JF2299: Out-of-State Turnkey Properties With Axel Meierhoefer

Axel Meierhoefer Real Estate Background:

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“Look for the best balance deal” – Axel Meierhoefer

TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners, and welcome to the best real estate investing advice ever show. I’m Theo Hicks and today we’ll be speaking with Axel Meierhoefer.

Axel, how are you doing today?

Axel Meierhoefer: Great, Theo. Thank you for having me. I’ve really been looking forward to being on the show.

Theo Hicks: Well, thank you for joining us, looking forward to our conversation as well. A little bit about Axel, he is the founder of AMC and Ideal Wealth Grower. He has nine years of real estate experience, and his portfolio consists of eight turnkey properties in two locations, plus his home in San Diego, and a cocoa investment in Belize. He’s based in San Diego, his website is idealwealthgrower.com.

Axel, do you mind telling us some more about your background and what you’re focused on today?

Axel Meierhoefer: Absolutely. So you can probably still hear the accent a little bit… I came over here 25 years ago from Germany with the Air Force, I was serving in the US Air Force here. coming from Germany. Around 2000, I was getting to retire from the Air Force, and being familiar with the system in Europe, you typically have some kind of government-organized retirement system. When I came here, and shortly after working for a company as an executive, started the consulting company you mentioned, it became very obvious that I needed to do something for my retirement. And initially, I thought that could be maybe in stock investments, because that was what most other people were talking about… But I realized, especially at that time – keep in mind, we had the Dot-com bust around 2003… A lot of people got wiped out, and I was like, “That’s probably not what I really want to be part of.”

I started researching, and really got fascinated with the longevity and all the things that you can do, all the benefits that you get with real estate. So that’s how I got into real estate investing, and in the last few years, more and more as I started creating Ideal Wealth Grower, it became obvious that there are many, many people who would like to do something, but there are sometimes mental and other hurdles in the way, and that’s what we are around for, trying to help people, to take them by the hand, help them to set themselves up and really get a little bit more confident in pretty much anybody can do it; maybe not overnight, but over time, and really get to a point that I call it economic independence. We can talk about that a little more, I hope.

Theo Hicks: Sure. So you would say that right now, your main focus would be the Ideal Wealth Grower education portion and then you use your money that you have saved up to buy turnkey properties, that are completely hands-off and passive?

Axel Meierhoefer: Yeah, we’re doing the Ideal Wealth Grower as a mentoring program, an educational program to help people, but we’re also getting paid for it, so there’s income from that, and some other sources. I’m still doing some consulting work from which there’s income… So I’m constantly growing the portfolio.

And what I’m priding myself is that I want to help mentor and support people based on what I have done myself. It’s one thing to say, “Okay, you can read a book, you can go on TV, you can do all kinds of things”, but I hope there is a different level of trust, a different level of expertise that I can bring to the table with my team by basically showing people what has worked, and helping them. And this is my definition of mentoring – to avoid to have to do the same mistakes, right? I did plenty of mistakes that I know now, and I know how to avoid them, and that’s what I basically see as a main value, is to say, “Okay, how can you actually become a residential real estate investor without having to do the same mistakes everyday?”

Theo Hicks: Can you maybe walk us through the first real estate deal that you’ve done so we can get an idea of what your strategy is?

Axel Meierhoefer: Well, there’s a little bit of a difference. The first deal that we did was basically for ourselves. We had occupied a home and we were told by the military that we’re going to move to a different location, and then the question was, “Okay, should we sell it? What should we do?” At the time, I started dabbling into real estate and what could be done with it, and decided it wasn’t really a good time, the economy wasn’t really in a good place… So we decided to rent it and basically, in that process became landlords.

From all of that, and over the years, what we’re doing now – to answer your question about the strategy – I call it “the out of state turnkey strategy.” And the reason is, as you said, we live right now in San Diego, we lived in the Santa Barbara area before that, and both of those areas, as well as other areas in the country, are pretty expensive. A lot of people around where we live, say, “Well, I can’t really become an investor, because any of the properties are way too expensive and I don’t have enough money for a down payment”, and so forth.

So “the out of state turnkey strategy” is really combining, number one, to look for well-performing properties in locations where the balance between the price and the rental income is still good. So most of those, admittedly, are somewhere in the Midwest. I have looked into the South, but I haven’t really found anything that worked there.

And then the turnkey component is basically a shifting of the risk… Because as you know, Theo, a lot of people talk about, “I want to do passive stuff.” I’ve seen you have recently done a couple of shows about what does it really mean to have financial independence, or what I call economic independence, and I’m really looking at how can we be still working still in the ramp-up phase of our careers oftentimes, and get into some form of a passive investment scheme.

