Today we’ll hear from a Cincinnati investor who is currently doing about 15 flips per year, and growing. Eric will share a lot of his experience with us today, he’ll reveal a lot of great information about the Cincinnati market and the range of deals he likes to tackle. We’ll also learn about his Master Lease Option deal that he is still working with. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Eric Kottner Real Estate Background:
- Full time investor since 2006
- Has done 15 of his own flips and owns 30 units
- Based in Cincinnati, OH
- Say hi to him at https://cincyturnkey.com/
- Best Ever Book: The Productivity Graph
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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, Eric Kottner. How are you doing, Eric?
Eric Kottner: I am doing pretty good, Joe. How about you?
Joe Fairless: I am doing well, and looking forward to our conversation. Eric is a full-time investor and has been a full-time investor since 2006. He’s done 16 of his own flips and owns 30 units. Based in Cincinnati, Ohio. With that being said, Eric, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Eric Kottner: Yeah, sure thing. My current focus right now is fix and flipping. I actually got into real estate investing full-time as a property manager back in 2006, and did that for a few years. I managed about 56 units, got into some ownership of my own rental properties during that time, and over the course of a few years I realized I am horrible at property management, so in 2009 I got my real estate license. Perfect timing for that as well. I realized the headaches and challenges involved being a realtor in 2009. I decided I was gonna start a fix and flip business in 2011, and since 2011 I’ve been focusing primarily on fix and flip properties.
Joe Fairless: So what type of properties do you go after?
Eric Kottner: I like to go for the bread and butter neighborhoods. My ideal ARV areas are between 120k all the way up to 300k, and I really don’t try to go above 300k for the Cincinnati market, because the outskirts of the suburbs that I prefer, Butler and Warren County, once you go above 300k, it becomes a lot more of a difficult remodel, because you need to have this right type of finishes done too, and the clientele during that time had certain expectations when it comes to the properties along those lines… So it’s a lot more difficult to have simple rehabs when you get above $300,000 in Cincinnati.
Joe Fairless: You’ve got 30 units that you own currently, correct?
Eric Kottner: That is correct. I am in a 50/50 partnership with a 12-unit, I do own an 18-unit that also has some commercial space with it as well, a triplex, and then also two single-family properties.
Joe Fairless: Oh wow, you’ve got a whole smorgasbord of properties. So you’ve got a 12-unit, and 18-unit with commercial… What else do you have, a triplex?
Eric Kottner: Yeah, a triplex, and then I have two single-families.
Joe Fairless: Two single-families, okay. Let’s talk about that a little bit… Which one is the best ROI?
Eric Kottner: Honestly, the best ROI right now is the 12-unit. That one we had some insider knowledge on. Essentially, what happened was – I’m gonna try to make this long story very short… This 12-unit – we had a property manager that we referred to that 12-unit a couple of years ago; they had a pipe burst, that pretty much ruined about seven of the units, and during that time the property manager was trying to report to this company that was in the state, a company down in Florida, to say “Hey, we need to do this, we need to do this, we need to do this”, and the asset management company was very difficult to work with… So what happened was all but one of the units became completely vacant during that time, and they put the insurance claim in for those units that got taken care of, so finally after a long ordeal they finally had all the units remodeled in that scenario, and they started renting them out again.
I think once they got to about ten of them rented, they decided to switch strategies and went with a different property manager. Then a few months after they went with a different property manager they called us and said “We wanna unload this 12-unit property. Do you know what anyone would buy it for?”
This 12-unit was located in Fairfield, and essentially we asked them how much they were looking to sell this property for. What they said was “Well, when we had our appraisal done, it was valued between 170k-180k.”
Keep in mind, during this time when they told us this, they already had 11 of the 12 units rented out, as opposed to the one unit, and they already had the seven units that were destroyed during the busted pipe completely fixed… But they based it off the appraisal that they just had when they only had one unit filled out.
Joe Fairless: Got it, okay.
Eric Kottner: So essentially we got this $500,000 property under contract for $180,000.
Joe Fairless: [laughs] And who’s “we”?
Eric Kottner: This was my dad. My dad and I went 50/50 partnership on it, because my dad was a W-2 employee, very easy to get a bank loan done on that, so we kind of went into it together for the property.
Joe Fairless: And what have you done since you’ve owned it?
Eric Kottner: I’ve been collecting passive checks of $1,000 a month.
Joe Fairless: Well, that’s fun.
Eric Kottner: Yeah. Once we took back ownership again we put the property manager that I recommended to them the first time back into it, and she’s just been incredible with it.
Joe Fairless: That is the 12-unit, and you mentioned you’ve got an 18-unit with commercial space.
Eric Kottner: Yes.
Joe Fairless: Tell us about that one.
