August 16, 2017

JF1079: Thoroughly Evaluating Multi Family Buildings Before you Buy

Omar has years of experience buying multi family properties. How he spends time learning a new market and neighborhood surrounding a potential property is genius. Something as simple as eating at a restaurant and talking with the locals about what is going on in the area, can pay huge dividends in the long run. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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Omar Ruiz Real Estate Background:
-Co-founder of LeRu Investments LLC, a private for profit real estate Investment Company
-Co-founder LeRu Management Services, the property management division Been in private practice for more than 10 years and is a real estate investor, property/asset manager
-LeRu Investments LLC currently manages 92 individual units located in California and Texas
-Based in Orange County, California
-Say hi to him at
-Best Ever Book: The ABCs of Real Estate Investing

Click here for a summary of Omar’s Best Ever advice: 3 Techniques to Evaluate an Out-of-State Real Estate Market

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Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluff.

With us today, Omar Ruiz. How are you doing, Omar?

Omar Ruiz: I’m doing great, how are you?

Joe Fairless: I am doing great, nice to have you on the show. A little bit about Omar – he is the co-founder of LeRue Investments LLC, which is a private for profit real estate investment company. He has been in private practice for more than 10 years, as a real estate investor, property and asset manager. He is based in Orange County, California. With that being said, do you wanna give the Best Ever listeners a little bit more about your background, Omar, and your current focus?

Omar Ruiz: Well, I actually started back in the beginning not in investing, but on the property management side of things. Now I just stuck with focusing on larger multifamily and apartments.

Joe Fairless: Okay, cool. So you started out in management, and now you’re focused on multifamily. What’s the last multifamily project that you closed on?

Omar Ruiz: The last one we did was a property here in Indianapolis, a 77-unit here.

Joe Fairless: And you said “here” – are you in Orange County or are you in Indianapolis.

Omar Ruiz: I’m actually in Indianapolis. I’ve been here for the last week just to supervise things, and I was actually all day today driving around, scouting out the competition and just getting information on what they have going on, what their rent rates are, and just trying to be as familiar and clear on the local market here as I can.

Joe Fairless: And when did you close on it, how long ago?

Omar Ruiz: This closed back in end of March, 2016.

Joe Fairless: March 2016, so a little over a year ago.

Omar Ruiz: Yeah.

Joe Fairless: How much did you buy it for and what is the business plan?

Omar Ruiz: This was a little over a two million dollar purchase price, and the plan here is to do some light rehab on the existing units. There were a couple of value-add situations. First off was that the seller – he was paying for the electricity for a certain percentage of the units here, and he didn’t have to do that. So there was that, and then there was a fair amount of units that were just slightly below market.

What we’ve been doing over here is having the tenants transfer the electricity back over into their names, and then bringing the remainder of the units up to market.

Joe Fairless: So the property wasn’t master-metered electric – the owner just decided that they were going to pay the electric?

Omar Ruiz: Correct. The story that I got is that when he was leasing it up, some of the [unintelligible [00:05:13].19]  mention that if they put it into their name, that they would have to come up with a hefty security deposit with the utility company. So because the seller – he already had history with them, so he said “I’ll tell you what – I’ll keep it under my name, and I’m gonna charge you an extra $60/month for the utility”, and they were agreeable with that, so they worked it out like that.

What I discovered during the due diligence period – and he didn’t even know this – when I was reviewing all the utility bills and I was able to isolate which ones went to the specific units, some of those units where he was paying the utility bill, it was coming up $100, and I think the most expensive was $120. He was only charging back $60, so it wound up being a bad deal for him, because their tenants were clearly not monitoring their use, and he actually didn’t even realize it. We looked at the bills and the setup and realized what was going on, so that’s how that came about.

Joe Fairless: You bought it for two million – how much in total do you think you’ll put into it and then what do you think it will be worth after that is done?

Omar Ruiz: Well, I know right now just from what the properties are currently selling, it’s already a pretty fair amount. What we’ve put into it so far right now – we’ve probably put into it already maybe about $40,000 already, and we’re just gonna continue doing light modifications, putting new appliances, which is not too much, and then just maintaining the existing tenants that are here and taking care of their maintenance needs.

