JF1950: Detroit Investor Talks Getting Started, And The Detroit Marketplace with Andrew Kuhn

TRANSCRIPTION

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, Andrew Kuhn. How are you doing?

Andrew Kuhn: I’m doing great, Joe. Yourself?

Joe Fairless: I am doing great as well, and looking forward to our conversation. A little bit about Andrew – he’s the founder and CEO of Kuhn Investment Group, Kuhn Property Management and Infill Development, principal on over 400 units, and has invested in another 1,000 units passively. Based in Detroit, Michigan. With that being said, Andrew, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Andrew Kuhn: Sure. Thanks for having me on, Joe. As a fellow Ohioan, I was originally born in a small town called Bucyrus, Ohio. I did my undergraduate studies at the University of Findlay, and was actually a pre-med major. I thought I was gonna medical [unintelligible [00:02:10].05] I was gonna be an orthopedic surgeon… And long story short, about 19-20 years old a friend of mine from Rutgers mailed me a copy of Rich Dad, Poor Dad, said “Read this book and tell me what you think”, and that was the switch I needed to pivot directions in my life.

So much to the dismay of my parents, I didn’t apply for the MCATs, rather I decided to graduate and move up to the state of Michigan, because that was the only place at the time where you could buy cheap housing as  a kid in his early twenties, to buy and sell real estate. So it was really an interesting situation, and I blame everything that started with that book.

Joe Fairless: Alright, so you moved up to Michigan.

Andrew Kuhn: Yeah.

Joe Fairless: Did you move to Detroit?

Andrew Kuhn: I did. I live in the inner ring suburbs, Royal Oak. I’m about three miles outside of the city of Detroit proper.

Joe Fairless: It’s a nice area.

Andrew Kuhn: It’s a nice area. And actually, that was the biggest thing that shocked me about Michigan. I moved up here, and — again, don’t get me wrong, I love Ohio, but the amount of water year-around up North, with Traverse and Petoskey and all these beautiful destinations, wine country, the West side of the state, natural beaches – it really blew me away with just everything it offers on top of the city of Metro Detroit, which has this cool energy; it’s got this grit to it, in regards to everybody’s hustling, there’s still opportunity, and it’s really a city that at one time was one of the largest in the United States, during the manufacturing era, and then kind of fell through decades and decades of despair, and just poverty, really… So  now it’s kind of nice to see it coming back again.

Joe Fairless: What year was this, when you moved to Michigan?

Andrew Kuhn: 2006.

Joe Fairless: 2006. How much money did you have in the bank account?

Andrew Kuhn: [laughs] I think I owed about 30k in student loans, and I had another 50k in credit card debt, and maybe a couple thousand dollars in savings from growing up. It was one of those things where you’ve gotta get out there and just start taking your first steps out there.

I started in the single-family housing market. As I mentioned in my bio to you, one of the things I did was I started just flipping houses, and I realized that the strategy of buy/sell/make some money – it wasn’t a very good strategy to get ahead, because you would spend the money that you earned to live and survive and to keep going.

So I realized that I needed to do what Michael Masterson calls chicken entrepreneur, so I went back into the medical device space, and for a long time – about 13 years – I was a medical device professional, basically supervising surgeries during the day. So I’d be in the operating room in the hospitals, watching surgeries, make sure implants were put in correctly, and then at nights and weekends I started buying houses. And the funny thing is I owned my first rental before I owned my first house.

I was laughing the other day telling this story to a friend, because when I started out I literally was renting an apartment, yet I was buying rentals…

Joe Fairless: Me too.

Andrew Kuhn: Yup. [laughs]

Joe Fairless: I owned four rental houses before, so I’m with you on that. So you made your money as a medical device professional, and then you invested that money into single-family homes, and then you started scaling your portfolio.

Andrew Kuhn: Yeah, and I also – to add to that – I had a partner in the single-family space, and he owned his own property management company… Originally, I actually hired him, because I got about two dozen houses, and I was like “I can’t manage these anymore. They’re starting to take up too much time.” So I hired him, then we became partners, and since then we’ve done probably close to 150 deals. We still own 100 houses together, and basically we buy and rent, we build to rent, we’ve done some modular construction for rent, we’ve done some buy/sell transactions, but… As you know, you live off of cashflow, right? So my whole goal has always been to work once and get paid multiple times, off passive income streams, or relatively passive, all things considered.

