January 29, 2019

JF1610: From Prison Guard To Successful Apartment Investor with Darin Garman

If you’re in a job that maybe you don’t love, Darrin was there too. Luckily, he came across the book Rich Dad Poor Dad and like so many of us, was turned on to real estate investing. He’ll walk us through his current strategies and how he got to where he is today. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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Darin Garman Real Estate Background:

  • Investing in real estate for over 25 years
  • Has been responsible for over $800,000,000 in apartment and investment property acquisitions
  • Has raised over $70,000,000 in funds for different apartment investment properties
  • Based in Marion, IA
  • Say hi to him at http://www.heartlandinvestmentpartners.com/


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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, Darin Garman. How are you doing, Darin?

Darin Garman: I’m doing great, Joe. Thank you.

Joe Fairless: My pleasure, nice to have you on the show. A little bit about Darin – he’s been investing in real estate for over 25 years. He’s been responsible for over 800 million dollars in apartment and investment property acquisitions. He has personally raised over 70 million in funds for different apartment investment properties. Based in Marion, Iowa. With that being said, Darin, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Darin Garman: Sure. I didn’t start out as a real estate; I actually graduated from college with a degree in criminology, so Joe, if you’ve ever watched any FBI/CIA shows on TV and how glamorous that looks being a cop, that’s kind of what I thought I wanted to be. When I graduated from college, what I found out was you don’t go from being a college graduate to what you see on TV, oddly enough.

Joe Fairless: [laughs] Imagine that…

Darin Garman: Yeah. So I started my criminology/law enforcement career, because of course at the time that’s what I thought I wanted to do, as a prison guard. So I worked for a prison in Easter Iowa, for the Department of Corrections, and it only took me about a couple of years to figure out “You know, I don’t really know if I wanna do this for the rest of my life as a career.” So during that time, I started really doing some soul-searching, and “What do I really want to do with my life? What do I wanna get involved in? What do I really wanna do for the next chapter?” and I thought I would really enjoy being involved in the real estate business, specifically the investment real estate business. I had this thought for probably a year, but I just didn’t have the guts to quit and just jump into it.

So one day I’m sitting in the warden’s office. Now, why in the heck am I sitting in the warden’s office? Because they found this empty liquor bottle outside my office, so of course, they think I had something to do with bringing alcohol in for inmates to have a party. Of course, I had nothing to do with it. But as I’m sitting there, there’s this book that probably most everyone’s heard of, that is called Think and Grow Rich, and this book is sitting on the bookshelf, in the warden’s office. I’m like, “Well, I’m sitting here waiting… It looks like an interesting title”, so I grabbed the book, I started reading it, got into it just a little bit, went and had the meeting with the warden, and got cleared and absolved of everything, but not only did that leave a sour taste in my mouth, I’ve got this book in my hand, right? So I took the book home, read the book, finished it, and that’s when I decided “You know what, I’m gonna jump into the real estate business.”

After I read that book, a couple weeks later I jumped into the real estate business, and have been involved in the real estate business ever since.

Joe Fairless: What was the last deal you purchased?

Darin Garman: Let’s see… The last deal that we purchased – and I say “we”, because what I ended up doing in this particular one, Joe, is we did put a syndication together to buy it. It was a 24-unit property consisting of two side-by-side 12-unit buildings, all two-bedroom units. And our focus is in Iowa, so… Everything’s relative with all of your listeners and where they’re at in their markets, but we purchased this project for $33,000/unit for two-bedroom units.

Joe Fairless: Okay. So you syndicated it, a 24-unit property. Quick math, 33 times 24, so that’s $792,000 purchase price. What is the threshold for you to syndicate a property, versus do a joint venture?

Darin Garman: Actually, there’s a couple of thresholds that I’ve got. There’s a property size threshold, and then there’s investor threshold. I’ll quickly give you an idea of what my property size is. In the market that I like to own real estate, it’s typically 24 units or above. Anything smaller than that, just because from an economies of scale standpoint, management and all the things that go into that, it just makes things a little more challenging than what I’d like… So from the size of the properties standpoint, typically the minimum that we would look at would be 24 units.

