January 14, 2018

JF1230: Find An Asset Class With Less Competition And Dominate It

When Tyler is looking for deals, he loves to find 5-50 unit deals. This is an interesting space because it cuts out the smaller investors who are intimidated by multifamily, simultaneously you cut out the bigger investors because the deal is too small for them. The biggest contributor to Tyler’s success he says is not assuming anything anymore, rather always asking questions. We get to hear great tips on how Tyler negotiates hs deals, be ready to take notes. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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Tyler Sheff Real Estate Background:

Founder & CEO of CashFlowGuys.com & CashFlowGuys Podcast

-Commercial Real Estate Broker, Investor and Syndicator

-Over 16 year’s experience in real estate

-Based in Tampa, Florida

-Say hi to him at www.cashflowguys.com


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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.

With us today, Tyler Sheff. How are you doing, Tyler?

Tyler Sheff: Hey, Joe. How are you doing today?

Joe Fairless: I’m doing well, and welcome back to the show. Best Ever listeners, if you recognize Tyler’s name, well then that’s because you’re a loyal Best Ever listener. If you don’t, well then shame on you, you should be a loyal Best Ever listener, but welcome; glad you decided to listen. Tyler was interviewed on episode 783, and the title of that episode is What He Did Immediately After Paying $40,000 for a 26-unit Memphis Property He Bought Remotely. That’s a mouthful, but that certainly is intriguing; if you’re curious about it, then go check out episode 783.

Today we’re gonna be talking about a specific skill that has helped him in his real estate endeavors. Because today is Sunday, and that’s what we do on most Sundays – Skillset Sunday.

Tyler, in addition to the lead-in I just mentioned, he is the founder and CEO of CashflowGuys.com and The Cashflow Guys Podcast. He’s a commercial real estate broker, he’s an investor, and he’s a syndicator. He’s got over 16 years experience in real estate. Based in Tampa, Florida. His focus really is buying non-performing notes and apartment buildings 50 units or less. With that being said, Tyler, how about briefly — just give the Best Ever listeners a refresher on you and your focus, and then we’ll dive into this skillset today.

Tyler Sheff: Well, as you’ve said, my focus is multifamily; I like the smaller stuff – there’s a space I play in, the five to fifty unit space. I don’t have a lot of competition. It’s just a little too big for the single-family guys, they’re usually scared of it because it’s multifamily, and the bigger guys, guys that are playing in the big leagues like you are, it’s a little too small for you, it’s not worth your time. So I kind of exist in this space where there’s only a few of us that are buying in this space, the mom-and-pop type arena, and I like that space, I do.

Joe Fairless: I know we were gonna talk about the skill of asking questions and not assuming the answers, and we’ll get to that, but I wanna follow up on this five to fifty space, because it’s a thing that’s really interesting. Is that okay?

Tyler Sheff: Absolutely.

Joe Fairless: Alright, cool. Management is the first question that I bet you get a lot from people – how do you pay for a manager if the property doesn’t pay for it, and how do you allocate that? What’s your response to that?

Tyler Sheff: As we all know, we make our money when we buy, so it all comes down to building those costs in in advance. When I factor management, I’m always coming in at 15% to 18% as a management cost, therefore it forces me to negotiate a deal to pay for all my management expenses. It’s a little trick that I use to force myself to do what I’m supposed to do.

Joe Fairless: Okay, so you make sure that you have that line item in there, and it’s 15% to 18% of what?

Tyler Sheff: Of the annual income.

Joe Fairless: Of the annual income. Okay, 15% to 18% of the annual income is allocated to management… And where are you netting out after you see those expenses? Is it in that range, or is it a little bit lower?

Tyler Sheff: We’re averaging — as far as ROI, or cash-on-cash return?

Joe Fairless: I’m asking is it truly within the 15% to 18% of the annual income once you start operating the property, or is it a little bit lower?

Tyler Sheff: I find it usually between 10% and 13%, that’s the true number. I like to have a little bit of fluff in there, a little bonus money at the end of the year.

Joe Fairless: Okay. The actual management of let’s say a 50-unit, how do you structure that team?

