January 3, 2018

JF1219: Renting To Owner Occupants In Higher Tax Brackets & Providing Turnkey Investments with John Larson

John and his company American Real Estate Investment provide turnkey investment opportunities for investors. One thing that sets them apart from other providers, they focus on Class A properties that rent to people making over $100k a lot of times. They also have your more typical investments of B and C class, but they like to focus on the class A properties with higher level tenants. Hear why they take this approach and how it has benefited them and their investors over the years. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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John Larson Real Estate Background:

Managing Partner at American Real Estate Investments

– Leading provider of A Class turnkey investment properties in the US

– Also own American Real PM our in-house property management solution

– Started in real estate at the age of 17 flipping houses with his family

– In first six months at AREI, he purchased, renovated & sold over 150 properties netting more than $1M

– Based in Dallas, Texas

– Say hi to him at: https://areiusa.com

– Best Ever Book: Exceptional Service, Exceptional Profit


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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 of that fluff. With us today, John Larson. How are you doing, John?

John Larson: Very good, Joe. Thanks for having me.

Joe Fairless: My pleasure, nice to have you on the show. A little bit about John – he is the managing partner at American Real Estate Investments, which is a provider of class A turnkey investment properties. He’s based in Dallas, Texas, and in the first six months at his company he purchased, renovated and sold over 150 properties, netting over a million bucks.

The website is areiusa.com. With that being said, John, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

John Larson: Absolutely. I’ve been involved in real estate since I’ve been a teenager. My family – they’re all real estate investors, they’re all people that believe real estate is their number one investment philosophy, build rental portfolios for themselves; they’ve been doing this for years.

As a young man, I used to work on a cruise and kind of be like the gopher, grabbing tools, learning how to work on houses, how to properly renovate homes. Then from there I went away to school, I went to college, came back, got my real estate license, and kind of just started doing investments myself and working with investors to build rental portfolio.

Through that experience I crossed paths with American Real Estate Investments, they offered me a position with them to come on as their sales director, I kind of led the whole sales team, and from there I made myself up to partner. We were once located in Kansas City when I started working with them; we moved the company down to Dallas in 2014, and I’ve been working diligently to build this company into one of the top turnkey providers in the U.S. today.

Joe Fairless: Congratulations on the evolution and getting in to be a partner in the company when you didn’t start out that way, and working your way through the ranks… One bullet point I didn’t mention in your bio that I had in front of me (that I should have), and you alluded to this – you started at an early age, but you started flipping houses, right? With your family.

John Larson: Exactly, yeah. Some of them they would hold, and they’d put in — my family basically has almost like a little fund of rental properties in Michigan where I’m originally from… But yeah, I would do the acquisitions as a real estate agent, and we’d work on the homes ourselves, just kind of keeping it in-house with the family, and then I would list the properties and sell them to just regular homeowners. So yeah, we had an active flip model as well.

Joe Fairless: As a turnkey management company, how do you differentiate yourselves amongst the competition?

John Larson: Well, a lot of the things that we do – I look up to the guys over at Memphis Invest as well; I think they have a great model and I try and create my company to kind of mirror what they do in terms of making everything very passive, and white glove service, things of that nature… I would say the only difference is that we do kind of go after these higher end properties as well. I’m a real firm believer — yes, I wanna see cashflow, yes, I wanna see great returns, but I’m also really looking for safety; when I’m looking for properties in neighborhoods specifically that are more so heavily owner-occupant instead of renters, just because I believe that those properties, especially in the Dallas market, are gonna give you that greatest chance to see appreciation… And obviously, they’re very desirable, and when you get these higher end rents – I’ll produce properties that rent all the way up to $2,500/month, well that tenant in order to qualify for that home they need to make at least three times the monthly rent, so you’re talking about people that make 100k or above a lot of times. These are the types of tenants that I’m placing in these properties, so it really makes the whole experience passive for everybody involved – myself, my management company and the investor.

So although on the spreadsheet the rate of return might look slightly less than what my competition can offer, really my property is honestly the safest property that you can purchase based on the neighborhood and based on the quality of the tenant that I’m putting in the property.

Joe Fairless: I love that point. That is the differentiator, and I’m really glad that you brought that up. Let’s dig into the neighborhood – you didn’t say this, but I think what you’re implying is that the primary indicator for the neighborhood is that it’s primarily owner-occupied homes versus rental houses; if so, is there a percentage that you look for?

