It’s time for another Follow Along Friday with Joe and Theo. They get to answer some listener questions today and update us on their investing. A big part of today is dedicated to the crisis in Houston and a way we can all help. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review! Best Ever Tweet: We all decide how we give, and which way we want to give
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Joe Fairless: Best Ever listeners, how are you doing? 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 fluff.
We’re doing Follow Along Friday today, and it’s certainly a heartfelt and special Follow Along Friday, and we’ll be talking about that in more detail… Specifically I’m referencing hurricane Harvey and what we can do to help out, as well as just an overall approach for investor communication when a crisis like this happens.
With us, as usual, Theo Hicks. Hello, sir.
Theo Hicks: How’s it going, Joe?
Joe Fairless: It’s going well. Let’s kick things off. The main thing we wanna talk about today is how to approach investor communication when a crisis like hurricane Harvey happens and you have investment property in that area. The acronym that I’ve come up with is SOS. The acronym stands for First Safety. S stands for Safety, and safety include safety of the people, first and foremost, who are at the property and who are on your team. Secondly, safety stands for money, so the safety of the investment itself. I’m gonna go through what each of the letters stand for and then I’ll elaborate on each.
Second – O stands for Ongoing Communication. Making sure that there’s a constant line of communication; not unnecessary communication, but substantive communication and information. Then the last S stands for Summary. Summarizing, after all said and done, where we’re netting out and what’s the approach moving forward with what happened.
Now first S, safety for both the people and the money. In our case, we have two properties in Houston, and one of them is not in a flood zone, the other one is. The one that is not in the flood zone didn’t really get anything other than a rain storm and it’s fine. The one that is in the flood zone, it did take in some water, but it wasn’t significant, fortunately. Most importantly, from all accounts so far, everyone is safe – the residents, the team members there.
From an investment standpoint, we have flood insurance on the one in the flood zone, so after we do a final assessment, once the weather cooperates, then we’ll be able to determine if we are going to be making an insurance claim on that or not.
From an ongoing communication standpoint, once we saw that there was some water that was being taken in — or actually, quite frankly, once we saw that hurricane Harvey was hitting that area, we sent out an e-mail and we let the investors know “This is where we’re at so far. No water has been taken in” or “So far we are seeing some water”, depending on the property. We have on our phones video of the properties. I can go on my phone for most of our properties and I can see pictures of the property. I can see the front gate, I can see the leasing office, I can see down the path between some buildings…
Theo Hicks: Is it like an app, a live security feed? [unintelligible [00:06:03].10]
Joe Fairless: Yeah, so I can see right at the property what it looks like in real time. So I’m able to do that and know where we’re at with everything. The ongoing communication – we’ve communicated initially with investors once things were happening, and we’re going to be sending out another e-mail tomorrow, letting them know what the status is as we understand it.
Then at the end – I’d say in about a week or two – we’ll have a summary (last S – Summary) and that will summarize where we’re netting out from an insurance claim standpoint, if there is one at all, and that will kind of conclude the crisis communication when something like this happens. But obviously, if anything persists from a building up or any fixes, then you keep them updated after the fact on how that’s going.
Theo Hicks: Okay. It seems definitely for you that you are proactive. Once you knew it was coming, you had all this stuff prepared so that when it hits you weren’t reacting; you were kind of ahead of it. I think that’s also something important with crises – try to get ahead of it as quickly as possible.
I guess for this one in particular there was a warning. For other crises – it might be a fire that’s coming out of nowhere… I guess for that one you can’t be proactive, but if you can be proactive, be proactive.
Joe Fairless: Yeah. And for fire, hurricane, earthquake or whatever, just think of SOS when you’re going through your investor communication. First S stands for Safety – both people, first and foremost, then money. Make sure you address both of those things in your communications. Second, the O stands for Ongoing Communication, but don’t bombard people with “Okay, here it is this hour; okay, now it’s looking like this.” Just give substantive communication.
