Another group of listener questions are answered in this episode. We get the usual updates from Joe and Theo, along with what they would do if someone handed them $1,000,000. Joe also has an opinion on where the new Amazon Headquarters are going. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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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, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluff.
We are doing Follow Along Friday today. I am joined, as usual, by Theo, and also Jack, our mascot for the show, a little 12-pound Yorkie.
Today we are doing Facebook live, so if you are listening to a podcast, then great; if you are watching via YouTube, then welcome. I hope you enjoy the show. If you’re watching via Facebook live, then you can comment below right now, and we have a team member (Grant) who’s responding to you, and if you have any questions we’ll probably get to them on next Friday’s episode, not today; we’ve got a lot of stuff to go over today.
Today we’re gonna go over the itemized cost for each of the ten due diligence documents that we mentioned two Fridays ago, and that was episode…
Theo Hicks: 1116.
Joe Fairless: Man, that’s a lot of episodes.
Theo Hicks: That’s a lot of episodes.
Joe Fairless: Episode 1116. We went through the ten due diligence documents for apartment buildings, and then we had some follow-up questions on how much does that cost approximately, and Theo is gonna walk us through that.
Additionally, we’re gonna answer some other questions that you have, and then we’ve got some miscellaneous things. And lastly, yes, I have a lisp today, because my other half of my mouth is numb from the dentist. I think this will be the last time this happens, so bear with me. Theo’s gonna do a lot of talking today. Ready to go?
Theo Hicks: Let’s do it, Joe.
Joe Fairless: Alright.
Theo Hicks: As Joe said, we’re going to first go back over the list of the ten documents required for due diligence, and their cost. So just overall, the cost will be around $30,000 to perform the due diligence, so just know that going in. For the itemized costs, I’m just gonna go over the titles, and if you wanna know what these documents actually are, listen to 1116; we went into a lot of detail on that.
First you’ve got your financial audit, which costs about $6,000. That will be from a financial services consultant.
Number two, you’ve got your internal property condition assessment (PSA), and this will be performed by a contractor. That costs about $2,500.
Joe Fairless: And PCA.
Theo Hicks: Did I say PSA?
Joe Fairless: Yeah.
Theo Hicks: PCA. Number three, four and five are actually going to be done by your property management company, or a property management company if you have one. That’s the market survey and condition report, a lease audit and a unit walkthrough. This would cost about $4,000 to do. However, if you’re gonna use the company that’s gonna perform these reports for your property management company, you should be able to get it for free. So that’s a $4,000 savings right there.
Number six is a site survey. That will be about $6,000.
Next you’ve got your PCA again, and this one’s performed by the lender; the first one was actually performed by you, internally. That will also cost $2,500.
You’ve got your environmental site assessments, also performed by the lender, also $2,500.
Number nine, for a standard appraisal, also performed by the lender, or they hire out a third-party. That will be $5,000.
Number ten is that green report, and that is also performed by the lender, and that will be $3,500. If you add all those together, including that $4,000 for the number 3, 4 and 5, it will be about $32,000, but it will generally be around $30,000. So my question for you Joe is is this something that the syndicator would include in their money raising, or is it something that’s independent, outside of that, like an out of pocket cost from the syndicator?
Joe Fairless: Yeah, it’s factored in the closing costs.
Theo Hicks: Okay.
Joe Fairless: That’s part of the money that’s raised/you’re investing alongside the investors. It’s just a line item on the budget.
Theo Hicks: Okay.
Joe Fairless: And you typically don’t need to pay out any of these prior to closing. Once you close, then you pay out from the closing proceeds.
Theo Hicks: Okay. I know that – I believe this is correct – for smaller properties, at least for the appraisal, we need to pay that out of pocket and then we’ve gotta credit it back at closing.
Joe Fairless: Okay.
Theo Hicks: So I guess it’s different for [unintelligible [00:05:45].09]
Joe Fairless: And do you know how much your appraisal was on your — you have 12 units, right?
Theo Hicks: It’s 12 units. I’m not 100% sure, but I think it was under $1,000 per building.