Now, when I first started in the real estate business, just as a quick sidebar, that wasn’t always the case. When I first started it was a four-unit here, an eight-unit there to get the momentum going. But as of right now, Joe, my minimum is 24 units.

In terms of investors, the investors that I deal with are either investors that have been with us a long time, and they’re basically letting me know “Hey, when you come across this kind of property, that has this kind of criteria that we previously discussed, just pretty much count me in.” And then there are new investors too that get involved with us at various times during the year.

So a lot of what we look at too is driven by the demand from investors, too. So if we’ve got a lot of investors looking for or waiting, especially with the way the stock market has been recently, with the ups and downs and the rollercoasters that we’ve seen recently, we’ve got a lot of investors waiting for opportunity, so we may be a little bit more flexible with our criteria, depending on the property.

I don’t operate on any hard and fast, etched in stone kind of operandi, so to speak, but in terms of size, we’re usually in that 24 units or above. In terms of investors, of course they need to be qualified and accredited, but if there’s a lot of demand, we may be a little bit more flexible, as long as the property meets our criteria, of course… We may be a little bit more flexible on what we’ll take a look at and possibly try to purchase.

Joe Fairless: For the 24-unit that you did, what was the investor structure on that deal?

Darin Garman: When you say “investor structure”, give me an idea of what that is.

Joe Fairless: Like percent ownership. You took a certain percent ownership, they took a certain percent ownership, how much did they put in, how much did you put in, if anything, what were the fees that you charged – that sort of thing.

Darin Garman: Oh, okay. Sure. I tend to be conservative when it comes to syndication. What do I mean by conservative? I mean conservative mainly in terms of financing. As a result, when our syndication purchased something we will typically put 40%-50% down payment. And what that does for us and for my partners is it not only gives a little bit of room in the event things don’t work like you think they will from a debt service standpoint. So we’re not highly leveraged in the event the occupancy isn’t up to where it needs to be, if there’s an issue in the economy, those kinds of things.

We buy ourselves a little cushion in terms of risk with our larger down payment, but the other thing that it does too when we get financing is it avoids all sorts of issues. Those issues I’m talking about, Joe, are personal guarantees on loans, number one. The other thing is it avoids things like our investors having to produce income tax returns, and personal financial statements, and those kinds of things. I wanted to make it as convenient as possible for them to enjoy owning the properties that we purchase, with as low of a risk as possible… So we choose to put larger down payments on our properties because of that.

There are other financing avenues you can go through, as everyone is probably aware, where you can leverage a little bit more and maybe increase the return a little bit, but that’s just our process. I tell you all that because we’re usually going into a deal with 40%-50% down, so usually [unintelligible [00:09:13].01] part of it is usually in that 5%-10% range, depending on the project and some of the things that are involved in it… But just in general, I’m around 5% to 10% of the ownership, and then depending on the size of property, I may have anywhere from a minimum of maybe five investors, maybe all the way up to 20-30 investors in that particular property.

This 24-unit property that we’re talking about, Joe – this was eight investors including myself, this particular one.

Joe Fairless: Okay, got it. That’s really helpful. So you had eight investors including yourself; the purchase price was around $800,000, so did you raise around 500k or so to cover the down payment plus cap-ex?

Darin Garman: That’s a  great question. Yes, exactly. I cover the cap-ex right upfront. I don’t raise just enough to get under the wire in terms of what it’s gonna require to purchase the property. I’ll go ahead and take a look and see what that cap-ex is going to be, or what I think it’s going to be over the next (let’s say) 18-24 months, and I’ll go ahead and have that money raised upfront and have that ready to go, versus having to go back to any partners and say “Oh, by the way, now we need this, because we need to repair or we need to make an improvement.” So I’ll do that right upfront.

Joe Fairless: How much in total equity was brought to this deal?

Darin Garman: The total amount on this one was 440k.