Then, lastly, Summarize. Summarize what happened – not necessarily summarize everything that happened, but summarize what were the results from a safety (money and people) standpoint and what’s the plan moving forward with either of those things, if there was anything that happened with that.
Now from a stepping back standpoint, one thing I remember watching is a Tony Robbins video, and it was when 9/11 hit, and he was in Hawaii at the time, doing a seminar. He said that the approach he takes when something unexpected/terrible happens is — if he is not directly affected, if he is not (in this case) without a home, where furniture is floating in your living room now where it wasn’t a day before, then his focus isn’t on anything other than “How can I serve?” That is the mentality that I have too, and on that note, if you are looking for ways to help hurricane Harvey victims and have not found a way or are looking for another way, then we’ve put together in coordination with an investor of mine and a friend of mine who is on the ground in Houston, we’ve put together a distribution center where you can mail clothing, shoes, socks, toothpaste… Just whatever is needed down there, and I’m sure you can google that really easily for what you should send.
If you want the information for his address — I don’t know it off the top of my head, but you can e-mail info@joefairless.com and you’ll receive the information for where to send. What he’s doing is he’s receiving the stuff at his house; he has a truck and he’s loading it in his truck and he’s manually taking it to the different areas around Houston that are in need… He’s taking it to shelters.
So if you wanna help out, there’s a way. I’ve sent an e-mail to my community and it stated this, but it also stated that I’m not one to judge if you don’t give, because there are things going on — there’s a huge flood not just in Houston right now… And there are things coming up every day. If we all decide how we give and which way we wanna give and how we wanna make an impact in the world, then just because I’m talking about this one thing in Houston doesn’t mean that that’s the only thing that’s happening in the world that’s bad.
I understand that everyone gives their own way, and I’m just mentioning this if you would like to find a way or would like to have a way to give to help out the hurricane Harvey people, then this is one way, but by no means do I judge or anything if you choose to give other ways or to different causes, or something in between.
Theo Hicks: Marcella is really big into dog rescuing and stuff, so she’ll be on the phone looking at all the images of the dogs tied up [unintelligible [00:11:11].17] and drowning. She actually wanted to go down to Houston and do something; I completely understand that… People always give back the way they wanna give back, but I know six months ago I was kind of thinking the same thing about “How can I give back? What’s the most efficient way to give back?” [unintelligible [00:11:29].13] that could be a good thing, but maybe you don’t know what you’re doing, you’ll get in the way, or maybe you could be more effective other ways.
There’s a company – I can’t remember what they’re called, but they basically did a bunch of studies to figure out what’s the most effective way just to give back in general… And actually, the best way to give back is to have a job where you make a ton of money, and actually just find a very high rated charity and donate on a frequent basis; you can set up automatic payments, or whatever. Obviously, you’re not doing it yourself, so it kind of feels disconnected, but you’re actually doing more by eventually working a job that makes money and then donating that money, versus spending your entire career focusing on actually doing charity. It’s just what the study came to find out.
I always feel guilty all the time; there’s all these problems going on and I’m not doing anything to fix them, but I guess based off of this study [unintelligible [00:12:21].06] now I just donate a bunch of money whenever I can to one-time things like this, or just if you find some charity and just set up a monthly payment and then kind of forget about it, so it takes care of itself. [unintelligible [00:12:32].24] in charity and things like that if anyone felt the same way or thought the same way.
Joe Fairless: An interview I recommend listening to – Tim Ferriss interviewed this guy who is the next-level genius, and they made a show about him… You know the guy I’m talking about?
Theo Hicks: I think that’s what I’m talking about, that’s where I got it from. I can’t remember what his name is though.
Joe Fairless: It’s like the Genius Center, or something… Anyway, if you google “Tim Ferriss Genius Center”…
Theo Hicks: I think he’s really young, he’s a philosopher.
Joe Fairless: I don’t know if he’s really young; I don’t think he’s really young.
Theo Hicks: Maybe I’m thinking of someone else.
