Anna has done what many newer investors set out to do: retire from their full time job and live on their real estate investing business. We’ll hear about her investing strategy and what she has done to scale to a point that allowed her to retire from work. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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“It took me about 60 units worth about $6 million to get to $150k per year income” – Anna Kelley
Anna Kelley Real Estate Background:
- Founding partner of Zenith Capital Group and ReiMom.com
- Worked in the financial field for 20 years, started investing in real estate 20 years ago
- Has a portfolio valued over $12.5 Million across 130 doors
- Based in Hershey, PA
- Say hi to her at https://reimom.com/
- Best Ever Book: Raising Private Capital by Matt Faircloth
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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, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Anna Kelly. How are you doing, Anna?
Anna Kelly: I’m great, Joe. Thanks so much for having me.
Joe Fairless: Well, it’s my pleasure, and looking forward to this. A little bit about Anna – she’s a founding partner of Zenith Capital Group and ReiMom.com. She worked in the financial field for 20 years, started investing in real estate 20 years ago, and has a portfolio valued at over 12.5 million dollars across 130 doors. Based right outside of Hershey, PA. With that being said, Anna, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Anna Kelly: Sure. Like you said, I have a background in the financial industry. I started out in private banking and was with AIG Life Insurance company for 20 years. I just retired from my full-time job about two weeks ago…
Joe Fairless: Congrats!
Anna Kelly: Thank you so much… Thanks to rental real estate. And about ten years ago I moved to Pennsylvania, we started a business with a lot of debt, and I started buying small properties really to house-hack, and a mixed-use building for my husband to practice in. So we got into having rentals really kind of by necessity, not because we were looking to be these big real estate investors… But over time, with things with AIG, when the economy collapsed, we were kind of on shaky ground, and I knew that I had to find a way to replace my six-figure income, and thought real estate was a great way to do it.
I started a plan about five years ago to replace my income with rental property, and just really materialized in the last two weeks, right according to schedule.
Joe Fairless: Well, let’s talk about that plan. When you put it together, what did it look like?
Anna Kelly: I knew, Joe, that really I needed to have a minimum of about $150,000 to $180,000 a year completely passively, just for my own rental portfolio, without really taking into consideration bigger deals at that time, or acquisition fees, or those types of things. I do have four children, work full-time, help with my husband’s business – he’s a chiropractor – and we knew that with limited time and limited money our best bet was to start off buying small rental properties. So we started buying small four-unit buildings initially, and some small mixed-used buildings here in the Hershey, PA area, where we could get to them really quickly… And start with putting in sweat equity, buying them low, forcing the values, cashing out our equity, and then using that to buy more and more cash-flowing properties.
So it was just really figuring out that I needed X number of dollars, and it was gonna take me about 12 units a year to own 100% of, to get to that point.
Joe Fairless: That’s what I was gonna ask… So for $150,000 in income that comes from properties, how many properties does that make up?
Anna Kelly: It took me about 60 units. I just bought another 10-unit yesterday in my own portfolio, but it took me 60 units, worth about 6 million dollars, to produce that passive income in my area.
Joe Fairless: Okay. And you started with the four-unit, and then you said you did some small mixed-use… What was the first small mixed-use that you did?
Anna Kelly: My husband coming here to start a chiropractic business, in a small town – the price to lease space was pretty high, and a lot of the businesses are in a bottom floor of a building that was at one point a business on the first level, and apartments above it. So we bought a mixed-used building for him to practice out of, that had the office on the first floor, three apartment units on top and behind it, and a four-car garage. So we bought it kind of out of necessity initially.
Joe Fairless: And did that end up being a good one?
Anna Kelly: It did. Other than the fact that we bought it at the height of the economy in ’07, so we probably slightly overpaid for it… The values bounced back at this point, but I wouldn’t say that it was necessarily the best investment if you were just looking for a return on your money. But in terms of fitting our needs to practice, and having all of the expenses of the office covered by the tenants, it was a really good deal.
Joe Fairless: So that was out of necessity. Did you purchase any mixed-use properties after that?
Anna Kelly: We’ve just purchased some properties that had garages with them, and some storage, with the multi-units.
Joe Fairless: Okay. No office though.
Anna Kelly: No office at this point, no.
Joe Fairless: How come?
