February 15, 2018

JF1262: Investing and Managing In South Side Chicago with Jared Kott

Jared started in real estate 5 years ago. Now he has over 75 rental units of his own, and manages over 100 more for his clients. Jared prefers the south side of Chicago, which he says is an often forgotten area of the city. He has a lot of wisdom to share with us today with both investing and managing properties. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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Jared Kott Real Estate Background:

-Owner of Marblestone Property Group, a property management company

-South Side Chicago real estate investor, an often forgotten area of the city

-Has accumulated 75 rental units, over 100 under management in under 5 years with no prior real estate experience

-Has a long lasting relationship with Secure Pay One, whom they partner with

-Say hi to him at http://www.mpghousing.com/

-Based in Chicago, Illinois

-Best Ever Book: Never Split the DIfference

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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 fluffy stuff. With us today, Jared Kott. How are you doing, Jared?

Jared Kott: Joe, I’m doing great. Thanks so much for having me.

Joe Fairless: Well, that is great to hear. It’s my pleasure, and I’m looking forward to diving in. A little bit about Jared – he is based in Chicago, on the South side of Chicago. He lives where he invests. He has accumulated 75 rental units, he’s got over 100 under management. He also manages his own stuff, as well as for other people. He’s the owner of Marblestone Property Group, which is a property management company, which I’ve just mentioned. With that being said, Jared, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Jared Kott: Sure, Joe. I started in real estate just shy of five years. Prior to that I was a corporate guy, working in downtown Chicago for some insurance firms… And unbeknownst to me, I bit off a little bit more than I could chew, I was fired, I was too proud to go back, and at that time in 2013 I spent a lot of time looking for deals but never had the courage to actually go out and invest myself. So I looked at this as just a perfect opportunity to jump in.

So I jumped in in February 2013, started absorbing every piece of knowledge, from books, podcasts, local REIA’s, relationships – anything I could use to learn about real estate, because I didn’t have much going on when I got fired. That’s kind of how I got started.

I worked for a guy for free for about 4-5 months, and learned a lot… He owned a management company and I learned a lot about how I didn’t wanna run a company, after about 60 days working with him.

I purchased the first unit – that was like 5th August, 2013. $25,000, Joe. A $25,000 brick two-flat on the South side of Chicago. I still have it.

Joe Fairless: Okay. Obviously, a couple questions and then we’ll keep rolling. One is you said you bit off more than you could chew so you got fired; what did you get fired for?

Jared Kott: We just didn’t see eye to eye. I think it was more of my personality of a guy that kind of — I just don’t sit back; I’m a driven guy that kind of likes to rock the boat, bring new ideas, and the company I was with at that time was more structured, “Let’s follow every procedure to a T”, didn’t like new ideas… And they just said “Hey, do you know where conference room B is?” and I knew that was my time being on that chopping block. [laughter] But it was the greatest thing that could have ever happened to me really, and [unintelligible [00:04:38].08]

Joe Fairless: [laughs] That’s funny. Alright… You said you got started by reading books, you worked for a guy for free… I think you mentioned how long, but I was trying to take notes and I didn’t catch it. How long did you work for someone for free?

Jared Kott: I worked for this guy for about four months. I met him at a REIA, exchanged some business cards and contact info and stuff, and I said “Listen, I have a lot of time on my hands. I’d love to learn the business.” I think he threw it out there he’s looking to train guys, and stuff like that… So that’s kind of how I made that introduction, and I remember — I didn’t have a car at the time, I had a Harley Davidson, and I rode my motorcycle down to one of his properties and met him… And it was crazy – there was like stickers on the door, the place just looked completely run down. He was banging on the door to get some rent, and I said “Man, I don’t wanna operate my business like this, but I could sure probably learn a couple things.”

Joe Fairless: You did that for four months… What were your responsibilities during those four months?

Jared Kott: It was more kind of just like — and I work well like this, Joe… I was like thrown into the fire. I was delivering five-day notices, calling tenants for back rents, updating utilities with the water companies and stuff like that. Looking back, it was a really good exposure, because sitting in an office you don’t know these things that you have to do to manage properties on a day-to-day basis… You know, the proper way to do it.

Joe Fairless: You said that you learned some things that you wouldn’t apply towards your business now… What are the things that you learned that you don’t do?