Joe Fairless: You’re thinking of someone else, yeah. But anyway, he said a similar thing; he said the way he gives back is he earns a lot of money and he wants to then donate… He used the comparison “Who touched more lives, Mother Theresa or Bill Gates?” and you could probably make an argument either way… Anyway, that is kind of getting off track a little bit, but cool – that’s a way if you want to give back, and that’s the crisis communication, SOS, when you have investor communication that needs to be sent out in a succinct way, and in a way, that makes sense.
Theo Hicks: Awesome. So you closed on a deal?
Joe Fairless: We closed on a deal today, yes.
Theo Hicks: Congratulations.
Joe Fairless: Thank you. We closed on a 200+ unit deal in Richardson, Texas (244 units, if you’re really curious). That is across the street from a deal that we have already. We expect some good economies of scale there. It’s in a submarket we really like. In fact, it’s in a submarket that has the highest or second-highest rent projections this year than any other submarket in Dallas, Fort Worth.
Theo Hicks: Wow.
Joe Fairless: Yeah, so that’s that… And Colleen and I are going to Europe tomorrow, and we’re gonna be gone for a couple weeks. Then as soon as I get back, I’m going to Dallas to go do a property tour, so we won’t be doing Follow Along Friday for two weeks.
What we have in store for you, Best Ever listeners – we’re not gonna forget about you… We have in store for you two special episodes. One is with Terrell Fletcher, former NFL running back, San Diego Chargers. He’s now an ordained minister, and he gives some really, really good life lessons. He’s a powerful speaker; not an in-your-face guy, but just insightful, really insightful. I enjoyed my conversation with him a lot.
That’s gonna be next Friday that that episode’s gonna air, and then the following, Franco Harris. He’s an NFL hall of famer, Pittsburgh Steelers. I really enjoyed talking to him. That’s gonna be airing 15th September. We talked about a life lesson that he applied towards business, and it was about a business that didn’t work out. He has a couple of really successful entrepreneurial ventures right now, but one lesson from the business that didn’t work out is something that we can all apply towards our real estate endeavors… So that’s an interview you wanna make sure you listen to. Terrell Fletcher next Friday (8th September), and then 15th September we’ve got Franco Harris, NFL hall of famer.
Theo Hicks: Perfect. Any other topics for your business?
Joe Fairless: No, I think I’m good. What about you? What’s going on with these three properties that you bought?
Theo Hicks: Just a quick update on those… Really nothing much going on from an ongoing basis. From a project basis, I’m in the process of putting each property in the individual LLC. I purchased those [unintelligible [00:16:12].27] I believe it said it takes 4-6 weeks. So a lesson that I’ve learned is that the next property I buy I’m gonna do this before… I’m sure this is what you do, but I wanna create the LLC before I buy the property, so I’m not sitting around and waiting for the process to complete.
Once that happens, I will go to the bank, set up bank accounts with a DIN number, which is what I’m waiting on now, and then I’ll take all the information to a lawyer, he’ll do his magic and transfer the properties into the LLC, and at that point I can create the new leases for each individual LLC, to have the residents sign new month-to-month leases. We decided that we’re going to just continue the month-to-month until they wanna leave, and then when they leave we’ll turn them over.
The reason why we’re doing that is because we don’t have enough capital right now to handle a mass exodus… So as they leave, we will do some touch-ups. Based off of the one unit that we had vacant that we re-rented at a rate that is $100 higher than the rates we’re getting now for the similar units, based off the condition of that unit, I would probably say for the majority of the one-bedrooms that we have, we won’t need to do anything except we hire someone to clean it up. Same for the two-bedrooms.
There’s probably only a couple of units there that require some work, but they don’t require a lot of work. So we’re kind of waiting on that for now, and waiting for the leases to naturally turn, so that we can build up some funds so that when that happens we can address any issues that come up. So that’s the plan for right now… Again, we’re just setting up LLCs, getting the properties transferred into them, and then getting the new leases signed for month-to-month.
