JF1472: From Comedy Writer On Family Guy To Real Estate Investor with Mark Hentemann

Best Ever Tweet:

Mark Hentemann Real Estate Background:

• Writer/Producer/Actor in TV & Film – He was part of the team that launched family guy
• Real Estate Investor for 17 years focused on multifamily
• Focus on value-add, the niches, and dislocations caused by rent control in a diverse, sometimes challenging metro
• Based in LA
• Say hi to him at markhentemann@me.com
• Best Ever Book: Sapiens by Yuval Harari

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Do you need debt, equity, or a loan guarantor for your deals?

Eastern Union Funding and Arbor Realty Trust are the companies to talk to, specifically Marc Belsky.

I have used him for both agency debt, help with the equity raise, and my consulting clients have successfully closed deals with Marc’s help. See how Marc can help you by calling him at 212-897-9875 or emailing him mbelsky@easterneq.com

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, Mark Hentemann. How are you doing, Mark?

Mark Hentemann: Great! How about yourself?

Joe Fairless: I’m doing great, and nice to have you on the show. A little bit about Mark – he is a writer/producer/actor in TV and film. He was a part of the team that launched The Family Guy, he’s also been a real estate investor for 17 years, focused on multifamily. His focus is on value-add, and we’re gonna talk more about that. Based in Los Angeles. With that being said, Mark, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Mark Hentemann: Sure. I’m originally from Ohio – I think where you’re from, as well… Or you’re living there now. I started as a greeting card writer and illustrator at American Greetings in Cleveland, and then moved into late-night comedy with writing for David Letterman, then moved out to L.A. and got hooked up with a brand new show called Family Guy back in 1999, and was through that after my first couple scripts payments, where I had a little bit of money saved up. I was trying to move out of my one-bedroom apartment and got talked into buying something, and that got me into real estate.

Joe Fairless: Who talked you into it?

Mark Hentemann: It was completely by accident. I’m an accidental real estate investor. I was looking to move into a new apartment, but I think across the street from the apartment building I was looking at was an open house, and the broker there said “Why are you throwing your money away on rent when you could own something?” My knee-jerk response was “I am in the entertainment industry. Do you think I wanna be saddled with the responsibility of a mortgage? My show could be canceled tomorrow, and I could be out of work for a couple of years.” I was on Family Guy and we didn’t even know if it would make it through the first season.

Joe Fairless: So that’s what you said, and then did that broker convince you, or…?

Mark Hentemann: You know, our conversation was — she gave me some good reasons why I should invest and build a nest egg and some passive income, and I said “Alright, look, the only way I’m gonna invest in anything is it would have to be the best investment I’d ever make. Don’t show me any pretty house. Show me something that’s a dump and that is undervalued, and that will provide me with some kind of financial cushion.”

So we parted ways, and I figured I’d never hear from her again… But she called me a couple weeks later and she said “I found the investment property that you need to buy. The trick is you have to become a landlord” My reaction was like “A landlord?! I don’t wanna be a landlord.” But I met her there, and it was kind of a dilapidated duplex in Hollywood, and it had goats and chickens being raised in the backyard. The sellers were moving to Kansas to live off the grid, and they were digging an underground house… So they were kind of eccentric.

Joe Fairless: Oh, yeah.

Mark Hentemann: But I could see the potential in it. It was one of those 1920’s buildings that had great original features to it. Not a ton had been done, but it just needed a ton of cosmetic work. I decided to take the plunge, and I was like “Alright…” I held my breath, jumped in… Of course, it was L.A., so there was 15 other bidders on this thing, and it began this rollercoaster ride of increasing our price almost daily.

I had offered $350,000 as my initial offer, and after two weeks the realtor was like “You are in the top two. If you go to 435k, it’s yours.” It was traumatic, it was nerve-wracking, I couldn’t sleep, but I pulled the trigger and got it. I immediately had huge buyer’s remorse; I thought I’d just made the biggest mistake in my life. But I tried to embrace it and jumped in, and tried to become a landlord.

My first tenant was a guy named Mike Henry, who works on Family Guy. He does the role of Cleveland, and Herbert, and Consuela, if people have watched the show. I got in and tried to learn how to become a landlord. He was a good test of a tenant.

