Joe recently closed on another apartment community which he hinted in a previous episode, hear how he grabbed this one and why it was the best deal against his competition. Joe and Theo answer questions from the best ever listeners regarding financing large multi family Communities, single-family homes, and small residential multi families.
Hear about the new feature the show has released, you’ll be glad as it will be an amazing tool!
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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any fluffy stuff.
With us today to do Follow Along Friday, like we usually do, Theo Hicks. How are you doing?
Theo Hicks: How’s it going, Joe?
Joe Fairless: It’s going well. We’ve got some exciting stuff happening. We’re recording it on Monday, because we wanna get the show edited and everything, ready to go for the podcast listeners on Friday. So today is Monday when we’re recording it, and we’re closing on a 314-unit property today, so we’re gonna talk a little bit about that, as well as another deal we’ve got going on, and answer a couple questions that have been submitted by the Best Ever community, as well as an exciting announcement about a feature of the show that you’re gonna love; it’s gonna be really beneficial to you. How do you wanna kick things off?
Theo Hicks: Last week we talked about your one deal, and I know this deal is actually across the street, and we’ve actually talked about how you went out finding that deal, about how to find deals in a hot market and how you essentially reached out to the broker who knew the person that owned the property across the street and was able to work a deal out. And not only were you able to purchase the off market property, but it also allowed you to purchase the on-market deal at a little bit of a higher price, still made sense though financially, but due to the scale and everything we talked about last week, you were able to do that.
Obviously, you’re closing on that one today, so maybe you just wanna talk about the numbers or the plan for that deal…?
Joe Fairless: Yeah, and you summarized it perfectly, so I won’t go into the back-story. If you’re curious about the back-story, about how we found this property and matched it up with the property across the street to close on an off market deal which is below market price, with an on market deal which is right at the market rate, but because we’re combining the two, it’s a below market overall purchase acquisition price, then watch the video “How to find deals in a hot market”. Go to multifamilysyndication.com, and the video will be there. The podcast episode was a week ago, the last Follow Along Friday.
This property – 314 units, and it’s 90% one-bedrooms, but across the street it’s primary two and three-bedrooms. This 314-unit is like a concrete jungle. There’s pavement, and there are buildings, and that’s basically it. It’s really tight quarters. There’s some green space, but as big as New York City one-bedroom apartment green space; there’s not a lot of green space.
Across the street, it’s the exact opposite (which we closed on a week and a half ago). This property – the business plan is to continue to do the renovations on the one-bedrooms — well, all the units have yet to be renovated, which are primarily one-bedrooms, and increase rents through the renovations.
The owner has already done that on a percentage of them, and we’re gonna simply carry it out to the rest. We’ve got a management company that has been working with us on our other deals in Dallas-Fort Worth, and they’re gonna be taking over today once we close. This is actually going to be the third property that we have in Richardson, Texas, which is a submarket of Dallas, and we are closing in on almost a thousand units in the submarket, which allows us to certainly have economies of scale with the operations, but then also, as we’re improving the properties, we’re starting to be able to dictate what the rents can be in the submarket, because we’re starting to own more and more in the submarket.
Chad Carson – I interviewed him a while ago; you can search his name and my name… The title of the episode was “Stay local and dominate”, and while I’m not local, because I live in a different state from Richardson, Texas, I am seeing how that strategy is playing out by investing in an area. Perhaps instead of “stay local and dominate”, if you’re not investing locally, then perhaps it is “stay focused and dominate”, and that can be applied in many ways. In this scenario, stay focused on a particular submarket and dominate that submarket. I’m seeing that we’re able to get a lot more traction as a result of getting more and more properties in this smaller area.
Theo Hicks: I know, because I’m obviously working with your partner and you, and learning a lot more about multi-family… And something I learned is that when you’re underwriting a deal, you’re either going through the renovation process, or you plan doing the additional rehabs, you look at what the previous owner has done renovation-wise and see if the rent increase is based off of that.