Something I need to figure out is when I go in to sign new leases, I’m allowed to give them my version of the lease, so I don’t have to have the exact same wording of the last lease…? I could just do the lease that I have the new people sign and go from there? Am I obligated to give them the same terms they had before? Not like money; they’re gonna be paying the same, and they’re gonna be sitting month-to-month, but I’m saying like the wording in the lease… Mine is obviously gonna be different; it’s not gonna be a copy of the lease that they have currently.
Joe Fairless: It’s a new lease, it’s a new lease.
Theo Hicks: Okay.
Joe Fairless: As long as they’re out of their previous lease…
Theo Hicks: Okay… I was making sure if there was something — like, they could do something because “Oh, I signed this lease…”
Joe Fairless: But that other lease is expired.
Theo Hicks: Yeah, it’s expired.
Joe Fairless: Yeah, new lease.
Theo Hicks: Perfect. I just wanted to make sure… And then something else that’s kind of funny. When I first started doing real estate — obviously, you talk to your parents about, and at least from my perspective, they’re like “What? You did real estate? You can’t do that? [unintelligible [00:19:01].28] toilets and all that stuff…” So it was probably a year and a half, two years ago, and we had some very heated arguments about it too, and I hadn’t even started yet. And then my mom calls me last week and says “Hey, Theo… I’m thinking about investing in some properties. Can you tell me which places in Cincinnati are good markets? I wanna buy a duplex or a fourplex…” Because she’s retiring soon, so she’ll visit and she’ll visit in the one unit while she’s here, and then she’ll Airbnb be it when she’s gone.
So my mom’s gonna become an investor… I know I talked previously about potentially starting a property management company, so I might have my first client.
Joe Fairless: Sweet. There you go. You mentioned that she was a little interested last time…
Theo Hicks: Yeah, we went into more detail on it, and we’ve got her set up on the MLS…
Joe Fairless: Great.
Theo Hicks: We were talking yesterday and she was sending me all these properties, like “Oh, this property is so cute!”, and I had to teach her how to use Google Maps to do Street View and look around… Like, “Mom, get a look around. The house may look good on the inside, but the outside, if you get a look around the area… Do you wanna live next to a parking lot? Do you wanna live on a dead-end street with this van across the street?”
Joe Fairless: You’ve gotta put our show app on her phone, so she can listen to some interviews…
Theo Hicks: Seriously.
Joe Fairless: Well, then congrats on the budding property management company with your first potential client… That sounds great.
Theo Hicks: Those are the updates I have, so now we can get into some listener questions that were submitted. First one is from Keith, and this is not so much a question, more of a comment, but we can respond to it… He says “I’ve been working my way through choosing my own investment criteria, and it’s taking a lot to first understand which questions I need to ask myself, and then secondly playing with the numbers to determine the best criteria based on my personality, location and goals.” Prior to this, he was asking if we have some sort of step-by-step guide of how to determine investment criteria for single-family homes… Let’s assume that he’s talking about multifamily properties, because that’s what you do, so how do you determine —
Joe Fairless: Large multifamily? It sounds like he’s trying to get his first investment property. From the way this is phrased, it seems like he’s just trying to start out, so I’m gonna assume it’s single-family. I don’t know the question…
Theo Hicks: He wants to know how you determine your investment criteria and what questions you need to ask yourself in order to do so.
Joe Fairless: You determine your investment criteria based on why you are choosing to invest in the first place. Why are you even talking about real estate? What do you want that real estate to accomplish, and then once you identify that, is it more “I need money in the bank right now”, or is it “I need some money in the bank, but I wanna build a real estate empire for the next 30 years”? If it’s that, then maybe you don’t do as much cash flow play, as you would more buy in really nice areas and make sure that you have a little bit of cashflow. I don’t think you ever wanna buy for just appreciation… That’s where you can get burned.
