Jay is a very experienced investor, and he also is a real estate blogger. Over the last 12 months Jay has stepped his game up a bit and added 42 units total to his portfolio. That sounds like something any investor would like to do, so hearing how Jay has done it can certainly help. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Jay Helms Real Estate Background:
- Started investing in 2006 with single and multi family homes
- Has added 46 units to his portfolio in the last 12 months
- Based in Pensacola, FL
- Say hi to him at https://helmsrei.com/
- Best Ever Book: Go Giver by Bob Burg
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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, Jay Helms. How are you doing, Jay?
Jay Helms: I’m great, Joe. Thank you for asking. How are you?
Joe Fairless: I’m doing great, and I thank you for asking. A little bit about Jay, he started investing in 2006 with single and multi-family homes; over the last 12 months he’s added 46 units to his portfolio, and we’ll talk about that. He is based in Pensacola, Florida. With that being said, Jay, will you give the Best Ever listeners a little bit more about your background and your current focus?
Jay Helms: Yeah, so 2006, as we all now know, was the high of most of the markets. My first — well, it wasn’t actually my first purchase, but it was my first live-in flip purchase. I was a single guy at the time, thankfully, and now my wife eventually moved in with me and saved me from making some horrible design decisions… But we bought it at the high of the market, lived it in while we were flipping it, which basically laid the groundwork for what we’re doing now with two kids, so it makes it a little bit more challenging… But that was it, that was the first purchase, and then we kind of put a pause button on everything, just the way the market was going; we didn’t really know what was going on, and that property was actually in Birmingham, Alabama… And I like to call that my false start.
The true start happened in 2014. We had already moved to Pensacola, we had been down here for a few years, and we really started focusing on what the market was doing and how it was recovering… So we had held on to the house in Birmingham, we turned it into a rental property, we finished all the renovations that we wanted to do, and held on to it for a rental property. We held on to that thing for about ten years, until it was ripe to get rid of it.
We walked away with some equity, and then we took that equity and put it directly into some single-family homes down here in Pensacola. That has been our focus for several years, and then last year, about this time actually, we closed on a 42-unit apartment complex over in Mobile County, Alabama, with a couple of partners. That’s the big bulk of the 46 units in the last year, but it has been an interesting and a great learning experience along the way.
Joe Fairless: Yeah, we’ll focus most of our conversation on this 42-unit, but just so I am understanding correctly, because I was with you up until when you said you sold the one in Birmingham and put that into some single-family homes in Pensacola, because in my mind, properties in Pensacola are much more expensive than Birmingham… So what are the numbers on the Birmingham property?
Jay Helms: The Birmingham property we bought for 216k, we put in around 42k-45k in the rehab, and then we ended up selling it for 246k. So over that ten years that we had it as a rental property, that our equity was being built by the renters that were living there… So we took that money — and when you say Pensacola, there were some areas of Pensacola, just like anywhere, where you have luxury homes, and there are areas that are up and coming neighborhoods, that are going through some revitalization.
So we were able to take that equity and put it into some of those real niche, real small neighborhoods that were up and coming, if that makes sense.
Joe Fairless: Yeah, but I wanna make sure that I got the numbers right… You bought if for 216k, put in 42k-45k; using 42k, you’re all-in at 258k, but then you said you sold it for 246k?
Jay Helms: 246k, yeah. So on paper it looks like we lost money, and we did. That was a huge learning experience for us, putting ourselves through school on that one… And the main reason that I sold it – I started listening to podcasts, and trying to understand the buy and hold market, because fixing and flipping is the sexy thing to do, right? So that’s what we were trying to get into, and I was like “Well, what makes more sense for us is buy and hold… So let’s look at how this property in Birmingham is actually doing if we analyze it correctly, and Joe, what I came up with is that property, just because of where it was located and the rental rates, everything that was going on in that market, it was costing me several thousand dollars a month to keep it.
When I figured that out, I talked to my realtor and I said “Look, we just gotta get rid of it. I’ve got some equity into it now, I’m not gonna have to closing with anything… Let’s just get rid of it.” So I walked away from that property with about 41k in cash.
Joe Fairless: Okay, so 41k in cash, and then you used that as a down payment for a couple properties, or what did you do?
Jay Helms: So we took that and we actually found a foreclosure. It was a one-bedroom, one-bath house, we paid cash for it, and did renovations. We were all in with that one for about 30k, and that rented right away for $600/month, and it stayed rented the entire time that we had it.
