Neal is a Best Ever listener and now a first time guest on the show. His approach to real estate was to become a Realtor to help pay for his PhD, and now he owns a full service firm specializing in investment properties. A lot of his clients come to him as ‘green’ investors that need some more education and help to get going. He will help them learn the ropes of real estate investing before helping them purchase a property. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Neal Collins Real Estate Background:
- Runs a Portland-based real estate firm that specializes in investment properties, founded in 2014
- First exposure to property management in 2006, he worked as a leasing agent for a 300-unit student housing complex
- Started in real estate to pay for a PhD, now has a full service firm
- Based in Portland, OR
- Say hi to him at http://chooselatitude.com/
- Best Ever Book: Five Day Weekend
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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, Neal Collins. How are you doing, Neal?
Neal Collins: Hey, Joe. I’m great. Thanks so much.
Joe Fairless: Well, I’m glad to hear it, and you’re welcome. Looking forward to our conversation. A little bit about Neal – he runs a Portland-based real estate firm that specializes in investment properties. They also do property management. He founded it in 2014.
His first exposure to property management was way back in 2006, where he worked as a leasing agent for a 300-unit student housing complex. He started real estate to pay for his PhD, and now he’s got this full-service firm. Based in Portland, Oregon. With that being said, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Neal Collins: Yeah, Joe. Thanks for the introduction. It’s a pleasure to be on the show. I’ve been listening to you guys since we really started real estate… And it was one of those things that we never intended to go into this industry; I was doing marine conservation work and studying whale sharks in the Maldives in 2013. Then in 2014 I was looking for a path to gain more education and advance in my field, and that was a PhD in California. On the way there, we stopped off in Oregon, had a little bit of time to kill… I wanted to really jump into a project in real estate. I had been listening to podcasts and was really intrigued with the idea of either flipping, or passive income through rentals.
We beat the pavement, ended up finding a really motivated seller… He wanted to sell on contract through seller financing, which was a mind-blowing concept at that time. Ended up not having to do anything to the property. I sold it to a builder not that long after.
Then I ended up having to do some really interesting financing moves where we couldn’t cash out our original seller, so we had to go find more property to collateralize a trust deed against… Which ended up going down this big snowball of how do you find investment properties, getting to learn the off-market multifamily world, getting to establish relationships with brokers to go find more multifamily deals…
It got to a point where I was like, “We’re making some pretty good money in real estate.” We were doing a lot of really good work of buying these buildings, really working with landlords that either had deferred maintenance, or they were just really fed up with dealing with their tenants… So we were raising money, putting money into these projects, and got to a point where we had a couple dozen tenants, and we really wanted the care and attention towards the property management that we had given to the renovations.
So we started to manage the properties ourselves, which organically turned into us creating a management company. We had to take on other employees to do leasing, and then property management… And once your overhead goes up, as you know, you’ve gotta figure out more ways to increase revenue.
Joe Fairless: Yup.
Neal Collins: We had been turning away other colleagues’ requests for us to manage their properties in the same areas, because they wanted somebody hands-on that they knew, they trusted, they liked the way that we were doing it… And we had been saying no this whole time, and then we finally said “You know what, maybe management is a really interesting realm, that would help us invest more”, and keep us on that nice edge of learning what’s going on in the industry, best practices… And really, what we thought at the time – which certainly holds true, but it takes a lot to get it going, is it does tee up investing opportunities.
Once you are able to establish a brand, you’re able to establish relationships with owners, and really just finding ways that you can increase your value to them, because they will be in a position one day that they do wanna sell. You do know that property in and out better than anybody else. And even if we don’t end up buying their properties, which 9 times out of 10 it doesn’t work that way, we find that we can really help them buy more properties, sell their property, 1031 exchange into more property…
So it was really about a year ago that we fell into the position of “If we look at our revenue, we’re doing more revenue from realty than we are from property management”, and that’s just from our management clients that are looking to do more activities and figure out where they wanna go. Then, once we realized we several hundred tenants, that we really believe in the power of real estate and buying your own home, we started marketing to them and helping them buy their first homes ever.
So we created a full-service realty company in January of this year, and we’re off to the races. We’ve got a couple dozen agents now.
