Best Ever Tweet:
Andrew Propst Real Estate Background:
- CEO of HomeRiver Group
- Over 18 years of experience both in residential and commercial real estate investment management
- Past National President of NARPM (2015)
- Kidnapped and held for ransom by Russian Mob. Movie made about his ordeal. – The Saratov Approach
- Based in Boise, Idaho
- Say hi to him at http://www.homeriver.com/
- Best Ever Book: How to Win Friends and Influence People
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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 fluffy stuff.
With us today, Andrew Propst. How are you doing, Andrew?
Andrew Propst: Great, man. Thanks for having me on the show.
Joe Fairless: My pleasure. I’m looking forward to our conversation. Andrew is the CEO of HomeRiver Group. He’s got over 18 years of experience in both residential and commercial real estate management. He’s the past national president of NARPM (National Association of Residential Property Managers). Oh, and by the way, he’s been kidnapped and held for ransom by the Russian mob… Apparently, there’s a movie made about his ordeal. Is that correct, first off?
Andrew Propst: Yes.
Joe Fairless: Okay, good. Alright, I just wanna make sure that someone didn’t sneak that in for a late April Fool’s day or something, I don’t know.
Andrew Propst: That would have been epic.
Joe Fairless: Yeah. And he’s based in Boise, Idaho. With that being said, Andrew, do you wanna give the Best Ever listeners a little bit more about your background and what you’re focused on?
Andrew Propst: My primary focus is residential property management, multifamily and single-family, nationwide. HomeRiver Group is a third-party property management company; we’re based in 14 states, I believe it’s about 18 markets, and we service investors managing their properties in multiple locations throughout the country, and our purpose is to offer them great service etc. and find our investors opportunities to invest, so we can obviously manage more properties.
Along with that, obviously, I have my own portfolio of properties that I’ve purchased over the years, commercial and residential. I’ve been in the business — obviously, member of NARPM, member of IREM (Institute of Real Estate Management) and CCIM (Certified Commercial Investment Member).
I’ve known a lot of folks in the industry nationally, I’ve seen a lot of good things in the business, and bad things, and learned a lot, made a lot of mistakes, and occasionally I do something right, so it’s nice to be able to talk to you about a little bit of that today.
Joe Fairless: Yeah, we’ll talk about the good, the bad and the ugly… Since I brought up the kidnapping thing, would you mind just telling that quick story, if it is a quick story?
Andrew Propst: Yeah, the best part about the whole kidnapping thing is that they made a movie about it, and that I can refer people to watch the movie, so I don’t have to tell the story anymore… But your listeners would be pretty bummed if I didn’t give at least a highlight. I was serving as a [unintelligible [00:03:04].22] missionary in Russia; I was approached by some Russian mobsters basically who owed some gambling debts, and they asked us to come over and talk to them about the church. We walked in there, we got beat up pretty bad, we got held for ransom for five days, and then they got scared and let us go. 13 years later, we had a director reach out and wanted to make a movie about the ordeal, and actually did make a movie, which is crazy…
It’s available on Amazon Prime. You can watch it for free on Prime, or Netflix. It’s called The Saratov Approach. You can watch me get kidnapped on TV.
Joe Fairless: There you go… And is it okay if I laughed about you saying “You can watch me get kidnapped on TV”? I don’t want you to be like “Wait, he’s totally just not taking it the right way.” Alright, got it. So real estate wise, you have been in the business for over 18 years, and you’re a past president of the association that organizes property managers… What are some best practices that you’ve learned over the years? Feel free to choose residential or commercial, whichever direction you wanna take it.
Andrew Propst: Well, I definitely have a love of the residential side. There’s a lot of people out there that either have a third-party property manager or manage their property themselves, and obviously I am on the camp of delegating that out, having a professional do it… But either way – if you’re doing it yourself, or have a third-party manager – you want to utilize the lease in your day-to-day operations of your business.
