TJ Konsen | Real Estate Background
- Founder of Sherlock Houses and Platinum Real Estate Mastermind. The company specializes in direct to seller marketing with a high volume of flips, rehabs, wholesales, wholetails.
- Portfolio: 200+ multifamily units.
- 15 years of real estate experience.
- Based in: Dallas, Texas
- Say hi to him at: www.linkedin.com/in/tj-kosen-a944382b/ | Facebook, Instagram: @tjkonsen
- Best Ever Book: 12 Rules for Life: An Antidote to Chaos by Jordan B. Peterson
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TRANSCRIPTION
Slocomb Reed: Best Ever listeners, welcome to The Best Real Estate Investing Advice Ever Show. I’m Slocomb Reed. This is the world’s longest-running daily real estate investing podcast. Today, we have TJ Kosen with us. How are you doing TJ?
TJ Kosen: Pretty good. Thanks for having me on. I appreciate it.
Slocomb Reed: Glad to have you. TJ is the founder of Sherlock Houses and Platinum Real Estate Mastermind. The company specializes in direct-to-seller marketing, high volume of flips, rehabs, wholesales, and wholetails. He currently has a portfolio of over 200 multifamily units, 15 years of real estate experience, and he’s based in Dallas, Texas. TJ, tell us about yourself. What got you into real estate?
TJ Kosen: Oh, dude, bad decisions and nothing else to do. I got into real estate actually in 2006, so way back in the day. I did loans for a little while, that was fun. So in California, doing loans, you saw some of the stuff that was getting worked through; we didn’t do any not good loans ourselves to speak of, but you kind of saw it in selling the products where it’s like, “Well, I don’t know if it’s sustainable.” So I saw that from the West Coast perspective and thought, “Well, let’s get into real estate investing… Not in California, because prices are high and things are tough to do.” So I went and bought a bunch of apartments in Memphis, Tennessee as my first investment deal. It was 112 units, a big value-add property; I went out there, managed it, leased it up, did a lot of capital improvement. It was an interesting first deal. From there…
Slocomb Reed: You started by moving to Memphis from California and owner-operating a 112-unit space?
TJ Kosen: Yeah, and they were distressed. They’re about 10% occupied, 15% occupied when we got them. I’m good in sales, a smart guy. [laughs] I said that this was my first deal.
Slocomb Reed: Well, we haven’t talked about the results of your first deal yet. We can decide whether you’re smart when we get to the end. I’ve bought distressed assets before, I know what it’s like to look crazy at the beginning and look like a genius a few years later. Tell us first, what spurred you into 112 units with 100 units or so vacant, almost completely across the country as your first investment deal?
TJ Kosen: We looked at a bunch of different markets that we thought made sense. And for cash flow, for upside potential, it looked like a pretty good deal at the time, so we figured, what the heck? The price per unit was actually, at the time, pretty reasonable.
Slocomb Reed: How much did you pay?
TJ Kosen: 8k a unit, something like that. 850k, 860k.
Slocomb Reed: Okay. Was this ’06, or was this during the recession?
TJ Kosen: Yeah, ’06. To fill in on that – the outcome of that particular property maybe wasn’t so good, because what we didn’t know in 2006 was that 2008 was right around the corner. If you knew at the time, then you were smarter than pretty much everyone that was in the market. But it was a fun first deal and I like to say that the project itself was very successful in terms of pretty much everything, from financing, to rehab, to stabilization. And when the market hit, we had a severe drop in rents, and had a kind of a market shifting dynamic which really caught a lot of people off guard. So So that was fun at the time. But from there, we were buying and selling a bunch of houses and kept going.
Slocomb Reed: So how did this 112-unit in Memphis come to fruition? How did it end? Do you still own it? Did you sell it?
TJ Kosen: We sold it, we cashed out. We took a loss on it, but we cashed some of our equity out, so it wasn’t catastrophic. Again, the thing about that particular property – big value-add, so the construction ended up being about 15k a unit, so not bad. We needed new ACs, new water heaters, most of the units needed new bathrooms and kitchens, but we got such bold pricing at the time that we just kind of blew through and did pretty well with it.