Jared Kott: Well, this is the key – there were zero processes in place, and when there’s zero processes in place, it’s chaotic all the time. Absolutely chaotic. So what I decided at that time was I needed to be able to create processes fairly quickly, so when I jump off on my own to start this, that I can scale, I can repeat, there can be consistency… Because there was none of that in my experience with this guy.

Joe Fairless: Now you’ve got over 100 properties under management… Tell us about the internal process structure that you have set up with your business now.

Jared Kott: Really good segue. So one of your past guests, Linda from Secure Pay One – I got to know her about two years ago… And I thought I had some processes in place, and they were decent, but it’s just not my skillset. So what we currently do now – we have a relationship with Secure Pay One, so all of the backroom stuff is done through Linda and her team… So the write-ups of the leases, all the data that goes into our management system – we use Buildium – all the rents that go in… All of that backroom stuff is done not in-house, not in our office, it’s done with Secure Pay One. That leaves us to be able to focus on boots on the ground, relationships with the clients where needed, sourcing more deals, bringing more management opportunities in the door.

Joe Fairless: For me to understand the business relationship more in terms of responsibilities, you said it allows you to focus on relationships with the clients and boots on the ground… So what are the boots on the ground doing from a management standpoint?

Jared Kott: Well, this all started in Chicago, if I paint it with a broad brush. It’s not the easiest place to manage properties. There’s just a lot of activity – people hanging out a lot of times on the larger units (three, four bedrooms), you have to do quarterly inspections just to stay up on the tenants… It’s just a very, very high touch, so we like to be visible, and we’re very clear with our tenants when we go through the interviewing process and the leasing and things like that, that we will be around. We’re not a hands-off operation where you just sign a lease and send the rent checks into the office. We don’t operate like that; we will be around.

So we do a lot of that… It’s the sixth of the month today, and there’s a couple folks in the portfolio that are late, so today that’s what our stuff is out there… Getting to five days out on the sixth. We’re just really on top of the things that [unintelligible [00:08:50].05]

Joe Fairless: Now let’s talk about 75 rental units… You started five years ago – how much money did you start with when you were buying deals?

Jared Kott: I had a small retirement account. I looked at it as it was liquid; I would have done things completely different now, learn some different strategies with investing with IRAs and things like that, but… I started with 250k, and I was just draining my 401k. It was basically everything I had, right? So I was taking it from the 401k, I was buying assets at the time for 20k-25k, putting 30k-35k into them, and then refinancing them.

I also had a small HELOC from a condo that I owned downtown, which was good… And things were great, until two things happened. One, I ran out of money. I saw the light at the end of the tunnel, that I was gonna run out fairly quick. And then two, I didn’t pay tax on any of that money, so I got a nice bill from the IRS. It was just a lack of knowledge.

So when I started to realize… I think I had like 10-12 units, Joe, at the time, so there was no debt, money was coming in and it was okay, but it was like “Who wants to stop at ten”, right? You’ve gotta keep going. So I went to a bunch of different banks… Remember in 2013, 2014 we were still bouncing off the bottom in terms of pricing here on the South side of Chicago, and not having a W-2 job made it really difficult for me to get financing to carry on. So I went to 21 banks, and I had a pretty decent plan put together…

Joe Fairless: What was it?

Jared Kott: What was the plan?

Joe Fairless: Yeah.

Jared Kott: It was like a 24 months rinse and repeat, sort of the BRRRR strategy before it was coined that… And all the banks loved it, but they said “You’ve only been doing this nine months, you don’t have a W-2 income anymore… Come back to us in a couple of years.” And I was like “I don’t have a couple years. I’ve gotta keep this train moving.” So I ended up hooking up with a local lender, a higher interest REIT; I wouldn’t say hard-hard money, but it certainly wasn’t soft… And they gave me a line of credit, so I pledged my assets and then from there I bought ten more, and went to a community bank that all the while I had been nurturing a relationship with, a local community investment corporation, and then they took me out. Since then, we’ve been just rinsing and repeating back and forth. It’s been a nice relationship.

Joe Fairless: What are the terms?

Jared Kott: Double-digit, like ten and two, so you’ve gotta be really, really good at your process on construction. We can’t be sitting on these things too long; we have to get in and get out of them… But certainly want to rent it up. My play down here is it’s all about high cashflow. What it’s worth on paper to me is not nearly as important as the monthly cashflow, so that certainly can cover that service.