A lot of people get very emotionally involved in what’s going on with their tenants, and allow the tenant’s situation, emotional state, whatever they’re dealing with in their life to dictate the tenancy, and that’s just not how you do it. You obviously want to stick with the lease. The lease is your best friend if you’re an owner or a property manager, and we do a good job of saying “Hey, this is something we’ve agreed to from the beginning. This is what the lease says. I understand your dog died, whatever happened, your paycheck got lost in the mail, but this is what the lease says.” We always just refer the tenants over to the lease, and that’s something that unfortunately the people we manage – almost 13,000 doors nationally; we collect almost 100% of the rents on a monthly basis… But I’ll have a property owner come in with six properties that all six of them are three or four months behind, and it’s because, again, they don’t lean on the lease, and they let the situation happen, whatever it is, with the tenant, and they get taken advantage of. So on a very high level, make that lease your best friend. That’s some of the best advice I can give. Everything that comes up, have something in your lease that addresses it, and when it happens, just point the resident back to the lease.
Joe Fairless: What if I’m living in a property that you’re managing and it’s the very first time I’ve been late, and I will be able to pay in two weeks? What do you do?
Andrew Propst: Typically — again, if you’re two weeks late on your rent… It’s very different from state to state, but typically we would give them, after rent was due, a three-day notice to pay or quit, and if they’ve had a great paying history in the past, we would still send that notice to get them on a promise to pay note. That is basically “Hey, this is the conditions that you’re agreeing to if you don’t pay. If you don’t deliver the rent by this time, then you’re forfeiting the property back over to us.”
So again, if they didn’t pay, we’d proceed with the eviction. If they did pay, then we would be fine; we would still collect the late fee.
Joe Fairless: Is that promise to pay note mentioned in the lease at all?
Andrew Propst: No, because this would be an addendum to the lease. Basically, whatever state you’re in, whatever the laws allow in your promise to pay note, you can put in there. There’s some states where you can get away with exercising those notes, and some states where there’s just a lot of fluff and you still have to go through the rigmarole of the eviction. But if you allow the tenants to pay late once, they’ll pay late forever if you don’t have these kinds of things in place.
Joe Fairless: What’s another policy that perhaps you didn’t have before, but now you make sure is in place?
Andrew Propst: I think that the many years of managing properties — when I first started managing properties, we had a lease that was three pages long. Our lease now is probably 12 or 13 pages long, so putting these things in place… One thing I really liked that we started doing about two years ago – if you own investment properties and you have central air in those investment properties, tenants, just like homeowners, are horrible, horrible at changing their air filters, and this is a huge expense. The furnace filters etc. are easy to change, but nobody remembers to do it, so we implemented an awesome product called Filter Easy, where a new filter will get sent out to a tenant on a regular basis, in the mail; [unintelligible [00:07:57].09] they put it in the furnace…
If we go out to the property and they’ve got an old filter in there and the points are dirty because they haven’t changed the filter, then our lease says that we charge the tenant for that, versus the owner getting the bill. So I love the Filter Easy program, or regular filter delivery program, because just like homeowners, tenants forget to do it, and it’s a huge mess; owners do not like getting $500, $600, $700 HVAC bills because their tenants never changed their filters. Before we had this in place, we saw some of the nastiest filters you could even imagine.
Joe Fairless: That’s a good business model. I just went to their website, Filter Easy. I hadn’t heard of them before.
Andrew Propst: It’s great, and they integrate with our property management system, so the second a tenant moves in. The other thing that owners typically like about it is we charge the tenants for it. It’s a tenant charge, versus an owner charge… So they get billed a small monthly fee – once a month or once a quarter, depending on which part of the country they live in – and they’ll get a filter automatically delivered to their door… And they change it, because people just don’t remember it. It’s crazy.
Joe Fairless: And who pays for that?
Andrew Propst: The tenant.
Joe Fairless: The tenant pays for the ongoing filters?
Andrew Propst: Yes, that’s right.
Joe Fairless: And how much is it?
Andrew Propst: It just depends. You have to talk to Filter Easy about that, I’m not 100% sure. It just depends on how regular the filters go out, whether it’s monthly or quarterly or bi-annually…
Joe Fairless: You make sure that they have that set up, but you’re not managing that process…
Andrew Propst: No, Filter Easy. Once we put them in our system, Filter Easy automatically starts sending them the filters.
Joe Fairless: And they give Filter Easy their credit card information, or however they’re paying?
Andrew Propst: We bill them. If their rent is $1,000 and they get billed $10 or whatever, they would pay $1,010 dollars.
Joe Fairless: Is there a profit margin for the landlord on that?
Andrew Propst: It depends on how you set it up and how you negotiate with Filter Easy, but I think there are some property managers that probably make some money doing that, or owners that are probably making some money doing that. I can tell you that the owners are saving a lot of money by having their furnaces properly cared for.