I believe turnkey providers are great if you get the right ones, because you’re shifting a lot of the risks in their direction; they find the property, they put the money in for the renovation, they make sure that it actually goes to the inspection, they have to make sure that appraises before we even ever come in.

So the out of state turnkey strategy is basically looking at places where you have a good balance between price and rental income, and have it managed and started in a very, I call it a virtuous triangle, turnkey relationship. So there’s plenty of turnkey providers, as you probably know, but not all of them are made of the same, and we in our strategy focus on a very small subset, that meets very specific criteria, that I’m happy to describe it to you.

Theo Hicks: Yeah, so my next question – let’s say I live in this expensive area, I’ve identified a market in the Midwest somewhere, and the next step would be to obviously find this provider… What are my next steps? How am I finding them, and then what am I doing to qualify them? What is the specific criteria?

Axel Meierhoefer: Well, the easiest way is you just work with me and my team and we help you, because I’ll personally introduce you to the ones I’m working with it. So that’s what I meant earlier, to have this benefit of not only not having to make the mistakes, but also I’m opening up my existing relationship with personal introductions to the organizations that I work with.

But even in the scenario where you say you want to do it yourself, what I basically say is number one, you want to look at a good balance – and you will hear me say balance over and over and over again. It’s the balance, for example, between the economic environment of a location… Let’s say you’re looking in the state of Ohio, because you deem that to be an interesting place. So you look at the state and you say, “Where are the locations with economic stability, with good schools, with good environments, with good jobs that people have? They don’t have to be super high-paying, but good jobs”, so they can qualify if you say I want their incomes to be three times as much as the rent.

And then you look at the properties, and my guiding rule is that the properties need to be performing at least at the 1% level, meaning you buy a $100,000 property, it needs to pay you $1,000 in rent. Now, sometimes you can get a little more, sometimes you can get a little less, but that is kind of the ratio we’re looking for. So that’s the one side of the balance.

And then the other side of the game and what I call the virtuous triangle for turnkey providers is it needs to be in a way that there are dependencies that prevent us as investors to be harmed from the relationship. And what I mean by that – if the turnkey provider is the one who finds the property and has a team that does the renovation, they take all the risk to get the property up to a modern standard.

Then the second thing is when you actually purchase the properties, assuming it meets all the criteria and has the 1% rule, it’s very well renovated, it made the inspection, it got the appraisal value, all of those things, then the turnkey provider also needs to be the organization that does the property management… For one, because we want as investors to be as passive as we can be. But for number two, this virtuous triangle comes together because if you are managing the property that you previously renovated, number one, as the owner, I’m not even getting the runaround between who is responsible when something breaks. And in our case, we make sure that we have a guarantee or warranty for the first year after we purchase, that anything that has been touched, anything that has been renovated, if it breaks, it will have to be fixed by the turnkey provider/property management.

But if you think about it, if they renovate it and they don’t renovate it well, but they signed that contract, they would shoot themselves in the foot if they then have to come up with the cost, they have to go out there and fix a faucet, fix the door or fix whatever breaks. So this virtuous triangle it comes together by them doing a good job on the renovation, knowing that the better the job is there, the less they have to do later.

Now, the other part is also where this comes in from an investor perspective, is really who pays for what. And I think this is really probably something that is not talked about enough, in my view, when I listen to a podcast – and I’m so glad that you’re making the opportunity for me to talk about it – and that is think about where the money comes from. So in our low-interest-rate environment, right now, when you buy one of those properties in the Midwest, you put 20% down and get 80% from the bank. Then later on, when you own the property and it’s running and you’re collecting rent and so forth and something breaks, let’s say after you’ve had it for a year, now you pay 100% of your money out of your maintenance reserves or cap-ex Reserves to pay for anything that needs to get fixed.

So you really have a choice to say — if you find a good provider, like the ones we’re working with, you put a little bit extra in the renovation. You decide exactly how your floor should look like, you look at other appliances really, on a long term warranty, and so forth and so forth, that might cost you maybe $1,000 more total than you would get in another year, but 80% of that comes from the bank. So those $1,000 extra or $2,000 extra cost you anywhere between $200—$400 of your own money, the rest comes from the bank. Later, when you’re in the maintenance phase, not only if you have a separate maintenance company do you have to fight between who renovated it and whose fault is it if it breaks, but also you have to come up with 100% of the money.

So this out of state turnkey provider strategy really says, “Let’s really have a relationship with the turnkey providers,” they do the upfront work, their property appraises, and they have every interest to get a good tenant and have done a good job on the renovation, so it’s really a smooth relationship where everybody benefits. The tenant benefits because they get a better renovated, higher quality home at a good price. The turnkey guys benefit because the less they have to do besides collecting the rent and sending my portion to me, the more of the 8% to 10% property management fee they keep to themselves, and I’m a happy camper because all I have to do on 9 or 10 properties a month is spend an hour or two to make sure that everything is running smoothly.