I guess a question going off when you’re talking about how you’re focusing on that one submarket you’ve got over 1,000 units in, are you able to use your own properties as comps now?
Joe Fairless: Yes.
Theo Hicks: And if you happen to buy a property that you have not renovated yet and you don’t necessarily know what rents they’re going to demand, you know you’ve got a property down the road that you did these upgrades to, and you’ve got a hundred-dollar rent premium, therefore you know that — maybe you could buy properties that other people maybe couldn’t buy, because they don’t necessarily know what the rent premiums would be based, off of previous projects… I just think of more benefits of that strategy we were just discussing.
Joe Fairless: That’s a good thought process. Yes, we can and we haven’t yet used our properties as rent comps for the acquisitions. It’s certainly something to keep in mind, because we know what we’re doing down the road with our property. You mention an interesting thing, where having a seller who has already proven the business plan of renovations and rent premiums – well, I know we have apartment owners who are listening… If you are thinking of selling, then think about renovating a small percentage, say 10% of your units; renovate them, get that rent premium, that way you prove the business plan of being able to command those rent premiums, and that will allow you to sell to someone like me, who wants that plan proven because it mitigates the risk for whenever I go in and I buy the property.
That will allow owners to get a premium for their property too, and rightfully so, because it shows the business plan has been tested… Maybe not proven, if it’s only 10%, but at least it’s been tested and you’ve received it. So there’s the flipside to that that I wanted to mention, as well.
Theo Hicks: That’s a good point. That definitely made the deal a lot more attractive. Something else you mentioned when you were talking about the differences between the two deals – because again, as we talked about in the last podcast, the [unintelligible [00:09:30].20] the bedroom sizes, the amenities… And one of the amenities you were talking about was a green space, and I was just thinking, how important is that when you’re looking at a deal? Is that something very important? People want green space, or does it depend on the area or the tenant?
Joe Fairless: It depends on everything you’ve just said. I lived in New York City for ten years, so I’m picturing the building I lived in on 9th Street and First Avenue, for nine of those ten years. There was no green space at all. I walk up, five-floor building and I was on the fourth floor, and my apartment was the size of a shoebox, and I was paying two and a half times more than what my residents pay in Dallas at a much nicer place. So it depends on your market, certainly.
Also, it depends on the type of resident profile that you have. If you have a lot of, say, students, and you’re doing student housing, then that’s a completely different amenity set than you would want, compared to a property that is more family-focused. And again, you rent to everyone, right? But if you have a primary target audience and you need to cater to that audience… So really it depends on who’s your audience. All roads lead back to the customer first; thinking about the customer first, and then making sure that your customer is fine with what you have there, and if not, what can you incorporate to make it a little bit better?
In our property we have a lot of students because it’s close to a local college. Then we also have a lot of day laborers and people who are in construction, and people who recently got divorced and are moving in — because this is primarily a one-bedroom apartment community. So really it’s more of a transitional place, where they’re likely not gonna be staying for ten years, probably more at most four, five, six years (at most, best case scenario).
We wanna make sure that the interiors are really top notch, and that’s why we’re doing the renovations. There is a pool on-site. There’s a tiny little area for kids to play, which when I was there, they were; it’s a very tiny area. There’s not a whole lot we can do with it on the outside, other than maybe help with some landscaping, which we’ll plan on doing. But really, it’s on the interior – that’s where we’re gonna focus our budget for the capital improvement dollars.
Theo Hicks: Okay. I’m really curious to see how this plays out, because you’ve got the one-bedrooms where you don’t expect people to stay in there for ten years. Technically, a deal where they move into the one-bedroom, and then — I guess I’m wondering what percentage of people are moving into the one-bedrooms and then end up moving across the street in the two or three-bedrooms, maybe find a family or whatever, they’re upgrading to a multi-unit… I wonder how many people will transition into that…
Joe Fairless: Yeah, and then as they continue to progress, maybe we’ll change the apartments and the condos, and we’ll have them buy their own condo. I ended two to three-bedrooms across the street that we closed on a week and a half ago, that is tons of landscaping, tons of area to roam… it’s on 14 acres — I forgot the acreage, but it’s expansive, completely different from across the street. So that’s the deal we’re closing on today, and I”m excited about that one, that’s for sure.
