BiggerPockets Real Estate Podcast - 131: Investing in Multifamily Properties in a HOT Real Estate Market with Serge Shukhat

Episode Date: July 15, 2015

Everyone wants to invest in multifamily properties. (Well, almost everyone.) But with the market heating up around the country, great deals are becoming incredibly difficult to find. That’s why we had to bring back one of our most popular guests on the BiggerPockets Podcast, Serge Shukhat. The last time we talked with Serge back in episode 60, Serge told us how he built up a massive portfolio in just a few years. But if you were impressed then, this show is going to blow you away. Filled with TONS of actionable tips, stories and warnings, this is one episode you are going to want (and need) to listen to over and over again. In This Episode We Cover: How Serge got started in real estate What he’s been up to since his last episode What value add and value add investors are What you need to know about commercial lending How he used seller financing for his 32 units The 3 components of successfully purchasing multifamily properties The ins and outs of cap rate and exit cap rate Why Serge does his own property management Things to avoid when value add investing What exactly submetering is Instances when overlooking things may cause problems later on Thoughts on using multi-units as vacation rentals How to train resident managers and tenants The importance of changing your strategy depending on the market What you should know about long term 30-year fixed financing What secondary markets are — and why Serge likes them How to connect with owners and resident managers How to keep a competitive advantage And SO much more! Links from the Show BP Podcast 060: From 0 to 68 Rental Units in Just Four Years with Serge Shukhat BP Podcast 108: Building a $350 Million Real Estate Empire Using the 10X Rule with Grant Cardone BiggerPockets Forums Stop Obsessing About All Those Damn “Rules” in Your Real Estate Investing (Blog Post) LoopNet BiggerPockets Multi-Family and Apartment Investing Forums Books Mentioned in this Show The Magic of Thinking Big by David J. Schwartz Rich Dad Poor Dad by Robert T. Kiyosaki Landlording on Auto-Pilot by Mike Butler The Real Book of Real Estate by Robert T. Kiyosaki The 7 Habits of Highly Effective People by Stephen Covey The ABCs of Real Estate Investing by Ken McElroy The E-Myth Revisited by Michael E. Gerber The ONE Thing by Gary Keller How to Win Friends & Influence People by Dale Carnegie Tweetable Topics: “If you want to do a syndication, make sure you find a syndicator that is experienced. It’s all about the sponsor.” (Tweet This!) “Time is not your enemy in real estate, time is your friend.” (Tweet This!) “Be on a location where people want to be.” (Tweet This!) “No matter how successful you are, you got to keep moving forward.” (Tweet This!) Connect with Serge Serge’s BiggerPockets Profile Learn more about your ad choices. Visit megaphone.fm/adchoices

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What's going on, everybody? This is Josh Dork and host to the Bigger Pockets podcast here with my co-host, Mr. Brandon Turner. What's up, B? Nah, not much. Today's a good day. Today is a good day. I'm feeling amazing. I'm actually reading this book called The Magic of Thinking Big.

And in this book, it's really good. I'm listening to An Audible, actually. And in The Magic of Thinking Big, he talks about the way you say things in life or the way that you feel. So when somebody says, how do you feel? If you say I'm feeling okay, you feel okay. Instead, instead, every time, say, I'm feeling amazing. And so I've been starting, the last two days I've been doing that. Change my life.

Like, seriously, like, when I'm working out now in the morning, I'm doing P90X again, right? And I'm like, this is miserable. I go, no. And I yell out, like, literally yell out. I feel incredible. And I instantly feel incredible. That's great. I feel incredible.

I feel incredible. No, I do. No, I feel incredible. Do you want to fight? You want a fight? Hey, well, and that works. I used to, I don't remember where I heard of, like, smiles, the same thing. So if you walk around with a smile, you're going to feel happier.

And you're going to influence the people around you. So I used to, you know, I used to walk around New York City when I live there because everybody's friggin miserable in New York. I would walk around with a smile. And I think people thought I was a crazy guy. I was this crazy dude walking around smiling, you know, nodding, acknowledging people. And, you know, people are spitting in my face. Of course, I moved to Denver and everybody does it because, you know, who's not going to

smile in Denver? Sunshine and always. Yeah, man. Yeah, man. Well, today we've got an awesome, fantastic. Awesome show. We've got a guy who was our guest on show 60, and it was our most popular show until we did a show with Grant Cardone, Serge Shukot.

And we'll get into that in a second. Before we do, let's get to today's quick tip. Today's quick tip is an old. I don't think we ever talked about it, but it's something like foundational on the site that I guess we just, I don't think we ever talked about. You can subscribe to a forum or a particular thread. In other words, if you are reading a thread and you're like, wow, this is really good information. I'd like to keep in touch with this as more and more comments come in. You can click the little follow topic button on the top of the actual thread. Or if you want to follow that entire subforum, like the multifamily subforum, you can subscribe to that forum and you'll get notifications whenever a new post or a new thread. is started in that sub-forum. So both of those are at the top of any individual thread. Check it out.

Subscribe to this forum or follow topic. Right on, right on. Good stuff. Good stuff. All right, cool. Well, let's get to today's rating slash review. By the way, ratings and reviews. This is show 131 of the Bigger Pockets podcast.

You can check out the show notes at biggerpockets.com slash show 131. So ratings and reviews. We talk about these things. Getting them is really good for a podcast. helps you grow your show. It helps expand your audience. And we like to share these reviews with you. So today's review is from Mama Mitt number two. So Mama Mitt 2. And it was five stars. Thank you, Mama Mitt 2. And the review is excellent podcast. Within each one hour episode, you will gain new information and see into many different types of real estate investing. The strategies discussed

vary from beginner investor to very experienced, but are presented in a way that all can understand and follow love listening to this podcast so do I thanks a blast thanks mama mama mama I hope it's my mom hey it might be my mom yeah my mom doesn't use a computer just kidding mom all right uh let's get on with this thing because today's show is like we said earlier terrific fantastic amazing awesome whatever word you want to use there really really in depth especially if you are somebody who's looking to acquire a lot of properties like if you're just buying your first one you'll still learn a lot here but you know I think I mean there's so much depth to today's podcast.

Like so much knowledge and wisdom from surge, you guys are going to be blown away. Absolutely. Really listen to the whole thing. Especially, I don't know, it got better. Like, even every minute got better than the previous until the end was like mind-blowing stuff. So, this is one where you'll, I can't talk.

This is one where you'll want a notebook handy and you'll probably listen to it more than once. Definitely one of the shows that you're going to repeat. So with that, let's bring him on. All right, Serge, man, it's been a while. It's good to have you back. Josh and Brandon, good to see you. Always, always a pleasure, a pleasure. So it's been about a year and a quarter since we last spoke.

And I will tell you that you had up until our interview with Grant Cardone, you had the single most popular podcast on the Bigger Pockets podcast. So congratulations. Nice. I'll take that as a compliment. That's awesome. It is. It is, yeah. Today, our goal is to beat Grant Cardone. Let's do it.

You can have a Grant Cardone sandwich. You, you know, number one, number three, and he can be number two. That's what we're shooting for. Let's do it. All right, so tell your friends, people. Tell your friends. Listen up. Today we're talking about what you've done since then, and we're going to talk about

kind of the struggles that the new kind of changes in the market have done. I think I'm kind of excited about that because obviously the market has changed over the last year dramatically in a lot of areas, including yours in the last couple of years. And we're going to talk about how to deal with that and what you're doing to deal with So I got kind of a list of questions here, but we'll probably just figure it out as we go because you know, you're a good guy. It's a good conversation. So maybe we just start with that. I mean, give us a history of who you are. In case people did not listen to the first show, which they can find at biggerpockets.com slash show 60. They want to go back and listen to that one. But tell us a little bit about who you are, how you got into real estate, what your story is. I have a corporate background. I'm an accountant by trade. I got my CPA in the late 90s, was.

working for a tech company in the Bay Area, transferred to Arizona in late 2008, started real estate investing in January of 2009, just buying SFRs. I had a little bit of success with the single families all around where I was living in the East Valley, Mesa, Gilbert, Queen Creek, kind of suburbs of Phoenix. It was buying nice cash flow property between $50,000 and $100,000. that was renting for between $1,500, so the numbers worked all day, was building the portfolio between 2009 and 2011. The market started to turn a little bit in Arizona in 2011, particularly in SFRs, and jumped into multifamily at that point, saw the power in multifamily, consolidated and purchased a bunch

of fourplex into a 32-unit complex. And last we spoke, we talked about some of the value ad we did in the multifamily space and kind of the lessons learned doing that and had the property for sale at that time looking to trade up to a larger multifamily. And since we spoke last, we had a gentleman who listened to the last BP podcast and from California. And he was also in my market, dabbling, doing kind of the same thing. I was doing with multifamily. So, you know, he reached out. We got together for lunch and started talking and drove out, looked at the complex, and he ended up buying the complex. So that's awesome, man. I mean, bigger pockets actually helped you sell that. And that's, uh, that's totally cool, man, that, uh, that, uh, that pleases me. Um, you can make the checks payable to bigger pockets.