This last February — I had some really great tenants in there, and I told myself and my wife, we talked about “Hey, once these tenants leave, let’s look and see if we can sell it.” Well, we tried that and nothing came about. Then a gentleman approached me; I guess he had been looking at the house and kind of watching it, and said “Hey, I really wanna buy this house from you. What will you take for it?” So we agreed on a price, the tenant is still in it, it’s still cash-flowing, great numbers – and when I say great numbers, this is cash-flowing $350/month from a cash-flowing perspective, after all expenses are covered… And he paid me 50k for it.
I was happy with the price, he was happy with the price, and then we turned it around and took that 50k and 1031-exchanged it into a fourplex.
Joe Fairless: Really?! You 1031-exchanged 50k?
Jay Helms: Yeah.
Joe Fairless: Wow… Into a fourplex! What are the numbers on that?
Jay Helms: The purchase price was 145k, rents are $550 for each unit. Tenants are responsible for all utilities, and it comes out cash-flowing about $600/month once all expenses are paid.
Joe Fairless: Did you have to put any money into it in order to get tenants to move in?
Jay Helms: No, it was fully occupied. This was what I referred to as the little yellow house, which is that 1-bedroom 1-bath house that we just talked about… It was an off-market deal; the fourplex that we purchased with that 1031 exchange was an off-market deal, and we came about the fourplex through our local REIA meetup.
Joe Fairless: How did that go down?
Jay Helms: Well, have you ever done a 1031?
Joe Fairless: Yes… Sorry, that was a very broad question. When I said how did that go down, I meant how specifically did you hear about it at the meetup?
Jay Helms: So with the 1031 you’ve got certain timelines that you’ve gotta meet, and I’d reached out to all the realtors that I’d worked with in the past, and some new ones, and saying “Look, guys, I’m under a 1031 clock. I’ve got to do something, otherwise I’m gonna be penalized pretty heavily…” and I could get anything. I kept getting listings from the MLS, and right now, especially for the Pensacola market, there’s nothing that meets our investing criteria.
Our local REIA has a closed Facebook group, and I just posted in there, I said “Here’s what I’m looking for. I am under a 1031 exchange clock. Let me know what you’ve got.” I got two or three people that responded immediately, saying “Hey, I’ve got this listing, I’ve got this off-market deal”, and this one had the best numbers.
Joe Fairless: Alright, cool. So now 42 units, with you and some partners… Please, tell us the story.
Jay Helms: So my main partner Tim Kelly and I met through one of the social media groups that focuses on real estate investing.
Joe Fairless: Which one?
Jay Helms: Bigger Pockets.
Joe Fairless: Okay, cool. I love Bigger Pockets.
Jay Helms: Yeah, those guys are great. So he and I met through there… Actually, we were linked up by a local realtor that had been talking to us individually and knew we shared some of the same goals, so we all went and sat down, and had some Mexican, drank some beer and started talking about how can we put a deal together.
Tim and I finally ended up working on a deal over in (again) in Mobile County, Alabama. It was a distressed seller; he’d bought it about ten years ago. He was an elderly man, he was in his mid-seventies; he was living there through the week, trying to self-manage, trying to do the maintenance himself, the lawn care himself, and the property was just in really bad repair. It had a lot of deferred maintenance.
We went through several months of negotiating with him, and then after we got it under contract for 700k, we started raising money. So we started reaching out, again, back to our local REIA group, and we partnered with two other members from our local REIA group on this deal and we all made it happen.
Joe Fairless: 25% across the board, or a different split?
Jay Helms: A different split. We basically split it up into class A and class B membership, to where class B membership are your asset managers, like myself and Tim and the two other members, and then the class A members are the money guys, who brought most of the capital for us to close.
Joe Fairless: Oh, okay, so you have three other class B partners, and then you have passive investors.
Jay Helms: Correct.
Joe Fairless: Okay. But in terms of the class B partners, you and the three other partners – is that 25% each, or how did you split it up?
Jay Helms: That is 10% each.
Joe Fairless: 10% each… Oh, sorry, I’m referring to the — again, my questions aren’t very good with you, sorry about that.
Jay Helms: That’s okay.
Joe Fairless: I’m referring to the general partnership, how did you four split up the general partnership?
