Anthony read Rich Dad, Poor Dad while in a network marketing company and was hooked on real estate. After more research, he knew he wanted to acquire multifamily properties. In order to learn the business he became an apartment broker and is now purchasing properties with a focus on value-add. Hear what it takes to go from nothing to buying value add multifamily deals. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Anthony Palmiotto Real Estate Background:
- Managing partner of Odyssey Real Estate Group
- Acquires value-add multifamily properties throughout New Jersey and surrounding areas
- Focuses on repositioning assets through better management and property renovations
- Based in Tom’s River, New Jersey
- Say hi to him at odysseyrealestategrp.com
- Best Ever Book: Rich Dad, Poor Dad
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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, Anthony Palmiotto. How are you doing, Anthony?
Anthony Palmiotto: Doing great, Joe. Great to be with you.
Joe Fairless: Nice to have you on the show. A little bit about Anthony – he is the managing partner of Odyssey Real Estate Group. His group acquires value-add multifamily properties throughout New Jersey and the surrounding area. He focuses on repositioning the assets through better management and property renovations. Based in Tom’s River, New Jersey. With that being said, Anthony, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Anthony Palmiotto: Sure, absolutely. So I did grow up in central New Jersey, born and raised, went to school in New Jersey – the College of New Jersey, actually. While I was there, I got involved with a network marketing company, and during that time somebody introduced a book to me called Rich Dad, Poor Dad, and probably just like many of your listeners and guests on the show, you read that book, it flips a switch… I realized that everything I had thought about business internally was kind of put into print, and I later read other books and decided I wanna manage apartment buildings.
From there, I kind of had a choice and wanted to figure out what I wanted to do, and I thought “If I’m gonna buy apartments, I need to figure out a) how to do that, and b) how to get the money to do that”, at the time not realizing about syndication. So I looked at it as I can either get a job as a property manager and learn the business that way, or maybe get a job as a multifamily broker, end up learning the business that way as well. I opted for the latter, being that I had an aptitude for sales already.
As a broker, I began listing and selling apartment buildings and learning the business. After a few years, I started buying my own deals, and we’re now up to the three properties, 15 units, but growing pretty quickly, and we’ve just closed on our most recent purchase just a few weeks ago.
Joe Fairless: Great, congrats on that latest purchase. What did you buy?
Anthony Palmiotto: Most recently we bought a 10-unit apartment building in a town called New Egypt, New Jersey. We bought it direct from the seller, and via direct mail is actually how we sourced it.
Joe Fairless: Really? I thought there are no deals at all in such a hot market across the United States, and you just can’t find any deals.
Anthony Palmiotto: If you listen to most people, that’s probably what you would think… And being in New Jersey, everybody says “Oh, the cap rates are so tight”, and as a broker I know that many deals do trade at 5%, 5,5% cap rates, even sub 5% cap rates in certain cases… But if you’re willing to put a little bit of work in – and we just did one direct mail campaign – we were able to buy this 10-unit building. And believe it or not, on real numbers it was a 10% cap rate, so… Fantastic deal.
Joe Fairless: [laughs] Wow, and it’s also a value-add deal?
Anthony Palmiotto: It’s also a value-add deal. The rents on each apartment are probably on average about $200 below market.
Joe Fairless: Wow. And how much do you need to put into the units in order to achieve that $200 premium?
Anthony Palmiotto: As I said, we just purchased the property about two weeks ago, so we haven’t put our plan into place yet, but we’re budgeting probably somewhere between $7,000 and $8,000 per apartment, and $200 is actually pretty conservative; some of the rent pops might be as much as $250 or more.
Joe Fairless: Did you buy this with your own money, or did you bring in partners?
Anthony Palmiotto: We actually were able to purchase this with our own money, as if it wasn’t already a pretty good deal; we actually were able to get the seller on this one to hold the first mortgage, which made the deal much easier and much better, from our perspective.
Joe Fairless: Will you elaborate on what holding the first mortgage means?
Anthony Palmiotto: First of all, we found him through direct mail… And as we expanded dialogue with this seller, we came to an agreement on price, and I basically said to him “Would you be interested in holding the first mortgage?” meaning “You be the bank, I’ll put a down payment, and then make payments to you.” Most people would initially think that there’s really no reason to do this on the seller side, because he wants to get paid now and done with the deal, but there are a few reasons that you would.