Tyler Sheff: The properties I have in Memphis now – and I’ve been growing over some time – we’ve added some properties, taken away… We’ve got one management company that manages everything for us. They primarily manage smaller assets, that’s kind of their niche. They don’t get into the big stuff, so initially, part of that 50-unit limit came to what their comfort zone is, the type of clientele that they’re used to dealing with.

I’ve dealt with a lot of bad managers, Joe; I’m sure you have gone through that as well…

Joe Fairless: Yes, absolutely.

Tyler Sheff: When I find a good one, I’m in love. I’m gonna buy what they like to manage, and that’s what I’ve stuck with.

Joe Fairless: I understand that approach. As far as the management goes – that’s one big thing for why people say “I don’t wanna do 50, because the property doesn’t support it; I need to do 100, because then I can hire full-time staff”, but you’re just saying, “Hey, budgeted in on the front-end, so that the property can pay for it.”

Tyler Sheff: Absolutely.

Joe Fairless: Okay, what are some other reasons why people say “I don’t wanna do 50, I’d rather do 100”?

Tyler Sheff: Well, I’m not sure why people wanna go larger. To me, I’m very hyper-focused, I’m very conservative when it comes to my investing, first of all, so I’m gonna make sure, when it comes to due diligence – because as we’ve talked about in the previous episode we did, on episode 783, I’ve made a lot of mistakes, and I’ve lost money doing it, and I came away a better investor, I came away a better syndicator, I came away a better broker by going through that emotion of losing it. So for me, if 50 to 100 doesn’t really matter, but when I’m investing in a certain market and I’ve got a manager that they just like to me in that 50-unit space so they don’t have to put somebody on staff, they like to run a lean operation where they don’t have people all over town on site, that’s their reasoning – it makes sense to me, so I go with it.

Joe Fairless: Okay. You plug into an operation that’s already got the system and the expertise, and you kind of [unintelligible [00:07:48].26] definitely benefit from it already being in place… It makes sense.

Tyler Sheff: Absolutely.

Joe Fairless: Okay. Disadvantages to buying five to fifty, versus smaller or larger?

Tyler Sheff: It does take longer to scale, in my opinion. That’s a big disadvantage. Obviously, it goes a lot faster with 100 units, 200-300 units…

Joe Fairless: And when you say “scale”, what do you mean by that?

Tyler Sheff: Well, to grow my portfolio. If I’m looking at my income levels, I have to work a little harder than people do in a larger asset class; I’ve gotta think outside the box a little differently, and I’m not necessarily dealing with the same type of sophisticated owner (owner direct); I’m dealing with a little different seller than what you would be — you’re dealing with a hedge fund in your space, commercial brokers, big companies, stuff like this, where they talk about hundreds of doors… I’m almost always dealing with mom-and-pop, so the emotion comes back into the transaction, where it wouldn’t necessarily exist in the larger transactions.

Joe Fairless: Okay. And I think that is a good segue into asking questions and not assuming the answers, because when I asked you what type of skills you wanna talk about, that you’ve honed and you think it would be important for other Best Ever listeners to hone, you said “asking questions and not assuming the answers.” Do you use that skill when dealing with the mom-and-pop owners?

Tyler Sheff: I’ve gotta say across the board. It is what has helped me stay successful and profitable, 100%. I find that in every case, we as humans, we assume everything. This is why people don’t like each other on Facebook over three words on a post; somebody misunderstands it. They assume what the other person means, and then they have a freak-out about it. This exact same thing goes on every day in transactions.

I finally woke up one day and I said, “You know what? I’m just not gonna assume anymore, I’m gonna ask the question.” An example of that is let’s say I’ve got a guy by the name of John as my seller, and instead of me thinking “John’s not gonna take this offer. This offer is gonna insult him. He’s gonna get mad at me and he’s gonna hang up the phone and he’s never gonna call me again.” I pick up the phone and I say “John, I really wanna buy your property. As a matter of fact, I woke up this morning deciding that no matter what, somehow today you and I are gonna sit down, we’re gonna figure out how I can buy this property and help you out of the situation. Now, for that to happen, I can assume all kinds of things, but realistically, I’m not that smart and I’m probably gonna be wrong, and you may walk away upset. We both know I can only afford what the asset can afford to pay, and I can’t pay more for this property than what the asset can afford to pay, so let me ask you, John, what can this asset afford to pay?”, and I won’t say a word.