Joe Fairless: High-level, what are the services your company offers?
Neal Collins: For outside clients, we do property management and brokerage, and now we’re starting to do more investment-tailored services, kind of bundling together a couple different investors that have some cash and wanna go in as a group to buy buildings.
Joe Fairless: What’s your role in that bundling of services?
Neal Collins: I get to play sponsor in that role, or I get to play deal-maker, just helping to be the broker to go find deals.
Joe Fairless: Have you done one of those?
Neal Collins: Yes.
Joe Fairless: Let’s talk about that. Can you give us an example of it, with numbers and just the story about the deal?
Neal Collins: Yeah, I think instead of going into the analysis of it, the biggest thing that I’ve really had to wrap my head around is 1) there’s a lot of people that come to us that don’t have huge down payment just ready to go, and they don’t want to be that concentrated; they are looking to diversify their funds a little bit more… So it’s been a real learning opportunity and a challenge for me to say, okay, how do I guide people, and realize that I’m not the only cook in the kitchen anymore? …and how do we go out and how do we find the right kind of deals, where for us they’re gonna be in our backyard, which is Portland, Oregon, so it is a pretty expensive market, and then how do educate people on “Hey, we’re not going for fully stabilized assets. We’re really looking for something that’s got some opportunity from value-add, either from poor management in the past, or low rents, or some kind of deferred maintenance and obsolescence on the property…” And really working with these — some are pretty green investors, that maybe have a rental house or two, but they’re stepping up into the multifamily world.
So that’s been the biggest thing for me, really trying to not have that mentality of you’re herding cats, but you’re there to provide opportunity… And for us it’s not these big 300-unit deals, it’s more like as small as a duplex, up to 20 units. That’s been my learning lesson.
Joe Fairless: Yeah, noted. And you mentioned you’re a loyal listener of this podcast, so you know how fun it is to hear specific examples… So noted on the concept, but let’s talk about a specific example, just to bring it to life. Can you talk about one?
Neal Collins: Yes, I’ll talk about a fourplex that we purchased… Kind of in the center of Portland, great location; it was an off-market deal, where the owners had inherited the property 19 years, they’re farmers, [unintelligible [00:09:21].13] in a little community outside of Portland. Beautiful place. It was very charming, built in 1924, craftsmen detail… But we looked at it and we said, “It’s in an A location, the rents are quite below market.” We’ve got a lot of stringent landlord/tenant laws here, so figuring out how do you actually bring this building up to market rate in a short amount of time? Because we went under contract for $800,000, and we knew that we had to put about $50,000 to $100,000 worth of work into it. So not only did we have to raise the $250,000 down, but we also raised an additional $100,000 on top of that.
Then we offered the tenants a way that they could either stay in the apartment building at an increased rate, or we could pay them a relocation fee.
We were able to get the building, do some work on it… Really, a lot of it is cosmetic, and go in, do new countertops, backsplashes, refinish the hardwood floors… So we were able to take rents from around $900/month to $1,600/month. Right now, the building is worth about 1,3 to 1,4 million.
Joe Fairless: We’ll take it! Nice work on that. How long did it take you to go from you closed on it, to today and it’s worth 1.3 million?
Neal Collins: It probably took us all-in six months to do that, because we’re looking at the value of how long do we have to season the property. From a bank perspective, it took us a year to actually refinance that… So we’re just finishing up with the process on that. But it’s really one of those things where we can crank on that forced appreciation lever pretty hard in these really expensive markets, and really provide a lot of value of just “Hey, we’re gonna bring great management to it, we’re gonna stabilize it, and we know that by turning this property around from its financial performance, that it’s gonna be worth significantly more on the back-end.”
Joe Fairless: And you said it’s a fourplex… How many out of the residents in those units agreed to increase their current rent from $900 to $1,600?
Neal Collins: We increased one not that much. He stayed, and then we actually helped him find another property. He was looking for a house to buy, so he had a little bit more flexibility on that side. He made good income, and wanted to stay in the area… So it was really fun to actually work with him.
Then the other residents in the building — you know, it is a big jump for them to go from $900 to $1,400, $1,500, $1,600… And that’s something we are very cognizant of, and we don’t want to go into any kind of a displacement attitude, or be blasé about that.
