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Noah Kagan Background:
-Founder product marketing platform, SumoMe & AppSumo.com (daily deals for entrepreneurs)
-Host of popular business podcast, Noah Kagan Presents
-Created four multi-million dollar businesses
-Based in Austin, Texas
-Say hi to him at www.okdork.com/podcast
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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. We've spoken to Barbara Corcoran from Shark Tank, Robert Kiyosaki, the author of Rich Dad, Poor Dad, and a whole bunch of others. With us today we've got Noah Kagan. How are you doing, Noah?
Noah Kagan: Noah Kagan's good today, man. I thought you said Noel for a second. I'm great, I've just told you I got from the dentist [unintelligible 00:01:26.05] and I'm gonna go get my chest waxed in an hour.
Joe Fairless: Sweet, you've got all sorts of body conditioning things happening, and I'm glad in-between those things we're able to have a conversation. This is going to be an interesting perspective, because I was talking to Noah before we started recording, based on your background -- I'm gonna give you a little bit about Noah... He's the founder of the product marketing platform SumoMe and AppSumo.com. He is the host of the popular business podcast Noah Kagan Presents. He has created four multi-million-dollar businesses. You can say hi to him at his website, which is in the show notes page.
We were talking before, and I asked "What's the best approach, based on your area of expertise?" and he said "Well, I'm not sure if real estate makes sense for me, because I can make a lot more money running my internet business", so we're gonna talk about "Is real estate an unnecessary distraction to some people?"
With that being said, Noah, do you wanna give the Best Ever listeners a little bit more about your background and your current focus and then we'll dive into it?
Noah Kagan: What's up listeners, all up in your earlobes? I worked at Facebook, I was one of the early guys there, I helped do marketing at Mint.com... I've been in tech 17 years, I'm like a dinosaur. Now I run Sumo.com, which is free tools to grow your e-mail list, and then AppSumo.com, which is a Groupon for geeks and small business owners. I spend a lot of my day doing Noah Kagan Presents podcast where I present just different business people I find super interesting, or write about it on OkDork.com.
I've done real estate -- you know what's crazy about it? I've been interested in real estate... I grew up in the Bay Area, where it's always been really expensive and interesting... So I've been trying to buy and thinking about it for like 14 years give or take, and only in the past four years have I bought four places. But it's been definitely something I spend a lot of time thinking about.
Joe Fairless: Four years you've bought four places - let's start there. Let's start with the places that you have purchased, because I think as you describe those places, I suspect you're gonna talk through why you bought them and your thought process.
Noah Kagan: Yeah, I've read Rich Dad, Poor Dad, I've read a lot of those real estate confessional books and a few of these other ones, and I just never really felt that comfortable. I think what dawned on me is "How do I really wanna spend my time?" I think if I had a traditional job like my stepfather, who's an engineer, who makes 100k or 75k a year, you know, the best way that you can really grow your money for some period of time, it's probably gonna be real estate... Because you can't control the dial of income, you're kind of limited.
For me on the other hand, I've started businesses. I'm not saying everyone should be able to start a business, but the best use of my time was actually running businesses and trying to grow money that way, where like with AppSumo it's like "Well, if we promote more products, I can make more money a lot better." One deal can make 20k, where a great real estate property will make 10k in a year, and that's doing well.
I think one thing that people don't think about is I've spent 10 years kind of looking at real estate for a long time, and only when the numbers really lined up did I make a decision on it. The decision was we were running our company, and it was like "Man, it'd be great to own the building." [unintelligible 00:04:14.01] has a great quote where he said "A dentist didn't get rich being a dentist, he got rich owning the building that he had his dentist practice in." I've always really liked that quote, it's really resonated with me, so I was like "Well, we need a new office. Let me go try to find one."
