typical buyers.
There have been some funds that have been looking to buy, and I don’t know how much you know about opportunity zones, but these properties were in an opportunity zone, so I was approached by some opportunity zone funds that were looking to place their capital into these projects, just for those tax benefits.
Joe Fairless: Did they buy any from you?
Josh Gorokhovsky: I was selling this building right before the Coronavirus lockdown, so I was getting a decent amount of traction on it, and then right when that hit, it was still on the market, so then all hell broke loose…
Joe Fairless: Right.
Josh Gorokhovsky: …and everybody rescinded their offers and I was getting a bunch of lowball offers… So it was not a great time to be selling, but I did get some offers before that.
Joe Fairless: What was the highest offer you got before the pandemic?
Josh Gorokhovsky: It was 2.3.
Joe Fairless: Okay. Well, you did pretty well, then. They didn’t shave too much off the price?
Josh Gorokhovsky: No, I kind of bit down and waited a little bit, and it panned out.
Joe Fairless: When did you end up closing on this deal?
Josh Gorokhovsky: This closed in, I want to say it was May or June—
Joe Fairless: Oh, quick. Okay.
Josh Gorokhovsky: -—of last year. Yes.
Joe Fairless: Got it. So when you mentioned soft costs, you gave some examples of hard costs. What are some examples of soft costs?
Josh Gorokhovsky: The architectural engineering for getting your plans done, demolition of the existing property that was there before, paying for the permits, obviously, to the city, and all the city fees.
Joe Fairless: Okay, got it.
Josh Gorokhovsky: [unintelligible [00:11:37].24] up very quickly.
Joe Fairless: You gave those examples earlier; sorry, my bad. So what are examples of hard costs, the $850,000?
Josh Gorokhovsky: That’s the actual construction. So we have foundational, framing, windows, so on and so forth.
Joe Fairless: So how are you able to get it done cheaper than what is typical?
Josh Gorokhovsky: Well, that’s just the luxury that I have of working under my mentor who’s had almost 30 years of experience in the Los Angeles market. He’s been developing for several years, so I kind of just assumed a lot of his resources. And over time being an industry, I’ve made my own connections, I have my own subcontractors just from being in the field, and being on several job sites. So I do run about half of these projects myself, and then half with his contractors. So it’s just their cost.
Joe Fairless: Okay, so it’s mainly the relationships that have been built with the subcontractors and getting it at preferred pricing, that’s where you saved the most money?
Josh Gorokhovsky: Yes, and material. I do have some resources for materials. Same thing, whether it’s through one of my contractors or through my mentor, just long-standing relationships with these vendors that give us preferred pricing on material.
Joe Fairless: Let’s talk about the numbers for a deal that you have held. Can you give us those numbers?
Josh Gorokhovsky: Yes, we can talk about — I’ve built duplex in South LA, which is a more inexpensive market in Los Angeles, more up and coming market. So we purchased the land there for $330,000. That lot was, I believe, around 5,400 square feet. So just big enough for a nice duplex. The hard construction on that project, which is the building cost, was $340,000; I was all the way into the project for $700,000. And that one appraised for 815k. We refinanced it, got a low leverage loan, I believe a 65% loan. So we ended up leaving about $180,000 in the project, when it was all said and done, equity left in the deal. And those are larger units. One of them is a five-bedroom, one of them is a four-bedroom. And those are renting out for $3,300 on the five-bedroom, and $3,000 on the four-bedroom. So that one is cash-flowing.
We have very minimal expenses on these projects, which is also why I like them; there’s not much going on there. So after we pay the mortgage, a lot of it is going into our pocket. So I believe that one’s cash-flowing about 12% to 14% cash on cash right now.
Joe Fairless: Nice work. The one thing I’ve noticed with the both of these deals in North Hollywood and the duplex in South LA – and I’d like to know if it’s a coincidence or not – the land, the hard costs and the soft costs for each project are about the same. So the land for North Hollywood is 700k, hard costs 850k, and the soft costs were somewhere around that. And then for South LA 330k-340k, and somewhere around 340k for soft. Is that a coincidence?
Josh Gorokhovsky: Yes, I think it’s just the scope of the projects that we do. We try to keep them very cookie cutter and that’s why we can build them inexpensively. Architecturally, they’re boxes; there’s nothing fancy about them. The finishes are super inexpensive finishes, so that they’re easily replaceable. And that’s why I like the new construction aspect more than flipping personally, because I can calculate it a lot easier. Whereas when you’re flipping a property, as I’m sure you’ve experienced, you know, you have your budget, and then you open up a few walls, and there are a lot of unexpected things that come up. So your budget gets altered a lot quicker.
