Joseph came to the US in 2007 and started buying single family homes. He didn’t like the idea of scaling single family homes so he decided to start buying multifamily. Starting with a 22 unit, eventually buying a 102 unit property in Texas. According to Joseph, the 22 unit property was in great shape but had poor management. Now that they have fixed the management issues, the property’s valuation is worth over $600k more than it was with the previous management. In this episode we get to hear how to find your first bigger deal, and how to increase the valuation of large properties. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Joseph Gozlan Real Estate Background:
-Multifamily investments specialist, leading group acquisitions of over $11MM in real estate at EBG Acquisitions
-Provides asset management services to a portfolio of 156 units and growing.
-In 2017 he led the successful acquisition of a 102 units multifamily property in Lubbock Texas
-Goal is more multifamily communities in Texas secondary markets and managing an asset base of 3000 units
-Began real estate in 2005, when he purchased with his wife Rita their first investment property in Israel
-Say hi to him at http://ebgacquisitions.com/
-Based in Plano, Texas
-Best Ever Book: The One Thing by Gary Keller
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TRANSCRIPTION
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 fluffy stuff. With us today, Joseph Gozlan. How are you doing, Joseph?
Joseph Gozlan: Doing great, thank you for having me.
Joe Fairless: My pleasure, nice to have you on the show. A little bit about Joseph – he is a multifamily investor, and in fact, in 2017 led the successful acquisition of a 102-unit multifamily property in Lubbock, Texas; I’m actually going there tomorrow. He is a multifamily investor, as I’ve mentioned, and his company is called EBG Acquisitions. He’s led a group of acquisitions of over 11 million dollars in real estate. With that being said, Joseph, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Joseph Gozlan: Yeah, absolutely. Like I said, thank you for having me, I appreciate the opportunity to talk to your listeners. I’m a long time listener and I love everything you guys do on the show. I came to the States back in 2007 from Israel, and as you can imagine, we landed at the most horrible and most wonderful time in the real estate cycle. We were lucky enough to kind of recognize that this is the bottom, it’s as worse as it gets, and we were able to make some purchases of single-families. It was right after reading Rich Dad, Poor Dad, and some other things that were going on in my life, so we made a few investments. My wife and I both got licensed so we can get more familiar with the real estate system in Texas.
We did that for a few years, and then at some point you realize that single-family is just not scalable. In my eyes, there’s a lot more risk in single-families, so that really was the point in time when I decided to graduate to something better, and after all the research I did, multifamily was the thing that I wanted to go. It was a lot of work and a lot of grind, but long story short, I got to the point where I was able to purchase my first multifamily property, which was a 22-unit, and then we went to something bigger, which came in a lot faster, and that’s the 102-unit you described earlier, in Lubbock. From that point on, it’s kind of like a snowball; more things come your way, more opportunities, more investors that you talk to, and that’s we do today – we’re looking for great opportunities for our investors in Texas’ secondary markets.
Joe Fairless: Well, let’s talk about this. Fortunately, we have the opportunity to dig into this story a little bit… First, you said that you bought some single-family homes but it wasn’t scalable, and you said something interesting to me, and that was you think that single-families have more risk than multi. What risk are you referring to?
Joseph Gozlan: This is a little bit counter-intuitive, so I’ll try to make it simple. When I have a single-family house as an investment, if I don’t have a tenant in the property, then I pay the mortgage, I pay the insurance, I pay the bills, and I take 100% of the risk. Also, most chances are that as an investor you bought it on your personal name, so it’s a full recourse loan.
I had a situation with one of my rentals that I ended up paying about $40,000 in a very short period of time for just life that happens; we had foundation issues, we had plumbing issues, we had a garage door go… All kinds of things. That’s a risk. How many first-time investors, how many investors that have one or two properties can afford paying $40,000 out of the pocket? So for me, that’s a risk.
When you transition to multifamily, if you have 100 units, you can have 10 units vacant, and you still have 90 other residents that basically pay for your mortgage, pay for the salaries, pay for the maintenance… So for me, it’s a lot less risk. And then it goes around to the mortgage side of things, usually of this size, now you’re looking at non-recourse loans. It’s no longer on my personal name, it’s no longer on my personal credit. So it’s a combination, and this is more about my investors than myself, because for passive investors in a syndication, we keep three degrees of separation from anything that happens on the property. It starts with the property being owned by an LLC, so you get the protection of an LLC, and then all of our investors are limited partners, which means they have even less responsibility within the LLC, and then third is what I said is the non-recourse mortgages, so the exposure for those investors is significantly lower and less risky.