Yeah, I mean, commissions are welcome at any point, you know, Joshua Dorkin, just, you know, Brandon Turner, hook a brother up. Not what? I think I was the one to invited him on I think I was the one who said we're going to put a podcast together. I think I was the one who was the... We've got surge here. Let's kind of focus. All right, here's the deal. I had a conversation with somebody yesterday who is a very, very smart individual who

invests in companies. And what she said to me is, hey, I'm looking to get into the multifamily space, but I'm waiting for the market to turn. and it's going to turn, and it's going to turn soon. And, you know, that wasn't necessarily based on any kind of one fundamental. It was based on kind of the vibe. And I've been feeling the same vibe. You know, across the country, we're getting, you know, kind of tippy, pricey.

You know, it's starting to feel kind of like 2000 stock markets, starting to feel like 0607 housing, just a little bit. You're starting to feel the, you know, people that shouldn't be thinking about real estate, you know, in general are like kind of hyped up about it. And when you start to see, you know, hype, I start to kind of get not nervous, but, you know, a little leery. So are you seeing that in the multifamily space? Are you noticing that, you know, it feels kind of topy? It's kind of hard to find a deal based on good fundamentals. What are you experiencing? Yeah.

It's clearly harder to find a value ad deal. Pretty much everything on the market today is going to be somebody else's value ad. So you look at the tax roll on any property you're looking at. And what you're going to see is similar story. You're going to see the guy bought it in 2011, 2011, 2012. He bought it for whatever, $30, $40, $50,000 a door, whatever he bought it for. He performed the value ad. So he slapped a coat of pain on it.

He got the rent roll up. And now he's trying to sell it. So you're the guy buying somebody else's value ad. So the big question is, what value add does that leave for you if you're a value ad investor? So every investor is different. If you're looking for a syndication and you're trying to drive IRR through cash flow, it's probably not going to happen because you're buying at such a low cap rate. Can you explain real quick what that means?

syndication IRR cap rate. Just knock out those things really quick. Sure, sure. So syndication is a method that, call it sophisticated investors used to buy real estate. So you'll have a sponsor, who's the person that's putting it together. And what he'll do is he'll search for a multifamily. He'll find the project. And then he'll do a what's called a Regulation D offering, which is basically a document that he gives.

his investors that says, here is what I'm promising. I'm promising 15% return over the hold period. We're going to hold five years. You're going to get a guaranteed preferred rate of return, whether the property cash flows or not. And then when we sell it, that's going to drive your final return on investment. And you're going to make over the hold period X percent. Okay.

And so a passive investor, a corporate guy that's sitting at his desk that can't do a value at or can't seek out the deals but wants to be in real estate. He can invest with an experienced syndicator. And that syndicator makes his promises. And in his document, he'll tell you, you know, there's a lot of risks here. You got to be crazy to invest. You could lose all your money. Blah, blah, blah. And you got to have, you know, the guts to get in to make your investment. And it's a truly passive way for the investor to invest. On the sponsor side, he makes money from the fees on the front end for finding, for managing, for all his work on the front end. And then he makes a cut of all returns over the promised return. So it can be a real win-win

on all sides. Where I see the problems happen is with inexperienced sponsors, people jumping into the market that don't know what a good project looks like. I had debates with brokers all the time. They tell me that you can syndicate and drive returns off cash flows alone. And most experienced syndicators know that cash flows alone are not going to drive your return. And you can look at it as, you know, you can simplify it to a single family residence. You're very rarely going to get returns that you think you're going to get on paper. Where you're going to get the returns is when you sell the property, when you make money on the back end. And that over the whole, period is what's going to drive your returns and really make real estate look compelling. But to just

drive off cash flows, it's very rare that I see that situation play out. Can I ask a stupid question? I've got a couple stupid questions. First off, you know, if I've gone and I've done the value ad and you're selling to me, you know, and I can't make any money on the value ad, why would I buy the property? Well, remember, Josh, not everybody is a value ad investor. A lot of people want something turnkey, A lot of guys don't have time to sit there and figure out time or experience to figure out, hey, I can do submetering or, you know, looking at the market and say population growth is here, and I think I can drive rents to that. That's a lot of hard work.

And that takes time and that takes knowledge. And a lot of people, you know, just cashed out, you know, a guy sitting in the Silicon Valley just went public, cashed out $10 million. He wants to diversify, doesn't want to be in stock, wants to use leverage to his advantage, wants to put $2 million down on a $6 million complex. Commercial lending right now is probably the frothiest, the easiest. It is easier. I got a loan on a commercial property.

I didn't even provide my tax returns. I got it on a phone call, literally. Yeah, if I want to get a 30-year fixed on a single family home, I'm out. By the way, is that a sign? I mean, because we were talking about, is the market looking a little silly? Is that a sign of the silliness of the market that they're just jumping on it? You know, it's certainly a sign with how easy it is to get loans. I don't want to say it's always been easier.

Outside of the crisis, though, it's always been a loan that's based on the asset. They'll always look at the asset rather than, you know, everything else that they look at on a Fannie Mae 30-year fixed loans. So it has been easier, but right now there's so many players in the market that want to lend to that because cash is so, you know, money is so cheap right now and interest rates are so low. But one thing I will say, remember, it's never been easy to source multifamily. It's always been competitive. The risks were just different and the spreads were different.

You're always going to have a spread of cap rate versus the ongoing interest rates. So when interest rates are higher, you're going to have higher cap rates and they're going to look like better deals, but your interest rate is higher. So it's always been difficult. Where it's a little bit more difficult today is it's just more difficult to source that value at. It feels like all the value ads out of the market. There aren't as many foreclosures because we have frankly been on a tear with rents. Rents have risen in most MSAs in the United States. And as long as rents continue to rise and investors feel like

rents will continue to rise, then a lot of people feel like, hey, I don't need to do a value ad. I just need to buy and let rents do the rest. Yeah. Yeah. Hey, a quick question. I'm going to roll back to you were talking about the syndications. And I don't want to focus exclusively exclusively on it, but I have one last question that I think a lot of people might ask is, hey, okay, well, I've got some money and that sounds kind of interesting. You know, I mean, I'm not rich, but can I invest $10,000, $20,000 into a syndication, or do I need to be an accredited investor, somebody who the government deems to be smarter, wealthier, yada, yada, yada. Can you answer that, porz?

Yeah, so you generally do have to be an accredited investor that there are new platforms that are trying to get rid of that requirement online as far as crowdsourcing money. At the moment, generally, yes, you have to be an accredited investor. And I think you want to be an accredited investor. You know, if you're a mom and pop with $20,000 in your bank account, syndication is not the way to go. You invest in your knowledge first. Cut your teeth on some local real estate.

Learn the tricks of the trade. Buy a small multifamily. And the principles at the end of the day are the same. You're still managing tenants. You're managing or managing a property manager. learn how to do it first with your own money. And then if you do want to do a syndication, make sure you find a syndicator that is experienced. It's all about the sponsor.