Joe Fairless: On average across your portfolio, what does one unit cash-flow per month?

Jared Kott: Just under $400.

Joe Fairless: $400. And that’s post-renovation, correct?

Jared Kott: Yes, correct.

Joe Fairless: Okay. So your model is you buy for cashflow, and maybe it depreciates, maybe it doesn’t, but the cashflow is the main thing… And is a typical deal about a 25k purchase, put 30k all-in, and then rent it out and cash-flow the $400?

Jared Kott: Yeah, that’s the model. Now, things are beginning to change. The assets that you could buy for 25k-30k are now in the $50,000 range, and rents certainly aren’t in line with the increase on that… But there’s still significant play for cashflow, but it’s not what we’re used to seeing, hence why we’re slowing down a little bit, and growing the management and really continuing to tighten up these processes, because — I don’t know; I don’t have a crystal ball, Joe, but I do think something is gonna change… I don’t know what or when, but I just kind of — and again, I haven’t seen a full cycle, so I may be way too early making this assumption, but it just seems to me like prices are a little bit out of line.

I’m seeing stuff in our local market, apartment buildings where some off-shore money is coming in and purchasing stuff for 80k-90k a door. At that, you’re gonna be cashflow-negative, so to me it doesn’t make sense; I’m gonna sit back for a little bit.

Joe Fairless: If a project does cash-flow the $400, but you’re paying more for it than you were previously, would you still buy it?

Jared Kott: Yes. Depending on the location and the deal, yeah. I’m never gonna turn away a deal, but it’s gotta be a deal, it’s gotta cash-flow.

Joe Fairless: Cool. It’s incredible what you did with $250,000 five years ago… How much was the HELOC loan?

Jared Kott: The HELOC was just under 100k… It was like high 80’s, so that I can move around.

Joe Fairless: Alright. So under 350k, about 330k…  You basically took 330k and in five years you now have about 330k in annual cashflow as a result of it, right? Because $400/month per property, times 75 properties, that’s 360k cashflow/year.

Jared Kott: Yup.

Joe Fairless: And would you say it’s just through the tried and true you buy a place, you renovated it, you’re refinancing into a loan and then you’re taking that cash back out and put it into a new deal that cash-flows? Is that basically the model?

Jared Kott: That’s it. Yeah, it’s like a see-saw. The line of credit will go up, and then the permanent debt will take it out, and it’s back and forth, back and forth, back and forth.

The only issue that we currently are running into is with our local bank. And it’s not really an issue, it’s just kind of like as you evolve, you go into uncharted waters… We’ve hit a ceiling cap in terms of debt with them, so we have to refi out of them now to get more relief, to be able to continue that cycle if we choose to do it. But I do think in the future that our model is gonna be more towards scaling up in the larger buildings.

These assets, single-family homes, 1-4 units – they’re great, they cash-flow like crazy; as we’ve touched on earlier, there’s a  lot of high touch and a lot of just administrative work for it. If you have 50  properties — let’s just say you have 50 properties and they’re all two-flats, so you have 100 units. That’s 50 grass to cut, 50 water bills, that’s 50 rent checks… I mean, it’s 100 rent checks, but you get the point – there’s so much of it, where if we can get more doors under one roof, I think that’s our next move.

Joe Fairless: You told me before we started recording that you listened to podcasts, so maybe through that you just — through your experience and my questions, you’ve basically stalled my question… You answered this; perfect, thank you for that. And that was, I’m sure a lot of listeners have a similar goal of “Hey, I’ve got some money”, whether it’s 330k, like you had available, or whether it’s 100k or 50k or 10 million (I don’t know), whatever it is, but “I’d like to take that money and turn that into that amount of cashflow in five years”, and that’s exactly what you did – you took the money you had to invest, and in five years, boom, now it’s actual cashflow… So what suggestions would you give a listener who wants to replicate what you did and maybe some cautionary things along the way we should watch out for.

Jared Kott: Let’s use round numbers. If you can get 300k, I would probably find the right partner and try to get it to 600k. I think that partnerships can really get you to the next level quick. If that’s not the road you wanna go, I think that leverage is your answer. Start now developing relationships with your lenders, your bankers, your private investors. It’s very difficult to go to somebody and say “Hey, I have this idea, let’s make this happen” in terms of institutional money, right? If you can begin it early, start and put a couple deals together and continue to leverage up, I think that’s probably the quickest way to do it.