So I’d answer that question by asking you a question – why are we even talking about real estate as it pertains to you? Answer that question yourself; once you have the answer to that question – “Well, I wanna make some money.” Well, do you need to cash-flow now? Yes? Okay.” Then what’s your investment criteria? You need properties that cash-flow. Then the question becomes “What’s realistic?” Well, talk to people in your market that you’re looking in and ask them what’s realistic for cashflow right now, and they’re going to tell you “Well, you can probably get X, Y, Z returns on this type of property.
Then you need to know if you have the money to buy that type of property, or if not, you’ve gotta figure out how you’re going to get those properties through other creative methods, like maybe you wholesale some deals, get some chunks of cash that way, maybe you partner with people, maybe you do seller-financing terms… Any number of things.
Theo Hicks: And also, if you don’t have enough money to reach your initial investment goals, you might have to shadow — if you wanna be a fix and flipper, shadow a fix and flipper, wholesale a couple deals, start going to meetups… Just getting your education first, while you’re building up your funds.
So I guess high-level it’s “Why are you investing? What are you trying to accomplish?” and then based off of that, try to get it to a specific number, like “I wanna make $100,000/year.” Alright, “How many properties do you need, and at what cashflow, based off of what your market demands or what your market has, to reach that number?” Then start thinking about a plan of how to accomplish that.
It’s always about reverse-engineering. It’s like “What’s my end goal?” and then “What are the small steps I need to take to get there?” and just kind of breaking it down from there.
Joe Fairless: Yeah, that’s a great way to put it.
Theo Hicks: He was also asking about my personality — and again, if you wanna know what your personality is, there’s plenty of personality tests out there that you can take, and then based off of those results listen to podcasts… Just get as much [unintelligible [00:24:02].07] as possible to see which one of those interests you the most, what part of real estate you’re passionate about, and that right there will kind of tell you what your personality is.
Joe Fairless: Yeah. At this point, Keith, I don’t think you need to be even taking a personality quiz. Come on, why are you investing in real estate? Why do you wanna do it? What do you want that to accomplish? And then, as Theo was saying, just reverse-engineer that, talk to people in your market, see what’s doable, and then if you don’t have the money, then get the money – save it, make it, earn it, whatever.
Theo Hicks: Based off of kind of going through the Bigger Pockets forums, but mostly based off of my personal experience starting out, something that I did and I think a lot of people do is that they want to make it more complicated than it is. Not only that, but they want to — I always wanted to feel like I was doing something, so I’d kind of just do things… You even rationalize to yourself that it was worth something — literally, this is what I did… To study the markets, I went and logged — I was gonna do mailers, and I literally went on the [unintelligible [00:25:01].27] site and I logged every single property in the neighborhood. It took hours and hours and hours of time, and I thought I was doing something, I thought I was accomplishing something… So I had all these spreadsheets of all the work that I did, and then I didn’t touch it.
Then a couple months later I was like, “Oh, maybe I think I will do mailers.” Then I did a little bit of research, like 10 minutes of research, and I realized I could just reach out to the auditor and they’ll set up an account and I could just pull all that information in like two seconds. So again, the reason I did that was because I wanted to make it seem like I was doing something, so that I could be like “Oh, you’re making progress”, but in reality what I was doing was not making any progress.
So in this case is taking a personality test really going to put you closer to your goals, or is that just something you’re doing to make it seem as if you are, but in reality you’re not really doing anything…? And trust me, I know exactly what it’s like to do that.
Joe Fairless: It’s like, if you have something important that you’ve been procrastinating on, then instead of doing that thing, you clean your desk or you go get a candy bar, or you do something else that’s not related to that, just because you’re delaying the inevitable.
Theo Hicks: Something interesting — I don’t wanna ramble too much, but something about the cleaning your desk part, at least for that, for me, whenever I’m not motivated, I’ll do something very small like that, that’s like accomplishing a task… Getting a candy bar is not really accomplishing anything, but cleaning your desk is a tangible change for the better in your surroundings, and then you blow up the momentum. It’s like very small, but you use that to then go do something else. But getting a candy bar, that’s definitely procrastinating.