I love that, man. I love that. I think it's so easy for people to get kind of excited and, you know, new people to come in and say, oh, I'm going to become a syndicator. And, you know, I'm a smart business school guy who's going to get into this business. And they've never dealt with, you know, actual real estate. And they come in and, you know, they, don't do an exceptionally great job. And those folks who kind of fall for the pitch, and listen,

I mean, it's not hard to pitch a deal are going to get burned. So yeah, I mean, experience is really going to be key. And that's great, man. That's that's really great. I appreciate you sharing that. So last time we talked to, you talked about the 32 unit property and had another 36 units. So you had 68 total units at that point. You had just a just. mentioned kind of seller financing one of these deals. What else has happened kind of since then? So I seller financed the 32 unit. It was a great deal on both sides. It was a win-win all around. The person I sold to, I felt comfortable doing an owner financing because he had a lot of experience, both in syndications as well as owning similar class multifamily property. I was lucky enough to

be able to source a 56 unit complex, which was in the same county, different city, but the city had quite a bit of different economic things going for it that the city I was trading out of did not, some better, some worse. So I was able to take that down payment from the 32 unit sale. So it was a standard owner finance. It was about 20% down. I carried the rest of first deed, first position deed of trust. You know, competitive interest rate. It wasn't one of those deals where, you know, where typically I'm leery of owner finance deals because it's a complex or it's a property that can't sell regular means. I could have sold it on regular means. For me, it just made a lot of sense. You know, I wanted the interest income. I wanted to get into notes. I've been dabbling in

notes. So it made a lot of sense. But I was able to 1031 that project into a 56. unit, which was an actual value ad, maybe one of the last value ads I've seen in my market the past couple years at least. And this was exciting for me because this was a higher class project. It was class B, 56 units. It was a condo project. So each, all 56 units were set up to be condos. They were all over a thousand square feet. So there was a lot of unique characteristics that I look for. On the last podcast, we talked about finding your competitive advantage. And I'm a real big believer in that, that if you cannot articulate what your competitive advantage is going to be on any specific project, in particularly a multifamily, if you can't say,

how am I going to stand out in the market, your recipe for success is limited, for sure. So on this project, it was very clear from the onset what my recipe for success was going to be. I had a lot of unique characteristics. All my units were two and three bedrooms. They were all over a thousand square feet had washer dryer hookups. I had late 80s class B property, a lot lush landscaping. It was a property where I knew people would want to live. So I saw the value ad was going to be backing up a little bit. When I look for multifamily, I need three components. The three components that I look for in purchasing multifamily are cash flow, equity, and value add. Okay. And I talk to brokers today and they tell me, Serge, you're crazy. You're not

finding a complex with all three components. They just doesn't exist. Maybe you'll find something with cash flow, but you're not going to find something where the basis is low enough where you're going to be able to add equity. And the value add is what's going to add equity, right? So this project had all three. And from the onset, the value ad that I saw was was going to be threefold. The first thing was property tax was way over-evaluated. When I came in, they had a property tax of $48,000 on the property. The owner was a second-generation owner who inherited it. She was sitting in Southern California, visited the property maybe once every two years, was completely disconnected from the property. Her rents were probably average 10% below value. So she had on a $35,000 gross operating income,

rent roll, she had about $5,000 in lost to lease. Okay. And what that means is based on market rents on that complex, she was underpriced by $5,000. Okay. So just on the loss to lease, if you extrapolate that $5,000 over 12 months, that's $60,000 in value add, just bringing rents to market. Okay. So at a 10% cap rate, you're adding $600,000 in value.

at a 5% cap rate, you're adding 1.2 million in value. Hey, really quickly, for those people who don't know, do that math for us. I mean, to those of us who get it, it's obvious, but for those people who don't understand how this works, you're adding value, you've increased income, and now you're using the cap rate as a multiplier. Is that correct? That's right. So the cap rate's going to tell you, so your exit cap rate, what you think your market cap rate's

going to be, you're just going to divide by that number, right? You're going to take the income that you added after you bought the project, and you're going to divide that by your exit cap rate. And your exit cap rate is going to be determined at what other complexes are trading at in your geographic region. In my geographic region, and this is exactly why, you know, people post on BP and talk about all the time, well, I bought this project at a nine cap or a seven cap. At the end of the day, it kind of doesn't matter what your purchase cap rate is. It's what is your exit cap rate going to be and what is your net operating income going to look like when you sell the property, right? And so for every value ad, you look at what are your value ads going to be?

And you just break them down into line items. And you say, what is it going to be and how long is it going to take to get there and how much value can add to this complex? So for you, you know, what kind of value ads? You talked about increasing rent. What other value ads do you typically find on multifamily properties? The ones I love, lost to lease is my favorite. It's a difficult one to do and it takes time. It could take a year. It could take two. You're not going to come in typically unless it's a complete dump, kick everybody out and start fresh. I mean, those kind of deals are rare these days. They're nice. You can get them at big discounts, but there's a lot of work involved and they're very rare and they're typically in very rundown projects. I don't want to deal with C class D class tenants anymore. So lost to lease is one where you have an owner. that's been there for quite a while, they're happy to have very little turnover. They don't want to spend money turning over the units. They don't want to maximize the rent of each unit because

that's going to take some capital expenditures to do that. Okay. So loss to lease is one. Submetering utilities is another, also very difficult, where the owner has not transferred any of the costs of the utilities back to the tenants. That's one I had a lot of success on in the 32. 32 units and I was able to capitalize a lot of value doing that. And then there's smaller ones that a lot of investors don't see. Things like, where are, where's the last owner paying too much? In my case, it was property taxes. So she had a $48,000 assessment, which was absolutely absurd. I knew that that should have been somewhere in the ballpark of $30,000 or less. Okay. You got that per month or per year?

Per year. Okay. For year. So it doesn't sound like that much, but $20,000 per year. again, capitalize that value at a five cap, that's 400,000, right? So every little bit of savings on your expenses equals a pretty large chunk on the exit. Right. And then you add up your loss to lease. You add up your utility submetering or however you're going to do that. You add up your expense savings. And for me, another big one is I property manage myself, you know, that's through a property

management company. I have operations people that work for me. And so where somebody else coming in to buy a project is looking at buying at a 7% cap and he's budgeting a 10% for property management, it's not going to cost me that much to property manage. So there's a lot of competitive advantages for me in my market where if I can find local multifamily, I can drive cap rates to near 10%, even if I'm buying at a 6% cap. As long as I see that I'm buying on actuals and not some pie in the sky pro forma, where they're trying to sell on a value ad that hasn't been implemented yet, right? That's what you definitely want to avoid because there's too many question marks. Can you explain that? Give us a potential. What might that be if somebody were giving one of these pie in the sky

performers? Like, can you give us a hypothetical? Sure. So brokers love to present financials on what they should be and then extrapolate a cap rate on those financials. And then you look at actuals and you say, hey, this owner's been losing money for three years, right? And he bought it for half of what he's trying to sell it for. So how am I going to make money? And the way the broker spins it is saying, well, if you brought rents to what they should be, which is this number, if you did utility submetering, you'll add an extra $30 per unit. If you fix up the units, you can get even more money on the rent. And voila, 7% or 6% cap rate on what it could be.

And here it is. But the reality is that none of those happen overnight. All of those take time to do. There's question marks on all of them. An example is on my 56 unit, I thought I would do utility submetering as well. It didn't work. It did not work. I took everything I learned in the 32 unit, applied it to the 56 unit, and it was a failure.

I want to talk more about that because last time I remember I was shocked by that idea of submetering and I was really excited about it. And then I tried to do it on mine. And I talked to like five different companies and nobody could do it and like nobody wanted to come to my area. So I thought, well, I'll just open up my own. But I still haven't done it. Right. So like why did it not work for you? What does that even mean by it?

You failed at it. Well, the first thing I did is I took the company that I used in the 32 unit and brought them out to the 56 unit and said, okay, I absolutely want a submeter here. I had a different situation on the shutoffs. So I had one shut off for two units for the downstairs and the upstairs. And so for me, when I submeter water, I want the ability to shut off water. Otherwise, you're just going to run into big, bad debt issues. And the only one that's going to get paid is going to be the submetering company. As soon as tenants know, you can't shut off the water, good luck collecting.

And then it becomes the whole debate of, well, I paid rent, but I didn't pay water. You're going to kick somebody out just because they didn't pay $30 in water. bill, right? But didn't want to get into that debate. So the submetering company said, hey, we got a great plumber. He'll come out and we'll just separate the, we'll just separate the meters. So I did a plan in Arizona. You've got to give tenants 90 days notice. I gave the tenants 90 days notice that we're going to submeter the water. Here's what we expect it to cost. We're going to submeter the water. We're going to submit to the sewer and the trash, right? So it was going to be a nice windfall of about $40, $45 per unit. And I was looking at 100 percent bill back. It was fabulous.

What I missed was two things. The first was that all my competition in the city did not bill that way. They did a flat $32, either $30 or $32 per unit. And I was kind of cocky saying, well, hey, I did it in my last project. I was successful. Tenants paid. They didn't pay. I shut off the water.

I beat the trend. Didn't matter. Okay. So I was going to go forward anyways. I sent the letters. Tenants freaked out. Okay. So as soon as I sent the letters, I started getting, you know, our office was inundated.

How much is it going to cost? How do we know? Nobody else is charging. You know, we like that. We know we can manage our expenses. I had a lot of retirees in the complex. So I overlooked my demographic. Okay.