The lease-up was pretty good, but we found ourselves in 2009, ’10, because we were kind of trailing I think, in terms of what was going on with the economy… We found ourselves when we bought being the worst property in a pretty good neighborhood, and when we sold, I remember going back in 2010-ish and being the best property in a neighborhood where the houses were still pretty stabilized, but a lot of the multifamily units were on the downward spiral.
So I think it was an overbuilt submarket where people that were in maybe a B-ish subdivision would drop their rents to keep the tenant base up. This means our properties which were definitely at that price point would see an outflux of tenants and would see a decrease in the rent, and even the potential rent. So I kind of saw that; I didn’t really see it coming probably as early as it would have been nice. But I said, “You know what? I don’t think we want to try to weather this.”
Slocomb Reed: Looking back on it now, is there anything foreseeable that you guys did wrong before you went into the recession? Or is it just the bubble burst, it hit everyone in your space hard… Because like you said, B rents went down, so C tenants trade it up. Did you just get caught with a sinking tide? Or is there something foreseeable a lesson that can be learned here?
TJ Kosen: Well, I’m not sure. The lesson is, I guess, be cautious of the C-, D+ plus product space, especially value-add. But that’s always a lesson in anything. That’s a lesson with single-family house flips, if you’re putting in nice new appliances in a C-, D neighborhood, make sure they don’t walk off. So that’s always a bit of a lesson.
In terms of the property itself, I think the only real thing that we didn’t realize as well as we could have – and I’m not sure how we could have realized it better – was the excess inventory of apartments in that particular sub-market. That’s a tough thing; at least at the time anyhow, it was a tough thing to kind of get a good gauge on, because the house prices in the area were 70, 80, $90,000, and now 16 years later, they’re not significantly higher than that, but it hasn’t gone downhill.
It was just an interesting little mix where there were a lot of extra apartment units in that area that were tough to manage and tough to kind of negotiate the process on. Since then, a lot of complexes have actually been taken out of the unit mix. A couple got condemned or taken back by the city. And again, in a subdivision or a sub-market where the houses are about 100 grand, so it’s just kind of a weird little balancing act. Obviously, we did our homework on the front end with property comps. Things were selling in the low 30s a unit at the time we fixed up — so on the surface, our numbers look pretty good. But again, I don’t think anyone saw that kind of catastrophic 2008, 2009 thing happen, at least not in that space.
Break: [00:07:15] – [00:08:54]
Slocomb Reed: So you decide to sell, go ahead and get out, cut bait, you transition to single-family house flips…?
TJ Kosen: Yeah. From San Diego, went back there, took a little bit of time off, went surfing… Because, man, that was exhausting. And then just started buying and selling a lot of houses. We did a ton in Southern California back in the day. We did one or two small multifamily – one was nine units, one was six – in San Diego at the time, and made some money on them.
Slocomb Reed: San Diego just made more sense to invest in when all the property values tanked?
TJ Kosen: Yeah, I think so. You know, it’s interesting… I remember at the time – I still have contacts out in Memphis, obviously… And I was doing stuff in San Diego and I’d call them up every now and then and ask about buying cash flows or rental single families out there. And their numbers at the time were not that much better in terms of gross cash flow than properties in San Diego that were buying. So I kind of scratched my head go “Well, I can buy stuff in the east of Los Angeles, like Riverside County, for 40k, 50k, 60k and it’s cash-flowing really, really well. Why do I want to go halfway across the country in this market?” It was a weird market kind of evening out at the time, at least in the single-family space that I then found myself playing in.
Slocomb Reed: Gotcha. It seems like a no-brainer if you’re getting the same cash flow in California and in the Los Angeles area or San Diego area.
TJ Kosen: It’s very different now.