Number one is that it makes it much simpler, in that there’s no bank involved. Number two is that you don’t have a particularly big capital gains tax to pay right this second, because you’re getting paid over time, and number three – this seller was an older gentleman who originally built the buildings, so what this was gonna allow for him is to still receive cashflow from the property, but not have to actively manage the property anymore… So when I kind of laid it out for him in those terms, it seemed like a good idea to him and his brother who is his partner, and they agreed to do it.
Joe Fairless: What were the terms?
Anthony Palmiotto: The brother was not really on board for doing this for the long-term, so we ended up doing an 18 months note at 4%, with a 20-year amortization. That worked out just fine for us, because in today’s world with interest rates rising, we decided that we’re gonna go ahead and refinance immediately, and go to a traditional lender and try to pull cash out of this property.
I actually have a terms sheet sitting here on my desk, and we got fantastic terms. While we were able to use the seller financing to acquire the deal and close quickly, we’ll now put some permanent commercial financing on it, get all of our money back and then some more on top of it, which could be great for us to go out and buy the next deal.
Joe Fairless: Any pre-payment penalty on the seller financing?
Anthony Palmiotto: No, we were pretty particular about making sure that was not in there, knowing that we were probably going to refinance rather quickly… So I actually just got terms from the bank for a seven-year note at 4,25%, but they’re valuing the property at $900,000 based on our numbers, and are willing to lend about 75% of that. So all in all, everything just kind of fell into place on this one.
Joe Fairless: That’s great. What did you buy it for?
Anthony Palmiotto: We ended up paying $500,000, which again is amazing, considering its very routine in New Jersey for properties to sell well over $100,000/unit… And if you just scratched the surface and took a closer look at LoopNet, you would probably think that to be true, but if you go the extra step and you do some direct mail, you can find good deals. So not only did we pay 500k, we put about 125k down, which we’ll get back in the refinance, and then we’re looking at maybe another 175k cash-out on top of that… Plus, we still have the value-add component to the deal, which we’ll implement over time.
Joe Fairless: That’s incredible… Let’s dig into how you got the deal. You mentioned direct mail – can you provide some more context around that?
Anthony Palmiotto: Sure. Direct mail is always pretty intriguing to me. I had heard guests on your show and other places talk about the success they’d had with it, but what I’d noticed is that most people doing direct mail are targeting single-family homes, so I just figured “Why not do the same thing to source deals, but just target multifamily homes?”
So I just downloaded the property records of the state website for a few counties in central New Jersey, and pretty much took the assessed values of properties that would be in the size range I was looking for, and just mailed them yellow letters.
I only sent out about 350-400 letters, that matched my parameters… And the really interesting part was that it’s commonly said in the direct mail space if you get a 1% or maybe a 2% response rate, you’re doing a pretty good job. We actually got something like a 5% response rate. I think the reason is we had a nice mail piece, and it looked good and it definitely got people to open it… But these people who own multifamilies, they don’t get direct mail.
If you ask anybody who owns a property that they don’t live at and it’s a single-family home, they probably get these letters all the time, whereas these multifamily owners do not. So I think it definitely caught their attention in that respect, and that’s why we probably got 15 or so calls off this one mailing.
Joe Fairless: That’s incredible. What did the yellow letter say?
Anthony Palmiotto: I don’t pretend to be the smartest person in real estate and there’s no reason to reinvent the wheel a lot of times, so… I literally just googled for examples of yellow letters, and what I actually did was I printed on yellow copy paper, I printed a template in Microsoft Word with lines on it, so it kind of looked like line paper… And more or less it just said that “I’m a local real estate investor looking to expand my apartment portfolio; I’m interested in paying you the highest and best price for your property, we can close quickly, and I look forward to hearing back from you.”
I’m paraphrasing a little bit, but that was really it.
And I did do a couple things that I think helped the letters opened – even though I printed all the letters and didn’t handwrite them, I did write CALL ME in big red letters by hand on each letter, just so there was a personal touch to it. And then as far as the actual envelope itself, this was a pretty good trick, I thought – rather than printing the envelopes and not being personal, or at the other end of that spectrum handwriting 400 envelopes, which is very time-consuming, we printed address label stickers, but we put them on a little bit crooked and just highlighted the guy’s name or the woman’s name who owned the property in yellow highlighter.
The fact that it was a little crooked and a little off – I think that got a really good response rate, and next thing you know, we found a deal from it, so… I guess it works.
Joe Fairless: The takeaway is when we do direct mail, do something so that it doesn’t look like a robot is sending it to them.