I overlooked my demographic. I overlooked my competition. Then the, and I was still going to go forward. I was still saying, I don't care. You know, if I lose tenants, it doesn't matter. I have to capitalize this value, you know. I was just being just being hardheaded on it. Then the submetering company brought out the plumbers.

Plumbers made me put a hefty deposit down on the project. I put the 50% of the cost, which is something like $4,000, like an $8,000 project to submeter the main. So I had a shut off in front of each unit. They opened their first wall and they said, this can't be done. This can't be done. Half the plumbing goes upstairs. Half the plumbing goes downstairs.

So some of your tenants are going to be charged for the downstairs guys dishwasher. As soon as my tenants found that out, it was going to be a scandal, right? So I didn't want to deal with that. So I said, well, you know, call off the project. It's not going to work. I need to think this through. And, of course, the plumbing company decided to keep my deposit, even though for about one days worth of work, that was worth $4,000.

So I had the whole headache and the debate of trying to get that money back, which didn't work. You never got it? Nope. I filed to the Arizona ROC. They said it was a civil complaint. I, maybe I'll sue them, maybe I won't, I don't know. But, uh, ended up in the, while all of this was playing out, I ended up losing four or five tenants who were good tenants who went, went to the competition. And I said, you know what? What's the point at the end of the day? You know,

I'm paying about $35. I can drive rents. I can add $30, $32 just like my competition, build it into rents. They don't pay the total amount. I can, uh, I have all the levers to evict. Why not do what the competition is doing? It just didn't make sense. you know so i kind of called it off and uh moved on listen man i i i love i hate that you experience that but i love that you're so forthcoming about it i think hearing that should show people i mean you've been doing this you know you're not a you know unsevy individual you know you're on it and seeing that you've kind of you know it's easy for anybody to screw up right and i don't think this is a screw up i think it was kind of one of those like you know

hey, it's easy to overlook something. And you may not be able to do everything that you think you can do. And that goes back to the performance and everything on paper, right? Which is it may not turn out the way that you expected to turn out. So keep that in mind. And hopefully all the listeners, like, I mean, this to me, this is gold, what you're talking about right now. It doesn't matter. It has nothing to do with submeters to me.

It has to do with, you know, it's really easy to overlook stuff. and it's really easy to plan for things to happen. And just because you plan for them to happen, that doesn't mean they're going to in the way that you want them to. Yeah, I mean, had four people not left and people not complained, right now we'd be sitting here talking about how successful that was, right? Or if the plumbing wasn't hooked up weird like it was. So, like, you would have never known that had you not taking those steps forward.

I think a lot of people are paralyzed by fear of, well, what if this happens or I can't see all the situations that possibly could happen? But I don't know. I think you just kind of go with it and, you know, like be cognizant. of what's happening as you're going with whatever action you're trying to do like you did and reevaluate if you need to and adjust and pivot. Agreed. I'll tell you what, there's unforeseen positives as well. So I thought it would be the submeters, it would be the loss to lease, and it would be expenses. And I would be

be able to decrease expenses. What it turned out is my expenses actually ended up higher than I thought I'd make them, even with the property tax decrease. It just cost me more to run this complex correctly than it did the last owner and the last owner. And the last owner. was lying on their on their income statement as always. But what I didn't budget for is that I would have demand for furnished units. I was able to, yeah, I had so had no office in the complex. Our friend Ben Leibovic came out and visited Arizona. We were looking at a syndication deal and I brought him to the complex.

I showed him how we were wasting one unit in an office and he said, hey, take this one unit, take one bedroom, wall it off, make the one bedroom a unit, and turn it from a two bedroom into a one bedroom, do a furnished one bedroom, and convert a lost unit into a, in essence, a vacation rental, right? I said, that's a fabulous idea. I never even thought about it. Right. So I did that. I did that. I transformed one bedroom into an office. I did the furnished the other one. And I thought, hey, who in this city is ever going to want a furnished rental? You know, it's kind of a pie in the sky idea, but I'll try it. I tried it. Lo and behold, I've had, out of the last year, 10 months, 10 months booked. That's awesome. It turns out there's a

cancer center right around the corner. Doctor has people flying in from all around the United States, made a relationship with him, and he's booking me out all year. Okay. That's awesome. So now, what do you rent that for compared to another business model? So what do you rent that for compared to a normal rental. I mean, like, what do you? So my average two bedroom rents for about $6.50 to $6.70. And I'm renting these for $100 a night. Wow. Yeah. And you're, you're, I mean, so you're not telling me that you're booked 30 days. I'm booked, literally booked out my October through March is booked solid. Every day. Holy smokes. Literally. I get long-term renters from Canada, you know, elderly folks that want to enjoy the weather, that want to play golf or people in for cancer

treatment, and they all stay for anywhere between one month and two months. They book out six months in advance, book out solid. And then the rest of the months I get between one to three weeks with in between stays. And because it's all in the complex, it's super easy to manage because I already have the infrastructure there. I already have my resident manager doing the intake. I already have my cleaning lady who's ready there doing unit turns. So I'm, you know, I could be a hundred miles away sipping coffee and I can have people in and out, no problem. That's amazing. So I want to talk about the, so a couple of things I want to address there. First, the idea of you have people on staff there. I want to talk about that, like who you have in that infrastructure. But also,

how many units do you have? Is it just that one right now or do you have multiple ones that are all furnished now? So I have two now. After the success of the first one, I put another one online. I've had 100% occupancy this entire year. The market's been fantastic. There's a lot of economic growth and population growth. So every new turn I do, rent's been going up 10, 15 bucks, and we're not even scratching the surface. I mean, the growth has been fantastic.

Wow. I finally have somebody leaving next month, so I'm going to put a third online. And the goal here is probably I'm going to have 10 to 15% of the complex is going to be furnished and vacation rentals. So during the summer, it's going to be primarily construction workers, people visiting hospitals. During the winter, it's going to be winter visitors. That's cool. That's very cool. It makes me really awesome.

I have a couple properties of mine that are fairly difficult to keep rented all the time. Like they're small. I have a one-bedroom house. It's like a studio house, right? It's like awkward, but it's beautiful. It's brand new ground up. I built everything in it. I'm thinking now, like, why don't I just try that out next time it goes vacant, which it will

because people don't stay in a studio house for long. you know, I'll try rent and not on a nightly rental. I mean, I only get $450 a month anyway off of it. So if I even did $50 a night and got it 10 nights, I'm still better than I was as a rental. Those are the perfect candidates for that. What I've got to say, though, is there there's a lot of costs involved. And since I stumbled upon that model, I'm looking at my, you know, my SFRs and some of my other assets and saying, well, hey, why not try vacation rental on that? there's there's a lot of costs involved a lot of front end costs and I'm very hesitant to do that you know you have you're paying for all the utilities you're paying for all the furniture they're

very very picky it's a very competitive market it requires a lot of handholding a lot of convincing they want to talk to you they want to talk to the owner you know they want to talk to they want to know about you know where to go in town how is it you know how they want a travel guy you're an in I mean, you're an innkeeper when you're doing that. That's right. That's right. So to do it on a specific house, unless it's next door to you, you know, it's hard to build the infrastructure. Change the sheets.

Keep it clean. And then what? Then in the winter, you know, you have a plumbing leak. You're not even going to know about it because it's not occupied, right? Your air conditioner goes out between stays. You don't know about it. Tent moves in. Your air conditioner's out on a four-day stay.

That's a big problem, right? So it's, I really like how it works. in a larger multifamily, if that larger multifamily needs to be a specific class of property. It needs to picture well. It needs to fit. Sure. How do your tenants feel? I mean, do they know, does it matter? Does it affect them at all? Is there any kind of interaction? I'm just curious about that. On a big enough complex, it doesn't matter. If it was a 10 unit, everybody knows each other and people are coming in and out, it would be a problem, I think. On a bigger complex, all the tenants don't know each other anyways.

I've stuck all the units next to each other, so they're all next door to each other on one specific end of the complex, so they're not spread out. And my vacation renters are fantastic, right? They're typically elderly. They have disposable income, right? They're willing to spend. They want an experience better than a hotel. They're traveling. They're not fly-by-night kids, you know, that are going to tear up your place.

They take care of your place. So they add value to the complex. They're hanging out at the pool. They're talking to people. They're on vacation. They're happy. They're in a good mood. They're barbecuing.

So no, there's no downside. That's so awesome. Yeah. That's so awesome. Hey, go ahead, Brian. I was going to ask about that infrastructure we talked about. You know, like, do you have a dedicated staff just for this property? Does a 56 support full-time people?