Slocomb Reed: Absolutely. But also, if you’re still holding anything that you bought 10 years ago in one of those spaces, you’re probably pretty happy about it. You then transitioned out of the single-family flips back into buying multifamily just as the economy improved?
TJ Kosen: We have a decent number of rentals and we have some self-storage. We don’t have any apartments right now in the portfolio. We have some self-storage and a bunch of houses. So we’ve bought and sold a couple of multifamily over the years. Since then, nothing quite as crazy as 112 units again, I think, both technically.
Slocomb Reed: Gotcha. So single families and self-storage… Is that serving two different purposes within your business plan, or they’re basically just both cash flow plays?
TJ Kosen: We do all the above. So we cherry-pick… Our main core competencies in the company is the direct-to-seller marketing that we do. So we do the PPC, we do the calling, we do all that stuff to find deals… And then we kind of take a deal-first perspective on what makes the most sense. We’re not one of the guys that want to do 30 wholesale deals a month all around the country. That sounds like too much of an operational headache for me, with margins that are too small. And by operational headache, I mean in terms of just the infrastructure that you have to have in your own company. We have most of that, but I don’t want the size to make that necessary. When we can do the volume and the margins that I like, by really a deal-first perspective on the houses.
So we find the house, and what makes sense for this house? Does it make sense to wholesale because it doesn’t fit our buy box? Does it make sense to maybe wholetail and do a light dust-off and put it on the market as is? Or does it make sense, based on what we bought it at, to just blow it out and flip it? Wholesale and flip have been our biggest profit generators, gross profit this year, for sure. And then for depreciation and for cash flow, we’ll pick up a couple of rentals, we’ll pick up the self-storage that we picked up last year, and we’ll play with that.
Slocomb Reed: So you’re going direct-to-seller to buy self-storage right now?
TJ Kosen: Yeah, that’s where I found it.
Slocomb Reed: Got you. What size self-storage facilities are you finding doing this?
TJ Kosen: For us, kind of a midsize. What we seem to be able to attract is the owner-operator. That’s kind of a similar space to the distressed landlord space, I guess, where there’s an owner-operator who probably lives in town, that’s doing a lot of the stuff himself, and then doesn’t want to deal with… If it’s a B- or C property, they have names for the tenants, right? They don’t want to deal with Jane [unintelligible [00:12:38].09] because she keeps saying she’s going to pay but she doesn’t, and all that stuff.
Slocomb Reed: Sure. Do you have a monthly or annual revenue or a unit count that you’re finding these owner-operators in?
TJ Kosen: I’m not sure if we have enough volume to have a good number on that, but the 100 units to 150 units — there are advantages and disadvantages. They’re easier to find but they’re harder to manage once you have them, because they take a lot of capacity to manage, especially in-house. So you kind of have to devote a lot of internal resources to it. But once you get a streamline, it’s really not that bad.
Slocomb Reed: Got you. By what means are you getting direct-to-seller for these self-storage owner-operators? It doesn’t seem like a Facebook ad is going to find you a bunch of owner-operator self-storage guys.
TJ Kosen: I don’t know, I’ve never tried that. Direct mail, old school, and conversations. So we all like to talk about real estate being a relationship game, but then we do mass marketing and call everyone that’s an absentee landlord in the city… And you’re making 10,000 calls a freaking month with just one VA, and then you get a bunch of VAs and you’re making however many more you’re making. But we find a better response rate based on a more personal, “Hey Tim and Sarah, we’re buying stuff in the area, small investors, kind of like you, younger…”, something that’s relatable to them. Then they’re like, “Okay. Well, I’m maybe kind of tired of it. Let’s have a conversation and see what we can do.”
Slocomb Reed: Nice. And you said that’s mostly direct mail and conversations. Is that a specific kind of networking that you’re doing to find these guys?
TJ Kosen: No, no, no. Once the lead’s inbound, then it’s something that I’ll take, instead of one of the team members. A team member might qualify it on a really base level, but then it’s just me talking to them, seeing what their goals are, and what their objectives are. It’s not that dissimilar from an inbound lead really with a distressed house, it’s just more complex in terms of the information you’re trying to gather.
