JF2120: Jumping In The Market With Patrick Menefee

Patrick served in the army for 6 years and is the founder of Invest DGP. Patrick started investing in June of 2019 and has acquired 12 units. Patrick is very open to sharing some of the hard lessons he learned from jumping in the market quickly and how he was able to improve his units and double his rent collections. 

Patrick Menefee Real Estate Background:

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“Never have your inspector and appraiser go out to your property at the same time.” – Patrick Menefee

TRANSCRIPTION

Joe Fairless: Best Ever listeners, how 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 that fluffy stuff. With us today, Patrick Menefee. How you doing, Patrick?

Patrick Menefee: Hey, Joe, I’m good. How are you?

Joe Fairless: Well, I’m doing well and looking forward to our conversation. A little bit about Patrick – he’s the founder of Invest DGP, he served in the Army for six years – so thank you, Sir, for that – and he started investing in June of 2019. He owns 12 units, and he’s located in Charlotte, North Carolina. So with that being said, Patrick, you want to give the Best Ever listeners a little bit more about your background and your current focus?

Patrick Menefee: Absolutely. Thanks, Joe and thanks for having me on. So like you mentioned, six years in the Army right out of college, and then I ended that in about February 2018, transitioned into financial services consulting, working with banks, financial institutions, traveling every week for the last two years. As I moved and transitioned to Charlotte, that was when I realized that I wanted to get involved in real estate in some facet or another; I just wasn’t quite sure what. So I turned 30 towards the end of 2018, and that was when I started setting some goals for myself, realized what I wanted to get to, and I spent a lot of time over the next six to seven months doing a lot of education, networking, listening to podcasts, meeting as many people as I could, reading all the books that I could get my hands on… And it was in, as you mentioned, June of the following year 2019 that I really decided to start taking action, and then within about five weeks, I had 10 units under contract. They were all small multifamily; one of them a fourplex, another one was a portfolio of three duplexes that were all side by side. The fourplex, I did it down by myself and then the duplexes were all with a partner.

So once I had a little bit of a foundation, once everything was– I actually made a decision to take action. Everything happened rather quickly after that. So as you mentioned, now I own 12 by the end of the year. The other two units are also small multifamily with a partner as well, and that’s really been my focus right now. It’s been small multifamily property. Ultimately getting into some of the bigger commercial, but primarily small for right now.

Joe Fairless: You were doing a lot of education, and then when you decided, okay, now it’s time to rock and roll, in five weeks, you had 10 units under contract. What was the tipping point where you made the decision now it’s time to go buy some property?

Patrick Menefee: Actually, I’d purchased my own primary residence back in March, and the company and the guy that I bought it through, they were having a networking event. I still remember the day; it was June 6th, and I was networking with people, talking to some people. I had my plan initially, which was going to be to use the VA loan and [unintelligible [00:05:36].02] houses and slow roll it and live in a house for a year, rent it out; that was my plan, and maybe pick some up along the way that made sense. But there was one couple that I was talking to. I can’t even tell you exactly what they said, but it was the exact conversation that hit me, and I realized that they had a couple of condos that they were renting out. They were actually doing what I wanted to do, and something right there just really kicked me and said, “Why aren’t you just taking action?” After that conversation, I doved in, and that was when I found– I actually had the fourplex. I technically didn’t get under contract until July, but I found it about a week later and started the negotiations with the seller. So it happened very quickly.

Joe Fairless: Okay. So it sounds like you had just built up knowledge and things were bubbling, bubbling, bubbling, and then there was some breaking point, and perhaps in retrospect, it’s an insignificant conversation. Maybe it was similar to other conversations that you had previously, but you were just ready. It was just that time and this conversation just happened to be at the right point and place and time where it just made you have that decision.

Patrick Menefee: Yeah, it definitely did. I probably had some more conversations, five or six times a month before that, but that one just did it.

Joe Fairless: Well, let’s talk about your purchases, those 10 units. You did the fourplex yourself, you said, and then you got three duplexes side by side with a partner. How did you structure those transactions with the partner?

Patrick Menefee: It was interesting. It was a mix of– by accident when that finally worked out, and then just some overall planning. I was looking for a partner on it, and I’d been doing a lot more networking and branding to let people know what I was doing. So as a result, some people from work were interested in working together on a deal.