I found a loft that I could work out of. It was 300k, and I saw it, and actually the interesting thing about it was that it was for rent. And I was just like "Hey, are you interested in selling it to me?" and they said "No." But I think one of the ways you get a good deal - at least my mindset with real estate is the only way to get a good deal is when it's not on the market, and that's just kind of like this mentality that I've really stuck with; maybe I'm dumb, maybe I'm not, but I find that if you can get a pre-market or pre-build or off-market or creatively reaching out or through referrals, you'll probably get a better deal on it.
That guy didn't wanna sell it to me, but his neighbor actually literally that day was like "Hey, I'm putting mine on the market", so I bought it that day.
Joe Fairless: How did the neighbor know that you were asking about the other person's property?
Noah Kagan: Yeah, it was crazy... So I went to the building and checked out this unit, and the neighbor put out a sign and he was about to go put it on the MLS the next day... But he put a sign out, and I just called him and I was like "Hey, I'll buy it." He was like "Okay."
That was the first one I've ever bought, and the reason I was able to make that decision so quickly was I interested in the math of it. I was like "Well, I'm already paying 6k/month in rent. A 300k building - I can rent it to myself for 3k, and the mortgage + HOA and all that stuff all-in will be like 2k. So I'm making 1k profit, and it's half the rent that we're paying now, so it's good for the company and it's good for me."
Funny enough, a year later the neighbor (the original one) - I hit him up and I was like "Hey, we're growing really fast. Can I buy your unit now?" and he said "Sure." So I was able to get his unit as well, so we have the two units next to each other.
Joe Fairless: What did you buy that one for? You bought the first one for 300k...
Noah Kagan: Yeah, that was 315k, and I still rent it to ourselves at 3k. I think the thing I wanted to consider is not like -- I guess I look at it like doomsday, like even if our company goes out of business, could I rent it for this much? And I personally have always tried to target 1%, meaning if I buy something for 300k, can I at least rent it for 3k? And that's kind of the stupid formula that's worked for me.
So those are the first two I bought in the first year, but I think one thing I just wanna share with your listeners is that that was after ten years of looking, especially in Austin, in the Bay, wherever I traveled... And I think the big lesson I learned from that - it has to be the right time and you have to be ready for it. You have to be able to say "Alright, I'm ready to go make this decision." I think -- would I have done it sooner? Maybe, but I just wasn't ready for it until that moment.
Joe Fairless: So those are the first two properties, and they're in Austin, both of them?
Noah Kagan: Everything's in Austin.
Joe Fairless: Okay, cool. Those are the first two properties, and that was after ten years... What year was that?
Noah Kagan: That was only three or four years ago. 2013, I think.
Joe Fairless: Okay, 2013. And what about the other two?
Noah Kagan: It's interesting... I think two things that I love -- my friend Jay Papasan from The One Thing and the Keller Williams Group, he said something really clever to me, and I loved it. He said "Never drive to work the same way twice if you're trying to do real estate", and I thought that was so true. If you're going to work, just drive different routes and you'll find out about the area and you'll find out about properties.
So I go to work, and then I know East Austin very well, and I saw a building that I just love the architecture. When I buy something, I'm more about "Would I wanna live in it? Am I excited about it?" more so than "It's just a good investment." That's not a strategy others do. I think they're like, "Oh, can I make money? Am I gonna be a great slumlord? Can I raise the rents and kick out the poor people and put in the rich people?" That's just not what I do; it's not the approach or what I'm interested in. What I'm interested in is like I just love what it is and it's something that I wanna be a part of and try to share.
So this building I just thought was gorgeous, and I was like -- it was on a Tuesday, and I said "If it's ever on the market, I'll buy a unit in it." And on Thursday one went on the market, and I bought it that night.
Joe Fairless: Was that a condo?
Noah Kagan: Yeah, all the ones I own are condos. I'm like the condo king. The condo kid. Not a king at all [unintelligible 00:07:59.01]
Joe Fairless: Yeah, we'll call you the Condo Kid, I like that.