Slocomb Reed: Yeah. So you send a letter, they call in, eventually, it gets to you, and you nurture the relationship until they’re ready to sell at a number that works for you?
TJ Kosen: Yeah.
Slocomb Reed: That’s a play that’s been run quite a few times over many years. It’s good to know that works in self-storage, that’s awesome. What kinds of returns are you seeing on your self-storage right now?
TJ Kosen: It kind of depends. The one we bought in a secondary or tertiary market, I’m not really sure what the cutoff is for that. [unintelligible [00:14:47].08] about 100,000 people, so it’s definitely a stabilized town with an increasing population growth. We’re not trying to buy stuff that’s rural in the sticks, that side of the highway kind of stuff. To be honest, I don’t really understand that product. And it’s 81 units, I think, with a warehouse and an apartment. Not a huge moneymaker, but its gross income potential is about six grand or something like that, and we bought it for 150k, 160k, so it’s not bad, it pays the bills.
Slocomb Reed: Nice. How long ago did you buy it?
TJ Kosen: That one, in January or February this year, I think.
Slocomb Reed: Nice. And how distressed was it when you got it?
TJ Kosen: It wasn’t pretty. You’ve got some folks living hanging out in the units, you have no fence around it, that kind of thing. Controlled access, not very good… In terms of the security of the units, unit security is pretty decent. Grounds were kept up pretty well, but it was an owner-operator thing. It was a guy, I think he had declining health, I think he had some lung issues or something. He’d been managing it forever, had a bunch of residential rentals, and then he said “You know, I don’t really want to deal with it anymore. What will you give me for it?” I said, “I don’t know. What do you want for it?” He gave us a number, and we said that number is pretty close but let’s get a little farther down. We settled on, I think, 160k. I think we closed on that, but I don’t remember exactly.
Break: [00:16:01] – [00:18:58]
Slocomb Reed: TJ, what is your Best Ever advice?
TJ Kosen: Best Ever advice, I think depends on who’s asking… But the most important one I think is to focus on your objective and set your objectives about 10% to 15% beyond your current abilities, instead of too many people getting scatterbrained and trying to focus on too many different things. The deep dark secret is all that stuff probably works. You can probably make it work for yourself, especially if you’re pretty diligent with it. But if you’re not focusing on one or two straightforward tasks, then it becomes really hard to do a bunch of different things.
Slocomb Reed: That’s good stuff. Awesome. TJ, are you ready for the Best Ever lightning round?
TJ Kosen: Yeah, let’s do it. I’m down.
Slocomb Reed: Great. TJ, what is your Best Ever way to give back to the community?
TJ Kosen: I do a lot of education, a lot of free events. Obviously, there’s a lot of money in that space, but the gratification part that we get with the events and with the helping bring other people up in the industry, I think, is huge. We’d like to see that people that want to improve themselves take action and see positive results from that action. Honestly, it’s more gratifying than walking houses. My whole reason for building a team was I don’t want to talk to sellers. It’s more fun to talk to people that want to better their position.
Slocomb Reed: Absolutely. What is the Best Ever book you’ve recently read?
TJ Kosen: A little unconventional, I guess… 12 Rules For Life by Jordan Peterson. Pretty good book. I don’t read a lot of real estate books.
Slocomb Reed: What’s the most money you’ve lost on a deal?
TJ Kosen: Probably 1.5 million.
Slocomb Reed: That you personally lost in one deal?
TJ Kosen: Well, not personally, but that’s what the deal lost.
Slocomb Reed: Gotcha. Is that the apartment building in Memphis?
TJ Kosen: No, that was a different apartment building. We didn’t get into that one.
Slocomb Reed: Well, tell me about it real quick… What happened there?