Eric Kottner: This one is actually the worst deal that I have done…
Joe Fairless: [laughs] But don’t you have a single-family home mess up–
Eric Kottner: Oh, I do, but this [unintelligible [00:07:06].13] The 18-unit on there was when I definitely got a little bit more ambitious. When I had ownership back then, I had three eight-unit apartment complexes, so what I wanted to do was I wanted to sell two of them and then upgrade into a bigger complex.
I noticed that two of my eight-units at the time were pretty much only grossing about $3,000, so two of those were only gross about $6,000, and this one, when I first saw the numbers on it, I saw that the potential of this property – I could easily reach up to $14,000/month on a gross. And when I did all my net, it was looking to about $3,500/month…
Joe Fairless: That sounds like a slam dunk.
Eric Kottner: Yeah, it sounds like a slam dunk, and the problem that happened there was I went with two eight-unit apartment-style complexes, I sold them, and then I pretty much bought this 18-unit that were townhome style. The expertise I had that made it so good with the eight-units didn’t transfer very well when it came to townhomes.
Joe Fairless: Why?
Eric Kottner: Well, because instead of A/C units I was now dealing with full HVAC systems, and also during that time, 2014, I think I maybe did four or five flips, so when I got the estimation of what it would take to turn this property around, I estimated probably close to about $90,000, when in retrospect it was probably close to $250,000…
Joe Fairless: Oh, dang…
Eric Kottner: Yeah… So I paid $500,000 for that one, and I think I had about $700,000 of my own money into it. At that point – I would say near the end of 2015, we were really close to getting above that hill; we only had two vacancies left, and then we had two dated properties out of the entire thing. Then just stuff happened and we went two vacancies back to six vacancies; one of the tenants complained about a bed bug issue, and the upstairs unit above where the bed bugs were coming from didn’t wanna do anything about it, so we pretty much had to wait till we got them evicted to take care of that issue, and then it just kind of spiraled back downhill, after being so close to it.
Joe Fairless: Oh…
Eric Kottner: And eventually – I think it was last year – I sold that on a master lease option, so I still technically own it right now, but in the next year or two I probably won’t own that property anymore.
Joe Fairless: For anyone who’s not familiar with master lease with option to purchase, can you just describe that, and then also maybe talk through the terms that you sold it on?
Eric Kottner: Yeah. The master lease option is essentially saying that I am giving this person the option to buy this property, as well as controlling the property until they decide to buy the property. A master lease option – I gave them control to turn over the units at their cost, to lease the units, and then the ability to collect rents, evict people, and all that stuff.
The terms that I had on mine were I sold it for $575,000, $60,000 down, and then anything past the current mortgage at the time, which was 469k, whatever principal they paid down, they got to keep. So when it comes time to sell the property, I should be receiving another $40,000 check back, from the 515k to the 469k portion of it. And essentially, I continue paying the mortgage and the insurance, they are paying for the property taxes, as well as the upkeep of the apartment complex… But they’re also collecting all the rents, while they just pay me one monthly amount.
Joe Fairless: And the commercial space that you mentioned – what is it?
Eric Kottner: I think as of right now it is vacant. When I took it over, it was previously a pharmacy, a CPA, and a barbershop.
Joe Fairless: Dang, was that big?
Eric Kottner: Yeah, this is probably about over 3,000 square feet on the main floor, and another 3,000 square feet on the bottom. Total, this is probably about a 6,000 square foot commercial space.
Joe Fairless: And what happened to those tenants whenever you first bought it?
Eric Kottner: When I first bought it, the pharmacy had just left the premises, so that just remained vacant and they just kind of left everything there, whereas the barbershop and the CPA essentially were still renting it out. Now, those two people were actually never on a lease; they’d been in that spot for over 25-30 years. The barbershop just retired last year, and I’m not quite sure if the CPA is still in there or not.
Joe Fairless: If you were to be presented an 18-unit with 6,000 square feet of commercial space, but a different one, in the area that you typically invest, what questions would you ask prior to doing the transaction on that new deal, that you perhaps didn’t ask or think through on this deal?
Eric Kottner: Well, on the commercial side right now it’s still really rough. The way I originally did that deal was I wanted the apartment complex to be good and cash-flowing based on my numbers, and then anything from that commercial space would have been like whipped cream or the cherry on top.
So the first thing that I would do is I would call up my buddy Osh and get his expertise on the matter of commercial complexes in that scenario, and I would pretty much ask him “How fast can this be rented out? Is it plausible to do a triple net lease to that, where I pretty much have to not worry about any of the maintenance issues?” Because I think that was one of the big hindrances as well – I treated that commercial side as you would a residential tenant, so if there were issues with HVAC, I would be the one taking care of it, and things like that. I think the only thing that I didn’t do was they paid for their own cosmetic fixes and cosmetic repairs, whereas I took over the mechanicals.
Joe Fairless: Okay. So now what’s your primary focus?