Jay Helms: 10% each. Basically, what we did is the class A members had 60% equity, class B members had 40% equity, and then we split that class B membership, since there’s four of us, we split it up 10% each way. So there’s four members total in the class B.
Joe Fairless: Okay, got it. But the only people in the class B are four people, so in essence you each have 25% of the general partnership. And then you have 10% of the overall deal.
Jay Helms: Correct.
Joe Fairless: Okay, cool. Got it. 700k purchase price… How much did you have to allocate for renovations?
Jay Helms: On top of the 700 we allocated 200k for renovations. That included a complete remodel of 12 units; there’s seven buildings on the property, so we painted the exterior of all seven buildings, we upgraded the playground equipment, which had been there I think since the property was built, in the early ’80s. We renovated the laundry facility with new equipment, we got new signage, repaved and restriped the parking lot… And there’s a fun thing about this apartment complex, Joe – we’ve removed a beehive… It was one of the unoccupied units – we’ve removed a beehive from this thing that was at least five years old.
Joe Fairless: Oh, my gosh…
Jay Helms: We had to hire a professional beekeeper to come in and take all this stuff out… But it was in the rafters of the ceiling; so you had to cut the sheetrock back, and once you cut the sheetrock back, the [unintelligible [00:13:46].01] in this thing was 18 inches by about 6 feet.
Joe Fairless: Oh my…
Jay Helms: But the cool thing is I grabbed a bunch of the honey when they did it, and packaged that up and ran it through some filters and cleaned it up and jarred it, and put some labels on it, and we gave it to all of our investors and partners.
Joe Fairless: [laughs]
Jay Helms: So I handed the jars over and I joking said, “Hey, either this is gonna be the most expensive jar of honey we’ve ever purchased, or consider this your first divided.”
Joe Fairless: [laughs] Oh, I love it!
Jay Helms: Everybody got a kick out of it. It was an interesting story.
Joe Fairless: Oh, that’s so great… I was gonna ask you some follow-up questions about honey and what you did with it, but you just rolled with it, you did all that stuff… That’s great! That’s awesome.
The $200,000 in renovations – you did a whole lot for $200,000. What was the most expensive item, and how much was it, if you can remember?
Jay Helms: The most expensive singular item was probably repaving, restriping the parking lot. That came in at about 25k. But individually, one of the things we ran into that we weren’t expecting, and that just didn’t show up during due diligence, was when we got in to renovate some of these units, we had a budget — there was a mix of 1, 2 and 3-bedroom units, so our budget was 6k for the one, 7k for two, and 8k for the three… We went over that budget; so we’ve had to really concentrate on finding better deals, and the parking lot was one of those deals.
The first quote I think we got for the parking lot was around 60k, or 62,5k. So one of our other partners said “No, that’s way too expensive. I’ve got this guy I’ve used before, let’s give him a call.” He came in and did with 25k the same job, and did a phenomenal job.
Joe Fairless: And what about painting the exterior of all the buildings? How much was that?
Jay Helms: That was around 22k… So it’s right there, closest to the most expensive. And probably why it’s not more is the bottom — so these are two-story buildings, and the bottom is brick, so we left that alone, and we just painted the top level.
Joe Fairless: For someone who’s listening and who has not put together a deal of this size, and they hear your story, like “42 units, that’s incredible! They’re doing this value-add business plan… They must be instant multi-millionaires as a result of the deal.” I doubt anyone’s saying “instant multi-millionaires”, but how much have you made in this deal, just to give a sense to the listeners of what’s possible when you do a deal like this?
Jay Helms: It is a value-add deal, so the first year we did not project to make any returns to our investors, and I’m glad we didn’t, because we haven’t… Yet.
Joe Fairless: You gave them the honey.
Jay Helms: Yeah, they got that, right. [laughs]
Joe Fairless: That wasn’t in the projections. You’ve exceeded expectations.
Jay Helms: Yeah… But our first year, as we were walking in, we knew it was gonna be a mess, and the property was only 50% occupied at the time… And these were not necessarily tenants we would recruit. So we knew as we were going through — and of course, you’ve done some of these, where renovations and upgrades always take longer than expected. That happened to us, for sure… And then also, we got rid of the bad tenants and we started getting great ones. And we also had a hiccup with property management. We’ve been through a property manager change in the last year, since we bought it. There’s been a lot of different things that came up, we’ve learned a lot, but we’re on a path now to hit those projections.