That’s the benefit of saying “This is what we’re gonna be doing to this property. It is gonna be a lot nicer, we are gonna put a lot of money into it, but here’s 20 other rentals in the neighborhood that we manage that we’d love to see become your home.”
Joe Fairless: Sorry, I missed that… So 1) stay, but then they didn’t pay all the way the $1,600, then you found him a house… But you said two, three, and four – what did they do?
Neal Collins: We give them the option if they wanna move into another property within our portfolio.
Joe Fairless: So what did they do?
Neal Collins: I do not know what they did. They moved out of the fourplex that we had to renovate.
Joe Fairless: Okay, so they moved. Got it. So they didn’t accept the increase. That’s what I was asking. Okay. So one stayed, but not for the rate, and then two, three and four, they left as well. Basically, you offered either a higher rate or cash for keys. Did you give any cash to any of them for leaving?
Neal Collins: We did. That’s actually been institutionalized here in Portland through what’s considered a landlord/tenant relocation fee. It’s not cheap; it’s per bedroom in the unit. If you have a one-bedroom unit, you’ve gotta pay $3,900.
Joe Fairless: Dang!
Neal Collins: Yeah, right. So if you’re doing that on scale, it adds up really quick. For us, we just have to really factor in, okay, if we’re gonna be buying a building and then having to put money into it, and we know that we’re gonna be turning the financial performance around – just capitalize that up front and plan for it… And if they don’t leave, then it’s extra gravy, because you’re not having to spend that money.
And a lot of these — it’s like, I completely understand the hassle that you have to go through as a resident, and you’re getting a notice to either pay almost double, or find another place to move to.
We’ve had a big learning lesson on the West coast, of “Okay, how do we work through these issues [unintelligible[00:13:57].24] politically?”
Joe Fairless: How many bedrooms per unit were there?
Neal Collins: Three of them were one-bedroom apartments, and then one was a two-bedroom.
Joe Fairless: Okay, got it. So did you have to pay the $3,900 for the gentleman who you helped find a new place, too?
Neal Collins: We did not, no.
Joe Fairless: Okay, got it. Cool. So that’s around 12k-15k, depending on how the math works on that… But for a property that is now worth — you said you paid 800k, you put about 100k in, so all-in around 900k, and it’s worth 1.3 million… So you’ve got about 400k in equity on it, right?
Neal Collins: That’s right.
Joe Fairless: And how did you find it? You said it was off-market.
Neal Collins: Yeah, we had sent out direct mail to long-term owners. We really like to go that route of seller-financing. However, this one was not seller-financed; it was conventional. That’s really what we like in that asset range of — okay, if it’s two to four, it is a pretty big purchase price for us, but we can put 30-year fixed, low-interest rate financing on it.
Joe Fairless: Who did you go with on the loan?
Neal Collins: We went with a local bank here called Umpqua.
Joe Fairless: What type of terms did you get? You said 30-year fixed. What about the rate?
Neal Collins: The rate was 4.5%, 25% down, 30-year fixed.
Joe Fairless: And how did you structure the general partnership with this deal? Along with the limited partners, what was that structure?
Neal Collins: Whenever we’re structuring that, we will be kicking in some of our own funds, and we will be getting a sponsor’s fee on top of that. We didn’t do an acquisition fee, and the other limited partners kicked in the rest of the equity.
Joe Fairless: Okay, cool.
Neal Collins: And we are the ones that are actually running the personal guarantee of it.
Joe Fairless: Okay, got it. So you signed on the loan, because it sounds like it’s a recourse loan…
Neal Collins: Yeah. Unfortunately. We’d like to get out of that… [laughs]
Joe Fairless: Right, right.
Neal Collins: In that residential product, it was common for us to have to do that.
Joe Fairless: Okay. So you signed on the loan, you found the deal, and your limited partners put up the $300,000 total for the project?
Neal Collins: Well, it was a little bit less than that, because we came in with some cash.
Joe Fairless: You came in with some cash, okay. Got it. And how do you structure the GP/LP split?
Neal Collins: We did an 80/20 on that, but it will range between 80/20 to 70/30.
Joe Fairless: Depending on performance hurdles?