Joe Fairless: I would just say whatever the original price was.

Tyler Sheff: And I’ll restate the question, and when I do this… [laughter] Seriously, when I do this…

Joe Fairless: I’d say, “Well, I heard you the first time.” [laughs]

Tyler Sheff: And I’ll reiterate the fact that, “You know, I would love to, but here’s the thing – when we go into this transaction, we’re gonna have appraiser and bankers, and I’ve got investor partners coming in on this… We wouldn’t buy this just because it’s cool, we’ve gotta be able to make a profit, so… At this price point, John, how do I make a profit?” I put them in the driver’s seat, because I’m not gonna assume what they’re gonna say. And I can tell you, very often they come back around to our way of thinking.

Joe Fairless: The natural question there would be “Well, how much money do you wanna make off this?”

Tyler Sheff: Exactly, and I work on monthly numbers. In other words, I look at a return. I say “John, when you owned this property, was it profitable, did you enjoy it? Why did you buy this property?” I revisit why they originally bought it. Again, I’m constantly putting them in the driver’s seat, because I have no idea what they’re gonna say, but when they feel like they have the ability to be in control of the situation, I think the reality of it is I’m being a good listener, I’m letting them drive the car, and we’re gonna get to where we need to go if I give them the impression that they’re driving the car. If I listen to them, instead of just assuming.

Joe Fairless: So in that scenario, where you say “Hey, I’ve got investors, I need to make money off of this purchase…” and I say “Well, how much money would you need to make off of it?”, you don’t give a direct answer, you then answer that with a question of “Well, how much money did you need to make on it when you bought it?”, or what would your reply be?

Tyler Sheff: Every situation is different, but in that example I would probably say something along the lines of “John, the last couple transactions we’ve made, we’re looking for somewhere between a 16% and 18% return across the board. For us to be able to do that, after we go through the diligence process, we’re gonna have to really get down to brass tax.” Then I’ll go right back to him again – “When you bought this property, you were probably in the 25%-30% return, weren’t you?”, because I know his proud, because most men are proud… And he’ll say “Of course I was, yeah”, because you know, all investors are getting rich.

Joe Fairless: Of course, yeah. Everyone does.

Tyler Sheff: Yeah, yeah. Nobody ever does a mistake, nobody ever loses money. [laughter]

Joe Fairless: Right.

Tyler Sheff: Yeah, I’ve got six million units, that’s great. And why are you driving a Yugo? [laughter] Anyway, so I’ll revisit that, and they’ll always come up with a prideful number, which is beautiful, because now I’m always asking for a number just below what their pride number is. Again, I’m not assuming; I’ll let him drive.

Joe Fairless: Yeah, that’s interesting. I can hear that play out and how that would work. I could also hear the opposite response for — I’m thinking of a seller in my mind, a specific person, so maybe that’s what it is, but they’ve done a very good job investing in a local market, and they are incredibly tight with their finances, and they do self-management etc. and I think they would actually answer the question “When you bought this property, what were you looking for?” – I think they’d say something like “I was just looking to beat inflation, and fortunately we did, and we made a little bit more than that, but I’m looking to get a fair deal”, and then they go back to “I need to retire, and I can’t retire off of the amount that you’re offering.”

Tyler Sheff: Well, you know, I’d absolutely agree with you, Joe… It’s tough to retire in today’s society. “What does retirement look like for you?” I’m gonna get them to verbalize that to me. “What does that mean? Because if I give you a pile of cash, Joe, if I give you three million dollars for this apartment building, we’re gonna put three million dollars down on the table, can I come back 12 months from now and visit it? Will it all be there? Of course not; you’re gonna do something with the money. Retirement is what that is… Tell me about that. What does that look like?” I’m focused on him and his pain, I’m not necessarily focused on the deal.