Or is this? I don't remember what you said, how close this is to your other properties. But, like, how do you run the infrastructure of your business? So for me, this boils down to my competitive advantage in my market. This is where I can excel, right? I bought this complex smack dab in the middle of where I have probably 50% of my SFRs, right? So they're all like literally within a mile and a half. So I inherited when I bought the complex a fabulous resident manager. She's just absolutely fantastic. I trained her on my system. I trained my tenants right away. So I went from tenants. paying with money orders and cash and partial pay and not collecting late fee and all that. Within two months, I had 90% of my tenants paying online. 90% of my tenants doing maintenance requests online made the job of the resident manager so much easier.

She showed a bunch of appreciation that, hey, it went from what we were doing to what it is now. It's amazing that it could be run like this. So she does the entire 56 unit. and she manages all the SFRs around. So I get maintenance requests come directly online. They queue to her. She sees them.

She knows who to call. We use the same vendors for the multifamily as we use for the single family. I have a handy guy, older guy who great with his hands. He shows up daily. He looks at the maintenance requests. He goes to the units. He fixes them and he bills me at the end of the month. We have plumbing vendors.

We have vendors all around town that I had already built. relationships with, already half pricing list, HVAC vendors. And it's the same process. It just fits right in. The multifamily process fits right in with the single family process. And so for me, it's all about it's plug and play. You know, I can manage the portfolio from pretty much anywhere. I drive out. I make sure everything is great. Where I'm holding hands is if I buy an SFR, that's where it starts to get, you know, that's where I spend a lot of time where I got to go out. I got to say how I want the remodel. I got to manage the remodel.

I got to pay the vendors. So for me right now, SFR in this market doesn't make a lot of sense anymore. You know, I can spend as much time on one single family as I can trying to source and buy a larger multifamily. And in this market, it's so,

I see so much risk in single family. We talked about Brandon, kind of how you change strategy in a, in a market like this at this point of the cycle. Yeah. It's dangerous. It's a dangerous time to start. And search.

Yes. I'm curious. So it sounds like you've got this infrastructure locally, right? What happens as far as diversification is concerned for you? You know, clearly you get to a certain point. You're like, hey, you know, what if there's an economic downturn in this area? What if this area has an issue? When do you start to consider, I'm too tied up in this one market? It's time for me to start looking at other markets as well to play and build up infrastructure there so that I'm at least diversified. You know, I've thought about that, Josh. It's, I'm in general not a big believer in diversification. I think you diversify to not lose money, but you don't make money either, you know. I'm all about figuring out where I can compete and pushing that to the limit. You know, I have, it's going to be very, very difficult. I'll tell you what, I know my market so well, street to street. I know what every house can rent for to the dollar.

I know what every multifamily can rent for to the dollar. I know what I can push it to. I know where the population is going to be next year in two years. I know every company that's moving into town. Okay. So for me to think, I'm going to go to Chicago and compete with Wendell de Guzman, you know, or I'm going to go to Lima and compete with Ben Labovich. It's not going to happen.

It's foolish. It's just foolish. And to chalk it up for the sake of diversification that, hey, now I'm in this market or that market where I have zero competitive advantage, where I have to build a new infrastructure from scratch, where it's going to take me twice as much work, time, effort, money as it would in my own backyard where I've already built this, diversification doesn't make sense. Where it does make sense and what I've started to do is instead of buying, particularly on the SFR, instead of buying SFR outright, what I'm doing is I'm buying smaller homes that investors

primarily only investors would like. I'm buying those either with a solo 401k or with my own funds. And I'm doing owner financing. I'm just turning around before even fixing them up, turning them around to other investors I know. They're putting down nice down payments. And I'm owner financing them with interest rates that are probably a little bit higher than would be in the open market.

But probably debt that they couldn't get on that type of property. and I'm converting into notes, you know. So now that's my diversification. I really, I really like notes. It's, it's, but I'm doing it a little different. Instead of going and, you know, there's a lot of operators out there that'll sell you non-performing, that'll sell you performing notes in different markets. I think that's good. It's a little bit more for the passive investor and that's all, all great. But that, that doesn't fit what I'm doing. What I'm doing is I'm choosing the property. I'm buying the property. I'm selling the property and thereby mitigating all my risk.

If I got to take the property back, I don't care. I know the property. I know the person that I sold to. I know that person well. I know that he could fix it up. I know the quality of remodel he does. I know how he manages his tenants. And if it turns on him, I'll be glad to take it back and I'll just fit it right back into my portfolio.

There you go. There you go. That's awesome. I'm not buying a non-performing note that I'm going to have to call a buyer and try to figure out how to get it preperforming or I'm going to have to take back a property somewhere in Toledo, Ohio, that I don't even know what that property is. It might be a tear down. If I have to, if there's a chance that I got to fly out to Toledo, I'm probably, I don't want that note. Yeah. All right. So I love that. And I really do. I love your philosophy. I think it's awesome.

Did you know your house gets bored when you leave? I can't actually prove that, but it probably misses out on the action, the footsteps, the late night fridge raids. Yeah. When you're gone, your place is basically on unpaid leave. It's sitting there in the dark thinking, I could be contributing right now. Your side room wants a side hustle. Even your Wi-Fi is like, we could be networking. You're on vacation, spending money like it's a sport, while your staircase at home is fully capable of sending your income upwards.

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You're not going to go there, Josh? I'm not going to go there. I'll say Detroit? Nothing? I'll say it. I'll say it. I don't know what you're talking about. I said it.

So, you know, I mean, and there's opportunities there. They've got portfolios in their areas. I mean, I guess you kind of said it, but, you know, it sounds like, you know, for you personally, it just doesn't make sense to do something like that. You know, for me personally, no. I've looked at it. I've looked at it. I've thought about it.

I have friends in those markets. So it would make a little bit more sense. And this is a really controversial topic all over BP, right? A lot of people are talking about this, especially now that it's so much harder to find properties in your area, right? In California, there is no cash flow property, right? So what is that guy with money and a portfolio in California to do, right? So I understand that debate. You know, it is controversial.

You've got guys like Ben that are writing, you know, about the $30,000 pigs and other people that sell these turnkey pigs that tell you it's the best thing since sliced bread. What I would do first and foremost is I would talk to people that have invested in that specific market long term and just ask them. You know, investors will tell you whatever you want to hear. They love to talk real estate. I got guys from BP calling me from around the nation and I'll spend an hour just talking, you know, and I'll give them whatever they want. So they'll give you this information and ask them. So you've been in this market buying this segment of property, right? $30,000 property in wherever, right?

Ohio. Tell me about what your financials look like after five years of owning this property, after three years of owning this property, after one year of owning this property, right? Because long term, it looks very different than it does short term. I learned this lesson. It took me three years to learn this lesson because I didn't have an investor that showed me financial statements. They look very different. That's what you got to know. So you go in and say, okay, you're $30,000 property and just think about it. What is it going to cash flow at best case scenario? Whatever it may be, $100, $200, whatever it may be.

And then say, is it worth it? And can that $100 of cash flow accrued over one, two, three years, how does that work when your tenant moves out and you have $10,000 in CAPEX? And how does it work and how does that cash flow drive your returns when you have no chance of appreciation? And then just think about, is it worth it? Is it going to make you rich? This game, honestly, today isn't about cash flow. It just isn't. You're not going to get rich off cash flow. There aren't cash flow opportunities aren't sitting and waiting for you. You're going to get rich off two ways off of building a competitive advantage in some market, in some way, in some means. And if that means you're, you know, I love the all of the above strategy. You want to get into real. estate today, become a broker, become a turnkey guy, sell knowledge, sell whatever it is, sell everything, you know what I mean? Because you're not just going to jump into a market, start buying,

buy a portfolio of $10, $30,000 properties and think you're going to quit your day job. It's not happening today. Those opportunities are gone and nobody's leaving equity on the table like they were in 2009. Yeah, I definitely, I mean, 100% would say it's so much difficult. I think Like, there's always one-off stuff. Like, hey, you got an amazing deal. Like, and suddenly you found that one property. But it's hard to build up that portfolio now. So I've kind of shifted my strategy a lot over the last couple of years as well to now

I'm looking at a lot more. How do I find these nice value at it? Like, I've been doing nice value at houses lately, you know, trying to find properties that I can add 40, 50, like basically flipping. And then I'll hold them as a rental for the market to climb more. And then someday I'll sell them off, maybe even sell them, you know, seller financing or a lease option or whatever. Because I know that that $100 a month, I might get off of the cash flow isn't, that's not going to make me a multi, multi-millionaire

someday. And so, you know, there's a fine line between changing and acting stupid in a market like people did in 2006, 2007, and trying to change your strategy to be smart within that market. And I think, I think you're doing it well. I know one thing that, I mean, really, the thing that changed my entire, like, outlook was the article that you and Ben wrote a while back together about the CAPX, about, like, you guys took, If people listening haven't read this, we'll put a link in the show notes, but they basically took this list of all the things that could go wrong. I mean, that will go wrong in a property, from a new roof to a new driveway to a new HVAC to, you know, paint, new carpet, the refrigerator.