Joe Fairless: Yup. Okay, I like that.
Theo Hicks: Kind of a hack to get some motivation. Alright, so that covers Keith’s question. The next question we have is by City Park Properties.
Joe Fairless: This is via YouTube, right?
Theo Hicks: It’s via YouTube, yeah. He said “What are the increased costs when you form an LLC? And for multiple LLCs, do you feel more obligated to use an accountant more often, aside from the standard tax filing?” Because it increases costs for an LLC, and then when you do more, do you bring on an accountant versus just doing it yourself online? That’s kind of how I interpret that question. I could be wrong, though.
Joe Fairless: I don’t know what “increased costs” mean when you form an LLC. Does that just mean how much does it cost to form an LLC? Like, what is it increasing from?
Theo Hicks: I’m not sure.
Joe Fairless: Okay, so what is the cost to form an LLC, I guess… It depends, but all-in, if you have an attorney do it – $1,000. LegalZoom, probably $200, but then you’ve got to have a registered agent, you’ve gotta have stuff mailed to you… I did my first couple on LegalZoom, and now I just have an attorney do them. It’s a lot easier to have them handle everything. They do the operating agreement, all that stuff. But when I got started I did LegalZoom, because I needed to make sure I was pinching pennies; now it’s not that I’m just lavishly throwing money around, but it’s just a better setup because I wanna make sure everything’s done properly. That’s more important to me than saving $600-$800 plus my time to do it, so that’s why [unintelligible [00:28:05].22] And what was the follow-up one?
Theo Hicks: The follow-up question is “For multiple LLCs, do you feel more obligated to use an accountant more often, aside from the standard tax filing?” Does that question make sense?
Joe Fairless: Yeah, if you have more entities, are you more likely to use an accountant? Yes, unless you want a heart attack or a stroke prematurely… Yeah, I would have an accountant handle your stuff, and we talked about that many times.
Theo Hicks: The second question [unintelligible [00:28:35].24] but can you invest your own money up front and then go back to the bank and get them to refinance it?
Joe Fairless: Yes, sure. I did that with my third house. I bought it all cash from Bank of America – it was a foreclosure – in 2010-2011… Bought it for 65k and then I got it appraised shortly thereafter for 86k, and I did put a loan on it, cash-out-refied, got all that money back, and I used that money to start my real estate investing business.
Theo Hicks: How soon after closing were you able to refinance?
Joe Fairless: Good question, I knew that was coming. I don’t remember exactly, is the short answer. I’m gonna guess… I wanna say it was six months after I closed.
Theo Hicks: I think that’s what it is, because we know someone that Marcella works with who just bought a property all cash, and worked with the same lender that we used for our properties, and he either said if he can do it right away, or in six months.
Joe Fairless: Yeah, it depends on the lender. It could be right away. If I’m a lender, why not, if the person has it all cash? But I’m sure lenders out there who are listening are like “Well, this is why!” [laughter]
Theo Hicks: Alright, so those are all the questions we had for this week. Do you wanna mention the Best Ever Conference before we wrap up?
Joe Fairless: Yeah, we’ve added a couple new speakers to the Best Ever Conference. You can go to BestEverConference.com. One of them is going to talk to us about parking lot investing. I have interviewed him before on the show. Right now there’s the early bird special – this is the lowest that you’ll be able to get a ticket for during the early bird special… So BestEverConference.com, looking forward to seeing you there. It’s in February in Denver.
Theo Hicks: Awesome. To wrap up, please leave a review on iTunes and subscribe to the podcast, for the opportunity to be the review of the week. This week we’ve got Gida Alufa, a quick one. He says:
“Joe gives you actionable intel and tells you how to get properties even in competitive markets.”
Thank you for the review and we are glad that you are getting actionable advice from this show.
Joe Fairless: Thanks, everyone. Looking forward to having a Follow Along Friday with you in a couple weeks. In the meantime, these next two Fridays, enjoy the interviews with the NFL greats.
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