Joe Fairless: Yeah, because it can fluctuate based on different variables, and I imagine with the smaller buildings it would be less. I remember getting an appraisal — when I did my master lease on my first apartment community and I ordered the appraisal, it was $1,500 bucks, and that was on a 150+ apartment building, and we just quoted here 5k, so it does fluctuate; I think it depends on who’s ordering it, what’s the purpose, how large of a scope is it, what’s involved in the appraisal… So just know that these are estimates, but this does give you a very good ballpark idea for how much you’re gonna spend.
And again, if you want more details on each of these ten, then go listen to episode 1116, and we describe the purpose for each of these ten, so we’re not gonna do it on this episode.
Theo Hicks: I believe these numbers are specific for a deal that you guys have, so we’re based off of that side of the deal; I just wanted to throw it in there.
Joe Fairless: Oh, yeah. And those size of deals are around 250 or so units.
Theo Hicks: Moving on, we’ve got four listener questions that were submitted. The first one is by John. He says:
“I’m in New York, where 20-unit apartments cost 8 million dollars. How do you go about getting it? Do I wait until I have the three million dollars saved up for a down payment, or do I start with single-family residences, or do I do something else?”
Joe Fairless: I don’t know what you do, it depends on your goal. I know that’s a pretty ambiguous and cryptic answer, but it’s a pretty general question. I’m not sure what you should do. You could choose to buy your own apartment building and save up. On a 20 million dollar purchase I suspect you will have to bring more than 3 million dollars; you’ll probably have to bring 30%, maybe even 35%… I don’t know, it depends on various things.
If that’s not in your near future and you wanna get started sooner, then maybe leverage where you live in New York, where you likely make more money on average than other people who are doing the same job in Iowa or in Idaho or even in Texas, and look at property there to bring your money into a market that has more deals that are more favorable for cashflow.
I have no clue what your goals are. If your goals are to generate as much cashflow as possible and you’re not as focused on appreciation (or forced appreciation), then you would take a different approach than if you are just looking to park some money and beat inflation.
So too broad of a question for me to answer, but those are some thought-starters.
Theo Hicks: The next question, from City Park Properties – he wants to know if Colleen (Joe’s wife) is supportive of your aspirations.
Joe Fairless: Yeah, she’s enjoying the fruits of the aspirations, that’s for sure. As I’ve mentioned many times, we really are minimalists. Not to the extreme scenario, but anytime we buy something, I wanna give something away, and I just don’t like stuff. As far as some of the quirky things that I do – yeah, she supports it.
Every morning I have – I’ve talked about this – a liter of water with a scoop of wheat grass, and now she does it. She’s been doing it for the last year and a half or so. I write into my journal every morning, the affirmations that we talked about last Friday, and she has purchased a journal but she hasn’t started writing in it yet… [laughs]
Theo Hicks: Baby steps.
Joe Fairless: Baby steps. I recently purchased what you affectionately call a Death Clock, and I made the mistake of calling it a Death Clock, and Theo’s gonna show everyone who’s watching via Facebook live or YouTube – he’s gonna show you the Death Clock. He’s just gonna turn the little camera around so you can see the Death Clock. Basically, for anyone who’s listening and not able to see the Death Clock, think of it as if you’re in a basketball game and you see a countdown for the shot clock; think of it like that, but it’s more rectangular and it has days, hours, minutes and seconds.
The purpose of this Death Clock is actually it’s counting down to when I’m 90, and I figure if I live to 90, then I’ve — oh, Theo just got his seat stolen from Jack, while he got up to show the Death Clock. If I live to 90 years old, then I think I’ve lived a good, long time. So the purpose of this for me is to show that every second counts, and it’s a constant reminder, it’s on my wall in my office, reminding me that what I’m doing right now is important, because the moment just passed, and I wanna make sure I’m spending the time correctly, whether it’s with you all on the show, or whether it’s with Colleen, or whether it’s doing something else, but time is precious and it’s fleeting. So that’s the purpose.