Joe Fairless: I never thought about it that way. So my perception coming into this conversation was that new construction tends to be more risky, because you’re taking dirt and making it profitable, or trying to. And fixing and flipping is not, because you already have something cash flowing, you just are enhancing it. But that’s a great point that there’s a lot of uncertainty behind those walls when you are flipping.
Josh Gorokhovsky: I think it also depends on who you are and how experienced you are. I have a very close friend of mine, all he does is flip properties, single-family houses, and he has an incredible construction eye just from being in the business for so long. So his budgets are fairly accurate when he can walk into a property and in 10 minutes, say, “Okay, here’s my budget” and he’s pretty spot on. I don’t have that construction eye, because I haven’t flipped too many houses, and I haven’t been in the business in general for all that long, so I can’t really walk into a property and pinpoint it so accurately. So I think it just depends on who you are and what you like.
Joe Fairless: What project that you’ve worked on has lost the most amount of money?
Josh Gorokhovsky: Thankfully, I haven’t lost any money just yet. But there was a project where I was converting a large single-family house into a duplex, all internal work. And it kind of went haywire on me, everything that could go wrong, did go wrong. I started out with a bad team that I had in terms of architectural work, and I’m not going to bash anybody, but it was just a poor job.
Joe Fairless: Of course.
Josh Gorokhovsky: So that went a lot longer than I anticipated. I had hard money on that property. So something that should have been ready for me to break ground in two months took seven months. So unexpected hard money costs there. Once we actually got the plans, it was significantly over-engineered, the work that was there. So that increased my budget by almost double. So by the time I actually broke ground and I was putting in all this work, I’m going to get lucky if I break even.
So I ended up calling [unintelligible [00:17:34].10] and finding a private investor to buy out the hard money guys. We ended up finishing it up, and it turned out to be a solid deal at the end of the day because of that reason, because I wasn’t continuously paying hard money for the remainder of the construction period. But that was a huge learning experience for me.
Joe Fairless: And for us all, because of your experience. So thank you for that. A couple follow up questions on that. You said the architect – and clearly not looking for any names, but I want to be educated on what the poor job equals from an architecture standpoint. Will you elaborate on that?
Josh Gorokhovsky: Yes, so unless it’s a blank piece of dirt, which they probably should go see it in person anyways, but if you’re hiring somebody to reconfigure a property, you’d hope that they would at least walk the property and understand the full scope, rather than just making assumptions. So that’s what ended up happening, and that’s why the overengineering came into play.
Also, I think that they were just a little inexperienced with this type of project. So a lot of mistakes being made, and the city asking for [unintelligible [00:18:41].03] before approving the plans, asking for a lot of revisions. So those two things is what caused the time delay and the overages on the budget.
Joe Fairless: What’s overengineer mean? What’s an example?
Josh Gorokhovsky: So for example, if you’re putting a lot more framing, or like heavier beams on the first floor of property to hold up the second floor, without understanding that you really don’t need these load-bearing walls or these beams because there’s not much going on upstairs, there’s not much living space – things like that. There was plans in there to redo the foundation, but the foundation was in a perfect condition; it didn’t need anything to be redone. So once those things are on the plans and you get your inspector out there, he’s going to make you follow the plans. It’s his butt on the line if you don’t.
Just little things like that, that just cause the budget to double. And when you go back to your hard money lender and say, “Hey, I know you gave me this budget, now it’s double. Would you give me more money?” 99% of the time, they’re going to tell you to kick rocks.
Joe Fairless: Yes. So you called that [unintelligible [00:19:48].05] and you got a private investor. How did you find that private investor?
Josh Gorokhovsky: Just over time — he was a family friend of mine who already expressed interest in investing with me. But over the years, I’ve been networking a lot and meeting people. So I had a small Rolodex at the time of investors which – I sent the deal to a few of them. And he expressed interest, I gave up a large portion of the profit share, just to make it work, to make it appealing for him. So I had him come in, like I said, he bought out the private money lender.
Joe Fairless: Yep.
Josh Gorokhovsky: I had a partner in the deal, so he bought him out, gave him all of his money back, so that he was back in the green, and then just finished this thing up. And I already told him if it didn’t end up landing where I thought it was going to land, that I was going to take everything that was over out of my end, not on his end.
Joe Fairless: Good for you. And that’s how you build long-term relationships, right?
Josh Gorokhovsky: You hope so, yes.
