September 28, 2018

JF1487: How to Analyze an Out-of-State Deal & How to Effectively Communicate w/ Passive Investors #FollowAlongFriday

Today’s Follow Along Friday is all about analyzing an out of state deal, and the best methods for keeping investors happy with great communication. We’ll hear exactly what Theo is doing as he evaluates a deal that is out of state for him. Then Joe tells us how he keeps all of his investors up to date and happy. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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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. We’re doing Follow Along Friday today. Theo Hicks, how are you doing, my friend?

Theo Hicks: Doing great, Joe. How are you doing?

Joe Fairless: I am doing well, and Follow Along Friday, as you all know, is all about lessons we’ve learned and how that can be applied to what you’re doing, Best Ever listeners, on your real estate endeavors and adventures. Today we’ve got a smorgasbord of topics to address, and it’s basically what we’ve been up to and what we’ve got going on right now, and things that we’ve noticed, and some helpful tips for you. Do you wanna kick it off, Theo?

Theo Hicks: Yeah, so – updates for me… It’s funny, because the Best Ever listeners know that I bought those three fourplexes about a year ago (last August) and it was kind of like, we just had all the money to buy properties, and we were going to start looking, and then all of  a sudden they just kind of appeared within a couple of days, through a mutual contact that I met through actually getting my real estate license, which I never really pursued further than just classes.

Joe Fairless: Are you still active with your license?

Theo Hicks: No, it’s [unintelligible [00:04:10].03] in the graveyard. I was just paying all those fees, and it just wasn’t worth it.

Joe Fairless: How much is it a year?

Theo Hicks: About $1,000.

Joe Fairless: Oh. I didn’t think it’d be that expensive. Okay.

Theo Hicks: I was constantly getting e-mails asking for more money, so I was like “I’m done paying for this.”

Joe Fairless: Yeah… If it was one payment of $999 a year, would you have approached it differently?

Theo Hicks: Probably. So we [unintelligible [00:04:30].16] about those properties, and then they came on the market, and we went and saw them and then bought them… And then we really haven’t had the cash to buy properties again until last week, when Marcella went to our bank accounts and was like “Oh, we can buy another property.” I’m like, “Oh, perfect. I’ll reach out to our agent and ask her to do another direct mailing campaign.”

Then on Monday I got an e-mail from actually the same agent that was representing the three properties that I had bought before, and they’re listing a four-unit in Pleasant Ridge for sale, which is literally exactly the market and the type of property that I want. And what’s even funnier about it is if you remember when I was talking — maybe it was a couple months ago… One of the properties we got back through our direct mailing campaign was in Pleasant Ridge; it was a fourplex… The guy wanted 179k, and I went and looked at it and I didn’t buy it because it was just too distressed, and we were only looking for properties that we could buy now, hold on to them and then make updates as people move out… Whereas this one – I think there were two units that were vacant, and there was knob-and-tube, and a couple other issues that just didn’t make it worth it.

Joe Fairless: For people who don’t know what’s knob-and-tube…

Theo Hicks: Knob-and-tube is the electrical… I’m not exactly sure what years it would be, but it’s old. Electrical that is difficult to get insurance on. It’s possible, but you’ll talk to some insurance brokers and they won’t even ensure the property with knob-and-tube. A lot of properties in Cincinnati that are older will have that.

This property must have been built in the ’30s or the ’40s, so it still had the knob-and-tube… So I sent the deal to my friend, who ended up buying it for 20k below what they were asking, and ended up putting a lot of money into it because of all the issues… But this property that came up yesterday is literally right next door, which I thought was totally funny.

Joe Fairless: Oh. Are you using the word “literally”, like actually the next door neighbor?

Theo Hicks: Yeah.

Joe Fairless: Okay… [laughs]

Theo Hicks: Obviously, I’m in Tampa, so I just wanted to mention my approach to how I’m going to review this property…

Joe Fairless: So this property is in Cincinnati, and you’re in Tampa, Florida.

Theo Hicks: Exactly. Today I’ve got my real estate agent and a representative from my property management company is going to visit the property. I sent them a list of questions to essentially provide me with the answers to. What’s the state of the mechanicals, is there knob-and-tube…? They’re only allowing us to see one unit, so I’m asking them what’s the actual rent of that unit, because the rents for this property are all over the place… I think they range from like $525 to $650.

Joe Fairless: Okay. Is that market?

Theo Hicks: $650 is closer to market. The other ones are below. I’ve got six one-units in Pleasant Ridge already that are renting for between $625 and $685, and these units are actually better… Not in better condition – they’re the same condition – but it’s the layout… It’s a lot more open. The kitchens are bigger, and the living rooms are larger, and the kitchen area is bigger. So I think $650 to $700 is gonna be a good target.