It was fun. I did the fix-up and agonized over it. I owned the duplex for about five years, and sold it – and I attribute this 100% to luck, but I was riding a rising tide in the market in the early 2000’s, and ironically, I thought the market was already too hot when I got in, but I got out in 2005 and made a great profit. I think I sold it for 1.27 million, and I bought it for 435k.

Joe Fairless: That’s a pretty good profit, absolutely. How much did you put into it?

Mark Hentemann: I put in 43k. I did the 10% down as a first-time buyer. Looking back, I would have done one of those FHA loans, where you can get even lower. I like leverage; leverage seems to equate to better returns, as I look back on all my investments.

Joe Fairless: Now fast-forwarding to today – what does your portfolio look like and where is your focus?

Mark Hentemann: Well, after that experience I was hooked. I fell in love with real estate as I was doing this. It was a little trying, and I had to get over the bumps and learn a lot about it, but I had decided that this is something that I wanna do for the rest of my life, and I started to collect buildings.

Right now I have about 140 units, all multifamily, all in Los Angeles.

Joe Fairless: And you’ve been investing in your backyard… Why L.A. versus Kansas, or somewhere else?

Mark Hentemann: Well, I think I want to move outside of L.A. and I have looked at things… I got in a bidding on an 82-unit building in Cleveland a couple months ago, and I was really excited. The fundamentals of that building were so good… But there were eight other buyers and I was second, or something like that. I got outbid.

Joe Fairless: You’ve gotta tell them you’ll write them into an episode of The Family Guy, or something…

Mark Hentemann: Right… [laughs] I’ve gotta use some other angle to get in there. But I’m looking in Salt Lake City… There’s cities that I like, but yes, I’ve gotta get out of my backyard, and I will… But so far, L.A. is an interesting market. It’s a vibrant economy, it’s so diverse… It feels to me like there’s 120 pockets of L.A., and I know them, I drive them, so I know street by street. And in my experience, and even as L.A. gets heated up as it has been, I can see – at least I fancy myself as being able to see – some neighborhoods that I know are inevitably going to improve, just by their proximity to massive development, by their proximity to downtown, which is exploding, and they’re still very affordable.

I have that knowledge of L.A. that I don’t have at any other city, which has allowed me to continue to find deals in a complex market, even with thousands of other investors competing with me.

Joe Fairless: Oh yeah, and I’m looking forward to talking to you about your approach, because I don’t interview a whole lot of investors who live in L.A. and actively acquire a portfolio of multifamily properties in L.A. What was the last property you bought?

Mark Hentemann: The last property I bought was a 36-unit building, and it was in an area called West Lake in L.A., which is an area that I like a lot. Like I said, it’s really close to downtown.

It was an interesting scenario… I do this search — my approach is I get a ton of deals e-mailed to me almost annoyingly on my e-mail every day, and anything that’s interesting, I throw into a folder. But then I’ll just go on searches of my own, and I’ll apply filters. I like cost per square foot; I think it’s a great basic metric. You have a lot of metrics to process and synthesize as you look at a property, and [unintelligible [00:11:09].09] and you never get everything you want. Sometimes you get a great cap rate, but the cost per square foot is really high… And I like cost per square foot. It’s straightforward, it’s honest, it tells you what the asset is worth… So I look for that.

I’ll even go on something like LoopNet and do a filter; there’s 20,000 buildings for sale at any given time in L.A. I’ll put a filter on for really obscenely low cost per square foot, and this is how I found this building in West Lake, this last 36-unit building. I think I put $210/square foot or less. To give you some perspective, in L.A. price per square foot can go up to $700 or $800 per square foot. I think the average is maybe high threes to mid fours… And I found a building.

As usual, my search for cost per square foot resulted in maybe 15-20 buildings. I eliminated 12 of them…

Joe Fairless: How come? Based on what?

Mark Hentemann: I know the neighborhood, I could look at the building and see “Alright, that’s in a rough pocket. That building looks terrible.” Kind of analyze why it’s priced  so low. Often times there’s a good reason why it’s priced so low, but there’s always anomalies where there’s buildings that are priced low, and maybe it’s for some other reason that’s not evident on the setup. Occasionally, some of those are in those early stages, up and coming markets. This one fit that profile, and I happened to know the broker; I had done some deals with him.