Now, how I have revised it, the approach for Colleen in particular, because she’s like “I don’t like the Death Clock”… There’s like a green, glowing light that comes from the office, and it’s near our bedroom, so it’s constantly reminding us… That green, glowing light out from the office, so we had to unplug it at night. What I do now is instead of it being a Death Clock for her, now it is simply a countdown to my 90th birthday so we can celebrate my 90th birthday.
Theo Hicks: There you go.
Joe Fairless: Yeah, sometimes I switch things up a little bit, just to not have her get caught up in my crazy thought process of how I think of certain things. But absolutely, she is in support of my aspirations and she is incredible; not everything is roses and rainbows and unicorns, and during those times she’s been incredibly supportive and I’m incredibly grateful that I met the love of my life and I’ll be with her forever.
Theo Hicks: Awesome. I enjoy the Death Clock, or the 90th birthday clock. The next question, also by City Park Properties – he wants to know if what is the average —
Joe Fairless: He or she.
Theo Hicks: Every time… He or she. I’m probably gonna be making the same mistake again, so I apologize ahead of time, and Joe will correct me. City Park Properties, he or she asked “What is the average length of time Ashcroft keeps a property?”
Joe Fairless: About five years.
Theo Hicks: “Joe mentioned one of the metrics for a deal is the 18% IRR on a five-year sale; are they often selling at the five-year mark?”
Joe Fairless: Ultimately, what we do is we do our projections based on five years, but we also use common sense and business sense once we purchase, and whatever makes the most sense based on capital preservation first and foremost, and then meeting the goals we have for the investors, and then exceeding them. So in that order, those are three orders of priority… Capital preservation is number one, number two is meeting goals, and number three is exceeding goals. We might sell early, we might sell later… We have the flexibility – and that’s an important thing – with the debt that we’re putting on these properties to hold on to it should a market correction take place, and we need to hold on to it longer than five years. So that’s our approach.
Theo Hicks: Okay. A live listener question, also by City Park Properties – he or she…
Joe Fairless: Boom!
Theo Hicks: …asked “For limited partners, is it 70% of anticipated return of 8%, versus 30% for the general partners?” and a little context, this is in response to you saying that you offer an 8% preferred returned, and anything above that is a 70/30 split.
Joe Fairless: Okay.
Theo Hicks: Maybe he’s asking is it 70% of the 8%, or is it after 8%?
Joe Fairless: Okay, I don’t quite understand the question either… [unintelligible [00:14:19].14] The first 8% of cashflow that the property has, and that’s 8% of the total equity that is brought by the group of investors. So let’s do simple math – if it’s a million dollars’ worth of equity that was brought to the deal, then 8% of that is $80,000. So the first $80,000 of profit goes to investors, because that’s their 8% return. And then typically – and this depends on the deal, but typically if it’s a 70/30 deal, then 70% of anything above that, so let’s say it’s $90,000 total profit for the year (a million dollars was the equity that was brought), then $80,000 of the $90,000 goes to investors, and then the remaining $10,000, 70% of that, so $7,000, goes towards the investors, and $3,000 goes to the general partnership.
Theo Hicks: The next part of his question might clarify a little bit, because he wants to know what’s the initial investment required to be considered a limited partner. So I guess he’s maybe asking “If I’m investing in your deal, no matter how much money I invest, am I considered a limited partner?”
Joe Fairless: Yeah. There’s no tiers of “If you invest $50,000 you aren’t on the limited partnership side, versus if you invest a million five.” Now, you will have less ownership shares of the deal, but that’s just on a return standpoint. There’s really no other benefit, but the return standpoint is a huge benefit.
Theo Hicks: Alright, so that concludes our listener questions, so we can move to some updates and observations for the week. Do you have any updates on your business from this past week?
Joe Fairless: Yeah, let’s see… I’m going to the Memphis Invest conference, I’m speaking there this Saturday, which will be 6th October, I believe…
Theo Hicks: 7th.