As far as I know, they don’t need any updates, but that’s one of the things I wanna know, because when you view these properties, they only let you see one unit… But we’re gonna at least ask the broker “How does this unit compare to the other units?”, also “What is the rent on this units?”, so we know if it’s the highest rent, or the lowest, the middle, so we can kind of figure out “Oh, are they just under-rented because the landlord hasn’t been keeping up with the rents, or are they under-rented because the unit qualities are different?”

Joe Fairless: What’s the asking price.

Theo Hicks: They’re asking 204k.

Joe Fairless: 204k, okay. And at $650/unit, that’s $2,600. So let’s just say $200,000 – easy math. That’s 1,3%.

Theo Hicks: The actual rents are $2,350 right now.

Joe Fairless: Okay.

Theo Hicks: I bought my fourplexes for 220k, in the same area. I can basically use my properties as comps. Now, the properties that I have now do have two-bedroom units, so the rents are gonna be higher, but what I like about this property is, number one, there’s no boilers… And everyone listening to this podcast knows about how much money I spent on those boilers. They have individual furnaces and individual water heaters…

Joe Fairless: How much did you spend on boilers?

Theo Hicks: Over 20k.

Joe Fairless: Dang…

Theo Hicks: Yeah. I’d say about 20k.

Joe Fairless: Across the three fourplexes, or for one?

Theo Hicks: Across the three fourplexes.

Joe Fairless: Okay.

Theo Hicks: And the majority of the expense came from having to actually replace the inside of the radiators in the rooms. So it wasn’t actually the boiler in the basement, it was the corrosion on the radiators… So as a tip, if you have boilers, you have to inspect every single radiator, like literally take off the cover and look at the valve, and make sure the valve is not corroded. Because if the valve is corroded, it’s going to cost you $3,500 to replace the entire unit.

So yeah, we’re gonna take a look at the property today. I don’t know what the [unintelligible [00:09:19].11] conditions are. They claim there’s newer roofs and newer furnaces, and things like that… They call it a value-add, because you have to call everything value-add these days…

Joe Fairless: Of course.

Theo Hicks: …whereas in reality the value-add is just raising the rents to market rate.

Joe Fairless: Well, that’s the best value-add if you don’t have to do anything, right?

Theo Hicks: Exactly. One thing that is nice is that I do know that right now this neighborhood is not gonna demand any type of upgrades, so it’s not gonna make sense for me to go in there and place nice countertops, nicer kitchens, redo the bathrooms, because that’s what my friend did next door, and he didn’t demand a much higher rental rate than I’m getting for my one-beds that aren’t updated at all.

Joe Fairless: What did he get, versus you get on the one-bed?

Theo Hicks: I’m pretty sure our highest is $685, the average is probably $650… I think he’s getting maybe $700.

Joe Fairless: Okay.

Theo Hicks: The thing is he did it himself, so the costs were a lot less. I would be able to do it myself, so the costs would be a lot more. So for him, it actually kind of makes sense, since he did all the updates himself, so he’s not paying two or three times as much for the upgrades. But for now, based off of the rents that he demanded, it’s not gonna make sense for me to drop 5k-6k to update a unit. I’m not gonna make that back. This is not worth it now. It’ll probably make more sense to do it in a few years from now, because I know Pleasant Ridge is doing pretty well, they’re adding a lot of retail, and restaurants, and bars, and stuff…

Joe Fairless: Yeah, it’s up and coming, that’s for sure. Why are you looking at four-units, instead 5+?

Theo Hicks: Just because of the residential loans. We wanna stick with the fixed interest rate, 30-year loans, and get as many of those as we possibly can. And then once we can no longer get those types of loans, we’ll probably start looking at the commercial loans, and then looking at the larger properties. And then also, the down payment as far as the second one – it’d be more. And then third, fourplexes – there’s just so many of them, and it’s a lot easier to find. Five units and six units plus – they’re there, of course, but these four-units are easier to find. And also, the management company I’m using – that’s what they have expertise in, is these four-units. But if I came across a 5+ unit that I could afford, then I’d be interested. So that’s on the new deal front.