I called him and I said “Hey, this looks interesting. What’s the situation?” He said, “As your friend, take my advice: run the other way.” I was like, “What? What do you mean?” He’s like “This is our third escrow, and it’s just about to fall out, and this buyer is gonna back out. There’s three lawsuits against the sellers, and it’s all tenant lawsuits over issues with the buildings.” There are these predator law firms that all they do is look for vulnerable landlords, and they’ve found this team — I think this was a partnership that was running this; it might have even been a syndication… And he said “They’re trying to manage it themselves. It’s 36 units and they’re not addressing things, and this “predatory” law firm has found a gold mine in this building, and they just keep issuing lawsuit after lawsuit, and they’ve won the first couple, so they’re emboldened.”

I was fascinated by this, and I was just thinking “Well, he’s not gonna be able to sell and pass on his legal liability to anyone else.” He was like, “Yeah, you’re right.” I was like, “I’m interested in this. Keep me in mind. Let me know if this seller backs out.” So I went and immediately called my lawyer. I said, “Hey, can I do this?” I told him the situation and my lawyer was like “Yeah, you can absolutely do this.” He’s a multifamily investor as well. He said “You need an indemnification agreement. I’ll look at it and I’ll make sure it’s bulletproof.”

I called my insurance agent, and I said “How can I protect myself?” He said “You’ve already got an umbrella policy, you’ve already got liability… We’ll just boost your amounts on this and we’ll be prepared if you end up in that situation.”

I called my property manager – they’re multifamily investors, too – and I said “Do you think I could do this? This is the situation”, and they said “Yeah, absolutely. We’ve bought these types of buildings.” They’ve been in business for like 50 years. These are good opportunities. They said “This is how you do it. The problem is the current owner is trying to manage it themselves, and they’re exposing themselves to, obviously, the litigation that is happening.” He said “Oh day one we send an e-mail to all tenants saying “All issues have to be submitted by e-mail, in writing, and we’ll address everything.” Once you have a paper trail, that’s your defense against these lawsuits.” He said “There are those law firms out there that smell blood with these buildings, but if you just dot your i’s and cross your t’s, they’re gonna realize that you’re not a good target for them. They’re not gonna get very far, and they’re gonna move on and look for someone else.”

So that’s what I’ve done, and I bought that. That was now five or six months ago, and I’m very happy. We’ve increased the income a lot… I bought it at $178/square foot. It’s probably twice that, I would say, in this area, because this area is getting very hot… So I’m hopeful.

Joe Fairless: How much was it? What was the total purchase price?

Mark Hentemann: The purchase price was listed at 4,5 million. I bought it for 3,95, and it was already well priced at the 4,5 million dollars.

Joe Fairless: I noticed when you were calling your team, the one team member you didn’t mention that you called was your lender. Did you pay all cash, or did you have a loan on it?

Mark Hentemann: No, I did. Sorry, I skipped them.

Joe Fairless: They’re not that important, are they?

Mark Hentemann: [laughs] No, he’s great. I use the same loan broker; that’s what I’ve fallen into. He’s really good, and I’ve used him a lot. I called him and I said “Can I get financing on this?” and he said “Over the years we’ve put you with seven different lenders, and there’s this one lender – they’re good with these types of properties. They don’t have the issues that others do.” He kind of knows all the lenders. He said, “Let me make some calls. I’ll float it by them informally.”

He called me back and he said, “I think we’ve got a great chance of getting them to finance this”, and ultimately, they did.

Joe Fairless: Do you remember the high-level terms of that loan?

Mark Hentemann: The high-level terms? Yes, it was 25% down, 75% LTV. I think it either a 3,75% interest, or 4% even, and it was for a five-year fixed.

Joe Fairless: Were you planning on refinancing it after you get it turned around?