John Larson: Usually, honestly some of the neighborhoods that I’m buying in, Joe, like Plano here in Dallas, which if anybody does a research on Dallas, Texas, Plano is gonna be an area that comes up. There’s a lot of jobs moving there, a lot of Fortune 500 companies; Toyota was the most recent company that just moved into the Plano market. They brought 4,000 jobs nation-wide. Those neighborhoods are honestly 90% owner-occupant, but these neighborhoods are still attractive for rentals as well, because all the new transplants that are moving into the DFW market and Houston market (which we’re also in), due to these jobs that are moving in here, a lot of times people have to move here for employment. A lot of these people – they could purchase a home, but they’ve just moved into Dallas and they’re kind of feeling the market out.

Dallas-Fort Worth is fourth largest metro in America, so they rent for a couple years first, at least a year if not two years, just to kind of feel the area out before they decide to go ahead and jump in and purchase a home. And honestly, really with my tenants I’m only losing them to the fact that they wanna go buy a property. When someone says, “Hey, I’m giving notice to move out”, the reason 90% of the time is “I’m going to buy a home for myself.”

Joe Fairless: And I would say that makes a lot of sense, because on the flipside I would suspect that if you look at the numbers – and I’m guessing, so I have no clue, but my guess is that if you look at the numbers for how long a tenant lives at a house, if they’re in an income bracket that’s around 50k-60k, they’re more likely to stay longer. And I know from my experience (this I do know) that my number one expense is tenant turnover. So with your business model being focused on people who make more money, therefore I would suspect live there a shorter period of time, that leads me to believe that the expenses would be higher than what the flipside would be. What are your thoughts on that?

John Larson: Yeah, turnover could potentially be more frequent when you’re dealing with higher end properties, because you are gonna lose tenants to the fact that, “Hey, I’m gonna go buy my own home.” The thing though about the DFW market and Texas as a whole – 400 people a day move into the Dallas-Fort Worth metroplex, so just in case we do have a turnover, I’m really able to get that property turned in seven days or less.

But number one, the tenants that are staying in my homes, they are in that higher income bracket, they just generally are more responsible and take care of things a lot better, so I really don’t run into any high cost maintenance issues; the tenants take great care of the properties. Literally, a tenant moves out of one of my homes in Plano, in North Dallas or wherever it may be, the house – I can move a new tenant in right away. It’s clean, it’s good, there’s no holes in the walls, stains on the carpet… There’s nothing like that. The house looks move-in ready on that turnover, and when you have such a large amount of people moving in daily, it’s very easy to rent these properties out, and really keep them leased.

I wouldn’t say that all of the tenants that we have in our properties are leaving because they’re going to buy their own home. Some of the people, they make 100k, but they don’t have the best credit score. So they wanna live in a nice neighborhood, they want a nice property, but they just can’t either afford that down payment right now, or they just don’t have the credit to get that good mortgage.

Joe Fairless: You mentioned Plano – what are some other areas that you are looking in or actively buying? And perhaps it’s not DFW, because I see on your website five to ten different markets.

John Larson: In the DFW area I’m focused mainly on — you know, North Dallas is where my higher end properties are. There’s also pockets of East Dallas that are going through a lot of gentrification. We have a lot of young business professionals moving into the DFW area and they still wanna live close to downtown, so there’s a lot of neighborhoods there.

There are some older properties, 1960’s, 1970’s builds, but you see fix and flip outfits in there, buying properties, renovating them, doing high-end renovations and then just selling them on the MLS to a regular homebuyer. Well, there’s also opportunity in there for guys like us to buy a higher end rental and put a young business professional type tenant in that property, and those areas are really super desirable, just based on the location, the proximity of the property, the location of downtown, things of that nature. So I focus  a lot on this Eastern part of Dallas, as well.

Then in South Dallas it’s kind of what I call my bread and butter rentals. That’s gonna be like the Lancaster, Cedar Hill, Duncanville, DeSoto type neighborhoods, Seagoville… Because those are the neighborhoods where you have more so around 60% on the owner-occupant side, but 40% are looking to rent, and that’s where you have the rentals… I would say they average about $1,500/month. Still really good properties, you still are dealing with the middle-class type tenant, but maybe down there you’ll have more of a longer-term type tenant and not as much turnover.

Joe Fairless: You’re not exclusively focused on the higher valued properties, you’re also buying properties that are less than 100k…?