Then something else too, which was kind of an interesting way to fill your vacancies, and is unique – and obviously, you don’t wanna apply that to everyone; it depends on your relationships in the market… But I have a vacancy at one of my buildings – it’s a two-bedroom – and then we’ve got someone else, one of the original tenants that I inherited is moving out on the 1st of October, another two-bedroom… So obviously, we’re losing money on the one that’s not rented, and it’ll take maybe about a week to clean up, per unit. I remember I’ve had to do some repairs in that unit that the person is moving out of, and it won’t be that expensive to fix it up…

But anyway, so my friend who owns the property right next to the one I’m looking at owns another fourplex in Pleasant Ridge and had one vacancy, and they had an open house, and they had a ton of qualified applicants, but only one of them could actually live there… So we got the names of the people that couldn’t live there yesterday, and my property management company is going to reach out to them and schedule a showing of the vacant unit, and then obviously once that person moves out of the other unit, hopefully (fingers crossed) they just rent the unit… Because we know they’re looking.

The rent is gonna be lower on ours, because the ones that they were looking at were a little bit nicer… But with mine they’re gonna get a garage instead of street parking, and the area is a little bit better, because it’s a little bit closer to the downtown Pleasant Ridge area… So if you know people in your market who have a similar property as you and you have a vacancy, it doesn’t hurt to reach out to them and ask them if they have any vacancies that they’re showing, and if they have extra applicants that they weren’t able to have sign leases because they didn’t have enough rooms available. So I just thought that was a unique tip…

Joe Fairless: Yeah, that is a great tip. If you attend a meetup locally, then that’s a conversation topic that you can have. A similar concept took place with one of our apartment communities – we were approached by a broker this past summer, and it’s a broker we have a really good relationship with, we bought a lot of properties from him… And he said “Hey, I listed a property in your area, it sold, and we have a couple back-up buyers who wanna buy a property in the area where this particular property is that you own. They’re a cash buyer, and they’re willing to purchase your property at X price.” We said, “Okay. Let’s do it.”

The back-up offer, the group that missed out on the first property, the broker was smart enough to say “Hey, you missed out on this one, but I know another group, and if you offer this price, then they’ll be interested.” And we were interested, and we ended up selling that deal (the deal in Carlton) last May, and it worked out for everyone.

So when you’ve got a lot of supply from something, think about how you can leverage that for either helping others, or a future business for what you’re doing already.

Theo Hicks: Exactly. And luckily, in my situation, I guess they owed me a favor since I was able to send in that deal and I didn’t ask for anything; I was like, “Here, you can just have it, because I’m not gonna buy it.” So in return, I got hopefully a list of qualified residents to live on my property.

Joe Fairless: That’s cool, yeah.

Theo Hicks: So those are my two main updates. What about you, Joe?

Joe Fairless: Okay, let’s see… Miscellaneous things – it’s a busy week. Tomorrow we are likely selling a property, and tomorrow we are likely purchasing a property. Nothing’s final until our attorney e-mails us and says “We officially closed”, but we’ve got a big day tomorrow, a big Friday… Investors who are in the deal that we’re closing – you know which deal it is, and same with the investors who are in the deal we’re selling. So a day of celebration on both fronts.

Theo Hicks: But that property you’re selling – I know that your business plan is to hold on to them for five years… How long did you own this property before?

Joe Fairless: About two and a half, and it makes sense to sell when you hit your number. If you can get a purchase price that is similar to what you’re projecting in future years today, and then do a 1031 exchange for those investors who want to do that, into another deal, which we are doing, then we’ll do that all day long.

The property that we’re purchasing is in Duncanville, where we already own property, and I am very optimistic about that area. But we don’t underwrite based on optimism, we underwrite based on the here and now. However, if the values do continue to increase, then that’s the icing on the cake. I think there are some strong fundamentals for that area to continue to increase in value.

I’ve owned a house there since 2009, and I have my three homes – one of them is the one in Duncanville – for sale, through my sister, who is just putting out some feelers… And that house has doubled in value.

Theo Hicks: Wow.

Joe Fairless: But now again, it’s nine years, so that’s a long time… But the house is worth — actually, it’s more than doubled in value. It’s about one and a half times what it was. So anyway…

Theo Hicks: Before we move on, when you’re talking about Duncanville as a strong market, and even though there’s some projected rental growths and value growths, you’re always underwriting based off of the here and now… And based off of the last couple weeks when we’ve been talking about underwriting tips, one thing that I did wanna mention is that when you are underwriting these deals which you just mentioned, and let’s say you’re investing in a market that has had a 9% rental growth each year, and you’re projecting another 8% each year thereafter, if you underwrite that into your deal, you’re gonna have explosive, crazy returns, but what happens if you buy the deal and that doesn’t actually happen? Which is why when you are inputting your annual revenue growth, which is just not you forcing appreciation, but just natural rental growth, you always want to assume a 2%-3%, which is what the historical averages over a vast period of time, and not input the 10% that’s only projected through the research… Because that may be what happens, and if it does happen – great, fantastic. But if it doesn’t happen and you project that it’s going to happen, you’re going to be in trouble. I just wanted to mention that really quick, since we were on that topic.