Obviously, it’s not bulletproof, no plan is, but when I’m focused on the seller’s needs and not on my own, and I get them to verbalize and get comfortable with me… And I’m not a one-hit-wonder, so I’m not one of these people that walks in and just [unintelligible [00:14:30].24] some mobile home wholesaler. This is a process. Sometimes it takes six months, eight months, nine months; meanwhile, they’re turning down everybody else’s offers, and I’ve been successful walking in nine months later, buying the property for significantly better price returns than what anybody else had offered. In other words, I’m getting a better deal than anybody else offered just because of the rapport.

Joe Fairless: Over those (let’s say) eight months, what are you doing over those eight months?

Tyler Sheff: If they’re in my local market, we’ll have a cup of coffee. Recently, I flew up to Memphis and I talked to a guy I’ve been talking to for several months and I said “Hey, I’ve really never got to tour Beale Street. I’m gonna be in town for a couple days. Can you meet me for a beer on Beale Street and kind of walk me around?” He says “Yeah, man. That’d be cool”, so that’s where we’ve been in the afternoon, walking around on Beale Street. He was giving me a tour of the history of Blues in Memphis, Tennessee. We struck up a great, rich rapport; we’ve spent maybe 30 minutes talking about the deal (or the property, so to speak). He’s not quite ready to pull the trigger yet, but we part as friends, you see? We’ve gone to a different place.

Two weeks after that he calls me and says, “Hey man, I just wanna thank you for not coming up here and trying to hump my leg over this deal. I really appreciated hanging out with you.”

Joe Fairless: [laughs] Did he use that expression? Because I like that–

Tyler Sheff: He used those exact words; I’ve been using them ever since. It just stuck in my head, it’s like “Great, I like that…”

Joe Fairless: It’s a good visual. I don’t know about a good visual, but it’s a visual.

Tyler Sheff: No, it’s a bad visual. [laughter] So yeah, it works, and I feel good about negotiations… It takes all the animosity out, because I’m genuine.

Joe Fairless: As far as ways to improve this – so that’s the approach that you take and it works, but now let’s talk about how the listeners and myself get better at this.

Tyler Sheff: Start with the why. You can’t get the answer usually the first time you ask the question; that’s been my experience. They’re gonna give you some other sort of an answer, so… Practice makes perfect. I don’t know about you, Joe – you do a lot of transactions, I’m sure you look at a lot of different deals… Anybody that’s gonna be out there actually doing deals, you’re gonna get practice all by itself, and practice is really what it comes down to. Get out there, fail… You’re gonna ask the question the wrong way, and I can’t tell you which way to ask the question. I could tell you how I do it, but this voice only translates so well… People think that I’m more like a caveman, and I should be [unintelligible [00:16:49].04]  kick your door in and steal your car.

You’re gonna have to try different approaches, but the key is if you go in with the mindset that you genuinely care about solving the seller’s problem, the only thing stopping you from doing that is the answers to those questions; I think most people reasonably will figure out after a couple of times on how to answer those questions that works best for them, I truly believe that.

Joe Fairless: A lot of times brokers get in the way…

Tyler Sheff: Yes, they do.

Joe Fairless: Any thoughts on that?

Tyler Sheff: Well, being one… Full disclosure, I’m a realtor/broker, whatever, but I’m not licensed in Florida as a broker, but I’m a listing agent as well, I list properties, and… I encourage communication, first of all. I will automatically try to befriend the agent. It’s a little easier for me being one; they treat me a little better because I’m one of them, so to speak; at least that’s how they see me. But for a person off the street, I would think — first of all, they live in scarcity, a lot of them do. They’re very afraid of losing out on the opportunity; there may be some insecurities there, whatever… A little bit of a scarcity mentality working. Knowing that, play to that. In other words, assure them that you’re focusing on everybody winning in this transaction.

And what I’ve done in transactions is I’ve actually taken the responsibility early on for paying the broker’s commission from the seller. In other words, instead of “Listen, John (the broker), I understand you have this listing… How about this, I don’t want your commission, or the seller to think that your commission may impact this deal, so let’s even the playing field; I will go ahead and cover your fee if we successfully close on this. Does that make sense?” “Yes, it does.” “Good. So now the commission’s off the table. Now, help me get this thing put together.” I’ve done a couple deals that way and they’ve worked out quite well.

Joe Fairless: That makes a lot of sense on the five to fifty units, because what’s the typical commission on average, on (say) a 50-unit that you’re buying?