We’ve gotta do some additional marketing. The property manager we have now has done a great job; she’s born and raised in the area, lives there, is a broker in that area… So the word’s getting out that she is now managing that property, and she’s filling up units faster than we can turn them around… So we’re on a good path. We’ve hit our numbers according to our plan; I think everybody was hoping that we’d be further ahead, obviously, than we are right now, but the future’s looking bright, as they say.
Joe Fairless: Did you all have an acquisition fee, or anything like that at closing that the class B partnership was compensated with?
Jay Helms: We did. It was 2% of the purchase price, but what we did is we basically turned around and reinvested as class A partners, adding some additional funds.
Joe Fairless: Okay, got it. Cool. So you don’t have money in your bank account right now as a result of this property yet. You could have, but you reinvested that money from the acquisition fee into the deal, therefore you have no profit personally to show for it yet, but you’re working the business plan.
Jay Helms: Yeah, we are working the business plan… And if we are too far off in the business plan, I’d be stressed out a lot more than I already am… [laughs] But going back and looking at our deal package we put together and the business plan we had there and the things we wanted to accomplish in year one, we’ve done that. There’s some things in year two that we’re already ahead of, and the money is gonna come. We’re not necessarily worried about that.
Joe Fairless: What did the management company not do that you needed them to do?
Jay Helms: To be frankly honest, they needed to tell the truth. They were just not very ethical people, from where I sit.
Joe Fairless: And how did you determine that?
Jay Helms: Well, there were some things that came up, from move-ins and move-outs… Specifically when tenants moved out, they’d go back in and make sure the units were clean, and make sure things were happening… We had a little bit of a pest issue that we dealt with – that’s the biggest example I can share with you.
Joe Fairless: Okay.
Jay Helms: And there were certain things that came up… If a unit has been offline in this particular county for six months, you have to get a new inspection done, for a city inspector to make sure it’s up to code… So we worked with the city inspectors and said “Okay, what do we have to do to get the power turned back on in this unit?” and he let us know, we approved the quote; well, the maintenance man they had didn’t necessarily do — they tried to hide some things from the inspector…
Joe Fairless: Like what?
Jay Helms: Ventilation of gas appliances, strictly the furnace and hot water heater. At the city, the code is you’ve gotta have a ventilation pipe for each appliance… So what they did instead of running two exhausts through the roof, they punched a hole in the ceiling, ran two exhausts through the ceiling, and then tied them back together before they exhausted out through the roof.
The city inspector found it, of course… And we didn’t know this was going on, but when we found out, hey, we’re not passing inspection, and it’s been a few months, we were like “Why not?” and this is what was told to us.
Certain bills weren’t paid, things of that nature. They just weren’t very honest. And that’s on us. We should have done better due diligence when we were interviewing property managers to begin with.
Joe Fairless: And how did you initially find them, and then how did you find your current management company?
Jay Helms: As we had this property under contract, we started working through our due diligence items; I just googled “property management Mobile Alabama.” I started calling everybody… Where this property is located is North of the county, it’s almost out of the county, so a lot of the property management companies didn’t want anything to do with it, because of the distance.
When I say distance, it’s about 30-45 minutes outside of the city. But this one company, they convinced us they were extremely hungry, and promptly returned our calls if they didn’t answer right away… I guess in the beginning we were in the honeymoon phase, and then we got to know each other after we got married, and it was not a pretty picture.
And then the current property manager we have, she is actually a — I’m gonna get her title wrong, but basically she is a part of the economic business development team for that city. So through our due diligence process and trying to find out “Okay, how is the city growing? What’s going on? How is the school system?”, she was our main point of contact, and she knew this property… Obviously, as she’s lived there her entire life; she knew this property, she knew what kind of deferred maintenance was going on and disrepair, and she was excited about somebody to come on board and really ramp it up to what it could be.
So she was extremely beneficial and helpful throughout the whole due diligence process, and working with us… So we eventually just approached her. Her business has some property management pieces of it; none of it apartment complex related, but the relationship there is so good, and she appears to be extremely honest and helpful, that we just said “Hey, what do you think about taking it over?” As a matter of fact, she might have approached us about taking it over…
Joe Fairless: What is one question you would ask a future management company that you didn’t ask the first one?