I mean, they listed everything. They divided each by the cost and the amount of time that it will live like last for. And it worked out to, what was it, like, $2.50 a month every single month or something like that. It was almost, I think it was a little bit over $200. And they, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, you know, nation, ripped our asses out, right? They were just like, you guys are crazy. It doesn't cost this much. And to give you some background, what we did is we just took the FHA, if you buy a large multi-family property, and you use long-term financing. I think it's called a 203B. I don't remember, but you can get long-term 30-year fixed financing, through the FHA. And what they do, a lot of investors don't like using that because what they do

is they do CAPEX holdbacks, right? So every single month, they do a front-end inspection, and this can be on a hundred unit complex, okay? So they do a front-end inspection. They have an inspector come out and they inspects all the systems of your building, all your mechanicals, your plumbing, your flooring, your roofing, and they assign a useful life based on that condition. And then they say, this is what it cost in this geographic region, average cost to get this thing replaced, and they just divide it by what's left in the useful life. And they do that by it for every single component. And at the bottom of the spreadsheet, it equals what the holdback is.

And what they're saying, what FHA is saying is basically, or it's not FHA, I think it's HUD. They're saying, this is what we're going to hold back from your income every single month to make 100% sure that you can afford your CAPEX when it comes. Because on 100 unit complex, when you've got to replace the roof, that could be a $400,000 hit. Right. And if you're not capitalized, you're done. So what we did is say, boil that down. Is the government that's stupid that they make you do that?

You know, have they not had experience over 50 years, 100 years of doing these loans that this is the part that gets investors in trouble every single time? So you just did the exact same approach. On a house, look at all the components. And you can argue that maybe in Arizona it cost 3,000. dollars to do an H-back, but in California it costs 25. That's irrelevant. The bottom line is there's a cost to it. And the lower price your rental is, the less your chance is to absorb that cost, meaning the less profitable your rental is going to be. So what the bottom line is, if your CAPEX is going to be, even if you want to debate the 200 plus number, call it 150,

call it whatever you want it to be. If your average rents are $600, And you have the added bonus, by the way, of zero appreciation chance because as soon as your tenant leaves, you're going to have to spend another $5 to $10,000 to get a retail ready again. So if you put all those costs, line them up one by one by one and then calculate how much money you're going to get when you sell the house. You'll see that your returns are very small. And on top of that, you're not building a balance sheet. You're not getting rich. You're managing C class tenants. You're buying yourself a low-paying job.

right just cut to the chase go buy yourself a 7-Eleven and work behind the counter you know what I mean tweetable topic right there why even get into real estate why even get into real estate you get into real estate you get into real estate for one reason as far as I'm concerned that's to build a balance sheet build net worth and you do that with property that has a chance of appreciation you do that with B class tenants you do that with assets that people want not assets that you got cheap because nobody else wanted it because guess what when you go to sell it nobody's going to want it either there you go there you go well and it's dirty true i love it and i you know okay you you open the door brandon but that's you know that that's always obviously been my my story here on the detroit riff

uh but you know who knows maybe things will change i i actually when i was in new york a couple weeks ago i had somebody come up to me and tell me about how they had bought a property in Detroit. I forget what they spent. It was like $12,000 or $20 or something and like, hey, what do you think about this? I know, I know you rip on it, but no, really, what do you think? And I said, I think it's probably not the best idea. I think at some point, if you held that for 20, 30 years, maybe quick and loans guy, buying over, taking over Detroit and trying to improve the economy single-handedly can do it. But, you know, there's a lot of time and you got to be able to hold out through a lot of that. And that's not just for Detroit. That's for a lot of these areas in the

Rust Belt where the chance of appreciation aren't very good and the economies aren't great and growth isn't there. And whether you live there or you don't, they may not be the best properties for building wealth. Well, the one caveat I would say would be the local operator where this model is his competitive advantage. Okay. If you're on the the ground, you live in that city, you know street to street. Then there's other business models. Then you become the turnkey guy. Then you become the property manager. Then you become the real estate agent. Now you're making money in a lot of different ways combined with your cash flow. Now you know the handyman and maybe you can control that cap X number isn't 220. Maybe it can be

$100 a month instead. So when you're on the ground and you can control all those for that guy, all the power to you, that's great. But for the guy sitting in San Francisco, So, you know, thinking he's going to get rich in Toledo or in Lima, I just don't see it. I just don't see it. A lot of digs on Lima for some reason. I'm not quite sure. Just an example. Just.

Yeah. I mean, there's no, you know, if somebody is listening and thinks that this is a dig, it might be. Hey, Serge, this show, by the way, I mean, this is an amazing show right now. I'm like my, Brandon and I have been taking more and more notes and we want to keep asking questions. And I want to kind of circle back a little bit on a few things. So the first show was zero to what was a 68 units. How many units do you have now? Just over 100.

Okay, just over 100. How big is your organization today? You will laugh, actually. It's me, my wife, and two contractors, two. There's two 1099 employees. Wow. Wow. That's very impressive.

Can I ask how many hours a week? I was about to go there. Do you consider yourself full-time, you're working 40, 50 hours a week, or are you more relaxed than that? Well, I spend my summers in the mountains to escape the heat. So I'm probably about 200 miles away from my rentals all summer for two and a half, three months. My wife is a full-time mom. We have two young kids. Anything but full time, I mean, I probably spend two to five hours.

I still maintain the books. I still have a hand on accounting. I'm just the guy I am. I'm an accountant, so I want to do my own journal entries. You know, I'll always do that. So I'll close my books. I'll reconcile, you know, reconcile cash. I'll do that.

I'll take some phone calls. But other than that, it's, that's about all I do at this point. But what is your, I mean, you do that, but what is your job? I mean, I would say your job is probably finding opportunities and finding deals. So I want to kind of go to that. That's my job. Okay. So earlier in the show, I mentioned this woman.

And she had asked me, she's like, Josh, well, so how do I find these properties? So I'm going to just pass that on to you. How does somebody go about finding deals? How do you find, you know, okay, today there's not as many value ads, but whatever. However, how do you go about finding opportunities obviously in your market because that is what you do? What is your method for doing that? So for me today, I've kind of come full circle. I'm over the late night searches on loop net.

Forget it. What I do is I first define exactly what kind of complex I'm in a position to buy. And that means what kind of down payment can I bring to the table, right? So if I say, okay, if I can bring $500,000 down, I know that I'm probably going to have to put 25% minimum down. And I know that that'll buy me a $2 million complex. Okay, so I figure out first and foremost, how much can I buy. And that'll also dictate how many units I can buy.

If I know that I want to buy a $2 million complex, I know that I'll be able to buy anywhere between a 30 and a 60 unit complex. So that kind of defines the size of the complex. Then I say, working backwards, what class? of complex and I let the tenants define that. I say, I know that if my average rents are going to be 500 bucks, I know the type of tenant that that's going to bring. And I know I either want it or I don't want it. In my case, I don't want it. So for me, I want average rents of 650 or higher. Okay. So now I know that I want average rents of 650 or higher. I know that I can I can afford to buy, say, a 50 to 100

unit and based on the average rents, it's also going to define the class of building that that's going to buy me. In my situation, I'm looking for a nicer class B, typically, you know, 80s to 90s. But I let the tenant define that and I let how much I can buy define that. So I'm not pie in the sky searching everything. Then I say, I refine it even further and say, what market do I have a competitive advantage in? And that's key. I'm not looking at properties. in Texas. I'm not looking at properties in Ohio or Florida. I'm not on loop net spinning my wheels all night because there's a lot of complex. I wouldn't know what a good deal look like in Florida. I wouldn't know. I wouldn't know that location. I wouldn't know what average rents are. I wouldn't

know my market. Okay. So I've expanded my market to two or three areas that I'm now comfortable in. I know the demographics. I know what's going to happen. I know where the economic shocks are going to come from. And what you'll find is that there aren't that many complexes typically in those areas unless you're looking in a big downtown city or whatever, which I'm not. I love secondary markets. I only operate in secondary markets. And I'm a big believer in secondary markets because it's that much easier to get a competitive advantage in a secondary market. It's that much easier to learn that market. And it's that much easier to predict shocks, track economic growth than it is a big MSA like downtown Phoenix, right? Also in secondary markets, I'm not competing with every other

1031 exchange buyer from Los Angeles that wants to be in Phoenix. Because they don't know a lot of these secondary markets, and it's scary to them. They can't fly in the Sky Harbor Airport and drive 10 minutes and see it. They got to drive two hours, right? They don't want to do that. So specific, figure out where I want to invest, and then I just drive it. I'll go to the complex. I'll drive that complex. I'll go to that complex. I'll meet with the resident manager. I'll send my resident manager to go meet with that resident manager. Figure out, talk to them. What's your occupancy? What kind of tenants? How are you guys doing? What are your, you know, you're just checking in with them, right? You're just like, hey, I'm, I'm a... That's right. I'm building a relationship.