Anna Kelly: Primarily because they didn’t quite fit within what my goals were for the five-year plan. I wanted to make sure that when I did retire for my job I had what I knew was stable rental income… And there are a lot of different mixed-use buildings available in my area, but they don’t tend to keep retail tenants for very long, I think because it’s not a big, major metro, so businesses don’t necessarily last. As you know, 90% of small businesses fail the first couple of years. I didn’t have the capital to take down large retail buildings, or much larger industrial buildings at the time, so I just didn’t want to risk having long-term vacancies in properties, just to be able to say that I had some.
Joe Fairless: When you created the five-year plan, your goal was to purchase approximately 12 units a year, yes?
Anna Kelly: Yes.
Joe Fairless: And that was five years ago, and at the time when you created your plan you had zero units?
Anna Kelly: I had a four-unit that we lived in, that we bought in ’08, the mixed-use building I told you about.
Joe Fairless: Yeah.
Anna Kelly: And then ten years ago, in 2009, I worked for AIG, and AIG needed a two-billion-dollar bailout from the government, because they were heavily ensuring mortgages, and something called credit default swaps… And within a couple of weeks, our stock went from $101 a share to about 43 cents. So my 401K took a tremendous hit… And know what I did about the markets, and having been trained on stocks, bonds and mutual funds, I knew I needed to get out pretty fast. Even though you don’t wanna sell while you’re at the bottom, I was heavily invested in AIG stock…
So I moved over a bunch of my money – what I had left – and I borrowed $50,000 from my 401K to buy another four-unit when it crashed… Because I thought I’m gonna lose my job; my job is really our sole source of income, because my husband was a business start-up, and at least if I have a four-unit, I can bank on some cashflow… So I had another four units. So I had 12 units at that point, and then I didn’t do anything in real estate for five years, partially because the lending environment dried up, the lenders knew I worked for AIG and that my job was probably not stable… And even though I wanted to buy more units at that time, I just really wasn’t able to tap equity, and didn’t have cash to invest at that point.
Joe Fairless: So you bought 118 units then, in about five years, and your goal was to buy 12 units a year, but you almost doubled that. You bought 23.6 units a year. What about your initial goal of 12 units a year was too conservative in hindsight? …because in reality you did almost twice that.
Anna Kelly: Yeah, and I’ve bought some more since then, too. So I met my 60 units in four years instead of five… So I was able to go — from the 12 units I had, I bought 12 units a year to get to 60, and hit that about a year ago. And at that point, I still had quite a bit of lines of credit, and business credit cards that I had used to remodel all of these units, because I bought them all well below market. They all needed to be completely updated to raise the values and cash out… So I knew at that point my goal was to save a year income and six months’ expenses on all of my buildings, so that I would remain bankable when I retired, and just so that I was doing it conservatively and wisely, given the fact that we might be heading for some harder economic times.
So a year ago I decided “Okay, I’m about a year out, and now I need to figure out a plan to pay off all that debt, and save a bunch of money”, and I found an off-market 73-unit here in the Hershey area. It was my first deal to really bring in JV partners. So I brought in two JV partners, we bought that 73-unit, and the acquisition fee was large enough for me to pay off the rest of what I needed. I sold two small rentals that were kind of dogs in the portfolio, that I shouldn’t have bought, and thankfully had a nice gain on that… So buying the 73-unit allowed me to really be able to retire, and do it wisely.
Joe Fairless: Well, I have a lot of questions for you.
Anna Kelly: Sure…
Joe Fairless: You’ve given us a whole lot to talk about. What a story… You’ve mentioned the 73-unit – let’s just start there. You said you’ve found an off-market 73-unit… How did you find it?
Anna Kelly: It was one of those things that the timing was right. I happened to be at gymnastics, Joe, and I ran into someone…
Joe Fairless: This doesn’t sound like we can repeat this process, but keep on going…
Anna Kelly: Yeah… Every once in a while these deals just come to you and you just say “Thank God, it was really good timing.” But I was at gymnastics that I’m an acquaintance with in town, and she knew I had rentals, and I was on the phone, dealing with tenant issues… And she was like “How many units do you have now? Oh, you must not be working full-time anymore…” And I said “You know, I really am, but I’m working on working myself out of my job, and I just need to start buying some larger multi-so I can have on-site property management, not manage them on my own any longer.”