Eric Kottner: My primary focus is just continuing building up the residential fix and flips. The reason I like that is because I can use the KISS method of keeping it simple. To me it’s a lot easier to keep simple tactics on the residential side, that I haven’t quite grasped on the commercial side, to be able to take care of it.
Joe Fairless: What are some common mistakes that you see residential fix and flippers make that you’ve got that puppy down and you don’t make those mistakes?
Eric Kottner: One of the things I like to kind of pride myself on is the ability to calculate the numbers and rehab profits. I think what a lot of people get confused on is the fact that when they go and take a look at a property the first time, they wanna use the 75% rule. When you put down those numbers on there, you can calculate the 75% based on the ARV, minus the repairs, with your maximum allowable offer. One of the things that I usually do now is instead of doing a certain percentage, I just put a gross profit into what I wanna make on a property, as opposed to using a percentage. Because that way, when I’m walking through a property, while I’m talking to the seller, I’m just doing basic addition and subtraction in my head, as opposed to trying to do calculations of 5%, 6%, 2%, while talking and trying to calculate the rehab.
Joe Fairless: So you think of the gross profit you wanna make, and then…? Just walk us through your thought process when you’re looking at a property.
Eric Kottner: Okay, so if I get a seller on the phone that wants to sell me a property for $90,000, the property itself is probably worth about $150,000. When I go for $150,000 or lower, the minimum gross profit I wanna make is $40,000, so now I already know in my head 150k minus 40k – I need to be all in on this property for $110,000. So if the seller is telling me $90,000, all I need to do is walk through the property and see if it only needs $20,000, I can give them the $90,000. If it’s worse than that, say it’s $30,000, I then can immediately right away give an offer of $80,000.
Joe Fairless: Very simple and straightforward. You mentioned 40k profit on what price point?
Eric Kottner: 150k.
Joe Fairless: Okay, 40k profit on 150k ARV.
Eric Kottner: And it’s gross profit on there. I always say that it’s on the gross side, because when you’re talking with the seller and stuff like that you wanna just keep your numbers simple, and then once you get the property under contract and you’re ready to go through closing, then you can calculate more on the sale side of it, of what those hits are gonna be… Normally, because I’m a licensed realtor, what I do is kind of the catch-all in percentages on the inside. For people who are just starting out and they are probably gonna pay a retail agent and hit all the worst-case scenarios, I always tell them to calculate about 12% on the closing side.
So if it was a $150,000 house, you would wanna do $15,000 for 10%, and then add in $3,000 for the additional 2%. So 12% – you’d be looking at about $18,000 towards closing costs, where if I base it off the $40,000, I’m now looking at a net of $22,000.
Joe Fairless: And if it’s higher than $150,000 ARV, what’s the gross profit you want on those?
Eric Kottner: It ranges. Obviously, there’s other factors I kind of go in, but if we’re doing just with price point, I usually like to say for every $50,000 I increase it by $15,000. So $150,000 would be 40k, $200,000 would be 55k, and so on. So I would increase it per $50,000, 15k, or per $15,000 5k, and then just kind of range it that way.
Joe Fairless: Is that just something that you’ve seen that the market will bear, or is that something that you just really want in order to justify your time, or a combination…? Where do you get that?
Eric Kottner: For those who like to do the percentages basis, I’m buying properties at about 74% of the market, so I’m at 4% different of the people that use the 70% rule. So for me, I know that it is realistic in the marketplace to where we’re at, and I know if people who are newer wanna use the 70% rule, I know my offer is gonna be relatively higher, unless they see something where they’re only trying to say about $15,000 in repair, which is in reality about $30,000.
Joe Fairless: What’s the last deal you got under contract?
Eric Kottner: The last deal I actually got under contract was a wholesale deal I bought from a friend of mine. This was something I just kind of met over coffee, we talked about it, and he pitched it on one of the groups, and I was lucky enough to be one of the first ones to go through the property. It was a 3-bedroom, 1-bath house in Fairfield. I bought it from the wholesaler for $65,000, I did a joint venture with a general contractor on it, where we’re only in for about $26,000, and we’re actually just about to sell it at the end of February, and we’re selling it for $139,000.
Joe Fairless: You bought it for 65k, so you and the general contractor fronted the money to purchase it?
Eric Kottner: No, I got a private money lender at 11% to fund $60,000 for the purchase price. I put $5,000 of my own money to it, and the terms of the joint venture with my general contractor was he fronts all the money on the rehab side, as well as oversees the project.
Joe Fairless: Okay.
Eric Kottner: So he pays for all the repairs and what we assumed was gonna be the budget for the repair estimation, and then he also managed the projects as well. Now, I will give a caveat to new Best Ever listeners out there – I’ve done four other projects with this general contractor as just a standard general contractor, so I vetted him very thoroughly before I was looking to do a joint venture with him.
Joe Fairless: 50/50?