Joe Fairless: That’s a very important note. Separately, as I mentioned, I’m selling my three single-family homes, and I have residents in each of those three homes, and their lease — they’re staggered, but pretty much through this next summer, and we’re not anywhere close to this next summer, so that limits our options for who our buyer is; it’s gonna have to be investors… Therefore, as I said, we’re kind of just sharing it with some people, but I personally wouldn’t buy them as an investor unless I really believed in the areas, and I didn’t care as much about cashflow at the price I’m gonna sell them for… So it’s likely — but every investor has their own approach… But I’m guessing that we’re not gonna sell the properties to an investor, and instead we’ll just wait until the leases expire, and then sell them to an owner-occupant.

Theo Hicks: Are you allowed to do any sort of buyout? Have you thought about that?

Joe Fairless: That’s a good question. I have not thought about that. I’m not in a rush, so I don’t care if they sell or they don’t sell over the next nine months. I’d rather just not rock the boat. For me, it’s more about the time I spend on it, and that would require more time, more conversations, and I don’t wanna spend any time or have any conversations about them. I just want them to either be sold, or just business as usual, and then whenever the leases are up for renewal, we just don’t renew them and we sell them on a one-off basis.

And let’s see – here’s an interesting thing that came up yesterday… I’ve never heard of this before. Frank, my business partner calls me, and he said he just got done having a nice lunch with a potential investor, who was discussing investing a significant amount of equity in our deals, and he said “Joe, guess how he heard about us?” I said, “I don’t know…” He’s like, “You’ll never guess!” I was like, “Alright, quit teasing… How did he hear about us?” He said, “He was following the SEC website for new registrations of securities”, because Ashcroft – we register every single deal through the SEC, like we’re supposed to… And he’s following that, and he saw that we had registered a new deal, so he reached out to us to see what other deals we have in the pipeline.

Theo Hicks: Wow.

Joe Fairless: Yeah. I didn’t even know you could track that to get alerts for when companies register deals, and Frank didn’t know either. I haven’t looked into it, and I don’t even know what I can do with that information, but I just thought it was interesting that an investor found us because we had properly registered an opportunity that we had just closed on, through the website, and they were tracking that somehow… So Frank had a lunch with this investor, and who knows, we’ll see what happens, but it was just interesting. I had never heard of that before.

Theo Hicks: That’s unique. It sounds like that’s an added benefit of — not the main benefit, but another benefit of creating a new LLC for every deal, rather than just not doing it for every deal.

Joe Fairless: Well, if it’s a security, it’s gotta be registered on the SEC. Creating anything aside, if you’re offering a security, you must properly register it with the SEC. So all of your entities are searchable on for each property, but that was really interesting.

Then the last thing I’ll mention is a reminder to communicate consistently with your investors, and have a consistent frequency of communication in addition to — go ahead and send out e-mails for important milestones, where you think people are curious about what’s going on.

For example, we do monthly e-mails for our investors by the 14th of the month, giving them the update on what’s going on with the property. In addition, if there’s a milestone like today, for example – we’re sending out distributions for the first time to our investor, and we wanted to communicate that to our investors on a particular property. So we’re sending out distributions for the first time on a particular property that we’ve just closed on about a month ago, and we wanted to notify them… So we crafted an e-mail… “We crafted.” That sounds– we wrote an e-mail… It sounds a little bit sexier than it actually is.

Theo Hicks: It was a very artistic e-mail.

Joe Fairless: [laughs] Yeah, a very artistic e-mail. We had some [unintelligible [00:22:56].16] and all sorts of stuff. We wrote an e-mail, and it simply said “Property name”, and it said “Distribution goes out today and tomorrow. We’re sending out first distributions for our *property name* today and tomorrow. ACH direct deposits will be sent out today, and checks will be sent out via mail tomorrow. For direct deposits, it should show up in your account within 2-3 business days, depending on your bank. Since we closed on *whatever date that is* your first distribution will cover the entire month of August (for example)”, and then we gave a $100,000 example, and we gave our approach for how we evaluate progress and how the future distributions will be handled. And we sent that out.

I got an e-mail back from an investor immediately after, and he said “Thanks, Joe. Your team rocks, as usual. My other partnerships could learn something from your communication style.” So other partnerships who are listening right now, I would suggest learn from this style, communicate consistently with your investors… It’s such a missed opportunity, because you could be nailing your projections, but if you’re not communicating to your investors and they’re in the dark on important things like when you get your first distribution, then you’re gonna get nearly the credit that you should for delivering on the business plan, which is the most important thing, in my opinion… But you’re not gonna get the return investors and the organic growth that you could by simply communicating consistently with them.