Theo Hicks: So for that last part about higher-quality renovations, because those costs will be included in the loan – so are you saying that we need to find a turnkey provider that allows us to decide what the renovations are, or we need to find a turnkey provider who is already doing these high-quality renovations?

Axel Meierhoefer: You could do both, but it’s rare to find one that is already doing it, because there’s a fine line between over-renovating and then not being able to actually meet the appraisal, because your lender doesn’t want to give you any more money than the property appraises to… So if you over-renovate, if you have golden faucets and super high-end marble or whatever countertops, then you’re never going to appraise.  So the deal is more to say, what is the relationship that we’re aiming for?

So for me – and that’s why I’m introducing our clients directly to the providers we’re working with – it’s on the one hand to find that balance, but when you have good relationships, the turnkey provider doesn’t suddenly out of the blue sky find a property and say, “Oh, Theo, there is a property now that you can buy.” They find the property probably 6-9 months earlier, when they actually look for properties that they’re going to renovate to sell them 6-9 months later.

So if you have a good relationship like we do, you find out that there are properties coming up the pipeline that fit the criteria that we gave to the turnkey provider, when the scope of work is not completed yet. When the question is still “I’ll be putting hardwood floors or I’ll be putting carpet?” And if I have a choice, I want to optimize the property for the tenant, and for myself. So the tenant has nice hardwood floors or luxury vinyl plank, and I don’t have to replace the carpets every two or three years.

But when the turnkey provider is the one who is actually conducting the renovation and the scope of work has been established, we can go over it together. And that doesn’t mean that I’m giving them money upfront, but we have a relationship. That’s really the important part. They know that if they do a good renovation, have a reasonable price that it appraises to, I’m willing to buy it from them. But that relationship allows me to have influence on the scope; not throwing everything over, but those little things.

For example, one thing that I learned and I recommend to everybody who is interested in this market, and to the listeners of the Best Ever Show, is really think about getting extended warranties on literally everything; on the refrigerator, on the range, on the ceiling fan, on the air conditioning… Literally, the example that you have when you go to Best Buy; every time you get to the register, they say, “Would you like to have the extended warranty?” I found if you add all the extended warranties that you can get on all the moving parts, anything that gets electricity, water or gas, kind of somehow fitting it, and you get those extended warranties, the price ultimately may go up 500 or 600 bucks; $5 here, $20 here…  But now, when something actually happens, even in the best renovation or the best equipment you get, something can go wrong. But for the next three years, or sometimes in some cases, five years, you have warranty, which is also much nicer for the turnkey provider property management side to say, “We just call him and have him come out.” We don’t need to charge you 80 or 100 bucks for somebody to come out and figure out why is this thing not doing what it’s supposed to do. And you can tell your tenants, “Everything in this place is under warranty.”

Theo Hicks: So you’d have to tell that provider that when they’re buying this stuff, include a warranty. What are your thoughts about the general home warranties?

Axel Meierhoefer: Well, most of the general home warranties that I’ve seen are a year, and most of this stuff that you buy, any kind of appliances or any kind of ceiling fans or air conditioning, unless it’s like a roof or a big A/C system or so forth, they also have about a year, sometimes maybe two years… But almost everything comes with an extended warranty.

Now, you can buy the builder’s warranty or the home warranty, but this, in my experience – and I’ve dabbled in this a little bit – is more applicable when you do new construction turnkey, where you would say, “Okay, everything is new anyway, so from that, I want the builder to warranty their work and the equipment in the house for 3-5 five years,” and you can get a policy for that anywhere between 600 and 1000 bucks.

What I’m talking about is a property more typical for turnkeys, that is maybe built in the 60s, 70s or 80s, something like that, and you’re bringing it back up to standard, but you’re still doing a lot of stuff and a lot of new equipment goes in, and those $600-$1,000 extra extended warranty is basically preserving your reserves, because I’m still saving about 5% for vacancy, 5% for cap-ex, and 5% for reserve into your little accumulation fund, but you want to use it as little as possible. The more you have on warranty, the less money has to come off your own pocket.

Theo Hicks: Alright, Axel, what is your best real estate investing advice ever?

Axel Meierhoefer: The best advice I would give people is look for the best-balanced deal. The best balance between people saying 1%, and what the property is really worth.The best balance for how much money you want to get in… But fundamentally, the best balance means you want to start now; don’t wait or let people tell you that you have to wait for a long time. Take the best balance that fits for you and start now.