When we’re looking at accredited investors, these are high net worth individuals; usually we have professionals, engineers, lawyers, doctors, people that on a regular basis walk around with a bull’s eye on their back for lawsuits. If they can invest their money without adding to the size of that bull’s eye, it’s a win for everyone.
Joe Fairless: I hadn’t thought of it exactly how you were describing, and that’s really interesting; I’m glad you talked through that. You said after the single-families you bought a 22-unit. Was that all with your own money?
Joseph Gozlan: Yes. We bought, like I said, in ’08, ’09, ’10, when everything was at the bottom. We were able to refinance some of our singles, and take the cash out and use it to buy that first one.
Joe Fairless: And where is that located? You’re in Dallas-Fort Worth, right? Plano, specifically.
Joseph Gozlan: It’s in Celina, just a few miles North of Plano.
Joe Fairless: Okay. And you bought a 22-unit… Tell us about that in terms of purchase price, business plan and management.
Joseph Gozlan: It was really hard to find my first one, and I know this is a struggle a lot of the first-time multifamily investors are having, is to find the first opportunity. This one actually came in — we did marketing ourselves, after I got frustrated waiting on brokers to send me decent deals… And I spoke to the owners, we agreed on seller-financing terms, and what was wonderful about this thing is the previous owner was an 80-year-old guy that literally built the building; he was a custom home builder for year. He was never a multifamily operator. So he was kind of half of it maintaining himself, some usage of real estate agents in the area that were helping him loosen it up… So there was a lot of value-add play just in management.
The property is pretty new, it’s well built, it’s in great condition, but when you get to a point where you don’t respond fast enough to your residents’ requests and you let them pay on the 15th or the 20th, whenever they want, really, there’s a lot of value-add over there.
I believe that within about six months from buying the property, just by bringing a third-party property management and putting the right processes in place, we were able to increase the property value with about $600,000.
Joe Fairless: How much did you buy it for?
Joseph Gozlan: 1.6.
Joe Fairless: Okay.
Joseph Gozlan: And valuation right now is about 2.2, 2.3, and that’s just by getting the right processes in place. And we believe in treating our residents well, build a community… So we’re not using sticks, we’re using carrots. We came in, and in order to solve the late payment situation, what we did is we told them, “Okay, let’s have a contest, and everybody that pays on or before the first get into a drawing for a 40-inch LED TV.” Well, guess what? We had most of the tenants pay on time for the first time in years, and it cost us about $200 for an LED TV.
Joe Fairless: Was that the main management issue that you had that really pushed it up 600k?
Joseph Gozlan: No, that wouldn’t be enough, just getting them to pay on time. What we did was every apartment was individually metered, but it was never charged back. So we implemented RUBS; water and sewer up in Celina cost a lot of money, so that’s about $14,000-$15,000/year that we could recover just by telling people “You’re gonna have to pay for your own water bill.”
Joe Fairless: What’s that communication like to them? Because before they were not paying it, now “Congratulations, now you have to pay your own water bill.”
Joseph Gozlan: Well, you can’t really do that. It has to happen with the renewal of the leases. I can’t go to someone that is in the middle of the lease and tell them “Surprise, you have extra fees to pay”, legally-wise. So what we’re doing is as we’re renewing the leases, we add in a clause in the contract that says “Starting now, you’re gonna have to pay your water bill.” It helps us with either new residents that come in – this is the fact, that’s what’s going on on the property, and the residents that are renewing their leases have a choice between this or leaving the property really, but we try to be fair and honest with our residents; we did not double tap them. Even though a lot of them were way below market rents, we didn’t increase the market rents AND implement RUBS at the same time.
We kind of decided to go with RUBS first, and then we’ll do the rents later with the existing residents. But new leases that come in – they are at market rent, and have the water bill built into the contract, so we see a lot of increase in our gross revenue just by turning units around.
Joe Fairless: And I didn’t mean to cut you off, you were going into another thing that you did to increase the value.
Joseph Gozlan: Yeah, I’m sorry, that was the other thing.
Joe Fairless: That was the RUBS program…
Joseph Gozlan: The water and increasing the rents for everything that comes into the market.
Joe Fairless: Okay, got it. I’m with you.