Theo Hicks: I’ve been going on Bigger Pockets a lot lately, just posting content and reading multifamily forums, and whenever I come across a forum where someone asked about a specific syndication group or crowdfunding group, or they are just asking “Hey, I’m interested in becoming a passive investor. What should I do as the next steps?”, and you read through it, every single time they mention a name, one of the things that they will say is about the communication style.

I have seen your name come up a lot, and [unintelligible [00:25:06].17] is how you communicate about the deal constantly. And I’ve read a couple, not about you, but other groups, where they said that the communication is not as great, or just nothing about communication was on there at all. But yeah, it doesn’t take that long to do; it just takes 10-15 minutes to write this e-mail for the update. It doesn’t take that long, but it’s so important to keep top of mind with your investors, let them know…

I know since I’ve met you you’ve had tons of e-mails and tons of responses about your communication style and how important that is to people and how much they appreciate it.

Joe Fairless: I love that you’re looking at it from the perspective of analyzing what investors are saying on Bigger Pockets and other forums and then applying that to this, because it’s true — just like I did research, and I believe you did research on Amazon Reviews for books prior to use writing the Best Ever Apartment Syndication Book, that way we know areas to address… And just if that didn’t convince an apartment syndicator to do it, then let me try one other angle and then we’ll move on.

The other angle is simply be selfish… Because by proactively communicating consistently with your investors, you’re gonna decrease the amount of one-off e-mails you have to reply to. So you’re gonna increase the amount of time that you have to spend on other things. If organic growth and having good things being said about you everywhere, about your communication, is not a driver for you, then just look internally and be selfish and do this, because then you’ll proactively address the questions, and then you’ll increase the amount of time you can spend doing other things that you wanna do.

Theo Hicks: Exactly. And another point before we move on – this is what I wanted to say about when I was going through Bigger Pockets, for syndicators or just investors in general… You will learn a lot by going on those forums – I’ve just kind of been doing it again recently, and I’m realizing how much value it adds, because you’ll see people that are either your potential customers… For example, if you’re a syndicator, you’ll see people who are interested in passively investing on there, and if you read what they say and the questions they’re asking, you can kind of figure out ways to add value, ways to attract them to your business that you might not have thought of otherwise.

For example, I was reading a thread where the person was asking questions about distributions, for example, and what factors are used to calculate those distributions. When I read that, I’m just like “Okay, I need to make sure that when I am going to present deals to investors, I need to make sure that I explain distributions in a simple form”, and actually explain them, because in my mind, since we do this every single day, we kind of forget that not every single person out there knows exactly what cash-on-cash return means, or how the internal rate of return is calculated… So figuring out a way to communicate that to your investors. And then also, selfishly, you’re not gonna have to have a bunch of one-off e-mails asking “What does COC mean?” or “What does IRR mean?”

This is one specific example, but  going on there and reading posts from either people that do what you do, that are trying to get into the business, or people that are kind of your customers, a.k.a. passive investors, and seeing the type of questions they’re asking so that you know to proactively address them and how to answer them when you’re having conversations with investors, or potential clients, or other people you wanna partner with.

Joe Fairless: Love it.

Theo Hicks: Good updates, Joe.

Joe Fairless: You too, Theo.

Theo Hicks: Thanks. So just to wrap up, make sure you guys and girls pick up a copy of the Best Ever Apartment Syndication book on Amazon. If you leave a review and take a screenshot and send that screenshot to us at, we will send you an e-mail with some apartment syndication goodies, some extra content and Excel spreadsheets that will help you start your business.

This week’s review comes from Christa. She said:

“I’m only halfway through this book and completely blown away by how much information there is… And it’s well-presented and enjoyable to read. I particularly like how Joe and Theo wrote this in a way to relate to all phases of investing. One helpful hint is this – grab a highlighter or some post-it tabs. As I’m reading, I know I probably should pause and actually do the exercises, and mark the items that I will want to remember, but I just wanna keep reading, ha-ha! Can’t wait to start the mentorship program next.”

Joe Fairless: Christa, thank you for that review, and I’m glad that you’re getting a lot of value from the book. Everyone, I hope you are as well. I think that’s all we’ve got. I enjoyed this conversation, Theo…

Theo Hicks: Me too.

Joe Fairless: …and everyone, thanks for hanging out with us. I hope you have a best ever day, and we’ll talk to you tomorrow.

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