Or some guys – I didn’t go this route – just swing for the homerun on the first one. I couldn’t put all those pieces of the puzzle together, so the way that I started was “I’m gonna do a two-flat, and then I’m gonna do another two-flat to make sure that this one wasn’t just a gimmick.” Then I did a four-flat, and then I sought a few single-families… I think there’s a lot of ways to do it, but I think the ultimate answer here is it’s all about relationships… Relationships and action – that’s the way to make it happen. And don’t wait. I got fired on a Friday, and I literally signed up for a week-long training session on Monday.

Joe Fairless: Which one was it?

Jared Kott: It was a property management program for community investment corporation (CIC), which is here at a local college. Then there was another guest who actually I’m buddies with out in Virginia, Jim Ingersoll, and he had a Bank Elimination Blueprint program, him and Daniil Kleyman, and I bought that thing for $500; there’s 100 hours of content and it’s amazing. If you don’t have a job, you have a lot of time, and I just absorbed all that stuff that I could.

And don’t be afraid to ask questions. Anybody who’s listening now and just trying to get into this, and “How do I break through?” and “How do I get started?”, “How do I make this happen?”, ask people. Nobody was just born with all these answers.

Joe Fairless: How good are you at swinging a hammer?

Jared Kott: I’m horrible.

Joe Fairless: You’re horrible, okay. So you’re not a handy guy.

Jared Kott: No, not at all.

Joe Fairless: Alright, what role did you have in the renovation process at the beginning and now?

Jared Kott: My role in the beginning was — I also wanted to learn, right? That’s why I worked for that guy for free. So I would talk to the guys who were on the job sites during some — because there was a construction arm that was construction arm that was going on… And I would ask them, “Hey, how long is this gonna take? I’m not your boss, I’m just curious… How long is this gonna take to frame this up? How many sheets of drywall is 500 square feet?”

Then I would go to Home Depot and I would look at how much is a piece of drywall, how many sheets is it gonna take, and then I would know the time. Then I would ask that question, like Grant Cardone says, 10x. I would ask ten people the same thing, over and over, to see if I’m in that same realm. So that’s kind of how I began to do it, and now what I do is I just deal with referrals and relationships and guys that I trust to get things done.

I’ve done some demo work on days where I was frustrated, but I’ve never–

Joe Fairless: After you went to conference room B?

Jared Kott: Yeah, exactly… [laughs] But I’m just not a handy guy.

Joe Fairless: Well, that give encouragement to everyone out there who is not a handy guy or gal, that’s for sure, but wants to replicate this process.

Jared Kott: Sure. And again, get the systems down. Every city has probably got some weekend course on construction management, or something like that. Learn the basics, because it’s important to know the basics. I’m not saying you have to know how much a piece of drywall costs, but you should know about some pricing in the beginning, and then you can get project managers and things like that to kind of take it over… But you just don’t wanna get taken for a ride too early.

Joe Fairless: What is your best real estate investing advice ever?

Jared Kott: Start now, and when you make mistakes – because you will – everything and anything is fixable. Don’t freak out.

Joe Fairless: You mentioned something earlier I’d love for you to elaborate on – you said you had a small retirement account, knowing what you know now, you would have done things differently. What would you have done differently?

Jared Kott: I would have had the 401k transferred – and please, to the listeners, I’m not an expert at this, so I’m just telling you what I would have done, but I would definitely sit down first with an accountant to make sure that it was the right way to do it… I would have taken the 401k, put it into an IRA, and then I probably would have found somebody with a similar account balance that was willing to lend back and forth at very low interest rates, so we can continue to move money back and forth. We do do some stuff now. But I just wouldn’t have withdrawn it like it was an ATM; it was one of the worst mistakes I could ever make.

Joe Fairless: Why?

Jared Kott: Because it was like a $50,000 bill, if not more.

Joe Fairless: At the end, when you weren’t expecting it?

Jared Kott: Oh yeah.

Joe Fairless: That’s fun.

Jared Kott: Yeah, it sure is… But it’s one of those things, Joe – you make that mistake and it will never happen again.

Joe Fairless: You won’t make it again!

Jared Kott: That’s right, we’ll not make that one again.

Joe Fairless: What did you do to make sure that didn’t happen again?