Neal Collins: Right. And the management piece… We’re bringing in our management company on it, so it’s a little bit more attractive for us to play in that role. So it really depends on the deal, and who’s bringing it to us, and how much effort we’re having to put in… It’s really deal-by-deal, instead of “This is the one way that we’re gonna run it.”
Joe Fairless: Why do a syndication versus joint venture on this deal? The reason why I ask is with this size of property, getting it registered with the SEC, and getting a PPM and everything situation can be a little costly, versus doing a joint venture, where you don’t have all that, but everyone has a say in what direction the property should go.
Neal Collins: Right. I think a lot of it really depends on how active you want other people to be in it. For us — this is a newer role for us. Our financial resources only go so far, but we have a lot of expertise in this area now, and if people are coming to us saying “Hey, we wanna bet on you and your ability to go find these properties. How do we do that?”
For us, it’s really getting to learn how to put together deals, and what’s the best structure and what’s not… And every single decision that we make isn’t perfect, but it’s been a great learning opportunity for us to figure out “Do we want a joint partnership, or is it something where we’re bringing in more people that we already have relationships with?” We wanna have this notch on our belts, so that we can — say, instead of a four-unit, let’s go take down a 40-unit.
Joe Fairless: And you said it’s been a good learning experience… What are a couple things that you’ve learned from the experience?
Neal Collins: In terms of working with others?
Joe Fairless: Anything. Renovations, working with others… Whatever direction you wanna take that question.
Neal Collins: Okay. Well, some of the biggest learning was how to navigate through a low-cap environment. If you’re working with investors from around the country and you’re doing work on a property on the West Coast, or on the East Coast – it doesn’t really matter – we’ve got some pretty low cap rates… And you’ve really gotta come in and show them, “These are the examples that we’ve done in the past. If we’re entering in on a low cap, we know that we’re gonna be able to increase the value.” So just really being adamant about your buying/investing criteria has been a big thing, because it’s not a market for us where we can just say “You know, I really like this building. It’s fully stabilized, and we see a lot of opportunity with it.” Unfortunately, those days and deals are very numbered.
Joe Fairless: What specifically, or maybe quantifiably, what do you look for in a deal, whenever you’re assessing it? In terms of age, or unit size, or price point, or median income within a certain radius of the property… That sort of stuff.
Neal Collins: I really look for a solid tenant location base where we know that there’s gonna be neighborhood amenities around, we know that we can bring in different types of programming that’s gonna increase resident retention… Because if you look at the numbers – and this is what’s great about having a management portfolio, is we say “How can we increase the financial performance? Is it through increasing rents, or is it through resident retention long-term, after we’ve stabilized the property?” For us, we’re not gonna be tripping over dollars to pick up the pennies.
We’ve found if we can bring in amenities like bike storage, and get rid of carpet and put in hardwood flooring, and do marmoleum in the kitchen, or bring in laundry, or shared laundry with storage spaces… It’s all these little things that we can do to help increase that rent, to get to stabilization, and then instead of having a tenant turnover every 12 months, it’s how do we actually get them to stay 24 months, or 36 months? That has been a huge boost in terms of not only our properties, but our property management clients’ properties, where we average about a 31-month tenancy… And you’re not having to pay re-leasing fees, you’re not having to turn these units, but you’re able to stay at market rent a lot closer. That’s been a big one for us.
Joe Fairless: Congrats on that average 31-month tenancy. That’s wonderful, and it’s impressive. One question I have on that is have you looked at the average month tenancy for single-family home renters versus buildings that are 5+ units and compare that in your portfolio for what the averages are for those two groups?
Neal Collins: I don’t look at it in grain like that, because I’m looking at more of the portfolio from a broader scale, of what’s our vacancy rate and how long are tenants staying in there. I would just anecdotally say that a single-family house is going to have a longer stay, because it’s just more of a hassle to move into a house and then have to move out 12 months later.
But we’ve seen examples where a resident will stay in a multifamily property for a long time. [unintelligible [00:21:30].22] I see the larger properties are turning over more often, and maybe that — it’s more of a hypothesis, that if you can find that balance of how to create community that they really buy into, and they feel like they’re a part of something a little bit special, more so than the apartment community next door to them, then they’re gonna stay longer.
