The Science of Flipping - Episode 54 – How to start investing in multiplexes | Real Estate Investing Podcast

Episode Date: November 25, 2014

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Welcome to the Science of Flipping Podcast. I'm your host, Justin Colby. Hey guys, welcome to the Science of Flipping Podcast. I am your host, Justin Colby, and welcome, welcome, welcome. Thank you guys all for being such great, loyal listeners. I have a very special guest on the phone with me today, but before we get to the guest, if this is your first time listening to the podcast, feel free to go to thescienceofflipping.com and download your free e-book. This is an e-book that myself and others put together

about the 15 most costly mistakes you can make in today's real estate market as a real estate investor. It's free. They are great tips. It's the 15 most costly mistakes you can make in today's market as an investor. So get on over to thescienceofflipping.com. If you are a loyal listener and you're ready to take your game to the next level and you want to speak with me personally about either coaching or mentoring and seeing if that's a good fit, go ahead and email me personally at info at thescienceofflipping.com. Info at thescienceofflipping.com. We can jump on a call one-on-one and we can figure out whether it'd be a good fit to come on and I can coach you or mentor you and get to that next level.

This podcast is all about taking your game to the next level and being able to do it virtually and have systems and blueprints and processes in place so you don't own a job, right? You own a company. And so my guest today, Mr. Joe Fairless is here and he's going to be able to give us some awesome information about taking your business from a residential buy and hold business to a multi-unit buy and hold business. What is going on, my man Joe? Hello, Justin. How's it going? It's going good, man.

How are things with you? Oh, they're doing great. I'm really excited to be on the show and I'm grateful for the opportunity to spend some time with you and your listeners. Right on. Well, I appreciate you and very grateful that you're here and giving my listeners some top knowledge. This is a very hot topic, so to speak. A lot of people who start in the residential real estate business, not quickly, but over time, tend to jump into the multi-unit

real estate investing business. And I know that's exactly what you do and you're an expert at it. And I know you're going to be able to drop some awesome knowledge on our listeners today about taking your game from the single family home world into multi, multi, multi units, as you've explained over to me. You have a, did I hear like 160 unit building? Is that right? You heard that right. 168. Don't forget about the remaining eight. That's right. That's where all the profit is in those days.

That's right. Exactly. That's right. Well, good. Well, why don't we just start out by kind of giving a background to the listeners where you started and how you started in the residential real estate game and how that transitioned into finding opportunity and raising capital to go into the multi-unit, especially 168. I mean that's not just a fourplex.

That's a large project. Yeah, that's a lot of fourplexes. It's a crazy transition but if done properly with the right guidance and education and faith, then you can make it happen. I mean, how I started out, I am from Texas and I moved straight up from Texas to New York City once I graduated college and I was in advertising working at an ad agency on Madison Avenue. And for anybody in the advertising or marketing industry, you know that you don't make any money right out of school. And in fact, I think I was making less than minimum wage when you factored in all the hours I was working.

So I didn't have any money to invest. But what I did is as I progressed in my career a couple years, I was able to save $1,000. And with that $1,000, I was like, hmm, I've got to figure out a way to invest this. And I had no clue about investing at all. I didn't know what stocks were, what bonds were, real estate, investing, anything. So I went to my bank and I saw that there was a CD, which I didn't even know what that was. So I saw that it stands for Certificate of Deposit and it was a better interest rate than I was making in my savings account. So I was like, you know what? I've got a thousand bucks. I'm going to put the money into this. Well, they held it hostage for 12 very long months, and it was only $1,000 that I had.

And then afterwards, they gave me a return of, I think, like $20. And I remember standing outside on the street corner in New York City, and I feel like, I swear, it was like a movie scene where the whole world was like slow motion as I'm spinning around the 360 and I'm like there has got to be a better way. I was like breaking a sweat and by the way, I also got taxes taken out of it later. Nice. They like kicked me when I was down. So I was like, all right, there's got to be a better way. I started reading books. Now I read at least a book a month, but usually more than that.