Anthony Palmiotto: Exactly. I think if you use the window envelopes, it looks like a bill or something, so you want to make it look like it came from an actual person.
Joe Fairless: Wow, that was really helpful. Thank you for sharing that. And the deal itself, that’s a 10-unit… Now, you said you have three properties, 15 units, so I imagine this 10 is part of the 15, is that right?
Anthony Palmiotto: That’s correct. Our first property was actually a single-family home that we rented to students, and I’m 50/50 on these properties with my partner… But we didn’t have a lot of cash to get going when we first started, and in New Jersey properties are much more expensive than in other parts of the country, so what we could afford was a single-family home that we rented to students, and we figured that was kind of like managing an apartment building. That was a great deal for us.
Once we did our first deal, that was super important, because it was a proof of concept; we knew we could do it, so we just then went on to a four-family house, and then later the 10-unit.
Joe Fairless: You mentioned it was your first direct mail marketing campaign, but how long were you looking for deals prior to sending out that direct mail campaign?
Anthony Palmiotto: That’s a great question. There’s plenty of deals out there; they’re not necessarily good deals. We had spent — I think May of 2017 we closed on our four-unit property, and again, we thought that was a pretty good deal and we were ready to go bigger… So starting that summer (2017) to spring of 2018, about nine months, we had our eyes out for a good, small multifamily deal, and there really wasn’t anything out there that was gonna generate the type of returns that we were looking for… So really nine months of nothing, and then within two weeks after sending out a direct mail campaign we had a deal.
Joe Fairless: How many direct mail campaigns have you sent out since that first one?
Anthony Palmiotto: Honestly, I got a deal off the first direct mail campaign, so we went through the process to close that deal, and now we’re going through the refi, and I actually have not sent out subsequent direct mail campaigns yet, because now we’re going bigger, and we’re gonna have some cash out, and some more capital, and probably raise money for the next deal… So we’re gonna have to retool the parameters for the next direct mail campaign, and hopefully we’ll be doing that probably within the next few weeks… But one campaign and one deal I think was a pretty good success rate thought.
Joe Fairless: Absolutely. During those nine months between your four-unit and finding the 10-unit, what were you doing to look for properties?
Anthony Palmiotto: We did a couple things. I still am a multifamily broker, it is my day job, so I kept an ear to the ground… I sell buildings in Philadelphia and Southern New Jersey, so I just kept an ear to the ground for properties that were in central New Jersey, which is not where I list buildings, but where I was buying buildings.
I did check out things that were on LoopNet, and just networking events, trying to find out who might have deals or who was selling, or anything like that. I didn’t really come up with much; there were a lot of deals to be looked at, and nothing really that was too appealing, to be honest.
Joe Fairless: In terms of the team that you have in place for this 10-unit property, how are you gonna execute the business plan?
Anthony Palmiotto: That’s a great question. So right now, as I said, my partner and I are 50/50. I’m a very sales-oriented, go-go-go type person, he’s the CPA, he’s a little bit more conservative, so we have very complimentary mindsets and skillsets, I think… So really as the units turn over, we’re gonna implement property renovations. We do have one part-time maintenance worker, and some additional help – family, friends and such – but it’s at a point now (which is kind of exciting) where we can start building out a team, and this is probably a spot where a lot of people who are in our position, who have a few properties, where to scale from here you kind of start needing to have more of a plan in place.
We do have some part-time help, we do have some friends of the family who are contractors and such, and we’ll have to grow that side of the business to be able to efficiently renovate units and bump rents and expand the portfolio.
Joe Fairless: New Jersey is a tenant-friendly state, right?
Anthony Palmiotto: Yeah, I was gonna say, very tenant-friendly, absolutely.
Joe Fairless: [laughs] Yeah. Any unique challenges because it’s a tenant-friendly state when implementing a business plan for a value-add deal?
Anthony Palmiotto: There are certain challenges… The one thing that’s gonna affect all deals, whether it’s a value-add deal or not, is that if you have a tenant who doesn’t pay, it can be a very difficult process to get somebody out. In certain states it’s done in a matter of weeks. In New Jersey, it’s always gonna be months typically, and it’s just something you’re gonna have to factor into your turnover and factor into your numbers when analyzing deals.
On the other end of the spectrum, there’s good and bad, because New Jersey – especially in Central and Northern New Jersey – the vacancy rate is probably as low as it is anywhere in the country… So there is good and bad, but it’s just something you’re gonna have to factor in upfront, knowing that for bad debt and things like that it’s gonna be a longer and tougher process to manage in terms of getting the tenants out.