Eric Kottner: Yeah.
Joe Fairless: Cool. And it’s on the market now?
Eric Kottner: Well, it’s actually pending now. It should sell at the end of this month.
Joe Fairless: We don’t wanna jinx it though, do we?
Eric Kottner: Exactly.
Joe Fairless: [laughs]
Eric Kottner: The good news is we’re past the inspection.
Joe Fairless: Okay…
Eric Kottner: But we still have the appraisal side.
Joe Fairless: Cool. Good stuff. What is your best real estate investing advice ever?
Eric Kottner: My best real estate investing advice ever is, honestly, on the residential side, keep it is as simple as possible, and that goes to all aspects of it – keep it simple with your numbers… I like to do catch-alls as opposed to itemize every little item; whatever you’re more comfortable with, go right ahead.
Joe Fairless: Well, you now have the catch-alls – did you initially itemize every item to make sure that the catch-all incorporated all those items?
Eric Kottner: Yeah. One of my mentors local in the area, that does a lot of fix and flips, he used to be a CPA, so he was very into the itemize every little thing, down to the outlets, and stuff like that. He would itemize every outlet, every square foot of paint, every light switch plate, everything like that, and put it down… I tried doing that and I realized that I got upset very quickly when I learned that “Oh, I went a little over-budget on this side”, not realizing that I was a couple thousand under budget somewhere else… So for me it was just a lot easier just to have that kind of bucket there that’s saying “Okay, I have this bucket for this entire scenario.” That way, I’m not gonna worry if I go a couple hundred dollars over on electrical, or something like that.
Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?
Eric Kottner: Let’s do it.
Joe Fairless: Alright. First, a quick word from our Best Ever partners.
Break: [00:19:41].00] to [00:20:42].04]
Joe Fairless: Best ever book you’ve recently read?
Eric Kottner: I actually like The Productivity Graph. One of the things they pretty much talk about there is finding out where are your areas where you work the most, and where you seem to lag behind. It’s a good time management book too, and it’s just giving you that thought process of where you can do the most productive portions of your day, and then learning where you can take a rest at, that way you can take a 25 to 30-hour workweek and make it feel like you’re working 60 hours a week, just through the productivity of listening to your body and doing proper time management in order to get the most productivity out of you.
Joe Fairless: It’s called what?
Eric Kottner: I think it’s The Productivity Chart or The Productivity Graph. It’s a blue book, that pretty much shows a graph chart with a line going up.
Joe Fairless: Cool. Best ever deal you have done?
Eric Kottner: Best ever deal that I have done… I would have to say that 12-unit.
Joe Fairless: And what’s a mistake you’ve made recently on a transaction?
Eric Kottner: A mistake I made recently on a transaction… The last flip I did – the one I did a joint venture on with the money partner – I agreed to oversee the rehab and also pay for the rehab costs. What looked like a $65,000 project turned into a $90,000 project; I just miscalculated about 500 square feet in the property. I also tried to over-improve the house, and stuff like that.
We still made money on the deal – I think we split $17,000 – but it was one of those scenarios where I caught myself where I have $90,000 of my own money into this project, and it went on for six months or so… And having that much money into one project kind of cramped my marketing budget, and it also really put a hit on my other cashflow needs for running the business.
Joe Fairless: Best ever way you like to give back?
Eric Kottner: I like to do donations to charity. I did recently tear my ACL, so I haven’t been able to go out and volunteer, either at Soup Kitchen, or something like that; I used to do it a few years ago… But I do like to donate monetarily, and as well as I love sitting down with people over a Starbucks coffee, just breaking down deals with them too, or trying to figure out ways that they can simplify their business… Or just listen into other people’s business, and if they want advice, I’m always happy to talk to them about it and see “Here’s what I saw in my expertise”, if I’ve gone through the same scenario, or give them a theory that might help them with a certain property or their business.
Joe Fairless: How can the Best Ever listeners learn more about what you’ve got going on?
Eric Kottner: They could follow my company, Turnkey Renovations, on Facebook. We also have an Instagram page @cincyturnkey, where you can see what our past projects have looked like, and you can see where I went over-budget on a lot of over-improving these houses (but they look amazing). They can also reach me at firstname.lastname@example.org, or just call or text me at 513-375-5819.
Joe Fairless: Eric, I really enjoyed our conversation about the different types of deals that you’ve done, from the 12-unit to the 18-unit, lessons learned on those, as well as your focus on just keeping it simple, and looking at, as you said, simple tactics on the residential side – calculating the gross profit and just simply backing out from there… And then how you found your recent wholesale deal – someone you had coffee with – and how you structured that deal too, with a general contractor, and the numbers behind that deal.
Thanks again for being on the show. I hope you have a best ever day, and we’ll talk to you soon.
Eric Kottner: My pleasure. Thank you so much, Joe.