We have been doing a little bit of an upgrade on some of the units… It just kind of varies. Some of the units are a little bit older, so if we were to just completely do a whole rehab on it, it would be quite pricey, and for the market, it’s not necessarily to go overboard.

I think the way some investors hurt themselves is they try to over-rehab beyond what the market expects. What we have right now works for the market; all we need to do is just do those little things that kind of catch your eyes – a little nicer handles… We are doing on some of [unintelligible [00:07:29].28] with a wood kind of texture/feel to it, [unintelligible [00:07:36].23] And the ceiling fans – we’re putting nicer ceiling fans, which ceiling fans are not a big ticket item, but when you see them, it does visually make an impact. And handles on cabinets, those kinds of things.

Joe Fairless: How do you know which renovations you should do and which ones you shouldn’t do? You’re based in Orange County…

Omar Ruiz: I look at what other comparable properties are doing, and that kind of clues me in. If i do wanna be a lot more aggressively competitive I can definitely put more into the units, but then it becomes a little bit foggy to see how high you can really take the rents there. But really it just comes down to what the market and what other local properties are doing.

I was mentioning before all day today I’ve been looking at other apartments; I’ve probably visited — oh my god, I’ve got a stack of that brochures and information, and I’ve been getting inside other people’s units… Obviously, I don’t tell them that I’m owner of the apartments, I tell them I’m looking to move, I’m looking for a place to move into. I ask them to give me a tour of the units, and then I can get inside and then I can get an idea, “Okay, how do my kitchens compare to their kitchens? How does my closet space compare to their closet space?”, because closet space is something that I try to be very conscious of. And the bathrooms – how do their bathrooms compare to our bathrooms? Those sort of things. And then if I can see where we stand compared to them, then if our pricing is right, then I’ll feel pretty good about it. If there’s things that they’re offering that we’re offering, then I might have to take a look at things.

I just start with where their rents are. Obviously, if their rents are higher and our are lower, then we’re probably okay. But if it’s the other way around, well we might have to make an adjustment. In fact, I just got back and I was in an area where I was actually kind of surprized, because their rents were higher than our rents, but they didn’t have air conditioning, so a tenant would have to bring their air conditioner; I thought that was kind of interesting… I had not seen that anywhere before.

Joe Fairless: So with your experience – you said you started in property management and now you’re focused on buying larger apartment projects… You’ve got the 77-unit, you’re in Indianapolis as we speak, touring the competition; you’ve just talked through what you look for from a comparison standpoint… When you go there and you have already acquired the property, do you do anything else from a local market standpoint? Do you tour local businesses or do you just go eat at a local diner and talk to people about the market, or is that just prior to acquiring a property that you would do that, if you do at all?

Omar Ruiz: Yeah, absolutely. In fact, that just reminded me – I remember when I was down here for one of my first visits, I actually ate at a Bob Evans restaurant; I went and had breakfast in there, and I was talking to the waitress girl. She was a student, and I was actually asking her — she was giving me some info about where she lives and what she was paying, and I told her “Yeah, I’m looking at some of these places over here, blah-blah-blah-blah”, and she would tell me “Oh, stay away from this area” or “Stay away from that area…” [unintelligible [00:11:05].03] she was a student at the college, she kind of gave me some information about the college as well; I thought that was really interesting, just from a market standpoint.

Down here in this area – there’s quite a few universities out here, and education is very important out here. If you’re close to a university or a school, that’s really good; you’re gonna have good demand for your units.

But what I like to do actually is instead of using the map on my phone, and google maps or something digital there, I’ll actually go up to a gas station and I’ll pick up a regular map of the city, a printed map. And then what I do is go as much as I can throughout town and make notes on that map. Because when I’m driving around the area and I just use my phone, if I see an area that “Okay, this looks interesting here”, when I come back and I try to recall that moment, it’s not that easy. But when I have that paper map there, and I actually make notations on there, I’ll say “Okay, this area is bad” and I’ll probably pinpoint and circle some properties that I looked at, put the name of it, and then I can see “Okay, this property was there. This is what I remember about it”, and then certain areas that are just bad I’ll try to kind of circle around the area. That’s been very helpful for me.

I’ve done that in Texas, and I’ve done that over here as well.