Noah Kagan: Condo Kid, yeah. The reason I bought that one is 1) I loved the architecture, and the location was just amazing for where Austin is, and 2) I just really wanted to learn about Airbnb and short-term rentals. This was 2014, and I just wanted to see what the math looks like. That place was 315k as well, and for 60k it's interesting enough for me to put up that much money (or 70k; whatever, 20%; 65k) and learn what short-term rentals look like. So that kind of made the decision easier, and it turned out I make at the end of the day between 7%-10% cash-on-cash return for my down payment.
Joe Fairless: And you said that you bought that one for how much?
Noah Kagan: That was 315k.
Joe Fairless: 315k. Okay, got it. So Airbnb - you decided to go that route. Did you run the numbers initially not using the Airbnb model?
Noah Kagan: I ran both. I wanted to make sure if Airbnb got kicked out of here or if there's ever legal issues with it in the city - which there actually was - that I could at least break-even. So I ran the numbers and I was like "Alright, if I can make 2k/month all in, then I can cover my costs and I'm fine with it", because I just loved the location.
Joe Fairless: What was it renting for? What was the projection?
Noah Kagan: With long-term renting it was around 2k-2.3k. With Airbnb I was projecting somewhere between 3k-5k/month, depending on how our big holidays do here. We have these big conventions and parties, and a lot of bachelor parties and stuff like that.
Joe Fairless: Okay. And then the fourth property from the Condo Kid?
Noah Kagan: Yeah, the Condo Kid - that's cool. So I lived in an East Side loft and I rented for six years, and I actually had a chance to buy it, and it would have gone up, and I just didn't want to. I think that was kind of an interesting sign, I think it was telling... I wasn't really excited about the place. So there was a building coming downtown that was right next to the water plant, and it's like this power plant that was downtown and it was the only one in the whole city. It's very historic, and there's a building being built there.
I knew it was being built about two years before, and I didn't have a connection, so one tip that I would learn for myself or teach everybody else there is to hit up the developer or hit up the agents that have exclusives on properties. Just be persistent with them.
Basically, what happened in this building was that two years ahead of it, the agency who had the exclusive on it, he hooked up all his friends with the best units and the best prices and the best parking, and then all the riff-raff people like myself got the scraps. And I'm super happy to be in the building, I love the location, but the only reason I got it was I spent a year calling every week to get on the waitlist. I was on the waitlist for not getting it, and so I called every single week for one year, until eventually they were like "Alright, stop annoying us. We'll give you one."
I think in retrospect if I was running the building, I would hook up my friends too, so I don't blame them.
Joe Fairless: Yeah. When you call, what would they tell you before they said "Okay, fine, you're in", what was the response?
Noah Kagan: It was the same thing, it was like "You're still on the list, you're still on the list." My mom has this quote and I love it, it's "The squeaky wheel gets the grease", and it's damn true. I think one of the most things in business that people are afraid of is asking. If you're doing real estate, go practice your asking muscle. I always recommend the coffee challenge, which is going to Starbucks and asking for 10% off. No one will do it. Maybe 1% of you will do it, and that's why you're getting what you want. But you've gotta go ask, you'll get rejected and you'll be like, "Hey, guess what, I'm still alive."
I think with real estate and in almost all aspects of life you have to go ask for things, get rejected, then keep going, and realize you're still alive, and persist.
Joe Fairless: Now going more high-level, you're a successful entrepreneur, and as you mentioned earlier, it was 10 years before you got your first real estate deal, and intentionally... Can you talk a little bit more about the formula that you look at or your thought process in terms of, okay, you still didn't invest passively in a deal for all those ten years that you could have?
Noah Kagan: Yeah, so I'll tell you what I learned and where I'm at now. I think where I'm at now is probably more relevant to everyone else, so I create spreadsheets for every single one. I use the stupid simple spreadsheets, and I'll send you an example so you can put it in the show notes... But basically I'm like "How much is my cost? How much is my mortgage? How much is the revenue I'm projecting and then what's my yearly ROI?" and if I can get somewhere between 7%-10%, I'm super happy.