Joe Fairless: What’s been a challenging property that you’ve taken over to manage?
Andrew Propst: On the third-party level, the most challenging properties are properties where owners don’t wanna give up control – “This is the way we’ve always done it”, blah-blah-blah. So we have very, very clear systems, and those systems when followed, things go great. When we have owners that are very specific as to how they want things done because this is how they’ve always done it, and then we deviate from those systems – that’s when those properties go the wrong way.
So in general, an owner that doesn’t wanna give up control of their property – which is the whole reason you hire a property manager, right? So this stuff will get done and taken care of without having to bother you, and there’s a statement and a check that shows up on a monthly basis; that’s the whole idea. If the property owner feels like they have to continually manage the property and manage the manager – that’s tough for us, and it’s probably not a good fit for the property owner… So those are tough.
As far as tenants in the property that are just difficult – we’ve dealt with them all. We’ve got pretty good processes on how to deal with most of them. I think some of the best deals out there right now are the most poorly managed deals. When there’s owners that are just desperate to sell, it’s because they have done a really bad job managing their properties, or their property manager has done a bad job managing their properties; they’re under-rented, they’re not collecting the way they should, and if you can identify those opportunities, there are some major buys out there for investors who probably listen to this podcast on a regular basis, some great opportunities. All the best real estate deals I’ve ever purchased are the ones that are the poorly managed ones.
Joe Fairless: That’s a perfect segue, I’d love to talk about your portfolio. You said you have your portfolio of commercial and residential properties… What are you actively buying right now? What type?
Andrew Propst: Right now mostly small multifamily, which is 100 units or less, single-family… I’ll look at anything on a commercial; I’m pretty bearish on office space and retail just because of what’s going on in those spaces, but… If you can get a good deal on multifamily, I think multifamily has some very, very long runway. I think one of the best plays right now is to go vertical, do a build to rent project in certain markets, because their margins are there, the need is there, and it seems like everything I’ve read, all the conferences I’ve attended and the statistics are saying multifamily is here to stay.
We have about three million multifamily properties that should be in the ground, being built right now, or [unintelligible [00:12:25].13] and they’re not there. Somebody’s gotta fill that void, and I think that is a good play and obviously I’m trying to take advantage of that as much as possible. Since 2010 I’ve helped investors put about 4,500 brand new multifamily doors in the ground, mostly in the Boise market. We’ve got a couple projects in Kansas City, also Memphis, but primarily those are in Boise… But there’s many opportunities, especially in the secondary/tertiary markets in this country, where build to rent is an amazing option. There’s some really good financing out there for that, and if you can find the right builder and maybe find the right partner too, there’s some major opportunities to take advantage of the huge need for multifamily.
Joe Fairless: You said three million units that should be up that aren’t. Where did you get that stat from? What’s the source? I’m just curious…
Andrew Propst: The source – it would be coming from the National Multifamily Council. Like I said, the three million unit delta, to where we and where we are. In some of these markets we’ve seen national historical vacancies of 7%. A lot of markets, especially on the West Coast – there’s 2%, 3% vacancies. That’s major. Even in Los Angeles, people aren’t building a lot of apartments because it’s just too expensive – vacancies are zero. There’s a huge need for multifamily housing, and it’s just not out there.
Joe Fairless: What was the last property you purchased?
Andrew Propst: The last property I purchased was on Friday, and it was a single-family home in Memphis, Tennessee.
Joe Fairless: What are the numbers?
Andrew Propst: It was $50,000, rented at $850. I think it’s between 1,100 and 1,200 square feet. It’s in a B area, probably a C property. It already came with a tenant in it, and it was sourced by one of our property managers there in Memphis; he brought it to me, and it was a very good deal.
Joe Fairless: That’s a whole lot of cashflow for a $50,000 house.
Andrew Propst: Buy those all day long in Tennessee, if you can. They’re harder to find than they used to be, but those deals are still out there. I couldn’t buy a cardboard box on a lot in Boise, Idaho, but I can buy a really nice C/D property in a C/D neighborhood in Memphis all day long. I love Oklahoma City, there’s still great buys in Indi, some good buys in North Carolina… Those are areas that we manage. If we’re there up and managing, I feel very comfortable buying outside of my home state, and having our property managers take care of it.