John Larson: Not as much. I do operate in Kansas City and St. Louis as well, where I would say those are my B-type properties. Still, I’m trying to keep my values at 100k and above. In my opinion, 100k to 130k, in that range, where you have properties that are renting for around $1,000/month – that to me is a B-grade property, so just a step below what I’m doing here in Dallas and Houston… But I would say the stuff in South Dallas – there’s a little bit less of a barrier to entry; the price points are more so I would say 160k to let’s say 200k, whereas the stuff in East and North Dallas, you’re starting at about 200k and they’re going all the way up to 300k.

Joe Fairless: What are the types of average returns you’re seeing on a typical property? And if you can define what that property is, if you’re referring to the A or the B.

John Larson: B class homes, on a cash purchase, you’re gonna be anywhere from about 7,5% to 8%. It can get as high as 9% net return. If you’re gonna take advantage of conventional finance, which I know a lot of investors are doing (why wouldn’t you?), it can get you anywhere from 15% on a leveraged rate of return side, as high  as 20% or more in some instances… Because up in Missouri property taxes are less, so you have less expenses there. Down here in Dallas property taxes are a little bit higher, there’s no state income tax here, and they make up for it on property taxes.

With my higher end properties I’m starting at about – on a cash purchase, probably anywhere from 5,5% on the low end, up to 7%. Then on the leveraged side, it doesn’t affect the yield that much because you’re putting a higher down payment down on the property… So even a 300k house, you’re coming out of pocket 60k to purchase that property, so you’re still kind of floating in that 6% to 8% range on my higher end homes.

On the properties in South Dallas that I was referring to, where the price points are 160k to 200k – at that point  I can get you starting at about 8% on the leveraged side, up to as high as 12%, and on a cash purchase you’re floating somewhere around 7%, 7,5%.

Joe Fairless: You started out not as a partner, and now you are a partner.  What would be something, if you can put yourself in someone else’s shoes for a moment, what would be something they’d say about your for why you’re able to grow with the company that you’re with and eventually become partner?

John Larson: Something about myself… Number one, it’s hard work. That was the thing that stuck out to the guys at American Real Estate Investments. James Wine – he’s an older gentleman now, he’s in his seventies, so he wanted to take a step back in terms of the day-to-day operations, and I felt like he could trust me; I was a loyal guy, someone that came in and put my head down and worked hard right away. As you said at the beginning of the show, I bought and sold, basically almost wholesaled, 150 properties for them right when I started on in 2014, and made the company a million dollars.

That was probably a notch on my belt that got me on the fast track to becoming partner of this company, but I think it’s just my relationships that I built with my clients. I feel like my clients can trust me because they know I’m trying to do the right thing. There’s other turnkey providers out there and other companies that try and spice up these properties on the spreadsheet and show you these high rates of return, but they don’t really explain the common risks that are involved with those types of properties. And I know the risks that are involved with those homes, because I started [unintelligible [00:14:24].02] in Detroit, producing these C and D class property, stuff that’s selling for 60k and below, and I’ve seen everything that can go wrong with these homes, and that’s why I try and steer my investors into really safe investments where I know I can consistently put really solid tenants in the home, tenants that I know are gonna pay rent every month, that are gonna be super low risk for eviction… We don’t have evictions in our market here.

Joe Fairless: When was the last eviction you did?

John Larson: We had a guy move out earlier this year because he was going through health problems, but he just came in and dropped off the keys at our office. We don’t have evictions. I would say we did have one last year, and the thing about Texas is it’s very landlord-friendly, I’ve gotta give them that… Coming from Michigan, where it’s very tenant-friendly and it’s a pain to evict people. Out here in Texas if you sign a lease and you go to court – if it gets to that point where you have to go to court, you just show the judge, “Hey, they signed a lease and they didn’t comply”, they’re out within 30 days. It’s really easy.

But when you’re dealing with that higher end tenant, so to say, a more responsible tenant I guess I would say, someone that has a better job and makes better income, and is just more responsible – better credit score, things of that nature – those are the types of people that pay their bills, and if they can’t afford their bills, they’re gonna come to you and say, “Hey, I can’t make the payment, so unfortunately I’m gonna have to break the lease and move out.” I don’t have to evict them, they just hand the keys over, and that’s a good experience. Those are the types of experiences we want.
So even when we have to make that call to the investor, like “You’re tenant moved out”, it’s not like “Hey, we’re going through an eviction.” It’s like, “Hey, they’ve moved out and the house is in great condition. We could lease it today.”

Joe Fairless: In that scenario, you really can lease it within seven days of someone moving out, and someone can be moved into that house in seven calendar days?