Joe Fairless: 7th, okay. This Saturday I’ll be in Dallas at the Memphis Invest conference, speaking at 9 AM. It’s free, it’s a no sales thing, which is really the only type of conference I wanna speak at… It’s just purely “Hey, this is some good info.” Chris Clothier puts it on, and his group. The owner of the Atlanta Hawks will also be there speaking, so if you’re in Dallas this Saturday, then go to Memphis Invest website and look up the details for how to get a ticket and attend. The conference is Friday and Saturday, but Friday I will be with Frank, my business partner and our largest investor, touring some of our properties that we have with him… So I won’t be attending the conference Friday, however I’ll probably go to dinner with everyone on Friday night, and then Saturday I’ll be doing that keynote.
So check that out, I’m looking forward to seeing you there; come up to me on Saturday after the keynote if you attend and you are a listener.
A couple other things – I’ve been following the Amazon headquarters that they’re going to be awarding to a city in the US. It’s gonna be their second headquarters, a five-billion-dollar investment and 50,000 jobs is what they’re projecting to the city that’s awarded it. I’ve had some questions — I had one question from an investor, “Well, should I wait until a city is awarded and then try and buy some real estate around there?” My thought process is “How lucky are you? Do you go to the casino a lot, and if so, do you win at the roulette table?” Because basically, what they’re asking — because once the city is awarded the deal, 90% of the real estate investors in that market are gonna be aware of it, and now your prices are gonna get increased. So you might as well not wait on that. I would say if you find a good deal now, just invest in a good deal or buy a good deal.
As far as the cities go that are going to be in top contention, and as far as the city that is my pick for winning it, I wanna make a prediction… And Amazon is not gonna award it until the next year, 2018, so we’ve got some time. But I’m gonna go ahead and say my top four cities. In fact, I’m gonna say my top four cities and then later – I need a little bit more time – I’m gonna pick the city I suspect will get it.
So my top four cities that will be one of the four that are selected will be Denver, Dallas, Chicago and Atlanta. Those are the four cities based on what I’m seeing Amazon looking for and what is currently available and just what makes sense based on what I think one of those four will be awarded the headquarters. So Dallas, Denver, Chicago and Atlanta. On a future episode, but prior to 2018, I will give you my selection for who I think Amazon will pick. Ultimately, it’s like the roulette table – who knows? But based on some things I’m reading, those are my four cities. And it’s a huge economic investment.
Theo Hicks: Yeah. I used to work for a logistics company, and I would run these models to figure out where we’d put these distribution centers. I know that the Amazon headquarters might not be an actual distribution center, but they calculate how the distance from this city to other major cities, based off of what items those people purchase, and all four of those places are top distribution hubs. So when you said it, my first answer was Atlanta, just because I know that the company I worked for – that’s their top choice for not headquarters, but a distribution main hub. So if I had to guess, I’m putting my idea in Atlanta…
Joe Fairless: You’re picking early.
Theo Hicks: …with no information at all.
Joe Fairless: Alright, cool.
Theo Hicks: I do well at the casino, so… [laughter]
Joe Fairless: You are good at Blackjack, you’ve told me.
Theo Hicks: Yeah.
Joe Fairless: Atlanta is Theo’s pick, I’ll announce mine some time before 2018.
Theo Hicks: Anything else?
Joe Fairless: Oh, lastly – we did an interesting analysis across all of our portfolio, looking at our projected rents versus our projected premiums that we were gonna get on the renovated units versus what we’re actually getting, and we are getting on average 9.1% more on our renovated units across our entire portfolio, than what we projected in our proformas. It’s a wonderful thing to see. And the range goes from 3.5% – and that’s on a property that we’ve recently purchased, so I think there needs to be a little more data to help us see how that is gonna do, but still, we’re hitting our projections on the renovations, and we’re going above 3.5%, so it’s still a great thing… And then all the way up to 16.2% on a property, and anywhere in between for the other nine properties.
I think it’s a product of a couple things. One, let’s be honest, it’s a great market right now, and it’s a great time to own apartments, but then also we’re in Dallas-Fort Worth, and two in Houston – and this factors in Houston, too – but primarily Dallas-Fort Worth; it’s a great market to be in right now, and I think in the foreseeable future.