Joe Fairless: For a listener who’s attempting to vet a property management company – let’s assume you don’t own one for a second – how would you vet a property management company?
Andrew Propst: That’s a great question. Typically, I would say 90% of property owners that are looking to potentially buy an investment in a market would start their search online. I would look to see how transparent that property management company comes across online. First of all, are they members of any local associations or national associations in regards to property management or real estate? The question is, when you’re looking at their website, what do they have to lose? If they don’t have a lot to lose, then maybe you wanna stay away from that one. But if you can go onto that website and see that they’ve got a good management system by clicking the Owner Portal login, to see if you have full transparency into your statements, into what’s happening on your property – that’s huge.
If you can see the owner’s name and you can see how to call that person and they have a biography there about what they’ve done, if you can see their employees… Are they putting themselves out there so if something goes wrong they’re gonna fix it? Those are things that I would start my search with.
Then, obviously, make a couple calls. Find the ones on there that have been there for a while and seem to be doing it right, and give them a call. I think obviously looking at the reviews too, but a lot of the times – I’m just saying this for my fellow property managers – property managers get a lot of bad reviews, but a lot of those times those bad reviews are from tenants that aren’t getting their security deposits back, which is the property managers stepping up and taking the heat for the owner, because that tenant has done a bad job being a tenant.
So I would try to weed through a lot of those bad reviews and look for owner reviews, see what the owners are saying specifically, versus how much are the tenants complaining because they’re not getting their security deposits back. That’s kind of the difficulty of being a property manager – you’re stuck in between doing what’s right for the owner and doing what’s right for the tenant, and you have to kind of be in the middle there. And sometimes, when you do what’s right, it makes one of those people very upset, and then they go to Yelp or Google and let you have it.1
Joe Fairless: When you make those calls to the property management companies and you’re attempting to determine if they’re (as you said) “doing it right”, what questions do you ask to determine that?
Andrew Propst: Hey, if it was me, I would wanna talk to somebody that understands investment property, and not just a toilets and tenants property manager. A T&T property manager — hey, I deal with tenant problems all day; “if you’re toilet’s leaking, I fix it”, that is not the kind of person that I personally wanna work with. I’m not saying that they’re good or bad, but probably not the best partner long-term to work with. I wanna be able to talk to my property manager about “Hey, what’s the market doing? What kind of cap rate can I get if I sell this or want to buy more properties?” More of an investment property manager, versus a property manager. I want them to understand what an IRR is, and understand how to put together a budget on my property, send me budget comparison to income statements, and basically manage it like a true asset, versus just sitting around and waiting for problems to happen.
Joe Fairless: Most businesses wanna compete based on value, not price. I get that. But just from a price standpoint, what are the fees that an investor should expect to come across for a high-quality property management company?
Andrew Propst: On the property management fee I would expect to pay anywhere between 7% and 10%. I can’t say specifically what people pay in certain parts of the country. If you say “We’re gonna start charging this fee” [unintelligible [00:18:30].20] but what I typically see across the country, shopping other property management companies – if it’s a single-family home, you’re going in and you’re buying one single-family home, you should be looking at a 7% to 10% management fee.
Joe Fairless: Based on your experience, what is your best real estate investing advice ever?
Andrew Propst: Diligence. When you’re making a buying decision, get all the information that you can. I’ve seen investors do this – they’ll go in and buy a single-family or a multifamily, a commercial, and they won’t even look at the leases, they won’t look at the tenants, they won’t look at the applications; the real estate agent won’t even put in the contract to transfer the deposits at closing… So just understanding “What does the actual income look like? What are all the expenses that are associated with that property? …not just what the owner says.”
There’s so many resources out there where you can go and get the right answer the first time and put it into your proforma and get it right, so you understand specifically what you’re buying. Who the tenants are paying the rent – that’s so important and gets overlooked all the time – and then what do the applications look like, and putting together a planned budget for that property and then having your property manager execute that plan.
I can’t think of better advice to give to folks… Because when I’ve done that, my investment is awesome; when I haven’t taken the time, I get surprised, and things happen that are outside of my vision for that property – that’s because I wasn’t looking. So just let the facts determine what’s going on and do your best to try to put the emotions aside, because you have an agent or a family member or a friend saying “This is the best deal of all time.” It could be, but make sure you check all the boxes before you execute on that decision.
Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?
Andrew Propst: I am so ready!
Joe Fairless: Well, I am so ready to it, too! First, a quick word from our Best Ever partners.
Break: [00:20:32].13] to [00:21:18].12]
Joe Fairless: Okay, best ever book you’ve read?
Andrew Propst: How to Win Friends and Influence People, Dale Carnegie.
Joe Fairless: Best ever deal you’ve done that wasn’t your first and wasn’t your last?
Andrew Propst: A 42-unit apartment building in Nampa, Idaho.
Joe Fairless: Do you still own it?
Andrew Propst: Just sold it.
Joe Fairless: What were the numbers on that?
Andrew Propst: I paid 1,750,000, sold it for 3,050,000, held it for two years… Increased average rent from $435 to $715 in two years.
Joe Fairless: 50k – was that in reference to how much you put into it?
Andrew Propst: No, I bought it for 1.7 and change, sold it for $3,050,000.
Joe Fairless: How much did you put into it?
Andrew Propst: 250 cap ex. It goes to show – one of my favorite quotes: “You never know how important a property manager is until you hire a bad one.”
Joe Fairless: So true.
Andrew Propst: That was a situation where there was bad property management, you had owners that didn’t care about what the rents were… The average rent for that property was $435; in two years we had it to $715. If you understand how to calculate cap rates, I think we bought it with a projected cap rate of about 15, and then we sold it just over a 6, so that’s why we almost doubled our money in two years.
Joe Fairless: And by “we” – it’s you and investors, or…?
Andrew Propst: I have partners.
Joe Fairless: Got it. Are they passive investors, or did you all joint venture together?
Andrew Propst: It was an equal partnership. We sold that building a month ago. We’re in the middle of a 1031 exchange; we’re buying a property in West Memphis on the exchange because of that. But after all the real estate etc. was paid, we had 1.5 million in equity.
Joe Fairless: What’s a mistake you’ve made on a transaction?
Andrew Propst: Just going back and not doing all the due diligence. I’m trying to think of something specific that I’ve done that was pretty dumb… I’m a pretty picky investor, man [unintelligible [00:23:09].23] I bought a portfolio of properties in Memphis, Tennessee, and because there was a portfolio, I didn’t get to look at them all the way I normally would – when I said a portfolio, it was nine single-family homes – so there were some surprises that popped up, and I should have looked a lot closer. Not that it’s gonna hurt; it’s not gonna hurt too bad, but it hurts, for sure.
Joe Fairless: What was the biggest ticket surprise?
Andrew Propst: Just the amount of rehab as we moved the tenants out to either re-tenant or flip… The amount of rehab that came along with the properties; all these properties were A properties, nothing was older than 2007, so we assumed rehab numbers, and some of those assumptions were not right.
Joe Fairless: Best ever way you like to give back?
Andrew Propst: Best ever way I like to give back… I think it’s pretty easy to give money; I think the best way to give back is to get involved and volunteer your time. I’m very involved with the Boy Scouts of America, and so when there’s opportunities to jump on an Eagle project or serve the local community with Boy Scouts, that’s something that’s awesome, just because of what Boy Scouts has done for me. Individually, if I can figure out a way to help out locally, that’s pretty powerful.
Joe Fairless: And how can the Best Ever listeners get in touch with you?
Andrew Propst: Probably through our website, HomeRiver.com. It’s very easy to get to. I’m the current CEO, so if you click on the company profile, you can see me and you can message me there. If there’s anything I can do to help with the property management, investment questions, build to rent, that kind of stuff, I’d love to help any way I could.
Joe Fairless: I really enjoyed our conversation, from some fundamentals with sticking to the lease – the emotional state shouldn’t dictate the policy at that point in time; it should be the lease.
Andrew Propst: Very well said.
Joe Fairless: I pretty much wrote down my notes by what you were saying, so we’ll credit you to that, because you were the inspiration behind it. Then also the due diligence that’s important – you talked about what we should do, and then what happens if you don’t do it (on that portfolio in Memphis). And then congrats on the recent sale with the apartment building, and best of luck with the 1031 exchange into the one in Memphis.
Andrew Propst: I really appreciate that.
Joe Fairless: Thank you again for being on the show. I hope you have a best ever day, and we’ll talk to you soon.
Andrew Propst: You too, thank you so much.