She motioned her husband over, who I knew was a wealth manager and an attorney in town, and he said “You know, we’re getting ready to sell our building.” And I said “I didn’t even know you had a building…” And he was gonna list it the next week. I said, “How much do you want for it?” and he told me “About seven million dollars.” I said, “I’d love to see it tomorrow.” So we made plans, I met with him the next day, I knew I had literally a day to put a deal together and make an offer before he listed it, and we were able to get it done.
Joe Fairless: How much did you end up buying it for?
Anna Kelly: 6.4 million.
Joe Fairless: So what’s that like, in the negotiating process, when it’s a friend of yours, it’s her husband, they have this off market to you, and they say “We want around seven”, but you end up paying less? Talk us through how that went.
Anna Kelly: Sure. To be honest with you, Joe, I was a little bit nervous, because I didn’t have the capital, but I knew I could figure it out… And I knew that if I didn’t find the capital, it would leave a bad taste in their mouth, and they’re local and well-connected… And I wasn’t really friends with them, but we had kind of an acquaintance relationship, so I knew I had to tread carefully. But I think because he did know of me, and he trusted me, and I had a good reputation with people that are joint acquaintances, he allowed me the day that we met to pull three full years from his QuickBooks to look at P&L… Because I said “Can I get a couple of years of history?” And he said “Just go to my PM. We’ll print it out for you. Look over everything and tell me what you think it’s worth.” So I was blessed to be able to have that kind of advantage, to really pour over the numbers for a day.
I made him an offer, which was about a million less than what he wanted for the property. He said we were too far apart, and he was getting ready to leave, but that he would think about what I had presented to him. I gave him numbers and a clear case for why I thought it was worth what it was… And he gave me a week until he got back from vacation for us to talk it over.
When he got back, we went back over and we just sat at the table and worked through numbers. He gave me some additional information, and we were able to just settle at the 6.4 mark.
Joe Fairless: And I’m sure, since he was planning on listing it in a week, he was in communication with his broker… And I’m 100% confident, without having heard this myself, that the broker was telling him “Well, we can get more.”
Anna Kelly: Absolutely.
Joe Fairless: Do you know what the broker was telling him he could get? Because I’m sure he was using that as a talking piece whenever he was negotiating with you.
Anna Kelly: Absolutely. And in fact, he gave me the actual presentation that this large broker had given him as to what he should list and get for it… And during the week he was gone, he went to another broker to get an opinion of value. And he was well-convinced that they would get at least 7 million, if not more, and thought that there would be a bidding war because this is such a highly attractive property. It’s within five minutes of the Hershey medical system, children’s cancer research center, Hershey park, all of the different things within Hershey… And really in good, good shape; no exterior cap-ex needed, and the rents were well below value.
So part of our negotiation was of course brokers wanna present values on proforma, versus what the actual rents were, and they were all like $200 to $250 below market, Joe. So one of the negotiating points, and really what helped save the deal and him sell it to me, was that it was very important to him that his property manager was taken care of, because it was someone who was a relative that they cared about… And he knew that anyone else that bought that property was going to fire that guy and bring in someone else… So we sat down with the property manager, made sure we were comfortable with him and that he was malleable, and would make the changes that we needed to be made, and we agreed to keep him at least for a while, and be fair and work with them until we could make sure that he was comfortable and we were comfortable… And that really was the difference, I think, in him allowing us to buy it, versus just listing it.
Joe Fairless: How long ago did you purchase it?
Anna Kelly: It was December 5th.
Joe Fairless: Okay, recent. Is that property manager still employed?
Anna Kelly: He is. One of my partners has a property management company, and he owns several units at an hour-and-a-half away, so we basically have him as an independent contractor underneath the property management company.
Joe Fairless: How did you structure this arrangement with your joint venture partners?
Anna Kelly: This was a new relation, the first time that we had done deals together. One of the partners and I had both been at a bunch of local meetup groups and knew of each other, but just hadn’t really worked together… And we knew that both of us were wanting to go after starting to syndicate, and getting into larger properties. We had just met a few weeks before, talking about finding something to partner on. So when I found this deal, I immediately called them and said “Okay, I’ve got something. Let’s look at if you want in.”
We were gonna plan to syndicate it, but he had an investor that he had worked with before, that needed to deploy capital, and liked our area, and we contacted him first. The deal was so good he wanted to fund the whole thing. So we didn’t end up syndicating. The three of us just basically negotiated what we thought was fair for all three parties, and made a deal.