John Larson: This is the hottest market I truly believe in America, Dallas-Fort Worth. The amount of people that are moving into the market, it’s so hard to get your hand on good opportunities and get your hands on inventory down here, because there’s so many people moving in.

When we do have a turnover situation, obviously we’re notified… 45-60 days from the expiration of the lease, the tenant is saying “I’m staying” or “I’m leaving” if they’re leaving. We already start pre-marketing that home; my leasing people in my office, we have a list of potential tenants that we can reach out to and say “Hey, this property is gonna be available on 15th November”, and they’ll just say “Boom! Here’s the deposit. Alright, I’m good to move in on 15th November.” So when that tenant moves out on 7th November, we go in, we spice it up, clean it up; if there is any work that needs to be done, which is very rare, we get that completed and we’re ready to move that new tenant in right away. But that’s the demand that we have in this market.

Joe Fairless: What are you applying in your current business, in your current role, that you learned at your first role? Can you briefly just describe your current and first role just to set the groundwork?

John Larson: When I was started with the company [unintelligible [00:17:13].19] sales and things like that?

Joe Fairless: Yeah.

John Larson: I still have my hands in that. I have a client who was a very successful businessman, and he invested with us when I first started with American Real Estate Investments, and I started to try and pull myself out of sales more and more and just kind of focus on the education aspect, because we also provide a lot of education as well on how to do this yourself and things to look out for, potential pitfalls when investing in real estate. So I kind of started more towards that.

Well, he reached out to me to buy another home, and I redirected him to one of my investment coordinators, and I said, “Sir, I’ve kind of pulled back on sales a little bit since I became partner, and I’m kind of heading up and overseeing the company, transactions…” – basically, Joe, you know there’s a lot of things involved with companies like this and with real estate, a lot of moving parts, and he said “John, can I give you a piece of advice? Never pull yourself out of sales.” [laughs] He said, “It’s the most important part of your business.”

So I kind of took that to heart, and still today I deal with the investors, I deal with client relations, but I’m overseeing things on the property management side; I still will consult with investors, serious investors, investors who are ready to pull the trigger right now, and I still keep in contact with our current client base… But right before I jumped on the call with you I was with my transaction team doing a closing meeting, and just going through each contract and where we’re at in the process, where we stuck on closing this deal, and so on and so forth. We do that once a week. So my hands are kind of just everywhere in this business.

Joe Fairless: You said one of the responsibilities is to oversee things on the property management side – what’s a process that has been enhanced since you’ve been overseeing it?

John Larson: Well, I would say it’s something that we’ve implemented with our property management team, to just add extra customer care and customer service; we call them investor concierge… So after we sell a property, we transfer property ownership to one of our investors, they’re assigned an investment concierge rep, which is basically a liaison between AREI and American Real PM our management company. They really work more so on the American Real PM part of the business… And that’s just that person that’s reaching out to your once a month to make sure you collected your rent and there aren’t any hiccups with the investment; we’re calling you and giving you updates, and kind of explaining where we’re going with the next step, because I just believe communication is key with these investments. I sell these properties worldwide, but most of my investors who invest with us are out of state or out of the country, so we just really and keep those open lines of communication.

Joe Fairless: Based on your experience, what is your best real estate investing advice ever?

John Larson: That’s a good question, actually. Honestly, what I try and tell all my investors is kind of the way we led off the show… With me, I’m really looking at neighborhoods and properties that are gonna attract – f we’re talking about rental properties, and that’s kind of my forte – the best type of tenant. You can really look at a neighborhood and you can really look at a home, and you could… It’s common sense. Anybody, I don’t care if you’re a new investor, a seasoned investor, you’ll be able to look at a home maybe just outside the downtown area of Dallas that’s a 3-bed one-bath, almost looks like a shack… You’ve gotta think about what type of tenant is that property gonna attract, and is this gonna be the safest investment for my money?

In my opinion, I would say no, steer clear of that. So I always try and tell my investors, always envision what type of tenant this property is going to attract, and usually that will give you an indication on “Should I pull the trigger on this one or not?”

Joe Fairless: It makes sense. Are you ready for the Best Ever Lightning Round?

John Larson: Let’s do it.

Joe Fairless: Alright. First, a quick word from our Best Ever partners.

Break: [00:20:38].11] to [00:21:25].26]

Joe Fairless: Best ever book you’ve read?

John Larson: Honestly, it’s something that was referred to me by FortuneBuilders – it was Exceptional Service, Exceptional Profit.

Joe Fairless: Best ever deal you’ve done?