So one is just we picked the right market at the right time, but also we’re just lucky, because we are living in this time in life, and that’s just how things are. And two, it goes back to conservative projections, and wanting to understate what you think you’ll do and then exceed expectations. And then three, having a management partner that can execute the business plan, because we all can be spreadsheet millionaires, but are we really millionaires whenever we actually go and implement the business plan? That’s where the on-the-ground team and staying close to them when doing the asset management comes into play.
Theo Hicks: Congratulations on those projections, that’s really nice.
Joe Fairless: Yeah. What about you, what’s going on?
Theo Hicks: There’s really not much. I know last week I was talking about my boiler issues on my three four-unit properties, and I got a quote back for how much that’s going to cost; it’s actually a lot less than I expected. It’s still a lot of money, but it’s a lot less than I expected. I was expecting $10,000, and it ended up being $3,400. That is replacing a couple of the radiators, replacing all of these valves that they used to bleed all the radiators (so they had to bleed all the radiators) and then just maintenance on the actual boiler itself.
I was very surprised of how much it cost to fix those radiators… But I’m not scheduled to have it done for a couple weeks out, because I’m gonna have at least one other person come in and look at it, just to give me another price and just to make sure that this guy is not [unintelligible [00:23:15].18] off, because I have no idea how much it costs to fix these things.
So that’s just for one of the buildings. At the same time, I’m just gonna knock out the other building’s boilers and radiators too, so I’ll have them go to each of those units, pull off the radiator tops and look in there, make sure that whatever those valves things are, the sticks — I wish I could show a picture, but it literally looked like (I said it last time) something off the Titanic. It was so rusted and corroded… It’s just amazing that that’s just like sitting next to someone’s head when they’re sleeping, and that the previous owner just didn’t address that, and the inspector that was looking at it missed it, because you can see the rust on the ground.
[unintelligible [00:23:54].05] but again, it just is what it is, and now I know moving forward what to look for, and my hope is that overall, to get all three boilers up and running, is less than my initial $10,000 mark.
And then right now we actually have enough money to buy another fourplex or another property around the $200,000 range, but we’re going to wait until we get this issue figured out first, just because we might go to the second building and they need a brand new boiler, which is like 15k or 10k. So we’re just gonna wait until we get this figured out, and then in the winter find another fourplex to buy.
How I’m going to find it? It was funny — I didn’t hear this anywhere, but I was driving around the town, looking at buildings, kind of driving for dollars, and I thought to myself “I wonder if properties that don’t have newer windows, that have those really old, swinging up windows, the manual ones – I wonder if people that own those are more willing to sell than someone who put brand new windows on there?” Because someone who put brand new windows on there — windows are so expensive. The return isn’t for a couple of years, so obviously they are thinking a lot more longer term than someone who may be not thinking long term, and thinking “Oh, maybe I plan on selling this building in the near future, so there’s no point in putting new windows on there.”
So I’m gonna drive around fourplexes and find the ones that have older windows and just mail to them to see what happens. And also a combination of other distressed, as well…
Joe Fairless: I was gonna say that I think that’s a microcosm of some other larger things you could look at, too.
Theo Hicks: Yeah. Because most of the properties I’ve seen — I haven’t written anything down, but just from looking, if they have newer windows, they also have nice landscaping, they’ve got paint, their lawn is cut… But the ones that have old windows, paint is chipping off the windows, the bushes are overgrown, and it just isn’t nice; it’s a little distressed.
Joe Fairless: You’re driving around this weekend? When are you doing that?
Theo Hicks: I’ll probably do that Saturday, because Marcella is out of town again, so I’ve got nothing else to do.
Joe Fairless: When you drive around, are you gonna have a notepad and make note of the address and something distinctive about it, so that you can personalize the note to the owner?
Theo Hicks: Yeah, so the plan is to go – and I think I’ve gotten this from one of the blog posts that you wrote… I take a picture of it, just so I remember what the property is, and then I find something distinctive about it, like “The windows are old” or “The garbage cans are out”, “Light’s out”, whatever it is, and then I kind of use that as an introductory in the letter, so it’s not just some generic letter… It’s more personalized, and…
Joe Fairless: Without offending them.