Theo Hicks: Alright, Axel, are you ready for the best ever lightning round?

Axel Meierhoefer: Yeah, absolutely.

Theo Hicks: Perfect. First, a quick word from our sponsors.

Break: [00:19:47] to [00:20:38]

Theo Hicks: Okay, Axel, what is the best ever book you’ve recently read?

Axel Meierhoefer: I really have to say I really like the Wealthy Gardener from John Soforic. I’ve spoken to John and got some permission to use some of the quotes that he has in there, but I would call this almost like a seminal book. And for anybody who hasn’t heard about it, I highly recommend it.

Theo Hicks: If your business were to collapse today, what would you do next?

Axel Meierhoefer: If it were to collapse today, I would probably move into one of those areas that our turnkey providers are in, and then basically start doing a BRRRR deal myself. Find the property, maybe a duplex or so, renovate it, refi it and then keep doing that to build equity, and as soon as equity is there, then find a nice place, like at the coast somewhere, to live again and keep doing what we’re doing now.

Theo Hicks: What’s the best ever deal you’ve done?

Axel Meierhoefer: The best ever deal is probably a house in New Mexico that we first occupied and then turned it into an investment property. And within a year of moving out, the city decided to build a road – this was in Santa Fe, New Mexico – that connected our neighborhood with the main highway, and improved the value of the house by 30% in nine months. Normally, I’m always a big, big fan of buy and hold, but on that one, I just couldn’t resist to collect 100 grand overnight, basically.

Theo Hicks: What is the best ever way you like to give back?

Axel Meierhoefer: I believe that the best way I give back is by merely educating and letting people participate in what we learned, and really making those relationships available… Because I know there’s a lot of fear of getting into investing, not knowing what to do, who to talk to and always being afraid that somebody is giving you a raw deal. So I think by helping people get my relationships accessible to them, so I’m making these introductions and helping them to actually really reach what your show showed about financial independence, I think that’s the greatest service I can do.

Theo Hicks: And then, what is the best ever place to reach you? Where can we go to get this education you’re talking about?

Axel Meierhoefer: People can email me at axel@idealwealthgrower.com. And one thing that I did for the show and for the audience is we created a mindset menu that helps people to get into what is this idea of Wealth Grower thing about. You can find that by going to https://idealwealthgrower.com/free, and you basically click on the little form there and then you can download it. And it’s going to help you understand how we work and wire your mindset in how to become a good investor and residential real estate investor using our out of state turnkey strategy. That is the first thing – you need to be willing and confident that you can do it, and then we help you to do it

Theo Hicks: Perfect. Axel, thank you for joining us and kind of giving us a taste of this out of state turnkey strategy, which could obviously work for anyone, but it’s ideal for people who live in a really expensive area and there’s not that good price-to-rent balance, whereas you will be able to find that in places like the Midwest.
The major benefit is the shifting of the risk over to — not it all being on you. But your big thing is balance, so the balance of risk between you and the actual provider. You talked about the virtuous triangle, and you gave us some ideas on how to make sure that this risk is balanced properly.

You want to have a turnkey provider who’s buying the property, who’s renovating the property, and if they sell it, they are the ones that are doing the management as well. That way, if they did poor work upfront, they’re the ones that are going to suffer the consequences, at least in part, especially if you add into that the one year warranty that you put in all of your contracts with the turnkey provider for any of the work they’ve done, in addition to getting extended warranties on everything, so that once this one-year period is over, you don’t have to worry about paying money for anything that gets damaged. The turnkey providers/management company can just call whoever is responsible for that warranty to get things fixed.

And then you also talked about the importance of relationships. Obviously, to find a good turnkey provider, you need networking relationships; you guys do that over Ideal Wealth Grower. But you also mentioned that having solid relationships will allow you to reduce your risk even more by making sure you’re able to get higher quality renovations. Again, not going overboard, but making sure that you’re not doing poor quality renovations that are going to end up resulting in maintenance issues. And so if you have this good relationship with the turnkey provider, then you will be able to get your foot in the door earlier in the pipeline, before the scope of work is completed, so you can direct what you want. Obviously, you need to have an established relationship with them first and probably do a few deals, but eventually, you want to get to that point.

And then your best ever advice, which [unintelligible [00:25:26].28] through everything we talked about, is making sure you’re looking for the best-balanced deal, the best-balanced market, the best-balanced provider, and starting now.

So Axel, thank you again for joining us; I really enjoyed the conversation. Make sure you check out that free mindset manual at https://idealwealthgrower.com/free/. Best Ever listeners, thank you for listening. As always, have a best ever day and we’ll talk to you tomorrow.

Axel Meierhoefer: Thank you so much, Theo. I’ve really enjoyed it.

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