Joe Fairless: What a great philosophy – work once and get paid multiple times from that.

Andrew Kuhn: Yup, exactly.

Joe Fairless: Modular construction to then rent… Educate us on why do that, compared to building to rent?

Andrew Kuhn: Great question. The actual modular industry is still a fairly new industry… And in modular construction, basically it’s the same construction methods of building either an apartment or a house, but instead of actually doing all the stick framing on-site, you actually are doing it in a controlled environment [unintelligible [00:06:26].19] industrial warehouses. And then they’re shipped, they’re put on a semi bed and shipped to a site. You still have to get your architectural plans approved by the state, you still have to follow every building code, you still have to get all your permits and everything signed off on, but the thing is that you get a prefixed price, you can control your pricing, and the delivery time.

To give you an idea, I live in an urban area, and the development company is infill because basically a lot of what we do is finding vacant lots or blighted properties, and I would buy them cheap, so that my land costs were low, and then I would constrict the construction time so that I could have modular to get a faster product from the time I order a house to the time we have it set, have everything tied in, and then get it rented out. I found that I shaved 6-8  months off the average timeframe of doing it the other way.

Joe Fairless: My goodness. And you have a price that’s much more reliable.

Andrew Kuhn: Exactly. Especially since costs are through the roof right now. I’m doing about a ten-million-dollar renovation on a 125(ish) units in the city of Detroit proper, in a historic neighborhood, and  – I’ll give you a perfect example; this is a story I give everybody. We had a $300,000 window budget, and after six months of historic commission meetings, our windows budget ended up at $925,000, so…

Joe Fairless: Wow…

Andrew Kuhn: [laughs] So those types of things, those types of lessons really make an impact on you and you learn from them to really try and mitigate risk, which I think is an under-utilized for investing in real estate as an asset class.

Joe Fairless: What were the changes that were made to go from 300k to 925k?

Andrew Kuhn: Basically, if any of the Best Ever listeners ever decide to do historic designated communities – basically, they can be designated historic by the state, or the United States nationally, and basically sometimes  it’ll be individual houses, sometimes in our case it was a full neighborhood of multifamily apartment complexes… And basically what happens is whenever the day is that it was designated, from that point forward any single thing you do to the exterior of the building, renovation-wise, everything, has to be in the original format as much as possible. What that means is we had just budgeted regular, standard vinyl windows, we’re gonna do it brown or black, because it’s a red brick building, to make it look good, and they didn’t like our sightline profiles of our [unintelligible [00:08:54].16] dividers. They said it doesn’t really represent the earlier model.

We’ve tried to do Juliet balconies and make exterior modifications to open up the apartments, because a lot of the B inventory that I own is sub-500 feet. Probably at least half of the apartments are very small spaces, urban walkable downtown [unintelligible [00:09:13].16] that affordable, cool aspect.

Joe Fairless: Going back to the modular construction, why would you do it any other way besides modular, if it’s cheaper and more reliable from a timing standpoint?

Andrew Kuhn: Great question. In regards to modular, there are pluses but there are also minuses to it. First off, real estate development as a whole is a very costly business, and so is the multifamily investment company. So you’re spending large amounts of money. Now, the reality is when you do a modular construction, you actually pay for the house upfront. So you put a deposit down when you order, and then the balance is due when they deliver it on-site.

In the single-family house world you’re writing a 100k to 150k check by the time it’s delivered, and then you still have another month of tie-ins, and approvals, and all the other fun stuff to actually basically have it on-site.

Joe Fairless: Okay, so it’s just cash-heavy upfront.

Andrew Kuhn: It is. And then really what you have to do is you have to be very liquid to be able to have cashflow management, and then on the back-end you can put long-term debt financing on it. But just know that you don’t get that going in.