Joseph Gozlan: Now, there are still residents on the property that haven’t had their rent increased since ’07, because that’s how the old guy was running the place. So as we renew the leases, we’re gonna work with them to slowly increment it. Again, for me, a key thing for multifamily is operation efficiency and retention. For me to take a resident out and rehab the unit and then find a new resident, even though we already have a waiting list, it’s a period of time that I’m not gonna have that income. So I’m gonna try to increase my retention as much as possible, so that it will be more efficient.
Joe Fairless: You mentioned that you got tired of waiting on brokers to send you deals, so you started marketing yourself. What specifically did you do?
Joseph Gozlan: I did yellow letters, I did postcards, I did cold-calling… Whatever I could in order to find the owners and try to have a conversation with them directly. And I talked to quite a few owners before I found my first one, because multifamily owners are not unsophisticated investors; usually they’re more sophisticated, so they know the market is hot, and some of them were just asking unrealistic prices. So for these guys we couldn’t make a deal, but I was glad to find someone that was just ready to sell and he was very honest and reasonable with his asking price. For what I was getting, I thought it was a great deal.
Joe Fairless: I’d like to learn a little bit more about that, because as you mentioned, it’s challenging for people to get their first deal, and even after you get your first one, it can be challenging to get good deals consistently, and we have to keep on digging, and I’m sure you’ve come across this, too. So you said you did yellow letters, cold-calling, direct mail… Which one of those actually delivered this deal to you, do you remember?
Joseph Gozlan: No one in specific. It’s not like I got all of them responding to the same thing. I spoke with multiple owners and they each responded to something else. That one specific was a postcard.
Joe Fairless: Postcard, okay. So on the postcard – what was on the postcard?
Joseph Gozlan: That specific postcard was about “It’s time to sell. The market is hot, there are a lot of opportunities going on around… Let me make you a fair offer, which will let you retire and move on.” I think it was an 80 years old guy, it kind of fell in place at the right time.
Joe Fairless: And he just saw that and called you up?
Joseph Gozlan: Yeah, and that’s the thing about direct marketing – it can never generate an opportunity; it just puts you in the right spot at the right time, when that opportunity happens to the seller.
Joe Fairless: That’s a great point.
Joseph Gozlan: When they’re ready, when they had to deal with one last thing that they didn’t like to deal with, or they had a fight with the wife in the morning about the property, or whatever life event happened to them right prior for you sending that postcard, that’s the opportunity of direct mail, which is why everybody tells you “Repeat. Do it again and again and again”, because it’s about being there at the right time, and you cannot time that thing.
Joe Fairless: How did you get the address?
Joseph Gozlan: My wife and I are still licensed real estate agents, so we have access to the tax system.
Joe Fairless: Okay. And you looked up the certain apartment communities that had certain characteristics, and then got the addresses, put in a spreadsheet and then mailed it out?
Joseph Gozlan: Exactly. Our mailing list is a constant refinement job. We wanted to find properties that didn’t have any transactions in the last few years, that had a certain size, that were in certain areas, cities or counties that we wanted… So we continuously refine our mailing lists.
Joe Fairless: And you refine it by manually doing it, or some other process?
Joseph Gozlan: I have a virtual assistant that helps me with this, but a lot of it is myself. We go sometimes down to the point where we actually look on Google Earth and take a look at the pictures of the property, because different counties have a different level of record-keeping. Some of them will call a multifamily a commercial building, and some of them will call it apartment, and some of them will call a commercial building a multifamily… So we have to constantly refine the list.
Joe Fairless: What type of seller financing did you get on that property?
Joseph Gozlan: That one was a great opportunity. We got in at about 15% down.
Joe Fairless: And how was it structured?
Joseph Gozlan: We have a 10-year term, 30 years amortization. Because of the low down, we have scheduled some equity payments over the next three years to kind of increase into the principal. I think it’s capped at about 6%. It’s tied to the prime, but it’s capped at 6%.
Joe Fairless: Okay. And the balloon payment or equity payment – that happens over the course of those 10 years… Is that because you proactively wanna do it, or was that negotiated in advance?
Joseph Gozlan: It was just negotiated, because I didn’t wanna put the whole 25% down ahead of time… So we negotiated 15% at the closing and another 10% in the first three years.
Joe Fairless: Okay. That’s great. This is inspiring for sure, for me and for other listeners. Let’s talk about the 102-unit in Lubbock. But before we transition to that, is there anything we haven’t talked about as it relates to the 22-unit that you think we should mention?