Joe Fairless: Okay, got it. And what type of loan do you get on this type of deal?

Darin Garman: I will work locally with a handful of commercial banks and credit unions, and my arrangement – I guess that’s probably the right word – with them is the loan-to-value will be in the 60% loan-to-value range. In return for that, what I’ll typically look for is a 20 to 25-year amortization. If I can get a longer-term amortization, that’s great, but I can live typically with a 25-year amortization.

With that 25-year amortization, the interest rates will be as competitive as possible, and those loans will be with a fixed rate for probably around anywhere from five to ten years, depending on what I’m able to negotiate.

Joe Fairless: How long ago did you buy that one?

Darin Garman: Middle of October. October 15th.

Joe Fairless: Okay, so a couple months from when we’re recording this call… What’s the business plan for that deal and how long do you plan on holding it?

Darin Garman: Well, it’s interesting you mentioned that, because we ended up purchasing this property at a discount… And here’s what I mean by that – I don’t mean discount because of anything that was going on with the property, like being in foreclosure, or anything like that… It was an owner that owned it long-term – and this will ring true to you, Joe – did not keep rents up to market levels, and was not active in controlling his expenses. So we own similar properties that were recently appraised for just a tick over a million dollars. So this property, because of the owner being slow to get rents up to market levels, because the owner has owned it for so long – and it’s performed fine, but I find that a lot of owners when they own their properties for a long period of time and they’re performing well, they don’t do a good job of keeping their rents up to market levels and controlling their expenses…

Joe Fairless: Yup.

Darin Garman: So this was one I identified right away when it was put on the market; it took me five minutes to look at the numbers to know that we had something very interesting here. The funny thing is the owner was asking $795,000 for it. We ended up purchasing it for the asking price. And you may say, “Well, that’s crazy. Why in the hell would you purchase it for the asking price?” Well, I know it’s a million-dollar property. Once we get the rents up to market levels and once we get some of those expenses controlled, we can be a little more proactive in controlling those expenses, we’re gonna have a property over a million dollars.

So the plan is to get that process completed and done over the next 18 months, as leases turn over, as those things happen there, and also work on some of those expense items, including the property taxes and the insurance and some of those other expense items – we’re gonna get those under control.

So the plan is to be in a position where the income is about as high as we’re gonna be able to get it for now. Those expenses are gonna be probably as low as we can get them, without sacrificing tenant amenities and those kinds of things, so that net income is gonna be at a really nice level. We’re thinking within the next 18 months we should have a property that will probably look over a million, or 1.1 million in value.

Joe Fairless: And then do you sell, or refinance, or just hold on to it?

Darin Garman: That’s a great question, because that’s a question that I have with my partners every single time we look at buying a property. We cover that before we even start getting really serious about it; it’s “Okay, what do we do next?” Now, my answer might surprise you a little bit. I typically don’t come up with the answer at that time. What does that mean? Well, what that means is what I wanna do with this 24-unit property – I wanna get it to its highest and greatest value as soon as possible. In this case, I’m projecting it’s going to be 14-18 months down the road. Once we’re there, then my partners and I will have the conversation. It’s basically, “Okay, we’re now at the point where it’s going to increase in value, it’s still going to be fine, but now those value increases are gonna come a little bit slower versus what we’ve just had over the last 18 months. What do we want to do? Do we wanna refinance? Do we wanna sell it and possibly do a tax-deferred exchange? Do we just wanna hold on to it and operate it for a year or two, and just enjoy the property as it’s operating?”

I’m one of those guys that doesn’t prescribe something right when we’re taking it over when it comes to that. My prescription, so to speak, is “Let’s get it to that highest and greatest value first, as soon as we can. Then let’s have the conversations.” Because who knows, the market might be different at that point in time, there may be good opportunities or they may not be good opportunities. I like to wait it out a little bit, get the property to where it needs to be first, then we have those conversations. On this one, the jury is out; I don’t know what we’re gonna do.