So I was talking to one of my really good friends that I was in the army with, and we were talking through some of the options for how I might split this up and how I might pull off a partnership with him, especially because the guy was going to be someone out of state, was primarily just going to be investing cash. We worked out some terms that we thought made sense, and then at the end of it, I could work with this guy, but I didn’t even think to ask, “Do you want to do this and do you want to get involved instead?” and he said, “Sure.” So we worked out the terms, he brought the majority of the cast to it, and I did everything else. So it ended up– because it was six units, and this was something I wasn’t totally prepared for at the time, but since it was six units, I couldn’t get a conventional mortgage, so I had to get a commercial loan; and then on top of that, the way that we worked out the negotiation, the way we worked out the partnership was he was providing the majority of the cash, but I was going to be primarily on the loan. So that was not something that I could typically do going through most of the normal Fannie/Freddie loans, because if you provide that money, it either needs to sit in your account for two months, or it needs to be from someone who’s also on the loan. So we structured it that way, and then we split the equity accordingly. Me doing all the management and all of the activities and all of the primary effort and some of the bigger portions, but we worked it out in a way that worked out perfectly for both of us.

Joe Fairless: Reminds me of the saying, “If you ask for money, you get advice. If you ask for advice, you get money.”

Patrick Menefee: I have to write that down. It’s a good one.

Joe Fairless: That’s what happened here, right? You’re asking him for advice, and you got money.

Patrick Menefee: Yeah, that’s absolutely what happened.

Joe Fairless: Well, you said you got a larger portion of– is it each of the three deals based off of your responsibilities?

Patrick Menefee: Yeah, it’s very close to 50-50, but yeah.

Joe Fairless: How do you structure it? So 60-40?

Patrick Menefee:  It’s 55-45.

Joe Fairless: Okay, got it. Very close.

Patrick Menefee: Yeah. We, on this one — it worked out really well. We said– based on the fact that I was going to be doing all the work, we set the all-in cash as a percentage of the investment. So we said, “50% of the investment is going to be for the cash. So if you bring 100% of that, you get 50% of the deal. If you bring 50% of that, you get 25% of the deal.” So that was how we worked it out. He brought 90% of the cash and got 45% of the deal.

Joe Fairless: With the three duplexes – are they located in Charlotte?

Patrick Menefee: They’re just North of Charlotte. They’re about 45 minutes north in Statesville, North Carolina.

Joe Fairless: Okay, and what about the fourplex?

Patrick Menefee: That one’s just west. All of mine are just surrounding the Charlotte area, just because multifamily is hard to come by with solid cash flow within Charlotte. So the fourplex is in Gastonia.

Joe Fairless: Okay. How did you come across the fourplex?

Patrick Menefee: It was on the MLS, actually. It had been sitting on the MLS for almost six months.

Joe Fairless: Why do you think it wasn’t snatched up?

Patrick Menefee: As I’m still dealing with it, because it was a nightmare. They had it listed way too high. It was an older couple that had a large portfolio that they were selling. So this was one of them. They had it listed at $210,000. I ended up– after negotiating with them, I ended up getting it down to $160,000, which was fantastic, but they [unintelligible [00:10:29].22] did $210,000. Yeah, I think that was a big part of it, too. A lot of people saw $210,000 and said, “Absolutely not. I’m not interested in that,” because it was way overpriced at that, but at $160,000, it worked out. So I think that was a big part of it; and it’s also a 100-year-old house. They didn’t take care of it all too well. It just got neglected over time, and it was an old farmhouse that got converted into a fourplex. So it was the perfect storm of not too great, but a great opportunity.

Joe Fairless: So, talk to us about some challenges that you’ve had with it?

Patrick Menefee: Oh boy, where do I start? How long did you say we have? [laughs] I had problems from the acquisition part initially, not even getting into what the house was. So after I got it under contract, I started going through the due diligence process. I got it under contract at the beginning of July and was supposed to close at the end of July; I wound up closing on September 13, instead of July 29. Yeah, I almost lost the deal a couple of times. I had four closing dates scheduled and I had three different appraisals done.

Joe Fairless: What’s going on?