Mark Hentemann: I think so. That’s the pattern that I’ve fallen in with almost all of my buildings – I like five-year fixed. Maybe I’ll fine-tune my process at some point; I’m kind of working on this now. I don’t know if other people have done this, but I now have enough buildings, enough equity – across my primary residence, I have a second home – that I’m looking into getting an equity line that is substantial. I currently have one that goes up to like 1.2 million, but I would love the ability to close with an equity line, do value-add, and then put on longer-term financing.

Thus far, I’ve always bought with long-term financing upfront, done my value-add, and after five years I’ll either refinance and pull cash out to buy a new building, or if it’s a smaller building, I’ll sell, 1031, and get into the larger unit mix.

Joe Fairless: Once you closed on the property, you’ve got all the team members in place, what was your primary focus to make sure that everything was headed in the right direction?

Mark Hentemann: Well, with this specific building I was calling my property management company almost every day, because I know they have a lot of buildings that they’re managing, and I said “Remember, this building has issues.” Through the broker, I said “Hey, do you think I can talk to the seller or his team?” I was able to do that, and I talked to their asset manager and I said “What’s the deal? What was happening there?” She was very helpful and honest, and she’s like “We made some mistakes, but what had happened is that this law firm was using one or two people in the building as their point people, and they were getting them to rally the other tenants and get them to participate in these lawsuits.” She said “If you can buy out these tenants and get them to move out…” Obviously, L.A. has rent control and restrictions, so she said “If you can find a way to get them out of the building, I think you’ll solve 90% of your problem.” So that became a focus.

One of them just stunningly – and pleasantly surprised – move out on their own. Then the other one, it took about five months. I think we bought them out. It wasn’t a huge amount of money, but I was relieved to have that happen. And since then, I monitor that building. I said, if I ever get a notice to comply that comes from the city, I call them immediately and I say “What is this? This needs to get corrected immediately.” And just kind of staying on top of it.

Joe Fairless: This deal seemed like quite a challenging deal, especially for  your team. Has there been another deal that was equally challenging?

Mark Hentemann: If I go through my history, equally challenging — that first duplex I bought felt that challenging, just because I was new. But in 2008 — I thought the market was really heated in 2004. I actually thought it was too heated in 2000, when I bought my duplex, but I was brand new, naive, and didn’t know much. But as the mid-2000’s progressed, in 2004, 2005, 2006, every year we were setting new records for building values, and I was like “Oh god, I don’t know if I should stay in or get out.” I was being very cautious. In 2008 I bought a building, and I convinced some of my co-writers on family guy to go in it with me. I was like, “You guys gotta get into real estate investing!” I’ll tell that to anybody; whatever your job is, start building that passive income. It’s been the most amazing hedge against a career in the entertainment industry, and a way to build wealth that makes you just feel a lot more secure as you’re going through, particularly in my instance of volatile industry.

So I brought these people on in 2008. While we were in escrow right after we removed contingencies, Lehman Brothers crashed and the whole economy collapsed. I was like, “Oh, no…! Right when I bring these smartass friends of mine that I see every day into this thing, after evangelizing to them about real estate, I’m gonna lose their money.” That was trying…

Joe Fairless: Did you close?

Mark Hentemann: I did close. I had removed contingencies. This building was distressed… I had this — not to go up on a sidetrack, but in an early stage of a market boom, I tend to buy more premium assets; that’s the only time I’ll ever go for B+, A- properties. But as a boom market matures and gets late in its stage, I get cheap; I just go for the cheapest buildings, because I just want to be protected. I imagine that the world is gonna collapse. There’s gonna be a collapse; or not a collapse, but any kind of correction.

In the mid-2000’s, when I saw the mortgage issues that were going on, I thought it could be severe, so I bought in a working-class neighborhood a very bread and butter building, that was mismanaged… This is the only other time I bought from sellers that were suing each other; these sellers were suing each other. But there were a lot of things — it was a great value-add opportunity, so I closed. Long story short – I closed, despite the circumstances, and I’m sure that the value declined, but we just kind of rode it out. I did not see a huge fluctuation or drop in rents that we were receiving; I think it was because we were that kind of middle of the road, very working class. Their incomes hadn’t spiked during the boom, and I think the profile of the tenants was they were in industries that weren’t impacted as strongly by the recession. So we rode it out.