Joe Fairless: Any feedback aesthetically from prospective buyers or renters about modular versus regular, custom-built?

Andrew Kuhn: Here’s the beautiful thing about modular… Just like anything in life, there are very cheap, inexpensive builders, then there are super high-end custom modular construction companies… So when you go with a mid-grade level product, it looks literally no different from an actual stick-built, frame-built house, that’s built on a lot, on-site, basically. So that’s the nice thing.

There are some limitations, because whatever they build has to be able to be shipped down the highway, so you have [unintelligible [00:10:58].12] of each block, and it’s kind of like building building blocks together and tying them together. And by the way, just so you know, down the street from me right now there’s a 382-unit development that’s all modular construction, super-high-end, class A, beautiful product, all kinds of amenities… And it’s kind of cool to watch it, because literally just bring in semi after semi after semi of what looks like pallets, and then the next day literally they have full stories added to the construction of these places… So it’s pretty incredible.

Joe Fairless: It sounds very logical to go that direction, assuming that you’ve got some cash and you’re physically responsible and you know how to manage it…

Andrew Kuhn: Yup.

Joe Fairless: I imagine though that the very first time you did modular construction, it was a little nerve-wracking, because it was just different.

Andrew Kuhn: 100%.

Joe Fairless: So how did you get over the thought process of “It’s different, and it’s kind of new, but you know what – I’m still gonna try it.”

Andrew Kuhn: One thing that those in my circle know about me and my life is that I’m a big believer in personal development. About that same time I got Rich Dad, Poor Dad introduced to me, I was introduced to a gentleman named Jim Rohn, who’s–

Joe Fairless: I love him.

Andrew Kuhn: So Jim was my gateway into the personal development space. He introduced you to Zig, and Brian Tracy, and Dale Carnegie, and Napoleon Hill, and all these amazing personal development speakers from what I consider the original generation really… And that was really what taught me that you need to win the inner game before you can win the outer game. And part of that – not only going through that whole personal development process – is really understanding that you win the inner game before you win the outer game, but also the fact that when you are growing in life, it’s painful… And the more you fail, the more successful you will be. The most successful people always have the most failures.

So what I’ve realized is that every time I get comfortable, I know I’m getting stagnant and I’m leaving a growth mode, and that’s a bad area to be in. Humans by nature are growth-oriented. So really, it’s a mental game first to understand that “Look, I don’t know what I’m doing, but I will tell you what – I know this for a fact – the school of hard knocks in life, of actually experiencing and doing new things will teach you better than any book, any other way that you can consume information, by actually doing it and learning and getting better because of it.”

Joe Fairless: How do you set yourself up financially — because with that mentality, someone might hear that and think “Okay, any time I’m getting comfortable, that means I’m getting stagnant, so I need to go out there and do something that might be painful.” They might interpret that to mean that they’re putting all the chips on the table, and continuing to bet on black. So how do you, from a personal finances standpoint, make sure that you’ve got some things separated from these risky, or new things ( I should say), that you’re doing, that have increased risk?

Andrew Kuhn: That is a great question. So what I would advise – and this is what I personally did, after a lot of introspection, was I realized that by nature I’m a very conservative individual. I mean, obviously, I have an element of risk-taking, but really what appears to be outside risk is learning how to manage the downside risk, and mitigate that as much as possible, so that it really only leaves you with the upside.

That being said – again, I spent nights and weekends for 13 years buying houses before I finally made a pivot and walked away from a day job that was a $350,000/year guaranteed job, that I could do in 30 hours a week. It was bonkers. But what I’m saying though is that in that timeframe I used it as a tool. So I built my dream house, I paid off my dream house, I got rid of all personal debt…

I have a philosophy that you always own assets and you lease liabilities. I think a lot of people don’t get their financial house in order so that they can be in a position of strength to then go out and bring your game to the next level. And really, it is the pre-work or the preparation that ends up determining the separation.

Joe Fairless: And just on the “you own assets and lease liabilities”, I imagine you consider your house a liability, right?