Patrick Menefee: The first time around, the first appraiser, I learned one very important lesson that I will, at any point, share with as many people as I can, and that’s – never have your inspector and your appraiser go out to the property at the same time. I now will base all of my properties around that, because the inspector looked at some of the stuff at the house. He was just having a casual conversation with people that were around them, pointed out a bunch of problems…

Joe Fairless: They love to talk.

Patrick Menefee: But he happened to point–

Joe Fairless: They love to share their knowledge.

Patrick Menefee: Yeah, and he’s a great guy, and he’s inspected all my properties, but he just said it to the wrong guy.

Joe Fairless: Yep. He was doing his job. He was inspecting the property and documenting everything, right?

Patrick Menefee: Yeah, absolutely. Unfortunately, the appraiser also documented that. So I had it under contract for $160,000, and he appraised it at $160,000, but he appraised it as– I think it was a C4 or a C5, so it was in too poor of a condition for banks to loan on; and I went in the inspection report, and it wasn’t like he cited specific things, he just cited comments from the inspector. So aside from getting it reappraised, I couldn’t go fix a certain thing and then get it back. So I went a different route, got a different appraiser. The next appraiser did the inspection. I actually went out and got the inspection done, and then no one ever heard from him again; just fell off the map. Very strange.

Joe Fairless: That is very strange. Okay…

Patrick Menefee: And then I finally got a third one. He did do the inspection; was very slow about all of it. He actually submitted the report, but when he submitted the report, he left the address off, which then took another week to get.

Joe Fairless: Goodness gracious!

Patrick Menefee: I don’t know how he left the address off of the report. Yeah, that could have been a sign upfront of things to come… But finally got it closed. It had tenants in it, which I thought at the time was a good thing, because I could go one by one and keep producing cash flow while rehabbing each one of the units. That turned out to be a huge problem. I evicted two of them. Dealing with the units themselves has been definitely challenging just because of how poorly they were taken care of, and then one of the tenants, on the way out, she, I think, I would say out of spite, she never registered any maintenance requests or anything like that, but on her way out, she called the city and registered a complaint. So I had a city inspector out there and all that stuff.

Joe Fairless: What was the complaint?

Patrick Menefee: It was just a general complaint of code violations. I had interacted with her before when I was out there doing some other work, and she had also said in other cases, she had talked about the lease and said how the lease was full of landlord-tenant violations. I have a other property manager that manages all of that, and I was asking her about it. It’s not something that we want to do… What’s wrong with it? What do we need to do? She said, “Well, it’s just old.” So it’s one of those lessons in dealing with tenants. So there’s nothing that’s ever going to be right.

Joe Fairless: Yep, some people you can’t please, no matter what.

Patrick Menefee: Yeah.

Joe Fairless: Alright. So where are you at with the business plan right now?

Patrick Menefee: Overall, on the six units, we initiated the refinance yesterday.

Joe Fairless: On the three duplexes?

Patrick Menefee: Yes.

Joe Fairless: Right. No, I’m talking about the fourplex. You were talking about the fourplex before, right?

Patrick Menefee: Oh, I’m sorry. Yeah, I’m sorry. When you said the business, I thought you meant overall.

Joe Fairless: Oh, sorry, yeah. So with the fourplex, where’s the business plan at?

Patrick Menefee: That one, I have two units that the rent has been increased. I made modest updates to them. I would eventually like to go in and do a little bit more, but kept the current tenants in and got a pretty good ROI on the improvements that I did make. I almost doubled the rent for each of those two units.

Joe Fairless: Tell us the numbers, please.

Patrick Menefee: Yeah, so when I took over, all four units were at $350 a piece. So $1,400 dollars a month total rent. I’m now getting from the two units that I did — I put a probably about $3,500 into those two units, and increased rent to $1,350 between the two. So pretty solid return on investment.

Joe Fairless: Wait, I want to make sure I’m hearing that right. You put in $3,500 per unit, correct? So $7,000 total?

Patrick Menefee: No, no, I’m sorry. $3,500 total.

Joe Fairless: Okay, even better. So you put $1,750 total, and… Let’s just do unit by unit. That one unit is now renting for how much more?

Patrick Menefee: One unit is up to $650. The other unit’s up to $700.

Joe Fairless: Wow, that’s incredible.