Joe Fairless: You held on to it and you still have it today?

Mark Hentemann: I sold it in 2015, and thank god, I gave my partners a triple return of what they had invested. I happily sent them an e-mail with the stock market performance during the dates that we owned it.

Joe Fairless: [laughs] I love it.

Mark Hentemann: I think the stock market returned 48%, and I gave them 199% percent return.

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

Mark Hentemann: From my perspective, I have a job that I like; I love it. I’m still doing what I wanna do, but man, investing in real estate made my job so much more fun, because it took away the anxiety, it took away the stress, the uncertainty of it… It’s been, like I’ve mentioned, the perfect hedge against a career in any volatile or uncertain industry, and it seems like every industry nowadays is uncertain. The economy is changing, technology is changing things so rapidly that I would advise anybody, as early as you can, start investing passively.

If they are not inclined to roll their sleeves up and manage these properties themselves, they could become a passive investor with someone like yourself, as I do. I wanted to participate in the Texas market, so I’m excited about that, to be working with you… Get in the game, but be careful right now; there is going to be some kind of correction, I don’t know when; nobody knows when, but the cycles are pretty predictable.

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Mark Hentemann: Sure.

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

Break: [00:24:47].09] to [00:25:33].27]

Joe Fairless: Best ever book you’ve read recently?

Mark Hentemann: Best ever book recently – Sapiens, by Yuval Noah Harari. I don’t know if you’ve heard of it, but he’s a scientist and he explores where the human race has come from and where it’s going, and in the process gets into everything, like economics, and religion, and all aspects of society. It’s really fascinating. It’s one of those rare books where it’s relentlessly thought-provoking and mind-blowing. On every couple pages I just had to stop and be like “Wow, I can’t believe that.”

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

Mark Hentemann: A big mistake was the story I just told – don’t go into escrow… I can identify a mistake that I made in that transaction, which might be familiar in this day and age – I had started to pull back from my investing in maybe 2006, and I watched the market continue to set new records in ’07 and ’08. I had some money and I was like “I’ve gotta get back in.” I wished there was a small correction so that I could jump in, buy on a correction, enjoy at a discount and then ride the market as it continues to go upward, which it had been doing for ten years; you’re starting to get numb to it, and thinking it’s gonna go on forever.

So when the market had a little dip in early 2008, I got excited; it dropped 10%, and I’m like “This is the time to get in”, and that’s where I jumped in on this building. However, I think that happened to a lot of people that were waiting and they were trying to be patient, but the market just kept going up year after year after year in the mid-2000’s, and my mistake, to summarize, is I mistook what I thought was a temporary small correction on what would continue to be an upward climb. I was at the tip of the waterfall, and it was gonna go down.

I think that’s a tempting thing to do for a lot of people in a market like there is today, where prices have been going up. I guess the silver lining is I’m thrilled that what I did buy had solid fundamentals, so… Keep that in mind.

Joe Fairless: And how can the Best Ever listeners either get in touch with you or learn more about what you’ve got going on?

Mark Hentemann: They’re welcome to e-mail me, it’s my full name – markhentemann@me.com. If they wanna reach out, I love talking to other investors. If they’re local and I have the time, I’ll meet up with them. I’m in joke-writing comedy world all day, so I love interacting with real estate investors.

Joe Fairless: And adults, having adult conversation?

Mark Hentemann: [laughs] Exactly. People that could talk finances.

Joe Fairless: Right, right. Well, Mark, thank you so much for being on the show. Thanks for talking about how you got started, and I’m glad I asked about the last deal, that 36-unit. Really interesting. A lot of lessons learned on that, as well as the types of team members that you brought in, made sure that they were on the same page prior to you entering into the fray… And the 2008 property – you bought it at the exact wrong time, but you weren’t forced to sell, therefore you did pretty darn well with you and your investors; almost a 200% return to the people who you were partnering with… That’s a good lesson, especially for anyone now who’s buying and they’re anticipating a correction, which I believe they should… Buying the right way, buying for cashflow, buying with debt that is long-term and having adequate cash reserves so that you can ride out any type of storm that might come your way.

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

Mark Hentemann: Thanks, this was great. I really appreciate it.