Joseph Gozlan: No, I think we’re ready to move to the 102.
Joe Fairless: Okay, 102. Tell us about that.
Joseph Gozlan: So part of this business is that the commercial real estate brokers – and I am one, so I can speak from the other side as well – it’s a probability business. If they have two buyers bringing offers and one of them is a first-time buyer and the other one has closed on thousands of units, there is a higher probability for you to close the transaction than the first-time buyer. Commercial brokers have mailing lists, they have shorter lists, they have short lists, and they have really short lists, right? And as they get to know you more and as they do more business with you, you advance through the ranks of those lists. So when a commercial broker gets a listing, first he calls his really short list; then if he can’t sell it there, he goes to the short list, and then he increases the circle of people that gets access to the property.
Once I closed on the 22, I started getting the “Oh, so you’re a closer… Come take a look at this, come take a look at that.” I was still not getting the best deals, but I was getting better deals.
The Lubbock property kind of came in through my property management company, because again, now they know I’m a closer, they’ve been working with me for a while; they had a property up in Lubbock, and the one that we bought was really bordering that one. They saw one of the brokers they’ve worked with in the past walking the property, and they called him in, said “Hey, what’s going on?” They said, “Yeah, the sellers are thinking about selling it.” They told him, “We’ve got the best buyer for you”, and we were able to kind of put it under contract before it ever went on the market.
Joe Fairless: And what did you buy it for?
Joseph Gozlan: That one was a 4.2 purchase price, with about $800,000 worth of rehab project, and that was the purchase. We had to raise 1.4 million dollars. We got Fannie Mae debt, which also included quite a large sum from the rehab budget into it, and it’s 102-unit. We’re still working on it. We closed at the end of May, and we’re still in the rehab process. It’s slower than we thought it will take, but within the margins of our expectations.
Joe Fairless: When you close on a deal of that size, after going from a 22-unit, what are some things that surprised you, or you weren’t necessarily prepared for, based on your previous experience with the 22-unit?
Joseph Gozlan: Property-related or process-related?
Joe Fairless: Both.
Joseph Gozlan: Okay, so I’ll start with the process-related… I did that as the syndication lead all by myself. I didn’t have partners or groups behind me, I just went out – friends, family, accredited investors, and I talked to a little over 150 people in order to get that equity raised. Two main insights… One – the equity raise piece was a lot harder than I anticipated. The other conclusion that derives directly from that is I’m not doing that again without a partner. Since then I’ve found a really great partner that is gonna come with us on our next transactions, and we’re geared up for the next one to make it a lot smoother.
Joe Fairless: And with the 102 units, what was the overall business model? Was it just renovations, putting in that $800,000 and then increase rents, and then refinance? Or was there something else?
Joseph Gozlan: We are geared toward a long-term buy and hold on that one. It’s in a great location in Lubbock. Lubbock is a fantastic market that is on a path of growth right now. The main driver over there is the university; I’m sure you know all about it if you’re gonna be there tomorrow. I’m gonna be there Friday, so we’re just gonna miss each other.
Joe Fairless: Oh, wow!
Joseph Gozlan: So the university alone brings about 1.2 billion dollars a year to the city. 300k people, so everybody thinks secondary market, but this is Texas-size secondary market. With the location of this property – it was great, it was one of the main streets that have a lot of traffic exposure… But a really unfair advantage with this entire purchase was our property management company. The company I work with, aside from the fact that they manage over 5,000 units and they’re 35 years in the business, they also manage five other properties in Lubbock, including one (like I said) that was literally bordering with that one. This really helped us tighten up our underwriting to the point where we knew exactly how much we’re gonna pay salary, we knew exactly what the maintenance costs, we know what the clientele is, what the demographic, what they’re willing to pay, what they’re not willing to pay. So it took a lot of the guesswork or the estimation work out of the equation for us in this purchase.
This property had great bones, it was just neglected on the outside. I’ll give you an example – we were doing the inspections, and all the exterior lights were out. At night, this property was pitch black. Now, when we were doing inspection around noon time, I see a nurse leave the property and go to work, so you know that nurse is coming back around midnight, 1 AM. Do you feel she feels safe coming in?
Joe Fairless: Not at all. I wouldn’t.