Tyler Sheff: You’re looking at 4% on average.

Joe Fairless: Okay, and how much are your purchase prices about?

Tyler Sheff: We’re looking at anywhere from 300k up to maybe 3 million.

Joe Fairless: That’s a big range. On a 3 million dollar purchase, 4% is 120k, so you would be baking that into the costs to acquire the property?

Tyler Sheff: Absolutely.

Joe Fairless: In exchange, you have an ally from the seller side, and that would help you get the transaction closed?

Tyler Sheff: Absolutely, correct. And over and above that, when I’m working with my license, representing the buyer, I always offer to take my fee as a promissory note, recorded against the deed. So in other words, I represent you in the transaction, and I say “Joe, I’ll tell you what – don’t worry about my commission. I will record it as a note. Pay me 6% a year. How long are you gonna keep the property? 10 years? Okay, let’s amortize it over 10 years. That’s 200-something dollars a month, or whatever it works out to be. Let’s do that and let’s let the tenants pay men, and then you don’t have to. It doesn’t become part of the transaction. It’s just [unintelligible [00:19:51].25]”

Joe Fairless: Let’s say that your fee is $100,000. How would you structure that again?

Tyler Sheff: I would basically amortize my fee. So let’s say if your exit strategy is a ten-year hold; I would note in the mortgage maybe 5%-6% interest, and then amortize it over the term of the duration, whatever you’re gonna own the property… Maybe structure a balloon, or something like that to pay off at closing, and that keeps it clean. And then I just become a monthly expense.

Joe Fairless: I haven’t heard of that before. In that case it would be roughly $10,000 + 5%, 6% interest, whatever you do a year, and then at the end of the ten years, you’re fully paid of… Or something like that with a balloon payment after ten years where it’s not 10k, whatever the structure is.

Tyler Sheff: Right. The beauty of it is that we can structure it any way we need to, to make the deal work.

Joe Fairless: And if they don’t pay it, what happens?

Tyler Sheff: I have a second position lien recorded against the property, so I guess we can start looking at foreclosure options and things like that, but I’ve gotta say, I’ve been in the business 17 years, I’ve never had anybody not pay, knock on wood.

Joe Fairless: That is one creative way I hadn’t come across before. Anything else as it relates to asking better questions and not assuming the answers that you wanna mention in our conversation?

Tyler Sheff: I would say – and this is gonna be a tough one for most people, especially in today’s society… But in today’s society, really there’s no excuse to not be face-to-face; we’ve got things like Zoom, we’ve got Skype, we’ve got the ability to get in the car and drive across town… Try to be face-to-face whenever possible – and by that I mean even virtually face-to-face – while you’re talking to people, because I think if they can see the fact that you’re genuine, I think that says a lot to the questions that you’re asking, and I think that’s gonna result in getting better answers. That’s been my experience.

Joe Fairless: Great stuff. I appreciate these insights and the overall approach. One additional resource I recommend on this topic of not assuming the answers is Crucial Conversations. It’s a book that I have read multiple times and I recommend to people. Anyone who assumes things, basically they’re telling themselves a story, and everyone has their own story, and nothing in life means anything until we interpret the meaning that we choose to assign it, and that’s something that this book talks about, and they give some great examples… So Crucial Conversations is a book I recommend.

How can the Best Ever listeners get in touch with you, Tyler?

Tyler Sheff: The best way to reach me is through my website, CashflowGuys.com. Of course, for our podcast, we’re on Stitcher, iTunes, the whole nine yards.

Joe Fairless: From why you buy five to fifty units, and the benefits, and how you handle the management – you just bake it in prior to closing, 15%-18% of annual income; in reality, you’re seeing between 10%-13%. Two, how you’re working with the local owners to purchase those properties and the focus that you have, which is being focused on the seller’s needs, not your own, and caring about solving the seller’s problems, that being the exclusive focus, then everything else falls underneath that. It might take a couple conversations, it might take eight months, or it might never happen, however you’re setting yourself up for success with a higher probability of closing with that approach. I appreciate you taking that approach and giving us some specific stories, with the Beale Street example, and the whole humping your leg thing.

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

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