Theo Hicks: Without offending them, yes. My friend has actually had a lot of success with mailers in the area/neighborhood that I’m gonna invest in. He’s gotten a lot of responses, he just obviously can’t buy all of them. But he’s gotten a lot of interest in wanting to have further conversations about the properties, which I have those names as well, so I’ll mail to them, too.
Joe Fairless: And what is he doing that is successful?
Theo Hicks: I think he’s just sending out generic mailers.
Joe Fairless: Okay, so nothing special.
Theo Hicks: Hopefully, that added [unintelligible [00:26:48].02] will help me get a response.
Joe Fairless: Okay.
Theo Hicks: So those are the updates I have. Last week we started answering the Best Ever Community question of the week, and we’re gonna do that again this week. This week, the question was “You’ve just been given one million dollars. What’s the first thing that you do?”
Joe Fairless: I buy a one million dollar lottery tickets. [laughter]
Theo Hicks: You’d buy one million dollar worth of lottery tickets? I like it.
Joe Fairless: What would you do? I don’t know.
Theo Hicks: So I was thinking about this, and again, I didn’t spreadsheet out and go to psycho about this, but what I would do is I would first take half and invest it in an overall two million dollar apartment project, preferably a value-add deal I’m gonna be finding like a 1.25 million dollar property.
Joe Fairless: 50% down?
Theo Hicks: No. Just $500,000 for 25% down, in an overall two million dollar project. That’s half. The next $500,000, part of it will be used to 1) I’d probably pay off my parent’s home, because I think I owe them for them creating me and raising me. And then my brother lives in this group home for people that have disabilities and my parents actually own the property, but they don’t own it outright; so I’d pay that off, so my brother would always have a house to live in for the rest of his life.
Joe Fairless: You mean they have a loan on it? A mortgage?
Theo Hicks: Basically, yeah.
Joe Fairless: Okay, got it.
Theo Hicks: And then whatever is remaining, I’d probably invest it in one of your deals. That’d be like 200k, 300k left over.
Joe Fairless: And then with the profits you make from my deals, you would then pay the taxes that you didn’t allocate for initially…
Theo Hicks: Yeah, seriously… [laughter] I’m assuming it’s tax-free money somehow.
Joe Fairless: Oh, okay. Alright, got it. [laughter] You have a million dollars post whatever you paid… Post taxes. Okay.
Joe Fairless: I don’t have anything sexy. I would put it in my bank until we come across another deal, and then I would just plunk the majority of it down in that new deal… That’s what I would do.
Theo Hicks: Would you buy a bigger Death Clock? A million dollar [unintelligible [00:28:50].12]
Joe Fairless: That’s right, I’d get some [unintelligible [00:28:53].14] and maybe a bell for every hour that passes by. [laughter]
Theo Hicks: There you go. That’s good. Alright, so these are some miscellaneous items – be sure to check out the besteverconference.com and get your ticket; we still are offering the early bird rate, which is $100 off, until Halloween. That’s besteverconference.com, the second annual conference.
And finally, we’re gonna do something new. We used to do the review of the week, but now we’re going to do shoutouts. This week the Best Ever shoutout goes to Justin. He says:
“I’m looking for my first syndication deal, a 2-4 million dollar 50+ unit property on the East Coast, anywhere between New York and South Carolina. I’d prefer if the property is poorly managed, with opportunity to improve the value via renovations, reduced expenses and increased rents. I have investors ready and an experienced investor on my team to guide me through the details. I just need a great property to put it all together.”
So if you know of a property or where to find a property, you can find and message Justin at his Facebook group, which is Liberty Property Investing.
Moving forward, if you wanna be the Best Ever shoutout of the week, go to our Best Ever community on Facebook and create a comment saying “Shoutout” and then what you wanna share the shoutout to be.
Joe Fairless: Cool. And then Grant, who does our social media, randomly selects one that we get either from that group, or some people even e-mail us. He’ll randomly select one, and then if yours is selected, then you’ll be included here. We might mix it up, we might still do review of the week every now and then; we’ll just see how things go.
Cool. Well, thanks everyone. I hope I see some of you in Dallas at the conference on the 7th, and if not, we will talk to you tomorrow via the next episode.