Patrick Menefee: Yeah, it’s a pretty solid return on investment.

Joe Fairless: Yeah, so let’s just do the $700 one. So that’s doubling your rent from $350 to $700. Wow, it’s quite the increase. If you hadn’t improved those units, and you just turned them over to a new tenant, could you have increased the rent at all from $350, and if so, by how much?

Patrick Menefee: Yeah, I could have. I probably could have turned them to about $500 or so.

Joe Fairless: There was already value-add built into it.

Patrick Menefee: Yeah, there absolutely was. Those units had been– I mean, I think the rent had been kept the same for– I can’t even speculate. I have no idea– for a very long time; that hadn’t been touched in a while. So there was definitely room to start with.

Joe Fairless: Nice. So you increased the rent $350 and you put in $1,750, correct?

Patrick Menefee: Yes.

Joe Fairless: So that’s 20% return on those renovation dollars. Nice job.

Patrick Menefee: Yeah, I can’t really complain about that. The other ones are getting to be a little bit more — and the one thing that I will say as a caveat is because they are lived in, there was a lot of stuff that I wasn’t doing. So I didn’t rip out and replace all the cabinets. I just updated what was there, and did some stuff in the bathroom, and replaced flooring where I could and all that stuff. But doing a full sweep of it, it will definitely, when I eventually get there, it’ll cost a little bit more, but it’ll also further increase rent by probably another $50 to $100 a month.

Joe Fairless: That area supports those additional rent increases?

Patrick Menefee: Well, I guess, given the current situation, I don’t know how much rent increases are gonna happen, but generally, yes.

Joe Fairless: Okay, got it. Well, now I interrupted you on the financing for the three duplexes. Will you pretend I did not interrupt you? What were you saying about that?

Patrick Menefee: Yeah, sorry about that. We had gone through the commercial loan — because they were all three on the same property when I bought them, the first thing that I did was subdivide them. So they’re all each on their own property now, and that way, I have a lot more flexibility if I need to sell one off to recoup some cash or whatever I need to do. So I’m refinancing them also into a 30-year fixed. So I initiated a refi last night; it’s definitely not a full BRRRR. Neither of them are going to be. Definitely not going to pull out everything that I put into it, but on this one, and especially that the six units, because I only put in 10% of the down payment to start with, I’m not going to see personally a big return, but I’m going to get my investor about somewhere between $15,000 to $25,000 back. I know that’s a– I had to give him a range, but with the whole electronic appraisal and everything that they’re doing with the virus, I’m less confident in my numbers now than it was a couple of weeks ago.

Joe Fairless: Yep, and just for the Best Ever listeners, we are recording this in the middle of the Coronavirus pandemic. So I recognize that this episode airs many months after we actually record it. So when he says virus, that’s what he’s referring to.

So the interesting thing that I heard, or one of the interesting things that I heard from you is that one of the first things you did was subdivide the three so that you have more flexibility. I thought I heard you say that you got a commercial loan on it initially. If I heard that correct, how did the conversation go with the lender where you said, “Hey, I know I’m getting this commercial loan, but I actually like to subdivide it and break it up”?

Patrick Menefee: That’s a great question. The one that I used is a regional lender. So I had the conversation with him upfront. I let him know what ultimately I was trying to do, and weighed out essentially the full roadmap. I’m looking to purchase these, I’m looking to subdivide them, I’m looking to rehab them and then ultimately look into refinance into a fixed loan. So I’ve had multiple conversations with a lot of different lenders before I settled on this guy, and a lot of places weren’t okay with it and understandably so, but as long as– it was, as long as when I refinance, everything is done at the same time, and they’re made whole on the back end, everything was A-OK.

Joe Fairless: What gave you the idea to subdivide?

Patrick Menefee: That’s a good question. I knew the conventional 30-year fixed route, and I knew that that was a way to get there. So that was really the only plan that I really had all along. But as far as what triggered it out at the very beginning, I think it was just because that was mostly what I knew, and I realized that it was a possibility that would likely add value, but also give me a lot of flexibility.