Jared Kott: Well, I don’t believe in the markets anymore, so I put my money into cashflow real estate… So I won’t have to worry about that anymore.

Joe Fairless: Are you ready for the Best Ever Lightning Round?

Jared Kott: I’m ready!

Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.

Break: [00:22:08].13] to [00:23:02].19]

Joe Fairless: Okay, best ever book you’ve read?

Jared Kott: I’m reading it now, Never Split the Difference, Chris Voss.

Joe Fairless: Boy, that’s the second time today I’ve heard this book mentioned, and I bought it after — I haven’t read it, because I’ve just bought it, but after the person mentioned it on the last interview I said “I’m gonna buy it as soon as the interview is over”, so I’m looking forward to reading it.

Jared Kott: Awesome.

Joe Fairless: Best ever deal you’ve done – not the last one and not the first one… One of the in between.

Jared Kott: Sure. I offered a guy $20,000 on a four-flat, he didn’t wanna take it, and I noticed he had a Las Vegas ball cap on, so I was talking to him and it was him and I doing kind of a direct feel sit-down, and I said “What else do you like doing besides hanging out in the neighborhood?” and he goes “I love Las Vegas.” And I said, “How about this – how about I get you a limo and some plane tickets and a hotel around $12,000 or $15,000 for the house?” He goes “You know what, that might work.” The whole thing, Joe, came up at $19,000, but it was… It’s perception, so… Yeah, he took it, and we did it. [laughter] Yeah, Vegas four-flat, baby.

Joe Fairless: Wow. How much does that make you a month?

Jared Kott: [unintelligible [00:24:17].23] $4,300.

Joe Fairless: Do you have debt on all your deals? I guess you do, because you do the cash-out refinance on them…

Jared Kott: Yeah, I do.

Joe Fairless: Okay. And that’s what you were saying earlier, where you’re about to reach a limit?

Jared Kott: Yeah.

Joe Fairless: Okay. Who do you have the debt with?

Jared Kott: I have it primarily with one bank, the commercial lender here, a community investment corporation.

Joe Fairless: Okay, just a local bank…

Jared Kott: Local, yeah. They’ve been around for like 30 years. Again, I try to deal with experts in the field, so this is what they do – they work in somewhat distressed neighborhoods and they lend to owner-operators.

Joe Fairless: What’s a mistake you’ve made on a transaction that we haven’t talked about already.

Jared Kott: I make them all time. I think my personality is — if you look at the disk, I’m [unintelligible [00:25:03].05] so a lot of times I don’t think through things as clearly and as detailed as I should… So I guess my mistake is I’m all gas, no break… Which can be good.

Joe Fairless: [laughs] Can you think of a specific example where that’s burned you?

Jared Kott: Yeah, I hired somebody about three months ago, and I had to let them go two weeks after… It was just because I shouldn’t be in charge of hiring. I was like, “Can you fill this role?” “Yeah.” “Okay, let’s go.” And then I just said “I’m really sorry, I made a big mistake here. It’s not you, it’s me.” I know it sounds like high school dating, but this is all me.

Joe Fairless: Because you just assumed that people will have the same type of drive and attitude as you have who you hire… It’s like “Okay, you say you can do it? Alright, you’ll do it…” and not everyone’s like that.

Jared Kott: Exactly.

Joe Fairless: Best ever way you like to give back?

Jared Kott: I try to mentor some men and women, mostly guys who are looking for a better way of life; I try to give them advice and spend time with them using real estate as a vehicle that can get them out to the next place that they wanna be if it’s not where they currently are.

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

Jared Kott: Check out our website, mpghousing.com. You can check us out on Facebook at Marblestone Property Group, and there’s a bunch of links where you can reach out to us. And if you’re in the Chicago area, we’d love to talk to you.

Joe Fairless: Mpghousing.com, that is also a link in the show notes page. Jared, thanks for being on the show and talking about your last five years. You $330,000 in five years, it now brings in $360,000 cashflow, and doing it through the renovation process of a home, then you refinance, take that money, put it into something else and continue to rinse and repeat… Scaling along the way, lessons learned, process approach – all good stuff.

I really appreciate you sharing some insight and your story with us. I hope you have a best ever day, my friend, and we’ll talk to you soon.

Jared Kott: Joe, thank you, man. Keep up the great work! Talk soon.

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