And the first book that I read was Investing for Dummies. Investing for Dummies lays out the three different types of investing you can do, stocks, bonds, real estate, then my sister mailed me Rich Dad, Poor Dad as I'm sure all of you listeners know that that's a very influential book in many investors' lives and I'm sure in a lot of your lives as well. And that really was the aha moment for me. And that's – I still didn't have any money though. So I ended up having to wait a couple more years, save up enough for a down payment. And at that point, I was able to save up enough to buy my first single family house. Well, that's a great way to kind of jump in and get educated. I mean, you and I both have educated people and try to help them get started. And I think starting by just reading a book, right? Figure out what direction you want to do,

what type of investing. There's so many different ways to invest in real estate. And that's why we're having this call is because you've been able to transition from buying that first single family home and jump into a completely different market, which I would assume most people would be terrified to jump into the market that you're currently rocking in, which is the multiplexes, but not just that, the 100 plus. When you did finally buy your first home, did you have any intentions of flipping homes or going any other route than the buy and hold model? None whatsoever.

In fact, I remember creating a document because I'm a total goal-oriented person. The document had, I think it was 75 homes that I had to buy and hold in order to reach my financial goals with single-family homes. And I was ready, rearing, and going to make that happen. But then once I ended up getting to four single-family homes, and I was like, hold on a second. This is a lot of paperwork to keep track of, and I am about 200, 250 bucks a house and granted some people make more and some people make less depending on the numbers and the market and all that good stuff and how much value you add to the property. But in the properties I was making about $200,000, $250,000. I fell into buying it at the right time in Dallas-Fort Worth where it was around 2009, 2010, 2011 when I was buying my homes. Now

it's a bit more challenging to find good deals there for single-family homes. But my plan was to buy 70, 75 homes and cash flow that way. But after I realized the amount of organizational stuff that's necessary, I was like, all right, I've got to scale this puppy. And I need to buy multiple quote-unquote homes at once so that I can have them all under one entity and have economies of scale with the management. Right, right. I mean that's the number one drawback I've ever heard is to reach the financial success that most people would like, you have to have a ton of rentals, right? You said you found out it was about 75 was what you were thinking was the number. Yeah, yeah. So I was like, there's got to be another solution to this. And that's whenever I really started looking at multifamily investing. And for whatever reason, I gravitated towards that in commercial real estate. I think probably because I grew up after my parents divorced.

I lived in an apartment for a while with my mom and my sister and my brother. And yeah, I was just familiar with apartments. I'm in New York City now, so I live in an apartment versus warehouses and storage facilities and all that because quite frankly, you can make money in any type of real estate venture like to do and what interests you most and what makes sense to you. And apartments just made a lot of sense to me. So I started studying it, read a lot on it, read the books, reached out to one of the authors, started speaking with him. He helped me along the way. And then I got up and running on how to evaluate apartments and learn the new language of commercial real estate versus single-family homes. Yeah, and I guess that's a great transition is how in the hell did you jump from going

to single family homes, which aren't too confusing, right? You either get a conventional loan, private money loan, you buy the home, you get it rent and rent it to jumping all the way into a 100 plus unit apartment complex. I mean, how do you make that jump? Weren't you terrified? I mean, I would be terrified. Yeah, it was quite the experience from a mental growth standpoint because as you mentioned, I mean going from single-family

homes to multifamily is a transition in and of itself. But when you go from one, two, three, four single-family homes to 168-unit apartment community, it's like, oh my gosh, that's a completely different ballgame. You're competing at another level and learning another language. It really is. So what I did from a mental standpoint is I didn't plan on buying 168 units. The opportunity presented itself and I grew into the opportunity. My plan was to actually acquire a 30-unit property with investors because what happened behind the scenes is I was the youngest vice president of the New York City

advertising agency. So I was rocking it out in my full-time job and I had a very, very good career going on and it would have been very good if I stayed in advertising, but I wasn't fulfilled. I wasn't doing anything on a regular basis that got me excited from a mental stimulation standpoint and a contribution. I didn't feel like what I was doing mattered. And people in advertising can get that. Don't get me wrong. That's just how I'm wired. And because of that, I quit. And I started my own company. So because I started my own company, I had to raise money. So not only was I buying a 30-unit property, but I was also combining that with investors and raising money for the first time when I had never raised a penny before in my life. So that was a couple challenges, kind of a dual challenge that I was working through.

And initially, I thought I could raise about $200,000, $300,000 from however many investors that I needed to make it happen. And that's what I was looking at. But I came across a property through a connection, a friend of mine who I'd made once I started focusing on multifamily properties. And he told me about this 168 unit property. But there is a way that we could get into it creatively through a master lease with option to purchase that wouldn't require as much. Initially, we thought it would be about $400,000, $500,000 we'd get into the property. So then I was like, yeah, you know what? That's about twice as much as what I think I can do. So I can pursue that.