Joe Fairless: Absolutely. In my opinion, it’s an advanced thought process for you to think that way. So bravo to you on that, and it’s always good to have more flexibility than less, and especially if you can get more favorable residential financing even better… And get some of your money back out. I mean, there’s so many instances — and I would guess that more than 50% of investors would miss that part of the process and not subdivide; first off, not think about it, and then secondly, if they thought about it, not go through the process that’s required in order to subdivide. So bravo to you on that.

Patrick Menefee: Well, I appreciate it. I think that’s one of the big takeaways for anybody. I had no experience with subdividing, I had no idea what I was doing, but everything is easy enough if you just start taking action and figure it out. So I made a couple of calls and I started asking people and–

Joe Fairless: Who was your first call?

Patrick Menefee: I called my real estate agent and asked him if he knew anybody that did subdivision or anybody that he had worked with as a surveyor. Then next call after that was to the city to ask them what they recommended and what needed to be done.

Joe Fairless: And then who ultimately was the point person that you got a lot of help from?

Patrick Menefee: Everything after I had that initial conversation with the city planner, and she just laid out what needed to be done, I used the contact that my real estate agent gave me, who was a surveyor, and he took care of everything. He went out, and about the only involvement that I really had– my initial thought was, I didn’t even necessarily know if I wanted to separate all three individually, and I wasn’t sure if I could because of some of the setbacks. So we had a couple of conversations on that and he just showed me some of the property lines from before – because it used to be split as well. So he showed me some of those options and said that we can just revert back to what it was; and not only did I get all three split out, but I also saved money from what I thought I was going to pay, because he just went back to the previous one. So credit the enemy, did a great job and took care of all that for me.

Joe Fairless: Bravo. Based on your experience today, what’s your best real estate investing advice ever?

Patrick Menefee: I think the biggest thing is what I mentioned before, just dive in and start taking action. You can spend all day trying to figure everything out like I did before, but the second that you jump in and decide to start taking action, a whole different world opens up to you and you learn a lot as you go.

Joe Fairless: We’re gonna do a lightning round. You ready for the Best Ever lightning round?

Patrick Menefee: Yeah, let’s do it.

Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.

Break: [00:22:48]:05] to [00:23:41]:04]

Patrick Menefee: Best ever book you’ve recently read.

Patrick Menefee: Tribe of Millionaires. I just finished it a couple days ago. I read it about two hours, couldn’t put it down. Speaking about the importance of accountability and mastermind and really being involved in something bigger than yourself. So it’s got me on the path to start some accountability groups.

Joe Fairless: What’s a mistake you’ve made on a transaction that we have not talked about already?

Patrick Menefee: On that fourplex, the one thing we didn’t talk about is I didn’t listen to what the inspector said. I think I got a little bit excited and blinded by the first deal and the numbers on paper. His recommendation was to get everybody out there, all the contractors out there, plumber, roofer, electrician, all of that. I didn’t end up getting all that stuff ahead of time, and now I’m working through all those pieces as I pull some of the other two units apart. So definitely not listening to an inspector.

Joe Fairless: Best ever deal you’ve done so far.

Patrick Menefee: I think those three duplexes have got to be the best one. They’ve produced consistent cash flow the entire time. Having six units, if I have a vacancy, I’ve got five other units to cover it up, and it’s really been a very solid investment and a very good learning experience between the subdivision, the partnership, the commercial loan, the refinance. I’ve really run the full gamut on that one.

Joe Fairless: How can the Best Ever listeners learn more about what you’re doing?

Patrick Menefee: Probably the two best places are going to be my Instagram account. I try to post on there regularly with lessons learned and always respond to anybody that I can; so that’s @investDGP. And then my website, investdgp.com, where I try to share a lot of what I’m doing; and then also anybody can reach out to me at any time, patrick [at] investdgp.com.

Joe Fairless: Patrick, thanks for being on the show. Thanks for talking about some moves that you’ve made in your real estate ventures, one of them being buying three, side by side duplexes that were all on one lot, and then subdividing it and maneuvering around the financing, as well as partnering up with a friend of yours to get those deals done; and then also your business plan for the fourplex and the 20% return on the renovations that you’re doing and the challenges that you overcame in order to get to that point with the inspectors and the appraiser and a couple other things. So thanks for being on the show. Hope you have a best ever day. Talk to you again soon.

Patrick Menefee: Thanks Joe. Really appreciate the opportunity.

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