Joseph Gozlan: Exactly. Even just the risk of tripping down and falling. And do you think she walks around in the hospital saying, “Hey everybody, come live in my community”? No, she tells everybody to stay away. So that’s really where we like to pick distressed properties and transition them into a community, into a place where people want to come in. We’ve got specials for law enforcement, firefighters, EMTs and medical professionals and teachers – the kind of residents we want in the property. We’ll do events, parties, we’ll do — right now we have an ongoing contest going October, November, December… If you paid on time, five residents get drawn for movie tickets. It doesn’t cost us a lot to give that, but the residents enjoy the opportunity to get these things, and they feel there’s a community going on.
That nurse walks around the hospital and really says, “Come live in my community”, and not warning people about our community.
Joe Fairless: What is your best real estate investing advice ever?
Joseph Gozlan: That’s a good one. I stick to three basic rules for real estate, and it doesn’t matter if it’s a $20,000 house or a five million dollar apartment community. Those rules are, you make your money when you buy. That’s rule number one. I know everybody says rule number one is location, but for me rule number one is you make your money when you buy. Buy right, so you won’t get hurt. Real estate is cyclic; none of us has a crystal ball to know when it’s gonna turn, so make your money when you buy.
Rule number two for us is location, because that’s the one thing you cannot change about a property. And rule number three is buy for cashflow, because hope is not a strategy. For everything I’ve done in real estate, I stuck to those three rules. And yes, it’s frustrating, we have to let go a lot of opportunities that come across our desk, but if you stick to those, you won’t go wrong.
Joe Fairless: Are you ready for the Best Ever Lightning Round?
Joseph Gozlan: Yes, sir.
Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.
Break: [00:25:27].26] to [00:26:17].12]
Joe Fairless: Best ever book you’ve read?
Joseph Gozlan: Best ever book… I have a love/hate relationship with Rich Dad, Poor Dad. [laughter] It’s a great book, but it doesn’t warn everything that’s gonna happen in your way, so I’m gonna go with The One Thing by Gary Keller.
Joe Fairless: Yes.
Joseph Gozlan: Strong book.
Joe Fairless: Best ever deal you’ve done?
Joseph Gozlan: The Lubbock deal, no doubt.
Joe Fairless: What’s a mistake you’ve made on a transaction that you haven’t talked about?
Joseph Gozlan: That’s a good one. Putting it on the wrong corporate entity. Putting real estate on an S-corp is not really advisable, let’s just say that.
Joe Fairless: And obviously, you’re not a legal person, but what do you do for your other deals, instead of S-corp?
Joseph Gozlan: That really depends on the person and their personal situation. For us, it was wrong to put it on an S-corp. It might be right for somebody else. We use a series LLC right now, and of course, when you go to a syndication, each one of them is an LLC by its own.
Joe Fairless: Best ever way you like to give back?
Joseph Gozlan: Children’s Hospital. There is a medical Children’s Hospital in Dallas and in Plano, and that’s our favorite target for our charitable actions. One of the things that we do, for example, is every time I see great deals on Amazon, or decent deals, something like that, for just stuffies, toys, I will just buy hundreds of dollars worth of toys and I will just go over there and hand it over to the kids, and they love it.
Joe Fairless: Oh, that’s great. That’s good long-term benefit, and then also short-term as well, for everyone involved, yourself included. How can the Best Ever listeners get in touch with you?
Joseph Gozlan: Our website, EBGAcquisitions.com, is probably the best way. I’m also very visible on the multifamily forum on Bigger Pockets. E-mail, phone – I’m very easy to find, just google my name.
Joe Fairless: Well, you were very insightful, I’m incredibly grateful that you were on the show and talked about a couple things… One is just what you’re doing in the multifamily real, but two, how you’re doing it, and how you found your first deal, the 22-unit, and I love the quote – I hadn’t heard this phrase this way before, where it’s “Direct mail does not generate an opportunity, it puts you top of mind for when the seller wants to sell”, and that’s why you have to do it consistently. You didn’t say it exactly like that, I’m paraphrasing, but that’s the gist of it, and it really, really resonates with me, and I’m sure a lot of Best Ever listeners who might be doing some direct mail and might feel let down because they haven’t generated something, but you have to be consistent with it. And then just you getting on the phone and calling people and doing it time after time, that’s what generates deals.
Then coming across the seller financing structure, which allowed you to bring 15% instead of 25% down, and then structuring accordingly. And also with the 102 units, congrats on that, and best of luck as you implement that business plan.
Thanks for being on the show. I hope you have a best ever day, Joseph, and we’ll talk to you soon.
Joseph Gozlan: Thank you so much, it was an honor.