Well, when the dust settled on the deal, I ended up raising $1.3 million on it. And it's still a fantastic deal. But if I had known that when it was initially presented to me, it would have been very tough for me to wrap my head around thinking I could achieve that. Right. Speaking about raising money, you had to go out and raise a ton of money. I have students from New York to California that they just want to raise $100,000 to do their first flip.

When you're talking the numbers you're talking, what is your one piece of advice or one or two when going out there and raising capital and money, especially for private funds? How did you do that? What are the two golden nuggets that you rely on when raising capital? People have to know who you are and people have to know, people have to feel comfortable with your knowledge of what you're doing. And so my two nuggets would be, first, the people that you raise money from for your first deal will be people who know you or people who know someone who knows you. It will not be strangers. Most likely. Obviously,

I never speak in generalizations. So most likely, it won't be strangers. And I think there are some rules against that anyway. And so what I would do, and then I'll get into the second point of knowing the numbers, but for the first unique, so they can't get it anywhere else, and it's something that meets their goals, so you'll want to know what their goals are, then you've got at least the ability to have the initial conversation. And then once you have the initial conversation, it's about knowing the numbers and the ins and outs of the deal and anticipating questions that they're going to ask. So thinking through from their standpoint, well, what am I most focused on? Well, most likely investors are most focused on not losing the money. There's tons of studies out there that prove

from a psychological standpoint, we would rather not lose a dollar than receive a dollar. It's proven. So first and foremost, you want to address the conservative aspects of the investment. And then secondly, you want to appeal to the upside, for lack of a better term, the greedy part or the sexy part of the deal where it's like, okay, conservatively, this is locked in, mitigating the downside in XYZ ways. And now from a, well, now I'm investing in real estate so this is the upside of real estate. What is there? So you also want to show them the upside potential of it and what I always do is I always proactively

address the questions and that obviously takes some time because you need to get a couple of conversations under your belt. But there are commonly occurring questions that always come up. And if they don't come up with an investor, then it's even better to address them with that investor because they know that you're looking out for their best interest and you have everything covered. Yeah, yeah. Great words of advice. Now, what I would say is making that transition, what I guess would be another two golden nuggets or key pieces of advice for someone who really is interested in getting into the multi-unit commercial type real estate where they may have some rentals, they may be flipping homes, they might even be wholesaling, but the ideal for what they want to become, whether it's now or sometime in the future, is they want to get into commercial

real estate, they want to get multiplexes. What would be the, key pieces of advice you'd have for someone that was looking to do that? I would say be the person today who you want to become tomorrow. And how you do that is you start talking with people who have successfully done what you want to do and follow the blueprint. What I do is not groundbreaking. what you want to do, and follow the blueprint. What I do is not groundbreaking. Perhaps the interesting part of what I did is that I went from four homes to syndicating a big old apartment community. That's not normal. But from a syndication standpoint, what I do is what everybody else does when they syndicate.

And it's a successful business model for the investors and for the syndicators or managing members or sponsors, whatever you want to call them. So I would say reach out to people who are successfully doing it. Learn from them. Have them guide you. and rinse and repeat. And that's the number one advice because that's what I did, and that's the fastest way to get up and running. I attend so many seminars, and it's incredibly valuable for bullet points of information because I always pick up something from somebody and it helps me. But what I found I personally need is somebody to help me through every step of the process. So that's what I would say for anybody wanting to transition.

Yeah. Yeah. Those are great words of advice. That is absolutely for sure. So Joe, tell everyone maybe where they could find you or maybe the website you would tell them to go look up, but I want everyone to at least know where to find you at? Well, it's super complicated. It's my name. Nice. It's Joe Fairless, J-O-E-F as in Frank, A-I-R-L-E-S-S.com. And I have a wonderful interview with you, Justin. So everybody can check that out if you haven't had an opportunity to listen to it. I do a podcast called The Best Real Estate Investing Advice Ever Show. You can check out all the episodes there. Justin was nice enough to be a guest on my show and you can listen to his as well as many others.

Right on. Well, good. Well, thank you so much. I really appreciate your time. I know you're a busy man. So anytime you give, I really appreciate it. Thank you so much for coming on the show today, Joe. Well, thanks a lot for having me. And I'm, I'm very grateful for the chance to talk to you and your listeners. Right on. All right,

guys. Well, that is what we got today. Again, I'm Justin Colby, your host. It has been a wonderful episode. It was Joe Fairless was our guest and that is all we got for today, guys. So we will see you on the next episode. Peace.