Joe Fairless: How do you model that, when you’re doing projections to investors and you’re sharing “Okay, here’s the deal. Here’s what I think we can do” – you have to have some sort of definitive projected end date in the financial projections, so what do you do when you’re sharing your financial projections?

Darin Garman: Great question. I basically use windows. I’ll use 6 to 8-month windows is what I’ll do. We’ll go ahead and we’ll put our financial projections together, and I don’t make it over-complicated, so I will typically go with a worst case, a probable case, and a best-case scenario. Then we’ll go ahead and we’ll get those projections put together. I’ll have a window of about 6-8 months on when I think we’ll be at that point where we’re going to have more intelligent conversations on what we’re going to do; we’ll model the financials based on worst, probable and best, with a 6 to 8-month window.

Right now, my window with this particular 24-unit, is 18 months. A few months before that we’ve got a model, we’ve got a model two months after that on what things are going to look like, in terms of where the rents are, where the income is, loan balance, those kinds of things that investors are going to want to know to make an informed decision. So I’ll put that out there and use a 6 to 8-month window, and then based on how quickly we get the property ready and we’re in that position where we can start having that conversation, then we’ll start having that conversation. And it may be a little bit early, which is fine, because we kind of modeled that, or it may be a little bit later; maybe things go a little bit slower than what we think they would, so we’ve got a model for that as well.

I use more of a 6 to 8-month window, versus saying “You know, on March 2nd of 2021 we’re gonna have a meeting.” I’m exaggerating a little bit there, of course, Joe. I don’t get that specific, but I use those 6 to 8-month windows instead, and it’s actually worked out pretty good.

Joe Fairless: Yeah, that’s really interesting. I hadn’t heard of taking that approach. How many properties do you have under management right now?

Darin Garman: 672 units right now.

Joe Fairless: And approximately how many properties makes up the 672 units?

Darin Garman: 23.

Joe Fairless: 23 properties, okay. For each of these deals – quick math, 623 minus… Or 672. I’m short-changing you, sorry about that. [laughs]

Darin Garman: Yeah, don’t do that.

Joe Fairless: Yeah. You worked hard to get to this point. That’s about 29 units on average per property… So what’s your largest property?

Darin Garman: Our largest property is 168 units.

Joe Fairless: 168 units. And smallest property, five units?

Darin Garman: Actually, our smallest property – we’ve got ten single-family homes. I’m not a big fan of single-family homes, but the quick story behind that is we had an opportunity to purchase 60 units, but we had to purchase these homes that were included with them, so we bought the houses with it as well.

Joe Fairless: Okay, cool. So in the deal structure that you have with your investors on the 168, compared to the 24-unit property, how did you – if at all – change the deal structure that you have with the investors?

Darin Garman: That’s a good question. The deal structure itself, in terms of what I’ll call the administrative processes – so partnerships agreements, operating agreements, all of the documents necessary in order to get the partnership administratively taken care of – all that is the same. The only thing that really changes there are numbers just based on the size of the properties. So all that is the same.

In terms of investors though, the larger properties – I will have the more experienced investors involved in the larger properties than I will with the smaller properties. I’ll go through a process – like with this 168-unit property, if you took a look at the partners that are involved in that with me, the simplest way I can probably tell you is we’ve got a little bit more of a sophisticated investor involved in that project, versus what we do with the 24-unit property. Now, not by leaps and bounds…

Joe Fairless: How do you structure it? In terms of the actual structure of the deal, is it the same, where you take 5% to 10% ownership, and that’s your only fee, or do you have a different structure with your investors?

Darin Garman: Great question. What I’ll typically do is I’ll get paid really three kinds of fees. The first fee is I’ll be paid a fee for putting the project together, putting the partnership together; our partnership is a limited liability company, so it’s the process of creating the LLC, and going through that process. So my fee there is typically between 3% and 5% of the purchase price of the property.