Joe Fairless: When you’re underwriting, how do you factor that in?
Anthony Palmiotto: Even though vacancy rates in New Jersey might be 2%, 3%, I’m still underwriting deals with vacancy rates maybe double that, because even though there’s ready and able tenants to rent your property, those units are gonna be stuck not producing rent if you have a tenant that stops paying, and it’s gonna be down for 2-3 months where there’s no income generated. So it’s just more conservative underwriting on what your income is actually gonna be from that property, and the additional legal expense required to deal with situations like that. If you do that upfront, you’re pretty well prepared for it when that inevitably does happen.
Joe Fairless: Based on your experience, what is your best real estate investing advice ever?
Anthony Palmiotto: I would have to say that you need to have a specific focus. I think a lot of people that I’ve worked with in the past or have talked to wanna chase the shiny object, and first they wanna flip, then they wanna wholesale, then they wanna buy apartments, then they wanna do note investing… It’s my opinion that maybe you should get really good at one particular thing, and then maybe later on if you wanna branch out, do that. But get really good at one thing first, and then branch out.
And I guess the second thing I would say is just take action. Even myself, I could have done this earlier; you’d be surprised what you can do if you just start. Most people analyze things way too much and never actually get around to doing a whole lot of anything.
Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?
Anthony Palmiotto: Let’s do it!
Joe Fairless: Alright. First, a quick word from our Best Ever partners.
Break: [00:16:18].18] to [00:16:58].27]
Joe Fairless: Best ever book you’ve read?
Anthony Palmiotto: Best ever book would be The ABCs of Real Estate by Ken McElroy, or maybe The 10x Rule by Grant Cardone.
Joe Fairless: Best ever deal you’ve done that wasn’t the last one, that 10-unit? Some other deal.
Anthony Palmiotto: I would say probably my first ever deal – it was a single-family home that I rented to students. We bought the property for $180,000 and it’s now generating about $2,850 a month in rent. It’s an absolute cash cow. But more importantly, for us it was a proof of concept that just taking action and getting a deal works, and if you just follow the blueprint of people who have been successful, you can do it yourself too. It’s not too terribly difficult.
Joe Fairless: 2050 – is that $2,050 in rent?
Anthony Palmiotto: I’m sorry, $2,850.
Joe Fairless: Oh, that is a cash cow! [laughs] I did the $2,050 and that was a 1.1%, and then this one is 1.5%. I know you know what I did, Anthony, but Best Ever listeners – and most of you know – is I took the monthly rent and divided it by the all-in price, and you tend to want that to be somewhere between 1% and 5% ideally. They say 2%, but I very rarely interview people who get the 2%.
What’s a mistake you’ve made on a transaction?
Anthony Palmiotto: A mistake I’ve made… Maybe more generally is probably just taking too long to start. I definitely had some deals that came up and passed by; I did not execute on them, just because I felt like I wasn’t ready, but in hindsight I was definitely more than ready. Then maybe when I did start, probably starting too small. I think we’re capable of much more than we realize. You should start where you’re comfortable, but typically you could be more comfortable doing bigger deals if that’s what you’re ready for, right off the bat. I think that 10-unit could have been my first deal, if I was going back to do it all over again.
Joe Fairless: How much did it cost monetarily to send out the direct mail from start to finish?
Anthony Palmiotto: The cost of postage was probably something like $200, and other supplies – let’s just call it $250, and then whatever you value my time at… But actual cash out of pocket – call it $250. And given the fact that the bank is valuing this building now at $900,000, we made $400,000 of equity day one when we closed… So I would say investing $250 to do that, it was a pretty good deal.
Joe Fairless: Just a couple follow-up questions… A 10% cap on — I assume those are the trailing 12 financials?
Anthony Palmiotto: Unfortunately, and this is gonna happen a lot when you’re dealing with smaller apartment buildings and these mom-and-pop type owners – he doesn’t have sophisticated financials, so I was kind of piecing together what he did have, and thinking averages over the past 12 months… But I did have, for the most part, trailing 12 numbers. And yeah, we’re looking at a $51,000-$52,000 net operating income, so just North of a 10% cap.
Joe Fairless: Why did he sell it for $500,000 if a couple weeks later — you said it closed a couple weeks ago, right?
Anthony Palmiotto: Correct.