Theo Hicks: Anything else about the deals, or do you wanna dive into the questions?
Joe Fairless: One other thing for investors who are also putting multi-family syndications deals, or really any type of syndication together – we have been awarded one deal, and I wanna talk to you about the process that I go through real quick for working with my investors and how I approach it… Because it will be beneficial for you to learn from my process and either replicate it or enhance it, do it better than I’m doing, or take aspects of it.
So we have a new deal we got awarded… This is in Fort Worth, Texas – a very nice area of Fort Worth, Texas. That’s my hometown; I was raised in Fort Worth, Texas in Aledo, West Fort Worth. The property is not in Aledo, but it’s in a very nice area. How I approach it is I send out an e-mail to my investor list, who I have a pre-existing relationship with, I’ve talked to them, I’ve corresponded with them… I send out the e-mail, and it’s an e-mail with about four pictures of the property, and two bullet points: why I like it, along with a two or three-sentence paragraph of just introducing them to the property, and then I mention the minimum investment, the maximum investment… And by the way, the reason why there’s a maximum investment is if they have more than 20% ownership of the limited partnership, then it triggers a know-your-borrower clause by the lender, and they’d be exposed to a pretty exhaustive and detailed financial audit by the lender. 99.9% of limited partners, passive investors don’t wanna go through that, therefore there’s a cap on how much they can invest.
Theo Hicks: I didn’t know that.
Joe Fairless: $50,000 minimum, I think 1.1 maximum for individual investors. So I send that out, in addition to the close date and the funding deadline. I send that out, and in the e-mail I also mention there’s a conference call, and I give the calling details and “If you’d like more information on it, then reply back via e-mail and I’ll send you the investor package.” That’s my initial e-mail to my investors.
For people who are syndicating deals, that’s my initial e-mail to investors, and then they reply back – those who are interested, therefore I know who is interested; I write them down in my spreadsheet, so I’m tracking that, and I send them the package. Then we’ll have a call in about a week and a half. Some people have already committed tentatively, pending review of the information, just because they’ve been investing with me for a while now. After we do the call, then we’ll send out the PPM. We’re working on the PPM right now. Once that gets sent out, then I have in my tracker – which by the way, if you haven’t got the investor tracker yet, e-mail info@joefairless.com and Samantha will send you the tracker that I use for my investor database. It doesn’t have my investors’ names in it, obviously, but it’s the template that you can use for your own people.
After the PPM gets sent out, during that time we’re also gonna have a video… We’ve got a videographer with a drone going on-site, and he’ll be there this week. The video will probably be done in about 7-10 days from now. So I send that out, just to give them a better idea of the property, and then I’ll start getting the PPMs back, getting the commitments back, and then funding is shortly thereafter.
So that’s the process for how I approach it, and that will be helpful for anyone who’s also going to raise money, or currently raising money.
Theo Hicks: Awesome.
Joe Fairless: Cool. Questions – we’ve got a couple questions that we want to address from the Best Ever listeners. What are they?
Theo Hicks: I’m gonna test my vision, see if I can get them from [unintelligible [00:17:24].04] The first question is from Neil Patel.
Joe Fairless: Neil…
Theo Hicks: Neil. Actually, you didn’t hear that last name… So he says, “Thank you for creating such a great real estate community. I listen to your podcast while commuting an hour every day. I’m a newbie to the real estate business, and I’m thinking about buying a quadplex in my area. I was wondering if I need to have a real estate license…”
Joe Fairless: No, you don’t need a real estate license to buy an investment property.
Theo Hicks: And then he finishes off the question by saying “It would be nice if you do a podcast about how you calculate numbers for a property you’re thinking about buying, like a 1% rule or something of the sorts.”