What happened was about two and a half years ago I was spending about half my day looking at real estate, and it takes a lot of time if you wanna get a good deal, because the money is made -- I think a lot of people may know this, and I still think I really know it, but you make money when you buy it, not when you sell it. So I was spending like half my day looking at this, and I ran the numbers and I was like "Alright, if I buy a property, at most I'll make 10k/year. If I run my business better, I can make 100k or more a year. What's the better use of my time?" I'm like, "Um, my business...? So let me spend my time doing that."
Where I'm at now is a few things. One, I use PeerStreet.com. Basically, it gives a chance for regular people to go invest in real estate without having to do the work, and you get first lien on the property, so if they ever default -- basically, if people wanna buy a property, they'll go to PeerStreet and say "I wanna buy this as an investor. Who wants to put up the cash?" Then I can spend my time on my business and where I'm great at, and then people who are investors can go be great at that, and I can get my 7% return from there.
So I've put in like 60k on PeerStreet, and so far it seems to be giving me good returns. I do most of them within one year, so it's all these loans that are about a year out... So it's not like super long. If the economy goes down I'm like "Well, within a year I think things should be okay."
The second thing I've done is looked for real estate investors to learn from. If people are young out there - I don't know what your audience demographics are like... My landlord is a real estate guy and I was like "Hey, can I just buy you lunch?" That was a great way, and I said "Hey, if you ever have any deals, can you e-mail me about them?" So that's kind of where you start building out your network. Now maybe every few months I'll get an e-mail if there's things I'm interested in.
Two years ago there was a restaurant building that someone - because of a lunch like that - said "Hey, do you wanna get in on it?" and I got in on it. I can't say the deal has been amazing yet, but I did that deal specifically because I wanted to learn what the economics look like for a commercial real estate developer, and they shared all their numbers with me, because I was an investor.
Joe Fairless: Let's go back to the lunch thing where you reached out to the investor... You just met up with -- is it a him or a her?
Noah Kagan: It was a him.
Joe Fairless: You just met up with him, you sit down... What do you ask?
Noah Kagan: His name is Alan, he's my parking landlord... And I was like "Hey, I looked up your website, it looks like you guys really cool stuff..."
Joe Fairless: What's a parking landlord?
Noah Kagan: Oh, I think people don't value their time very well... Whenever you buy a condo, just a few things to check - check your cell phone reception and check your parking spot. I was on G9, and it takes five minutes to get up and down, which doesn't sound like a lot... They're like, "Oh, no [unintelligible 00:14:09.24]." It's like, "No, that's five minutes times five days a week, in and out." So that's now an hour of my life every week for a whole year; now that's a week of life that I've been driving up and down this building. So how much is a week of your life worth? A week of my life is worth a few hundred bucks, at least, a month... So I paid that to a guy, because I posted, "Hey, I wanna get a parking spot." So he responded and said "Hey, I'll give you a parking spot." I saw he worked at real estate, and I said "Hey, can I take you out to lunch?"
At lunch what I was curious about was like how did he end up there, and then how does he evaluate deals? The thing that was interesting was that he was actually an entrepreneur who sold his company; he was bored and he was like, "Well, let me do real estate", so what he did was he went and partnered with people and followed on the money. They would come up with a deal and he was just giving cash, and then over time he was like "Well, let me try to do it myself."
I think that's what I've noticed with real estate - a lot of people start small and they just keep building up and up and up, and over time they kind of specialize in some type of category. He specializes in like 30-100 unit apartments that are kind of needing to be gentrified.
I called him out a little bit, I was like "Dude, do you ever kick out the people that get gentrified? Do you ever evict them yourself?" and he was like "No." I kind of think you need to do that yourself to really see what's happening and what you're doing with the properties. Most people are like "I make $100/month, who cares what happens to the people?" I just don't agree with that personally.
Joe Fairless: What action items or what (if any) direction did you change after having the conversation with him?
Noah Kagan: It was two things. One is find people that are doing investing, and specialize what you're great at. If you're not a great at real estate, go partner up with someone and be their gopher. If you are great at business, specialize in business and find someone to do the real estate.