Andrew Kuhn: I do consider my house a liability. I did pay it off after we built it, and the reason I did that was because – again, this goes down to planning for the worst. So if at the end of the day the sky started falling and all my investments were upside down, and I had to give them back to the bank, or they called everything due, at the end of the day I still own my house, free and clear, so I actually technically own it, minus the taxes I have to pay every year… And basically, I still have a position of security. So it’s a cost, and it’s not just financial; you can’t always measure things strictly on a financial numbers basis, especially personal life and living decisions, too.

Joe Fairless: Very true, yeah. There’s investment decisions, there’s quality of life or lifestyle decisions, that just give us a peace of mind.

Andrew Kuhn: 100%.

Joe Fairless: What’s a deal you’ve lost money on? Let me rephrase, what deal have you lost the most money on?

Andrew Kuhn: That’s another interesting story… As any entrepreneur, I have plenty of battle wounds. I’ll tell you the greatest lessons that I’ve learned. Early on, I was helping to try and develop an indoor go-karting facility. When I first moved up to Michigan, I was like 22-23, and I ended up making an unsecured loan to who I thought was my partner at the time doing this, of $50,000.

Now, as a 22-year-old, I had a line of credit with that kind of money on it, but I didn’t have any savings… So I’m like “Okay, this makes sense…”

Joe Fairless: I was gonna say, you had 30k in student loans, 50k in credit card debt…

Andrew Kuhn: Exactly. So 8%-10% interest… I’m like “This sounds good.” Well, the reality is he ended up disappearing with the money, and then that put me in an even worse situation, having to pay that back over the next couple of years, and have the fortitude to stick with it, to pay it off, to learn from my lesson. And that taught me a really good thing about lending money and being very careful, because no one’s gonna care about your own personal money and financial well-being as much as you will… Because they don’t have as  much invested. So that was a  big one for me.

I also have houses — like, right now I’m in the middle of a pretty high-end single-family home flip. We paid — basically, it’s still to be determined, but it could turn out to not be that great… Whereas we bought a house in a very Tony suburb of Detroit, a 3,000 sqft. house, ended up spending about 650k on the acquisition, have another 400k in the budget for renovations, so there’s over a million bucks… And we’re pegging it to the market to 1.2-1.3. But the problem is because I abdicated responsibility, I lost control. So what happened was that property sat vacant for 14 months at an interest cost of just sitting there of $77,000.

Joe Fairless: Why did it sit vacant?

Andrew Kuhn: Basically, because I had a partner on this deal that I went in with, and long story short, he was kind of running the deal, and I was the finance guy behind it… And I didn’t hold him accountable to his construction timelines, and stuff like that.

Here’s another great lesson for your listeners – always, always be cautious and wary of short-term debt. I had a mentor, Jack Miller and John Schaub, in the housing world, that always said that you should never have short-term debt, because it’s basically a ticking time bomb… And 2 years, 3 years, 5 years, even 10 years goes by really fast. So I made a pact to myself that there was no more short-term lending under 5 years.

Joe Fairless: Okay. And the unsecured loan of 50k, in your early twenties – you wrote a check to that person… And then what happened exactly?

Andrew Kuhn: So I drew up a promissory note, and we had terms, he signed it, gave his personal guarantee, and we were trying to raise about two million bucks that we needed to get this — basically, to buy an Old Sam’s Club… And we were gonna outfit it with indoor go-karting, and a restaurant, and the whole deal.

Joe Fairless: [unintelligible [00:19:29].02] idea.

Andrew Kuhn: Yeah, it was a huge idea. And when you’re in your early twenties and you don’t know any better, it sounded awesome, right?

Joe Fairless: Yeah.

Andrew Kuhn: So I was all-in.

Joe Fairless: It still sounds awesome. Not profitable, but awesome though.

Andrew Kuhn: Yeah, exactly. Not profitable at all, but really awesome. So anyways, especially when you live in Detroit, the Motor City, and everybody loves cars and stuff up here… But that being  said, we were doing this in 2006-2007, and really we’d just hit the downturn, where we basically tapped out on being able to raise the additional capital that we needed to be able to get our renovation and everything up and running online. So then – this is what happens, is people get behind, and then they’re like “Oh, I have an electricity bill, and taxes are outstanding”, and all this stuff… And it was one of those situations where he had expected more money to come in to pay me out, and it never came. The other prospective investor pulled out and said “No go.”