Jay Helms: Tell me about your team on the ground. Who do you have that’s within a 5-10 mile radius of the property that we’re looking to buy?
Joe Fairless: So you’re looking for proximity of current team members… And anything else? Any one or two follow-up questions you’d have, whenever they talk about their team on the ground?
Jay Helms: Well, the team on the ground is “Who do you have? Who do you know? Who are your contacts?” but probably a more important question – I probably should have said this first – is what is your plan to increase occupancy? What is your marketing plan? We’re at 50% now, we’ve got some people that need to get out, we expect we’re gonna go down to 30% occupancy… Once those bad apples are out, we’re finished with renovations, what is your marketing strategy to fill it up, and how do you foresee that playing out? Can we do some of that before we’re completely finished with renovations?
Because when renovations are going on, there is a lot that’s happening, and without your finger on the pulse constantly, things are gonna get missed.
Joe Fairless: What’s your best real estate investing advice ever?
Jay Helms: Know your market. We started investing in Pensacola three years ago; it is not the same market today as it was three years ago. The prices are high, the rents are following… Between my wife and I, we look at probably two or three properties a week, if not daily. Our last acquisition was in May, and it was over in Mobile.
So I’d just say know your market, regardless where you’re gonna invest; spend some time understanding and learning, so you don’t get yourself in a situation like I did in 2006.
Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round? Alright, let’s do it. First, a quick word from our Best Ever partners.
Joe Fairless: Best ever book you’ve recently read?
Jay Helms: Best ever book I’ve recently read… I’m gonna have to bring it up on my phone, because I just downloaded it. So I’m an audiobook guy; I spend a lot of time in the car… So The Go-Giver.
Joe Fairless: Oh, Bob Burg. It’s a good one. Yeah, good story. Best ever deal that you’ve done?
Jay Helms: It was probably the little yellow house that we were talking about. We bought it for cash for 30k, and everybody told me I was crazy… They didn’t know that you could buy houses for 30k. We turned it around and sold it for 50k. In the meantime, we made about $325 cashflow every month, for the few years that we owned it. That’s been the best deal so far.
Joe Fairless: What’s a mistake on a transaction you’ve made?
Jay Helms: Oh, man… [laughs] There are so many. I’ll give you a recent one. This fourplex that we purchased, that was off-market, I assumed – just because every other transaction I’ve done where tenants were already in place, that the rent rolls… So if you close in the middle of the month, that the new owner would get half the rent for that month already collected, and the previous owner would get the other half.
Well, in this case we closed toward the beginning of the month, and that was not part of the agreement. It was basically “Hey, you’re getting a great deal”– and I did. There’s competing properties in that area that are selling for 180k-200k, that are not occupied, that are in similar condition. I got a great deal for it. It was just one of those things – when we got to the closing table and we were looking at all the final numbers, I’m thinking “Wait a minute, where is the prorated rents?” and it wasn’t part of the negotiation, which I always assumed it was.
Joe Fairless: Best ever way you like to give back?
Jay Helms: Doing interviews like this. I make a lot of mistakes… [laughs] And I do blog about them. I haven’t had a chance to write anything recently, but I do blog about them at HelmsREI.com; that’s kind of where I put everything, so there’s that… I also have a Facebook group – Real Estate Investing for the W-2 Employee, because I think there’s a misnomer out there that you have to choose one or the other… That either you’ve gotta work, or you’ve gotta invest, and quite frankly, if you love your job, there’s no reason why you can’t invest also.
I like educating people, and it’s a little bit selfish, because the more I talk to people and the more I try to educate them, the more I actually learn… And I know that. So it’s giving back, trying to educate others to follow in my footsteps.
Joe Fairless: Well, you certainly educated a lot on this call, during our conversation, from the 10-year false start – there’s the title of the next blog article for you, “The 10-year false start” – to this 42-unit. The lessons learned on the 42-unit, from questions you would ask the property management company, to the type of clauses in the contract, with prorated rents, too. The good stuff, about finding a good deal, partnering up with people through Bigger Pockets that you met with, and other ways… And then I love how we got into the specifics of different renovation costs and you’re doing, and what was a certain price… And the beehive, too! How could I forget the beehive…? Giving investors honey. [laughs]
Thanks so much for being on this show, Jay. I hope you have a best ever day, and we’ll talk to you soon.
Jay Helms: Thanks, Joe. You too!