Joe Fairless: Yeah, real simple… We’re talking one to four-unit properties, really simple… This is how I did it whenever I was buying properties. First off there’s a document that I’ve mentioned on my story, part one, two and three; I’d be happy to give that to everyone – just e-mail info@joefairless.com. It’s how I ran the numbers on my single-family purchase, when I purchased them… Characteristics that ruled out certain properties. So e-mail info@joefairless.com and you’ll get that document.
Now I just do the 1% rule and see where it falls on the 1%. What that is is you take the monthly rent, divided by the all-in price (the purchase price + any rehab that needs to be done), and is that 1%? Is that 1.5%? Is that less than 1%? If it’s at 1%, then I consider that the bare minimum. Everyone’s got their own opinion on it… It depends on the area, it depends on what your business plan is, it depends on your goals… But I personally consider 1% the bare minimum. All of my homes, when I bought them, it was between 1.4% and 1.6%.
I just looked on Zillow the other day and they’ve at least doubled in value, but I don’t care, because I am not selling them. The only reason I would care is if I was doing cash-out refinances, which I’m not gonna do right now; I don’t want to. But that’s the general rule.
There’s a document I’m referring to list out the three things I look for at the time, for single family homes. That is “Is it move-in ready, or does it cost at least $1,000 or less to be move-in ready?” Two is “Do I have at least $10,000 in equity based on the valuation of sales comps at closing?” So at closing I want at least $10,000 worth of equity in it. And three, “Does is make me at least $100/month in rent?” and that’s based on the calculator that I use (there’s a link to it in that PDF document).
Knowing what I know now, after interviewing 1,000 people and evolving my business and being in the business longer, I would have purchased deals with more equity in them… Because I was basically buying turnkey properties. But I was just starting out, and I’m glad that I did buy more turnkey properties. Knowing what I know now, I know that the value is created when you improve the property and put some sweat equity in it. That’s what I would do now if I was buying single family homes (but I’m not). So if you wanna know what I was doing before, then there you go, Neil.
Theo Hicks: I’m not sure what the answer to this is, but the 1% rule – how high up in unit size would that apply to before it no longer works? Is that all unit sizes, or just for single families?
Joe Fairless: I would just do it for one to four units, because after that you’re dealing with technically commercial properties – or at least commercial loans – different structure, and there is different considerations for that.
Theo Hicks: Okay.
Joe Fairless: It is interesting, because I’ve done this before on my apartment deals. It is interesting to do that on, say, a 200-unit apartment community. Okay, I’m buying it at $70,000/unit; what’s the average rent? But there’s too many variables in play for a larger apartment community to use that as a rule of thumb.
Theo Hicks: So one to four units.
Joe Fairless: Yeah.
Theo Hicks: Alright, Neil… We’ve got you, and thanks for being a Best Ever listener. Our next questions – a couple of questions, and one is from Ale. He says, “If you don’t mind me asking – we don’t mind – how were you intending to finance your initial attempt at purchasing a multi-family unit in Tulsa?” This is based off of him listening to your part 1, 2, 3 series, and how you mentioned you were first looking in Tulsa for your properties. He’s asking how did you plan on financing that deal? “I believe you had already left your W-2 job by then, so wouldn’t it have been easy to secure a mortgage? Did you already have –”
Joe Fairless: Oh, I thought you were gonna pause. [laughs]
Theo Hicks: Yeah, I’m gonna pause.
Joe Fairless: Alright, the first question is how did I plan on financing my first property (my multi-family property) in Tulsa? I had left my job and I was planning on financing it by partnering with a high net worth individual; they would get approved for the mortgage and I would also be on it, but they were gonna be the balance sheet and the borrower primarily.
Theo Hicks: So you had one person do it?
Joe Fairless: Yeah. Again, this is when I first got going, I was wet behind the ears… But yes, I was going to, and we ended up looking for properties around the 30-unit range, but did not find anything, and then moved on. Are there other questions on that first deal?
Theo Hicks: Yeah. He says, “Did you already have reliable funding from potential partners?”
Joe Fairless: The financing was gonna come from a community bank. I was working with a community bank in Tulsa, Oklahoma.