Another fee that I get is I’m also a licensed real estate broker, so I’ll be paid a fee from the seller when it comes to purchasing that property as well. Then the third fee I get of course is managing the partnership, s for the ongoing management of the partnership I’ll be paid a fee as well. The fee on the management of the partnership fluctuates depending on the size of the project. On the 168-unit project I’m paid 1% of the gross income every month for that, and it might be a smaller amount with the smaller partnerships like the 24-unit.

There’s really about three or four avenues of income and fees that come into me above the income that I would be getting by owning the property.

Joe Fairless: And how did you structure it with the 168-unit, your percent ownership?

Darin Garman: That one I’ve got a 7,5% ownership interest in that one.

Joe Fairless: Cool. And with any of your money into it?

Darin Garman: Yes. That 7,5% is all my money in that particular project.

Joe Fairless: Got it. So you don’t take any ownership interest into the deal for putting the deal together.

Darin Garman: Not in that particular one. I’ve done that in the past, and I do have some of our projects where I am getting a certain percentage every year, typically maybe 1% to 2% ownership in a project over a period of time… But our largest one – in that one I did not.

Joe Fairless: Switching gears a little bit and taking a step back, what’s your best real estate investing advice ever?

Darin Garman: Great question. I would say the best advice – and this is gonna sound so over-simplistic, so you may be disappointed with what I’m gonna say, Joe…

Joe Fairless: [laughs] I won’t be disappointed. I’ve enjoyed our conversation so far, so that’s impossible.

Darin Garman: It’s get out there and actually do it. Take action and do it. And here’s why I say that. I’ve spent way too much time thinking about it, reading books, listening to experts on what I should do and how I should do it, and it took me a hell of a long time to actually take action and get out there and invest in something, get out there and start looking for partners, get out there and start taking action. I think it’s really easy to be in the knowledge business almost full-time and trying to get to a point where you think you’ve got all the bases covered. “Okay, now I think I know everything I need to know before I should  move forward.” The truth is we all never even get to that, no matter how much experience we’ve got.

So I would say you wanna be taking a shot at getting involved in the market, whether it’s raising money, buying that property – do it now; don’t wait for the perfect time, because months can go by, years can go by, and by the time you get involved in something, you’re thinking to yourself “Why in the hell didn’t I do this two years ago? Why didn’t I do this three years ago?”

So I would say, as over-simplistic as it sounds, you’re never gonna have a perfect time to get involved in the real estate market. Do it now, take action and go for it.

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

Darin Garman: I’m ready, buddy.

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

Break: [00:24:02].23] to [00:24:51].10]

Joe Fairless: Alright, best ever book you’ve recently read?

Darin Garman: “Am I being too subtle”, by Sam Zell.

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

Darin Garman: Not doing enough due diligence and finding out after we’ve owned it.

Joe Fairless: What is a specific example of that not doing the due diligence?

Darin Garman: Not doing the investigative work on the income the property was producing, taking the real estate broker’s word on what the property was producing, and then finding out after we took over it wasn’t even close to it being that at all.

Joe Fairless: Best ever deal you’ve done?

Darin Garman: The 168-unit property I’ve just told you about. We purchased it for 5.1 million, and it’s worth a little bit over 9 million dollars now.

Joe Fairless: And the best ever way you like to give back to the community?

Darin Garman: I like to give back through our church, and participating in church activities that involve the community with what our church does.

Joe Fairless: And how can the Best Ever listeners learn more about what you’ve got going on?

Darin Garman: Easy, just go to GarmanBlog.com (not Garman, the GPS, unfortunately; I’m not involved in that family).

Joe Fairless: I thoroughly enjoyed our conversation, how you approach projections with that 6-8 month window at a certain period of time, then having a conversation with investors about the best approach, as well as the lessons you’ve learned along the way, how you structure your deals with your investors, and how you focus locally, and how you’ve been able to acquire a 672-unit portfolio at the current time. Really interesting, so thank you so much for being on the show, Darin. I hope you have a best ever day, and we’ll talk to you soon.

Darin Garman: It’s been a pleasure, Joe. Thanks a bunch.

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