Joe Fairless: I was gonna ask you how you make notes or rather what you make note of, but you’re already on top of  things… You’ve answered it before I could even ask it. So you identify the areas that are — when you say “bad”, what qualifies as bad whenever you’re driving through the area?

Omar Ruiz: Okay, I try to look at things that give you an indication that’s a little income area. One sign is – I’m not trying to be mean about it to anybody, but if I see signs that say “EBT Here” or that kind of stuff, if I see boarded up housing, that’s not a good sign. And also by the types of vehicles that you see parked in certain areas. That gives you an indication that it’s probably a depressed area.

I remember one of my previous trips, I went to go see a property and I remember driving around the area. The property itself seemed marginal, in that it could have been a good value-add situation, but then when I started driving around the neighborhood and I just saw a proliferation of just boarded up houses, one after another on the same street, and you go around to the next street and there’s more and more of that – that just clearly told me that “Okay, this is gonna be a very management-intensive area, it’s probably gonna be high crime, there’s probably gonna be drugs… A good tenant is not gonna want to move into this particular building.” So those are the kinds of things that help somebody have an idea of whether the area is good or bad.

Now, on the other end of the spectrum here, one of the trends that I’ve been noticing in many different areas, this kind of urban type of lifestyle where people try to live close to places that they can walk to. So people can walk to a Starbucks, or walk to a little market, or walk to a little convenience store, or walk to their whatever retail place – that’s very desirable. And like I was mentioning before, that apartment complex where their rents were higher than mine, but they weren’t offering the air conditioner; well, they just happened to be in that same type of neighborhood where the Starbucks was a block or two down, and they had a little market up the road… So it had that desirability to it, so that’s why they were charging more, obviously.

On that map where I’m making notes, that’s where I try to see the good, the bad and the ugly.

Joe Fairless: And for a Best Ever listener who’s listening and they want to have the eye that you have when you look at these markets – you started in property management, so you’ve got years of experience doing this, but for a listener who has some experience (not as many years), but wants to get to the level of expertise that you’re at from an evaluation standpoint, what would be a waste of their time to spend doing that you think perhaps they would think to spend time doing to get to where you’re at?

Omar Ruiz: If I’m understanding the question correctly, is it how can they speed up their learning curve? Is that…?

Joe Fairless: You said it so much more succinctly than I did… Yes.

Omar Ruiz: [laughs] Okay, one of the things that I do like doing now is I use the census website a lot. When I’m looking at deals, I look at the income statistics for a certain area, and I use a very methodical way of doing it, but just to kind of give you the CliffsNotes version of it – if the majority percentage of incomes are on the low end of the scale, then that right there tells you that it’s gonna be a lower income area, high crime, management intensive… And Joe, not to say that that might be a bad deal; there’s some people that target those kinds of properties in those areas and they probably do very well, but you have to have the right team in place. You have to have the right type of manager, and the right team around that manager to make those types of deals work out.

But using a census website, or just looking at income statistics, the income demographics is gonna tell you right away what type of people are living there. That will definitely speed up people’s learning curve there.

Joe Fairless: What is your best real estate investing advice ever?

Omar Ruiz: My best advice ever is to get really, really good at analyzing profit & loss statements, or income statements. Be excellent at that, because the incomes statements tell you the story of what’s going on. Robert Kiyosaki used to say that – the income statement tells you the story of how the business is operating.

Joe Fairless: You just got a profit & loss statement in front of you, you’re looking at it for the first time… Walk us through what you look for.

Omar Ruiz: Okay, one of the first things I try to pinpoint when I’m analyzing a deal is to get a reasonable estimate of what the taxes will be after the sale, because the taxes are one of the more – in my opinion – challenging things to actually pinpoint… Especially when you’re in different areas that treat taxes differently. But once you figure out, you have a reasonable estimation of what that tax number is – and I tend to be conservative on my numbers; I tend to put the taxes, give them a little bit of a bump, because I don’t wanna get in trouble and underestimate the taxes.

The thing is that you can analyze the utilities, the maintenance, contract services and all that stuff and finally get to them, but then when you come back and you kind of figure out your taxes, your taxes are gonna be one of your biggest expenses. That right there can just mess up your whole deal, so I try to get that (being the hardest thing) out of the way. Once I know that – okay, great. Now I can look at some of the other things that I have a little bit more control on.