So it was kind of like "Focusing on your sweet spot" was number one, and I think everyone should be aware of that. If it's not real estate, fine. Do you want it to be real estate? Go learn, listen to this podcast all the way through, go on Bigger Pockets forums, go actually find realtors - realtors will meet with a lot of people - and just be like, "Hey, can I shout out you? Can I put up your posters?" and be friends with realtors; that's how you learn from it.
The second thing that I've taken away from that experience was that as I'm doing property for myself, I want part of my formula, besides that the math looks good, I wanna be excited about what I'm buying. For example, one of my ideas now -- and I don't look at real estate as like "How do I just create passive income?", I like it to be interesting income, personally. One of the things I'm looking for is "How do I buy a ranch?" I'm excited about a ranch, because I think it'd be cool to create a corporate retreat center, so companies can go and have retreats and meetings and stuff like that.
So from meeting with him I realized I wanna specialize in creating properties that I would live in myself and I'm interested in myself... Not necessarily just "Oh, I can buy those and fix it up and flip it and things like that", that's not necessarily what I'm interested in. That was one of the bigger takeaways from how I wanna evaluate real estate from meeting with him.
Joe Fairless: One question that's more geared towards your background and the success that you've had in your businesses - what part of your experience that you got through your businesses have you applied towards helping make your real estate more profitable?
Noah Kagan: I think a few things... I've done online businesses - AppSumo.com, Sumo.com... I think a few things. One, hiring - I've hired people; now at AppSumo we have over 50 people. So I immediately hired a property manager for the Airbnb unit... And some people are like "Well, you're making less money", and it's like "Well, I don't even wanna think about it. I don't even wanna have to know about it", and that's something [unintelligible 00:17:21.15] "Okay, that's a good use of time."
The second thing -- it's funny, the building I'm living in now, I was looking at buying another unit, and the way I found the other unit was that I actually didn't just wait for MLS... I think if you're waiting for MLS you're probably gonna get a bad deal, especially as an investor, but I actually posted on our message board, like "Hey, I'm looking for another place. You'll save 6% realtor fees, plus I can pay a lot in cash", and it actually got me a few people that showed me their units that weren't even on the market. And I think what I realized for my own business and how I used it in that application was that if you wanna get ahead in business, you can't be doing what everybody else is doing. If you wanna do marketing, you can't be doing the same marketing your competitors are doing.
So that way, I went a little bit off-market angle and I actually got three or four people saying "Hey, I'm interested", so I've been checking them out over the past few months.
Joe Fairless: Great stuff. Anything else that we haven't talked about, Noah, that you think we should talk about as it relates to your experience in real estate, and then also reflecting on your business success that you've applied towards real estate?
Noah Kagan: I think there's two things. One, I came up with this formula called TST - or this theory - which is Test Shit Out. The idea with that is I was about to buy this old unit in our building; it's about 700k or 800k, and I was about to buy it, and I was like "Is there a way just to test this out?" Because I bought an expensive car last year and I was very unhappy the whole time, and I ended up selling it and lost a lot of money to get a 2004 Miata, which I'm so much happier about. And it was good lesson, and it's something I wanna share with everyone - if you're thinking about something to actually live in, is there a way that you can test it out? Can you ask them to Airbnb it? Can you ask them to rent it for a weekend, instead of having to do a full commit? So that's one thing that's been an interesting approach, where especially if you wanna live in it, can you consider that?
Number two, try to be a little creative. One thing is that you don't have to own the whole thing - can you own part of the thing? When we bought the church in San Antonio, I didn't buy the whole thing. This guy put together the deal, and he just got all these investors and he actually didn't even end up putting in that much cash, because all the investors did. We've applied that - we bought a place in Budapest, because there's a lot of these foreign countries that are really cool, low taxes, really cheap and fun... So my friend got people, we each put in 10k, and now we own a place in Budapest. Maybe that will turn into an Airbnb, or for now at least, all of us can have our friends visit there when we go.