And then eventually, I'll figure out who the owner is. And I'll figure out a way out to call the owner. And I'll say, hey, I'm in your market. Let's talk. And typically that owner owns one or two of those buildings. And I'm just going to talk to that owner. And I'm going to stick to those buildings and kind of shut out everything else around me because I know I only want that asset. And because I have a competitive advantage in that asset, I can pay a market rate for that asset. You know, I can pay what, you know, two, three years ago I would have thrown up on $50,000 a door, for example, I would have said, you got to be crazy to pay that. Well, today, maybe I can pay that because I know that in a year, I know what development's coming to that city. I know what rents are today.

I know what they should be and I know what they will be. So I can be competitive and I can do a competitive offer. It's not just throwing out stupid lowball offers where they're not going to take you seriously. It's building the relationship first. And it's identifying that three, four, are five buildings that fit your profile that fit your competitive advantage and just being persistent in going after them. What does that conversation look like? I mean, like, so you know, you find the three buildings and, you know, you forge a relationship, hey, I'm a local owner as well. It's great to meet you. Like, what does that look like? How do I even spark that conversation? And what am I said, you know, what, what are we saying? What are we talking about here?

You know, it looks very different depending on the complex. So it's going to look different. on a complex that's owned by an out-of-state owner with a property manager, then it is the local guy that's on site. I like building relationships with resident managers. They're on the ground. They know everything about the property, right? They'll tell you everything. You go and spend 10 minutes in their office. They'll tell you everything that's great, everything that's bad. They'll tell you how the owners are cheap ass. They'll tell you how he does this and he does that. And once you've built that relationship. Once you built that trust, then it's like, hey, next time the owner comes to town or comes to visit the property, give me a call. Tell him there's a guy that also invests in multifamily that just

wants to have lunch. It just wants to talk. It's slow. It's slow to build that relationship. Because remember, this isn't a property that's on the market. And I don't want something necessarily that's on the market. I don't want to compete with five other loop net buyers, you know, for highest and best. That's not what I'm trying to do. I'm trying to buy something a very specific asset. And if it's not that specific asset, I don't want it. So I'll wait as long as I can. I'm not in a rush. I don't care if I buy it in a year, in two years or five years. I'm not in a rush to buy that asset. I'm fine. It gives me more time to look at the market to see what's going on with that specific complex, to see what's going on with the city. Time is your, it's not your enemy in real estate. Time is your friend. So I want to follow up on that

really quick and then we'll kind of move on here. So to me, if I'm listening to you, I'm going to extrapolate that you probably have a number of deals in the works right now. Deals that may not be deals, deals where you're not actually having negotiations, but deals that you're starting to kind of work it. How many of those do you have going on? Right now, probably two that are in advanced, that are in the advanced stage, where I'm actually face to face within one situation an owner and another situation a broker that that knows the owner that kind of knows me and knows the owner that's helping

to do this. And probably another three more that kind of working through the pipeline. And I consider myself very lucky if I'll be able to buy one of them. And that'll be within the next 24 months. Got it. And will it be a home run deal? Probably not, to be honest. Nobody's going to leave a million dollars of equity on the table.

I'm not looking for that home run deal. I'm not looking to low ball. Everybody knows, no one's stupid. Everyone knows the multifamily market is hot. Everyone knows their asset has value, right? So it's just a matter of can you get, is there value left in the project? And I've already done that work. I've already looked at the project and determined that there is value left.

So I can pay him a fair market value of the business he's doing today, knowing that there's still value in the business I'm going to do tomorrow. Yeah, I love that. Ben. Yeah. Awesome. Yeah, I feel like we could probably talk for like the next five hours with you. I think we can.

But we'll start to wrap this thing up because I'm sure people got to, you know, and we may have to have Serge back for another show at some point. Someday what we need to do is probably get Brian Burke, Ben, and Serge all on a round table. That would be great. That would be a fascinating show. Oh, man, it'll be, it'll turn into a debate of why not to buy real estate with that. There you go. There you go.

of it. All right. So let's go to the fire round now. It's time for the fire round. All right. The fire round, these questions come directly out of the bigger pockets forums. And I pulled all of them from the actual like sub forum of multifamily properties. So we're kind of talking about that today. Number one. And I know we covered a lot of the stuff today, but we'll rehash it quickly here. How do you find motivated sellers in an apartment building or for an apartment building? You know, kind of the way I'm doing it. It's not about motivation. motivated sellers, you know, it's about buying the right assets. It's different than SFR. It's you're not doing a 30, 60 day flip, right, where it's all about the basis how cheap you bought it.

There are multifamily projects that you can get for free that you will never turn a profit on. It's not about how cheap you buy it. It's about the right asset, the right location and the right value that you can add. And in that case, you can pay a market price. I'm I'm okay paying a market price. I'm okay paying a 6%, 7% cap. It's not about motivated sellers. It's about realistic sellers and it's about the right asset. Start with the right asset and go from there. Right on. Right on. All right. How can a small multifamily owner compete with large multifamily holding companies that offer ridiculous amenities? I think that's for attracting tenants. How do you compete to attract tenants if you're a small guy? Yeah, furnished and loaded and free this and free that.

and, you know, dog walking services. The answer to that question is you don't compete. If you got to compete with 500 other units on your street, you probably don't have a competitive advantage. You can't control your price. You can't set your price. This is why I like secondary markets where my units are in an area that are typically surrounded by single family,

and there's going to be your competitive advantage. You're in a location that people want to be. So in that case, you don't have to compete on amenities. You don't have to give them free Wi-Fi and a pool and a spa. They came to you because they want to be in that location. It's close to their job. It's close to their work. There's your competitive advantage.

If you have a 10 unit surrounded by 500 other units, you have no competitive advantage. You don't control your price. You're going to have high turnover. I don't buy that project. I stay away from that. There's plenty of product out there to pick and choose. Love it. All right.

I want to buy a duplex or tripe. and I'm choosing either San Diego or Phoenix. Which do I choose? Oh, today, it would depend on the project. I mean, I'd do San Diego. I would do San Diego because you're not going to cash flow in Phoenix. You're not going to cash flow in San Diego, right? In San Diego, if you can find the right deal, you can, you have a lot of exits.

You have, you can vacation rental through the roof, right, if you have the right location. If you have the down payment, I think a duplex at the end of the day, today, it's not going to necessarily be a cash flow play. It's going to be more of a store of value. So five years, ten years down the road, would I rather have that San Diego duplex on my balance sheet or downtown Phoenix, you know, air conditioning, breaking 1960. I'd be in San Diego all day. There you go. I like that. Nice. All right. Last question on the fire round. If you had $900,000 in cash to invest in real estate, what would you do?

Today, I would, first and foremost, it depends on what my skill set was, right? If I had never touched multifamily, I wouldn't go into multifamily. If I had never touched single family, I wouldn't go into single family. I would look to hard money lending. I would look towards buying notes, originating notes, owner finance. I would look around real estate. I would look around the bubble of the asset itself. If I had experience, first and foremost, I would use that as a down payment to leverage on a nice multifamily that I can add value on, but only if that was what I do and that's what my competitive advantage is.

I can tell you what I wouldn't do. I wouldn't move that money out of state and give it to a turnkey operator. I'm sorry, I love turnkey operator. I like the model, but I just wouldn't blindly do that. Sure. It's too much money to lose. and you're taking $900,000 from one line item on your balance sheet, moving it to another that's not growing.