So long story short, he spent that money and didn’t have it to pay back, and I never saw a dime of it.

Joe Fairless: And you asked “Hey, buddy, come on…” What was the response?

Andrew Kuhn: Great question… I mean, we’re really starting to get personal here, bu that’s okay. So if you really wanna know the story about that –  so I actually pursued him legally. I went after it, I had an attorney… It was actually a great original introduction to attorneys, because you deal with them so much in this industry… And had him kind of go after him. He wasn’t originally from the States, so he relocated back to his old state, and just kept dodging it, and dodging basically the attorneys for a long time.

Then unfortunately – it was about 7-8 years after that – he passed. He had a heart attack. So he was basically uncollectable. My attorney calls me one day and says “Well, I don’t think we’re gonna be able to pursue this anymore.” So then it was actually closure. And that’s another big thing – you don’t wanna leave things lingering out there, and open; you really want closure on stuff. So that was very comforting, to at least know that “Alright, this chapter in my life – it was the school of hard knocks. Lesson learned, and now I’m moving forward.”

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

Andrew Kuhn: Sure thing.

Joe Fairless: Alright. First, a quick word from our Best Ever partners.

Break: [00:21:47].03] to [00:22:28].10]

Joe Fairless: Best ever book you’ve recently read?

Andrew Kuhn: Oh, best ever book I’ve recently read… So  I am big into Dan Sullivan right now, Strategic Coach. I go up to Toronto and do workshops with him. He just wrote a book called “Who, Not How”. Basically [unintelligible [00:22:39].05] when you have these ambitions to build a big business, it’s not the how you do it, it’s the who; that means you need to be spending your time finding the right who’s to be able to build your team, to get more done… Because as you know, investing in multifamily real estate is a team sport.

Joe Fairless: What’s the best ever deal you’ve done?

Andrew Kuhn: Best ever deal I’ve ever done… Actually, I’ll tell you two stories. One was a value-add class B asset in the Metro Detroit suburbs; ended up buying it for about 1.4, put about 250k in renovations, so I was in for 1.6-1.7.  I got a post-stabilized valuation of about 2.6…

Joe Fairless: Wooh!

Andrew Kuhn: Yeah, almost a million dollars’ worth of equity there. It was a relative small deal, 28 units, but it was a nice little hit there for basically a 2.5 to 3-year turn, running the whole process through and stabilizing it.

Another deal – again, as I mentioned earlier in the podcast, Detroit does have a lot of inexpensively-priced real estate. A couple of years ago I had an opportunity to buy a large multifamily complex with some partners. We paid about 8k/door, and really it was just an occupancy issue. It was the right problems – it had poor management, and we ended up  stabilizing it, and then I actually sold it for 22k a door, so I almost tripled my money on that one.

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

Andrew Kuhn: The best ever way that I love to give back – and this is truly why I do what I do – is I like to create success and continual growth, so that I can provide more for my community: for the charities I support, for the communities, so I can have a bigger influence, and really make a bigger impact in this world.

Same thing with owning apartments. It really is an amazing thing when you can provide someone a safe, secure community and place to live, that can sometimes change their life. So it really is rewarding in that aspect.

Joe Fairless: How can the best ever listeners learn more about what you’re doing?

Andrew Kuhn: Easiest way to get a hold of me is KuhnRealEstate.com. That’s our main investor page, and there is a form they can submit. I believe they’re gonna post in the show notes as well the office contact info and everything.

Joe Fairless: Andrew, thank you for being on the show. Thanks for sharing your stories, thanks for sharing your path, some specific case studies, talking about some lessons learned on the historical windows – 300k to 925k – talking about modular construction, talking about loaning money to people and all sorts of other relevant, helpful pieces of information.

I really appreciate, and grateful you were on the show. I hope you have  a best ever day, and we’ll talk to you again soon.

Andrew Kuhn: Yes, you too. Thank you.