So that's something [unintelligible 00:19:35.14] real estate in general. I wanna own a place in Venice Beach, but to some extent, do I really need to own it? Can I focus on making a lot of money with the internet stuff and then just either Airbnb when I go to Venice or HomeAway, or am I really wanting to actually own something that I can always come back to? And that's something that I'm still exploring.
Joe Fairless: Yeah, I remember talking to my roommate when I was in college, we were on the porch drinking some beers, and I told him "The first real estate property I'm gonna buy is a house by the beach, so I can see the waves crashing in", and now knowing what I know, I will rent it when I go there, I'll do Airbnb, and then I'll have other people clean up after me and then I'll leave and I don't have to worry about the place, and I'll make money in other areas of real estate.
Noah Kagan: I think that's the great part - find your angle; either find the area of your town, or find the type of real estate that you're excited about... Maybe it's creating hostels, or maybe it's doing hospitals, or restaurants, or whatever it is, and specialize in that.
I think part of the thing for me is -- and I think it's hard for everyone, but it's letting go of the ego. The greatest thing about real estate is that it's real, and everyone can see it and you can show it off. "I have ten units" or "I have 100 units" and I'm bragging... And I think that's kind of the interesting about like what do you really need to have when you're gonna be in the ground, and how is this real estate helping you accomplish the actual goals you want, versus just making more money? And I think kind of just reflecting on that, for me it's like "Well, it doesn't actually really make me feel that much better. I don't think I'm adding that much to the earth. Let me not spend as much time on that." Let me just do the real estate vision I have - my vision is own a place on the beach in Venice, have my downtown pad here, and then get my ranch. I don't know when it will happen, but at least I have that vision, and everything else then is just like "Let it go." And that part is hard. It's hard not to be like "Well, I can make more money doing this."
I think what people don't realize is that you can make more money, but it also takes time away from something else that's probably more important.
Joe Fairless: Great stuff, Noah. Where can the Best Ever listeners get in touch with you?
Noah Kagan: Whaddup, Best Ever listeners! If you wanna hear more of me, check out Noah Kagan Presents Podcast. If you wanna grow your business, we have a bunch of free stuff at AppSumo.com or Sumo.com. Those are the two companies I help run.
Joe Fairless: Outstanding. I'm 85% positive that my website uses AppSumo, or some form of one of your companies, because I've been focused on getting more conversions for the traffic that I get sent to my site, so... And I've heard a lot of good things about your companies, that's for sure. So Best Ever listeners, go check it out.
Noah, I really enjoyed our conversation. I was taking notes the entire time, and I wrote down six keys that you've used from your lessons learned in business and applied towards real estate.
One is if you want to get ahead, then don't be doing what everyone else is doing, and your MLS/off-market thing is an example.
Two is hiring intelligently - we didn't really dive into it that much, but nonetheless, right out of the gate, you immediately hired a property manager for Airbnb, and you've scaled your company as well.
Three - test it out, or TST, as you have that acronym.
Four is "Can you partner on it?" Does it have to be you doing the whole thing, or can you partner on it and go in together and mitigate the risk, and still get what you're trying to accomplish?
Five is specialize in what you're great at, or as you so succinctly said, focus on your sweet spot.
Six, do what gets you excited, and that's one of your key tenets in how you approach real estate.
Noah Kagan: I love it, man. That was great.
Joe Fairless: I'm listening, baby...
Noah Kagan: You're definitely listening. Can we do a bonus one? Because you just got me so excited...
Joe Fairless: A bonus -- six plus the bonus one from the Condo Kid. What's the bonus one?
Noah Kagan: Condo Kid. Are most of your listeners just starting out or are they super rich with a bunch of real estate?
Joe Fairless: It runs the spectrum, it really does.
Noah Kagan: I'd say two things. One, build your network, and here's the easiest way to build your network - look at any building that you really like, or any area, or anything specifically that you like,
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