Joe Fairless: Oh, very cool. So that works out for everyone. How did you structure it with each of you three?
Anna Kelly: The partner who put in most of the capital is a larger percentage owner, of course, and the other two of us both got an acquisition fee, and we split asset management duties. So because he has a back office and a property management company already, we were able to utilize some efficiencies with AppFolio and the financial reporting on that side, and then I’m really close to the property manager, so I’m into the property. So I’m doing the on-site asset management fee, and overseeing the turnover of the units, and kind of more day-to-day helping the property manager to do what we need for the asset to perform the way it needs to.
Joe Fairless: And on a deal like this, what type of acquisition fee should someone expect?
Anna Kelly: We did 3%.
Joe Fairless: Okay. 3% of the purchase price?
Anna Kelly: Right. And a 2% asset management fee.
Joe Fairless: Cool. And usually — I know with syndicated deals you do either 70/30 splits, 60/40, 80/20… It can vary. What type of split is typical for a deal like this?
Anna Kelly: I think typically 70/30. With this particular deal and with JV partners you kind of have a little bit of give and take, and you all figure out what’s important to you and what’s important to the others. For me, the acquisition fee was important, because I knew I needed a certain dollar amount to be able to get to that retirement point. And to our investing partner, he wanted more cashflow than we necessarily wanted to give up… So we kind of went back and forth and came up with something kind of unique. But we got the acquisition fee, and we’re splitting cashflow 75% to the primary investor, the other two partners split the other 25%, but on the back-end it’s 65%/35%.
Joe Fairless: On the sale?
Anna Kelly: Right.
Joe Fairless: Okay, cool.
Anna Kelly: That was a great deal, and it’s the one that I really needed to be able to get to the retirement point, and the three of us just bought another 31-unit building last week. So we’ll continue that process.
Joe Fairless: Wow, goodness gracious! And you closed on a ten-unit two minutes ago, right?
Anna Kelly: I did, yesterday.
Joe Fairless: Wow… You’re on fire. And the 31 units – let’s talk about that real quick. How did you find it?
Anna Kelly: This was another off-market deal. I actually have an acquaintance relationship with an agent who knows and is actually related to a seller of another really nice property… And I told her “We’re looking to buy more. If you can find us a deal, bring it to me”, and a week later she had something for us.
I also had an acquaintance relationship with this seller – I had met with him a couple of times for completely different reasons – and they were just ready to retire and sell. They built a 31-unit in 2005, that was an old warehouse conversion, and it’s just an absolute top-of-the-line rental property in our area.
Joe Fairless: And what value was there to add, since it was a relatively new construction?
Anna Kelly: Primarily the property was mom-and-pop, managed by the owner’s daughter, who was in college and working and trying to be a property manager in-between…
Joe Fairless: Enough said… [laughter] Keep going, please. I think we get the picture…
Anna Kelly: Sure… So these expenses were kind of high, and there were some higher than normal vacancies, and they had not been raising rates, even though the leases that they could and should. So they’re below market rents, and have some efficiencies that [unintelligible [00:20:53].11] So while it’s not as much of a slam dunk value play where we’re gonna make a killing on the backend, it’s a really nice, stable, long-term hold for the three partners, and we anticipate really probably holding it for ten years, and raising the rents, and there’s not a whole lot of cap-ex to do that.
Joe Fairless: What type of financing do you have on it?
Anna Kelly: We have Freddie Mac small balance financing.
Joe Fairless: Any tips for someone who’s undertaking that process?
Anna Kelly: The process in general is pretty smooth for Freddie Mac small balance. I did learn a lot on this one though, Joe, because I didn’t realize that Freddie Mac has different criteria for debt service coverage ratio, and for the amount of LTV, and the amount of IO that they will give based on the market size… So this property was located in a very small market, and therefore we had to meet a higher debt service coverage ratio that we realized, and had less IO than what we thought we had upfront. So I would just say you really need to understand the differences of the programs, and where your property is located can make a big difference in your underwriting.
Joe Fairless: Thank you for sharing that. That’s good information for a lot of people. What was your debt service coverage ratio that you had to meet, versus what you thought you have to meet?
Anna Kelly: So we had done a Freddie small balance loan on the 73-unit, that was a 1.3. So we assumed it was 1.3, and in the very small market it needed to be 1.4. And of course, they only go based on the currents of the current owner… So when you have a property that’s poorly-managed and they’re not collecting all their rents, and the rents aren’t maximized, and the expenses are too high, that really can hurt the coverage ratio. So we had to get a waiver and an exception to use 1.3, which we were able to do, and we just skirted by with current underwriting into that 1.3.