Theo Hicks: Okay. A different question, still about your initial search for deals… “What was the price range – or let’s say unit range, as well – of the properties you were looking at?”
Joe Fairless: A million dollars, around 30 units.
Theo Hicks: Is there a reason you selected that number?
Joe Fairless: Because I thought that I could raise about 200-300k. It turns out I ended up raising over a million dollars, and it was over 150 units on my first multi-family deal. So I had exceeded the level that I thought I could play at, but that’s what I was originally going for.
Theo Hicks: Which is awesome, because some of the people [unintelligible [00:24:08].17] talk about the Grant Cardone 10x rule, like setting a goal 10x higher than – not necessarily what you plan on hitting, but if you wanna get 30 units and you say “I wanna get 300 units”… But you can’t say you’re gonna get 30 units, but you [unintelligible [00:24:21].19] It’s interesting.
Joe Fairless: Yeah.
Theo Hicks: Next question – “Do you approach multi-family units mainly as private equity syndication with or without bank loans? Are you the sole owner of some of them?”
Joe Fairless: They’re all syndicated. We have bank loans on all of them, and I am a part owner in all of them, but not a sole owner in all of them, because they are syndicated.
Theo Hicks: Okay. And he asks, essentially, would your approach criteria be different for duplexes and units up to four dwellings, versus single family homes.
Joe Fairless: I would give more leeway to the area, being a little worse on 2-4 units, compared to single family homes. Because I think with 2-4 units, if you were to sell, you’re dealing with more of an investor type, whereas a single family home – you would like be dealing with investors or people who want that as their primary residence, therefore the area will be a little more important. But 2-4 units, primarily investors, so it’s not as much about the area as it is the cash flow of the property… Otherwise I run the numbers the same way.
Theo Hicks: You’re talking about the 1% rule up to four units, so that’s kind of somewhere there…?
Joe Fairless: Yeah.
Theo Hicks: So those were all the questions, so we got those out of the way.
Joe Fairless: Awesome.
Theo Hicks: And the last thing we wanna talk about is the new feature.
Joe Fairless: New feature! You love this!
Theo Hicks: I do love this feature!
Joe Fairless: You love this feature! Alright, Best Ever listeners, here you go… We have every episode from this point forward being transcribed, so if you’re wondering “Hey, I heard so-and-so, or someone mentions this particular thing on a podcast today or last week, but I don’t remember which podcast it was…”, all you’ve gotta do is go to the BestEverShow.com and search for whatever you remember, and it will come up. Before, you’d have to have a good memory and take notes on every episode – which you still should do – but at least now we’ve got something to assist you in your searching.
This is only available at our website, so you have to go to the website and check it out, and read the transcriptions. We didn’t wanna put it in the show notes on your mobile device because it would be an intense amount of text to go through, so it’s only available on our website, BestEverShow.com. You can go there and read the transcription. It’s beautifully formatted; it’s like “Joe Fairless: blah-blah-blah” (what I say) then “Theo Hicks: blah-blah-blah” (what he says), nice and bold. So if you want to simply read through the episode in addition to listening, or if you just wanna read through episodes from this point forward, go to BestEverShow.com and click on the actual episode, and below you’ll see the transcription.
Theo Hicks: Yes, I like that feature a lot. I know some people learn very well through reading and some people learn very well through listening, so we kind of get that dual approach… But for me personally, I like to do both. I like to read something AND listen to it, because I just absorb it so much more. So yeah, it’s an amazing service, amazing idea… And again, it’s listed very beautifully down, list by list, all of it is in there.
It’s even nice for the Lightning Round too, at the end. You can kind of go quickly read through the Best Ever Lightning Round for the deals, and their mistakes… Or you can go straight to the Best Ever Advice, instead of having to scroll through the podcast, that bar, back and forth, to find exactly where it started. So it’s helpful for a lot of reasons.
Joe Fairless: Excellent. Best Ever listeners, that’s all we’ve got today. I hope you have a best ever weekend, and we’ll talk to you soon!
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