Joe Fairless: Yes. How much was the hard money lender and that other partner being bought out in total for?
Josh Gorokhovsky: I believe it was around $600,000, somewhere around there.
Joe Fairless: Okay. And then I ask this just for someone who is in a position like this to know, “Hey, you’ve got to do whatever it takes to make things right, and then to exit out of it and move on, because fortunately, there’s lots of other real estate opportunities out there. You’ve just got to lick your wounds and move on.” So what profit percentage did you have originally, and then what did you end up with?
Josh Gorokhovsky: So this property, I was actually going to flip it; I was going to convert it and then flip it. And there was going to be, if I remember correctly, like around $100,000 of profit in it for me and my partner. Obviously, that didn’t happen, and then once it was done, we decided that it didn’t make any money if we flipped it. So when I pitched the investor, I said, “Hey, this is going to be a hold, and we’re going to hold this duplex, rent it out, cash-flow it.” So when he came in and we did that, obviously finished it up, refinanced it, and he got most of his capital back; I ended up leaving whatever I had into that project, he left a few bucks in there. And now it’s been cash-flowing for almost a year, it’s been doing actually pretty well. I think it’s been cash-flowing also around like 12-14 percent cash on cash.
So it ended up working out, because I was—before bringing him in, I was debating on just selling it as it was to maybe break-even or lose a few bucks and just move on with my life. So I’m glad that I ended up taking that route instead.
Joe Fairless: You self manage?
Josh Gorokhovsky: I do self-manage.
Joe Fairless: What’s something you’ve learned through that process?
Josh Gorokhovsky: When you say self manage, I’m assuming you’re talking about the rental aspect of it.
Joe Fairless: Yes, sorry. I segued with no transition. Yes.
Josh Gorokhovsky: No, it’s okay. It’s okay. I just wanted to make sure. It’s been great. It’s a great learning experience. And I do plan on keeping everything in-house as I continue to grow; I’ll just make hires and have a management arm of my business for my units. So I feel like it would have been very difficult to run that side of my business had I not been hands-on like I am right now. So it’s been a great learning experience through and through from A to Z, from leasing the tenants, showing the units, qualifying the tenants, interacting with them, going through the leasing process, dealing with maintenance issues, by handling all the backend stuff, the bookkeeping and the property taxes and paying your insurance, getting quotes. So just every little thing adds up, and over time, you kind of just get this whole peripheral view of the management side, which has been great for me.
Joe Fairless: Taking a step back, what’s your best real estate investing advice ever?
Josh Gorokhovsky: Be patient. I’m going to steal something from Gary Vaynerchuk, but I love that guy. He says, “Micro Speed, Macro Patience.” And I couldn’t be a bigger advocate of that. In my day to day, I’m going as fast as I can and I’m trying to reach my goals, and I get down on myself and I’m very hard on myself when I don’t hit those goals, and those are a lot of times, but in the grand scheme of things, it’s important to be very patient and allow yourself to grow, allow yourself to get educated and go through the growing pains.
Joe Fairless: We’re going to do a Lightning Round. Are you ready for the Best Ever Lightning Round?
Josh Gorokhovsky: I think so.
Joe Fairless: Alright, I bet you are. First, a quick word from our Best Ever partners.
Break: [23:58] to [26:00]
Joe Fairless: Alright, your best ever book you’ve recently read?
Josh Gorokhovsky: In terms of real estate, I would say Real Estate Titans by Erez Cohen. For somebody who might just be getting started or wanting to learn more about the basics, I always push for Millionaire Real Estate Investor.
Joe Fairless: What’s the best ever way you like to give back to the community?
Josh Gorokhovsky: I’m part of a few organizations right now that have different philanthropic missions. But besides the money aspect, I’m always around to lend a ear, and for whatever it’s worth, my advice or my two cents. So I’m always around to help anybody out.
Joe Fairless: How can the Best Ever Listeners learn more about what you’re doing?
Josh Gorokhovsky: On all the social media platforms, my website, telosproperties.com, @TelosProperties on those social media websites – Facebook, Instagram, LinkedIn. And then I’ve got my personal social profiles as well, if you’re interested in keeping up with me personally.
Joe Fairless: And we’ll put a link to your website in the show notes. Josh, thank you for being on the show. Thanks for talking about how you are developing in Los Angeles, and lessons learned on how to do that successfully, and what not to do. And when you get into a deal that is challenging, some tips for how to navigate it. So thank you for sharing that story as well. I hope you have a best ever day and talk to you again soon.
Josh Gorokhovsky: Thank you very much, I appreciate you having me on.
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