So beyond the taxes then, I try to look at some of the variable expenses. In fact, I’ve mentioned utilities – that’s something that you wanna be conscious of depending on the seasons. For instance, in California we don’t worry too much in the winter time because we don’t really have winters in California, but out here in Indianapolis we do have winters out here. So if somebody was trying to do an analysis based on just six months of income statements, I might get the wrong six months, so that expense is not gonna be accurate on there.

I’ve seen some brokers try to get away with that kind of stuff, so be very conscious of that, especially if you’re going out of state. Out there in Texas we don’t have the winters also, so it’s not a factor out there. So that’s something to keep in mind, those utilities.

Your payroll also – you wanna make sure you have the property adequately staffed. That’s important to keep an eye on. One of the things that I also sometimes have noticed is when there’s gaps in the P&L. Coming back to utilities, for example… If I see that the payments have been steady over several months, and then there won’t be a payment in a certain month, then it continues on and then there’s a gap in another month down the line, that kind of makes me wonder “Why was there a gap there? Were they not able to pay the bills that month? Did they just not get the bill on time?” or something like that. Those are the kinds of things that sometimes raise a little flag for me.

Joe Fairless: Are you ready for the Best Ever Lightning Round?

Omar Ruiz: Best Ever Lightning Round? I guess I’ll have to be…

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

Break: [00:20:28].06] to [00:21:28].06]

Joe Fairless: Best ever book you’ve read?

Omar Ruiz: It would be The ABCs of Real Estate Investing by Ken McElroy.

Joe Fairless: Best ever deal you’ve done?

Omar Ruiz: Best ever deal I’ve done was a 32-unit down in Houston, Texas.

Joe Fairless: What’s a mistake you’ve made on a transaction?

Omar Ruiz: That’s a great question. It was early on not getting the bank statements to verify deposits.

Joe Fairless: I made that mistake too, it’s a tough one.

Omar Ruiz: Yeah, you know what I mean, right?

Joe Fairless: Yup, yup. So now you make sure the bank statements line up with the money that they’ve shown is coming in, that way you can verify it.

Omar Ruiz: Yes, absolutely. Now, I have come into instances where the seller, they have various complexes, apartments, so I wouldn’t suggest people do this because your accounting’s gonna be a mess. But what he did, he was just funneling all the income into one account. He had a property here putting money into this fund, another property there, so he wasn’t able to isolate deposits. I still went forward with that deal, but that left me a little bit uneasy.

Joe Fairless: Best ever way you like to give back?

Omar Ruiz: I do host Cashflow Games, and I actually like educating people and letting them know how they can get involved in real estate, too. I come across a lot of people that wanna get involved and they just don’t know how to go about doing it. I get asked questions all the time at the Cashflow Games. It always feels good to know that there’s other people getting involved and making things happen for themselves.

Joe Fairless: How can the Best Ever listeners get in touch with you, Omar?

Omar Ruiz: They can go to my website,

Joe Fairless: Excellent, and that is also in the show notes page, the link. Best Ever listeners, you can go check that out.
Omar, thanks for being on the show. We’ve really spent a lot of time on the 77 — well, not even the 77-unit, but really the approach that you take when looking at markets, and shopping the competition, looking at the kitchens, the closet space, the bathroom, how you’re comparing and contrasting… We did talk about the business model with your 77-unit and the purchase price etc., but we did more macro-level stuff that can be applied in a practical way for the Best Ever listeners who are doing the due diligence on properties.

I love the couple examples – get the map at the gas station and actually write notes on the map; I’m sure there’s some millennials listening like “Just use an app! I’ve got an app, it’s the perfect app!” etc. Well, it might be perfect for you, but other people, like myself — I’d rather have a printed map and actually write on the map. I like that visualization right there. I’m an old soul.

And then also being excellent at analyzing the P&L statements. They tell you the story. Some specific things that you look at – the seasonality of the expenses and the taxes; you said the payroll – make sure it’s staffed properly, and what that would cost, and the gaps, because that would really tell a story if there are gaps in-between.

Thanks for being on the show. I hope you have a best ever day, Omar, and we’ll talk to you soon.

Omar Ruiz: Sure, absolutely. Thanks for having me, Joe. Take care!


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