Yeah. I love that. Interesting. I love that you use accounting terms, you know, to talk about real estate. I think that's actually cool. That's great. And I like to use the analogy when I'm talking about people with money. I say it's, I think it's more dangerous to invest with a lot of money than it is without

almost because it's like walking around with a loaded shotgun without any training. You're just like, what does this button do? And you, you know, shoot people. Because like, yeah, people don't know what they're doing. And when you have a lot of money, people just buy terrible deals because they're like, well, you know, whatever. I don't need to get a great deal. And everybody's pitching you, right? Everybody's pitching you.

Everyone's got the story about their friend that made a killing in real estate, right? And it's just they go from those antidotes. And when they're ready to do something, you know, find by your knowledge, find people that are doing it and pick their brain, become friends with them, ask them what their long-term numbers look like. They'll tell you the truth. They'll tell you the truth. Nobody's in this. nobody's lying just to be an asshole. You know, they're trying, they want to help.

And so take those opinions and do it with people that have done it long term. Not the one year operator, not the six-month guy, not the guy that looks to be rich because he's doing this or that, but the guy that's done it for five years. Yeah. You know, earlier, I meant to say this earlier and we moved on and never got to say it, but that point you made earlier and you just made now about, you know, talking with experienced people in the market you want to invest that. there for five plus years. I think that's one of the single best pieces of advice anybody's

ever given on this podcast. It's so true and it's so realistic. People often think competitive, but like you said, I've never met a real estate investor who didn't want to brag about everything. It wasn't wide open. I mean, almost everybody's like, this is what I do. This is what I've done. This is how I've done it. And this is what you shouldn't do. And here's all my mistakes right here, lined up. You'd be shocked at how easy it is to get in here with a lot of these guys, right? It's easy to sit down. Most of them want to talk about it. And you know what?

They've been in the market long enough. They'll tell you in two seconds if the path you're on is junk or if you're on to something. And they'll tell you why. So don't go out of the loan. And that's what BP is for. That's what BP is for. I get people that are starting, that call me and they say, you know, how do I do this? How do I break in?

I say, first thing I say is figure out BP members that are active in your market. And sometimes I'll tell him if I know it's Chicago or I know it's the Bay Area, I know some of these guys that are active. I say, call this guy, take him to lunch. That's the first thing you do. Listen to this guy's podcast, you know, spend $200 on some education. You know what I mean? Get it for free first. Figure out who's in the niche you're in.

You can figure it out. Spend the money, spend the time, buy people lunch. It's so easy. People don't want to do it. People don't want to do what you did. I want to do what you did. Yep. I was at this New York meetup a couple weeks ago.

And that was the thing that I told them. I was like, you know, pulled the room. I said, hey, who's new here? Who's experience here? Okay, new guys. Before you leave, I want you to at least have met two of the experienced guys in the room. And I want you to ask them to go to lunch, get out there, and sit down with these people. Because they're more than happy to work with you.

and they're going to help you out. And you may be their partner down the line. So, you know, it's an advantage to all sides. So you learn, they learned, you guys potentially do deals. It's a beautiful thing. There's no downside whatsoever except time. And frankly, time is on your side for all parties. Because that's what you do.

That's your job. That's right. But what surprised me is, you know, people want the riches. They want the wealth. They want to do what other people did. But they just don't want to do the minimal steps. It's just, it's not, come on, guys. You know, it's not that difficult.

Start there, and you'll be just shocked at where it leads. Yeah, awesome. Love it. All right, moving on, even though I don't want you want to, but we're going to move on to the world famous. Famous for. All right, these questions, we ask every guest, including we asked you on the last show on show number 60,

which, of course, people can listen to at biggerpockets.com slash show 60. But we're going to ask you again today, just in case anything has changed. So number one, what is your favorite, real estate related book. I got to say something different than last time. I don't remember what it was last time. I don't do that. But, oh, man, I hate to say rich dad, poor dad.

I hate to say it, but I think the one that I really liked was we talked about landlording on autopilot last time. Yes, you did. And you talked about the real book of real estate and good to great. I recommend those seven habits. So give us something new here. Come on. I stopped reading real estate books.

I felt like I read all of them. They're just getting so old. I like all of Macquarie stuff, read all of Macquarie stuff. I just honestly, I'm not reading real estate books anymore. And I think there's a point where people shift to business books more often. Or at least like the idea of other ways of learning, not just about how to buy a rental property or whatever. All right. So let's move to that.

What about business books? What's on your table these days? God, I just reread the e-mend. Yep, yep. I just went to lunch with somebody yesterday. Actually, a BP member who asked me to go to lunch. And so he went to lunch together, and he bought me like Lucas. So shout out to Lucas.

What's up? And on there, I told him, I was like, go home and read the E-Meth. I was like, the first thing you do, go read the E-Meth. I was like, and then go read some real estate books, but read the E-Meth first. I like the E-Mith. I just reread the one thing. I like that. My favorite business book.

I am reading that right now, actually. It's fantastic. It's fantastic. And then the Oldie-Bugty, I like the Carnegie books. how to win friends and influence people. I typically read that about once every two years just as a refresher. Just how to treat people and stay positive. That's fantastic.

All right. You got the two kids. What else are you doing for fun? You're out there in your mountain home. What do you do up there in the mountains for fun? Man, it's fabulous. Just swim during the day, play with the kids, pickleball, speedminton. I don't know what you know.

Yeah, what is that? Is that Arizona things? Speedminton is a, it's like, it's a mix between tennis and badminton. Just speed it up. It's fantastic. We stumbled upon it. Wife and I enjoy it. Hanging out with friends here at the club.

It's, it's fantastic. It's just, just to get away, it's 110 degrees in Arizona. And out here, it's in the low 90s, high 80s. So it's just getting away from the heat. come August, it'll be back to the grind. I want to know what pickleball is before we move on. Look it up, Josh. Because I'm not the only one who doesn't know.

So you got a captive audience of tens of thousands of people. Tell us what it is. It's played on a tennis court. Look it up. You'll see the details. It's funny. YouTube it. You'll laugh.

All right. All right. Now, the sport, which two, three or four players use solid paddles made of wood or composite material to hit a perforated polymer ball. Awesome. All right. I'm playing. You and me, Serge. I'm coming to your house. We're going to play. Challenge. Open him, open him, but. All right. Good. It doesn't sound good or promising for you, Brandon. It doesn't. All right. Final question for me.

What do you believe sets apart successful investors from those who give up, fail, or never get started? Undying search for knowledge, man. Undying search for knowledge. I will talk to anybody in this business, hear opinions. change opinions, change strategies. You can never stop. You can never stop. You can never rest. It's dynamic business. The cycles change. The strategies change. You cannot rest on your laurels. You cannot sit in one position. You always got to move. You always got to buy. You always got to sell. No matter how successful you are, you got to keep moving forward. Perfect. Love it. Amazing. Amazing. All right, man. Where can we find out more about you? Where can we find you?

contact me on BP. That's that's where it's at. What is BP? Bigger pockets. Oh, start there. Start there. Awesome. Awesome. Serge, what a great show. Really, really enjoyed it. Pleasure to have you back. And I know without a doubt that as long as we're still doing shows in a year or two, we're going to have you back. So, thank you for the time. And we'll look forward to seeing you back on the site. Guys, my pleasure. Thank you for having me. Thank you. Thanks. All right, guys, that was show 131 on the Bigger Pockets podcast. You can check out the show notes at biggerpockets.com slash show 131. And on those show notes, not only do you get notes and highlights and links to anything that we talked about, but you can also interact with Serge.

So please jump in there, get into a conversation, ask him any questions you've got. He's going to jump in and help out. And so we definitely encourage you to do that. as we mentioned in the upfront, please jump on iTunes, leave us a rating or review, even if you listen on Stitcher or somewhere else. It definitely helps us SoundCloud, however you absorb the show, please leave us ratings or reviews. And beyond that, this guy, this guy surge, is active on bigger pockets. This guy is sharing the wisdom that he has with you on our forums. I don't know if it's every day, but on a regular basis.

and there's tons of guys just like him, experienced kicking backside, and they're there helping out. And obviously they're doing it to help out and they're doing it because it helps them out. So jump on, interact with them. If you haven't jumped on our forums, if you're not participating,

you are missing the opportunity to get to know guys like Serge and to potentially work with guys like Serge. So get in there, do it today. If you haven't already, post one post. That's all you got to do. Start with one. And then do the next and the next and next.

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Tell everybody. Get the word out. We appreciate it more than you have any idea. So thank you for listening. I'm Josh Dorkin. Sign it off. Sign it off. You're listening to Bigger Pockets Radio,

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