Joe Fairless: If you hadn’t got a waiver, what would you have done?
Anna Kelly: We probably would have just had to put more down.
Joe Fairless: Based on your experience, what’s your best real estate investing advice ever?
Anna Kelly: I think that the best advice that I know to give is really that you have to really have a strong vision for why you want to be in real estate and what you wanna do, and really create a plan that you can execute and be laser-focused on executing that plan, so that you are not buying things that you shouldn’t buy, and that you’re staying on progress.
You have to have relentless determination to succeed, and be able to stay resilient and get creative when the obstacles come, because it can be really hard, and your plan doesn’t always go according to plan, and obstacles come up… But if you just stay determined and laser-focused on your vision, you really can succeed and figure out a way to meet your goals.
Joe Fairless: What’s been your worst deal, speaking of obstacles?
Anna Kelly: My worst deal… I had kind of the shiny, gold object allure of buying a property with high cashflow – because cashflow was my main purpose over the last five years – in a C- to B+ area, and I thought “Wow, I’m getting this property for 33 cents on the dollar. It’s not a great area, but I’ll just fit it with a property management company and surely they can figure out how to keep it profitable, and vacancies low and expenses down.” And I spent more time and money in a year-and-a-half that I owned it, and trying to get the property management company to care as much about the bottom line and the tenants as I did, that it was just not worth the time. So thankfully because I bought right, I was able to sell it 18 months later, and cash out and still make some good money on it… But it taught me never to chase cashflow in a bad area.
Joe Fairless: Those were the dogs you were talking about earlier…
Anna Kelly: They were.
Joe Fairless: I usually call them “ugly ducklings”, but I like dogs better.
Anna Kelly: [laughs] Big, hairy dogs.
Joe Fairless: [laughs] We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?
Anna Kelly: Sure.
Joe Fairless: Alright. First, a quick word from our Best Ever partners.
Joe Fairless: Best ever book you’ve recently read?
Anna Kelly: Raising Private Capital, by Matt Faircloth.
Joe Fairless: Best ever deal you’ve done?
Anna Kelly: The 73-unit that I’ve just bought in December.
Joe Fairless: What’s a mistake you’ve made on a transaction that we haven’t talked about already?
Anna Kelly: Overpaying because I underestimated rehab costs.
Joe Fairless: What is an aspect of the rehab estimation that you would do differently, knowing what you know now?
Anna Kelly: I have a much better idea of the extent of costs involved for structural damage and things that you can’t see, that are hidden behind walls.
Joe Fairless: Who would be a good person to talk to in a market, should a Best Ever listener want to be more educated about that?
Anna Kelly: I would say property inspectors and realtors and contractors who know the problems that come up with a certain vintage of properties. Things like [unintelligible [00:26:35].19] piping behind walls, and things of that nature.
Joe Fairless: Best Ever way you like to give back to the community?
Anna Kelly: I’ve started doing some coaching with some local people on learning how to get into their first rental properties. Some are houseparents at the Milton Hershey school, and some local pastors who really give back with so much of their time, but really are strapped financially… So just being able to teach people about real estate and the way that it can change lives and improve cashflow is tremendously rewarding for me.
Joe Fairless: And Anna, how can the Best Ever listeners learn more about what you’re doing?
Anna Kelly: They can reach me on Facebook at Anna ReiMom Kelly, or my website, which is ReiMom.com.
Joe Fairless: Anna, thank you for sharing your five-year plan that came to fruition. Congratulations on leaving the corporate job and having the income that replaces that salary and then some, plus all the freedom that goes along with it, plus the net worth, and all the other good stuff… And thank you for talking about the deal specifics with your joint venture partners on the 73-unit, how you found that deal, although maybe we couldn’t replicate it as much… But there is a takeaway – make sure that you’re being social with other human beings, and [unintelligible [00:27:55].19] whenever you’re at gymnastics or other things, you’re not sitting in a corner by yourself, on your phone, doing your thing.
Anna Kelly: Absolutely.
Joe Fairless: Thank you so much for being on the show. I hope you have a best ever day, I really enjoyed our conversation, and talk to you again soon.
Anna Kelly: Thank you so much, Joe.