Joe Fairless: A couple weeks later it’s now valued by a bank at around 900k…
Anthony Palmiotto: Yeah, that’s a great question. The honest truth is this guy built the building about 30 years ago, he’s been managing it ever since, and he wanted to retire. He had a number in mind that he wanted, he named his price, and I found out that price was not really the significant factor for him. What he wanted was somebody who was gonna close quickly, somebody who was not gonna retrade the deal, or in other words ask for money off the deal during due diligence, and somebody he could trust.
Once I got to meet him and build some rapport, he trusted me, he liked me, he wanted to do a deal with us, and he kind of gave us his price, take it or leave it. So I would have to say because of the fact that price was probably the third or fourth most important thing to him, that was the price he was comfortable with and that was the price he was comfortable to execute the deal at.
Joe Fairless: Any tips when having conversations with owners who call us about their properties that you can provide us with?
Anthony Palmiotto: I would say the number one thing that I did accidentally that I would make sure to always do now is never give your price first. If I had to make a blind offer on this property, I probably would have offered him something like $650,000 or $700,000, and in hindsight that would have been a $200,000 mistake… So I just very respectfully told him I did not wanna waste his time; he’s much more familiar with the building than I am, and I’m sure he’s thought about it and given it some thought as to what he wanted for that property, and if he wants to share a number with me, I’m happy to let him know if I can do that price.
So that’s kind of the route I took, and he gave me that number and I was blown away when that’s what he said he wanted.
Joe Fairless: That’s great stuff, and thank you for those additional talking points about he/she being more familiar with the building than we are, and I’m sure that they have a price in mind and you don’t wanna waste their time, so what are they looking for. That’s a great way to reframe that.
What’s the best ever way you like to give back?
Anthony Palmiotto: I’m actually a big fan of St. Jude’s Children’s Hospital. I always try every year, especially during the holidays, to give to that organization. I think they do great work. I’m still in my 20’s, but when you’re in your early 20’s, you can give not that much if you don’t have that much, so as my business continues to grow, I really hope to be able to expand the contributions to St. Jude’s. They just do a fantastic work and I’m proud to support that hospital and that organization.
Joe Fairless: How can the Best Ever listeners get in touch with you?
Anthony Palmiotto: We have a website, odysseyrealestategrp.com. If they go on there, our contact and our e-mails are on there, and we’re very easy to get a hold of. I’m happy to help anybody with any questions or anybody who might be in the same shoes as me and trying to grow their portfolio.
Joe Fairless: So helpful, and inspiring, and very practical… Hey, Best Ever listeners, do you want a 10-unit deal, off-market, with seller financing, where you buy it for like 60 cents on the dollar, or something like that? Then do direct mail, and here Anthony (not we) talked about how to do it: just google examples for yellow — I love that! Just google “what should I write in a yellow letter”, you put it in there, you had a CALL ME in big, red letters… That’s in the letter itself, right?
Anthony Palmiotto: Correct.
Joe Fairless: Was that handwritten?
Anthony Palmiotto: Yes.
Joe Fairless: And on the envelope printed the label stickers, and then highlighted the individual’s name and put the label stickers on a little crooked to make it more personal. I’ve heard of investors draw pictures of a house, but in [unintelligible [00:23:34].15] on the letter, and that stands out… Basically, anything to make it more personalized is the way to go. Anthony sent out 350-400 letters, and he got about 10-15 phone calls and one deal, and holy cow, it definitely was worth the time.
I think definitely for 99.99% of the population that is an effective use of time; it’s an effective use of dollars for anyone, no matter what their net worth is, but for the majority of people on Earth, that’s an effective use of their time with this type of return. So there’s the template, there’s an approach for how to get off-market deals.
You and I talked at Dave Van Horn’s conference, right?
Anthony Palmiotto: That’s correct, yes.
Joe Fairless: Yeah, and we talked for a little bit… The first 25% into our conversation, then it triggered, I was like “Oh yeah, we’ve met”, because I actually asked you to be on the show, because you told me about this off-market deal that you bought, and I was like “We’ve gotta share this”, so I’m very grateful that you’ve spent some time with us sharing this, and I know a lot of the Best Ever listeners are grateful, too.
There are ways to get deals, in this market and in any other market; we’ve just gotta roll up our sleeves a little bit and get after it. Thank you so much for being on the show. I hope you have a best ever day, Anthony, and we’ll talk to you soon.
Anthony Palmiotto: Thanks so much, you too.