Joe Fairless: Yeah, I agree. I absolutely agree. The follow-up question is what are some specific things you or your team have done to increase resident retention?
Neal Collins: One, it’s looking at your management practices. Are you communicating well with your residents, and telling them what’s going on, and giving them opportunities to give input? And then really finding those programs, like “How do we encourage people to ride their bikes to work, or to use public transportation?” So as simple as putting in covered bike storage, where the bikes are gonna be secured and they’re gonna get wet in the winter time is a big boost for people in Portland, Oregon; we have a pretty big bike commuter population, and you’d be shocked at the amount of apartment buildings that don’t offer these amenities.
Where if you’re going in and you’re buying a building that’s got a really large unfinished basement, how do you go in and actually build storage units? And you can even charge for monthly rent on that.
The biggest thing that’s coming to mind right now is once we started to allow pets, we saw a huge increase in the amount of applications that we were getting on vacancies. It was staggering. A lot of people have pets, and they do pay for that privilege, but it is something that I feel we open ourselves up to a broader range of people that are looking for homes, so we’re able to increase the financial performance on the building that way, because we’re gonna be charging pet rent… And they do like to stay longer, whilst we are now allowing for them to have their animals, and hopefully there’s a yard or something where they can run around.
Joe Fairless: What’s your best real estate investing advice ever?
Neal Collins: My best real estate investing advice is really focus on self-discipline first. If you wanna be doing apartment syndications, you’ve really gotta make sure that you’re firing all cylinders. If you wanna get to achieve a goal, start with putting in those practices of “How do I get myself better? How do I form daily disciplines that are gonna lead me to that goal?”
Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?
Neal Collins: I’m ready, yeah.
Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.
Break: [00:24:08].22] to [00:25:07].02]
Joe Fairless: Best ever book you’ve recently read?
Neal Collins: The best recent book that I’ve read is from Garrett Gunderson, and it’s called “5 Day Weekend.”
Joe Fairless: Best ever deal you’ve done that we haven’t talked about?
Neal Collins: The first deal that we ever did, actually… We kind of briefly went into it. We got 2% interest for 30-year financing. That was just incredible, and mind-blowing at the same time that we didn’t have to go to a bank to get financing.
Joe Fairless: A mistake you’ve made on a transaction?
Neal Collins: Oh, god… There’s too many to even count. I think really looking at our experience as real estate agents, there’s so much paperwork and you really have to make sure that you’re on top of it. I can’t tell you how — that feeling in your stomach of like “Oh shit, I just lost some paperwork”, or I told them that it was gonna be one way, but it’s actually the other way, so… I don’t even wanna bring out those skeletons from the closet, but invariably they do happen, and you just try to minimize it and move on.
Joe Fairless: Best ever way you like to give back?
Neal Collins: We really like to work with people that they self-select a non-profit that they wanna donate towards, and we’ll actually match a realtor commission towards that. Or we’ll just say “Hey, if you really like whatever NGO, we will give a percentage of our commissions to that organization.”
Joe Fairless: How can the Best Ever listeners learn more about what you’ve got going on?
Neal Collins: You can go to our realty website, which is ChooseLatitude.com, and you can find our company Latitude Realty and Property Management. Or they can reach out to me directly via e-mail, which is firstname.lastname@example.org.
Joe Fairless: Neal, thank you for — well, first, you mentioned you’re a Best Ever listener, so thank you for listening. I’m glad you get a lot of value from the podcast. And thank you for being an interview guest; I really enjoyed meeting you and learning about your background, as well as the fourplex that you all bought for $800,000, put in $100,000, and you got into the specifics of how you structure it with your investors, the business plan, the financing… You know we love that stuff on the show, so thanks for talking about that and getting into the details, as well as your business. And when you look at deals, look at not only how can you increase the rents through adding value, but you can add value through resident retention, so increasing the number of months residents live at the property, which I think most of the listeners think about already, but you got into the specifics of how you all do that, the specific ways, and how that’s always incorporated into your business plan, which is really interesting and really necessary… So thank you for talking about that.
I hope you have a best ever day, I really enjoyed our conversation, and we’ll talk to you soon.
Neal Collins: Great. Thank you, Joe. I appreciate it, it was a pleasure.