TJ Kosen: Kind of the same story, I guess. Don’t buy stuff in 2007 either. It was less than a value-add, and it was the negative part of leverage. It was 70% occupied. We bought it with assuming a hard money loan. There was actually prime plus two at the time.
Slocomb Reed: That’s 17% occupied?
TJ Kosen: No, about 70% occupied.
Slocomb Reed: 70%?
TJ Kosen: Yeah, about 70% occupied. We bought it, we assumed a hard money loan at prime plus two, so the rate was pretty good, and it was adjustable. So its prime was going down and it got even better. I think the sellers did a 200k second. We came up with a down payment, and then we actually refinanced out of it a couple of months later. But it ended up being in an even less desirable neighborhood when 2010 hit.
Slocomb Reed: In Memphis?
TJ Kosen: Yeah. If the other property was kind of a C-ish, this was unquestionably a D. There are no ifs, ands, or buts about it being a D. So it just wasn’t economically feasible. We actually ended up short selling that one, which it is what it is, I guess. The ironic thing is, the guy that got bought from us ended up losing money also. So it wasn’t just a situation of us not being able to operate it, it was a case of the market which is very different than it is now.
Slocomb Reed: Specific to buying in a D market in Memphis right before the recession, this may become freshened again if we see another economic crisis. It sounds like your D market apartments in Memphis got hit harder than your C, C minus apartments in Memphis when the recession hit. Tell me about the difference, tell me what happened.
TJ Kosen: I think — and again, this is probably 14-year-old information, really, so I would take it with a grain of salt, especially talking about these particular markets.
Slocomb Reed: Yeah, of course.
TJ Kosen: Because I think they’re very different now. It was more overbuilt, with a more vacant inventory. So even though our property is relatively stabilized, we were across the street from a property that was a similar size, I think 90 units or something like that, that was 100% vacant. So there’s more of that over there. We bought it as a stabilized just cash-flowing thing; it was making some money when we did, and we figured we could up it as we went along. We did for a while.
It was one of the only zip codes in the whole US, I guess, that didn’t appreciate from 2011 to 2015-ish. That’s kind of a weird situation ,where everything else was going like this. It actually had, I think about a… I don’t remember, it’s been a couple of years since I looked. Maybe an 8% to 10% deflation in that zip code. But again, here’s where the grain of salt comes in… Right now, houses in that area, in the city, have actually gone up about 20% to 30% in the past three or four years. So it is going up, and I think it’s going up for a lot of probably good fundamental reasons. But it’s just a very different market.
So the biggest issue in my experience with D and C properties, as opposed to the couple of smaller A properties that we’ve done, is if your rent rate is 600 bucks, I guess at the time, for a two-bedroom, a water heater still costs 1,200 bucks. A water heater costs 1,200 bucks if your rent rate is 1,500 bucks. So just the gross expenses can be higher even on a stabilized property, even if you’re managing it well. That’s where the cap rate always comes in, as people think that a cap rate is an indication of the risk profile, without understanding what the actual risk profile is. If you’re buying into this market, I guess, if you’re buying at a seven cap, you think you’re a rock star, but you’re buying there because maybe some of the fundamentals of the property are — even once your water heater goes out, even if you put new ones in, it goes back out again in 10 years. Well, then your rent is not going to cover it as well. Does that make sense?
Slocomb Reed: It does. You’ve shared some very helpful information here, TJ, and it’s good to know that you are seeing some success now through single families and your self-storage. Good to know that you’re willing to share from your failures, but that you’re also succeeding now. Where can people get in touch with you?
TJ Kosen: Absolutely. All over Facebook, on Instagram, both @TJKosen, Instagram also @tjkosen, and the website, – really creative with this one – tjkosen.com, you can find me there. We do, again, a lot of single families, a lot of self-storage in North Texas, and pretty much North Texas. That’s pretty much it.
Slocomb Reed: That’s awesome. Well, TJ, thank you again for being on our podcast today. Best Ever listeners, we hope you have a Best Ever day and we’ll see you tomorrow.
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