John Larson: That’s a good one. I would say when I was working [unintelligible [00:21:37].14] shoutout to Max Brooke in Birmingham; I used to work for a luxury brokerage… I sold a two million dollar home; I was just starting as an agent, and I would say that was probably the most rewarding feeling, and a pretty solid commission check.

Joe Fairless: After doing that, why not continue to do that?

John Larson: Because Michigan is honestly kind of up and down in terms of the real estate market.

Joe Fairless: Oh, Birmingham meaning Birmingham, Michigan.

John Larson: Yeah, Birmingham, Michigan, yeah.

Joe Fairless: Okay, I was thinking Alabama. Alright, anyway, go ahead…

John Larson: Just being a retail agent obviously, you know, things can go up and down, things are very cyclical. Also, when dealing with buyers that are looking to purchase a home themselves, they’re buying on emotion, they’re not necessarily looking at numbers and what makes sense, right? So I just kind of veered to the investor side of things, or steered back into that, because of the fact that investors are kind of looking at numbers and what makes sense, and it doesn’t matter if it’s summer or winter or whatever it is, an investor is not gonna turn down a good deal.

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

John Larson: Selling it too early I would say, before I had my GC go out and actually perform the final rehab bid on the property; that’s something I’ll never do again. Obviously, you get estimates on what you think the rehab is gonna be while you’re going through your underwriting process… Well, I’ve sold it to an investor, and I’m thinking in my mind “It’s only 35k rehab.” Well, now my GC goes out and it turns out it’s a 60k rehab. I took a loss on that one. My partners weren’t too happy about that. So even the pros, Joe, make mistakes here and there.

Joe Fairless: What is the best ever way you like to give back?

John Larson: Honestly, mentoring. Believe it or not, I have people that will e-mail me, find my contact information… Young guys, just like myself when I was young, trying to get started. They’ll reach out and say, “Hey, John, do you mind if I come by your office? I just wanna pick your brain.” I just went out to lunch with a guy the other day, he was just getting into real estate… I feel like giving back is just kind of sharing the knowledge that I have.

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

John Larson: The best way would just be to hit our website, www.areiusa.com. We have a Contact Us page, but also have resources on that page. I’ve also started a web series called AREI 101. The first episode is actually “Why I Stopped Buying C-Class Investments.” I also interview Scotty Mitchell who is the COO of our management company, that’s on episode two. The first three episodes are coming out here shortly, then I’m gonna add to that each month. That will be a great way to get some great education for newbie investors, and like I said, there’s a lot of other good resources on that website as well. But if you wanna contact me, just put your information in the Contact page, and one of our investment coordinators will be reaching out right away.

Joe Fairless: Thank you for being on the show, John. Thanks for talking about how you differentiate your company from others, and that is the types of properties that you purchase, which consequently you’ve got a different resident, one who earns more money and is able to pay for a higher rent. So that’s one, the higher-earning tenants, and then two – the owner-occupied neighborhoods. You gave the example of Plano being 90% owner-occupant; you look at other areas, but really that’s where you all differentiate yourselves, is having those class A type of properties. A little bit less return, a little bit less risk… So there’s risk-adjusted returns, that’s for sure.

John Larson: Yeah, Joe. If you don’t mind, I have one more point that I kind of forgot about.

Joe Fairless: Yeah, sure.

John Larson: Another reason why I like to buy these properties in these better neighborhoods is it gives my investors multiple exit strategies as well. When you’re buying properties just trading on cap rate, whether it’s single-family homes or whether it’s a multifamily apartment building, whatever it may be, if you’re pigeon-holing yourself in a neighborhood that’s more investor-owned, where you don’t have as many people looking to actually purchase properties in those neighborhoods for themselves (it’s a neighborhood full of landlords), you’re really not gonna be able to get that market value for the property. You’re gonna get offers based on how much income the properties produce.

Another reason why I buy these properties in these nicer neighborhoods is just in case these investors… Obviously, with rental properties we wanna go with that long-term hold, but let’s say you need to exit on the property, or let’s say your property appreciated $100,000 or $50,000, whatever it may be, and you wanna sell it and cash in on that equity – I can help you achieve that with my homes that I’m doing right now in Dallas, those ones that rent for $2,000 to $2,500, in these nicer neighborhoods.

Hopefully that makes sense to the listeners as well. I wanna give you multiple exit strategies, just in case you need to go down that route.

Joe Fairless: John, thanks for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

John Larson: Thank you, Joe. I really appreciate you having me on.

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