Jack Miller Real Estate Background:
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“You don’t have to do that many good deals to make a fantastic living, so focus on the best deals” – Jack Miller
Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless. 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. And first off, hope we’re having a Best Ever weekend. It is Sunday, and because it’s Sunday, we’ve got a special segment for you called Skillset Sunday. You knew that was coming, right? Because you’re a loyal listener, and that’s what we do on most Sundays.
With us today, we’ve got a guest who has made over 10,000 loans in excess of a billion dollars, and has also purchased a lot of properties. He’s the president and founder of Gelt Financial Corporation, and he’s going to talk about some lessons he’s learned along the way that will help you build your real estate portfolio the right way. With us today, Jack Miller. How are you doing, Jack?
Jack Miller: Excellent, Joe. How are you?
Joe Fairless: I’m doing excellent as well, thanks for asking. So, let’s get right into it. What’s the first lesson we should talk about that you’ve learned based off of your experience, that you see real estate investors do, or shouldn’t do, or should do more of?
Jack Miller: So the first lesson is you don’t have to do that many good deals to make a fantastic living, and to really become wealthy. But a lot of people want to do all the deals. So we see a lot of both as lenders and as buyers, you really need to be selective with the deals. So my first lesson is, don’t do a lot of deals, but focus on good deals.
Joe Fairless: That can ring true with some people who have fear of missing out. Because I’ve heard similar advice, but the exact opposite, where it’s don’t wait for the perfect deal, just get in there and do a deal, take action. What would you say to that?
Jack Miller: I would say whoever gives that advice isn’t there when things fall apart. The reality is there are a lot of people talking about how much money they make in real estate when things go good. But there’s a lot of deals that don’t go good and they end in total disaster. It’s sort of like people walking out of the casino, you always hear about the winners, but you don’t hear about the losers. So my biggest advice to people would be, learn to say no. Say no more often than you say yes. I would say approach this with precision, and absolutely don’t do deals that you don’t think are perfectly aligned. Because if it goes bad, you can do eight or nine good deals, and if you have one deal that goes bad, that can tank you and leave unbelievable damage to you, your credit, and your future ability to transact.
Joe Fairless: What’s the next lesson?
Jack Miller: I would say don’t fall in love with the deal. A lot of people fall in love with the deal, they fall in love with doing deals, and they put good logic to the side. You need to approach it from a business point of view. The deal is not going to love you, so don’t love the deal. So approach it very analytical, with your comparables be conservative… You see people and they’re too optimistic with their estimate on repairs, or too optimistic on their hold time, or too optimistic on what they’re going to sell it for… I would say, approach it from a pessimistic point of view, and if it works as a pessimistic point of view, the deal will surely work. Again, I don’t want you to think I’m a pessimist. I’m the ultimate optimist. But if everything works and you’re conservative, it’ll surely work when you’re optimistic.
Joe Fairless: Don’t love the deal, because the deal won’t love you. I love that.
Jack Miller: There’s no love back.
Joe Fairless: There’s no love back. No reciprocity at all.
Jack Miller: No reciprocity. The deal will suck up your money, and destroy you, and cause you sleepless nights like you wouldn’t believe.
Joe Fairless: What’s the next lesson?
Jack Miller: More people and companies die from indigestion than starvation. So what we see a lot is somebody will do one or two or three deals, they’ll make a good amount of money, and then instead of doing one or two or three at a time, all of a sudden they’re doing five deals at once. And that’s the wrong approach; I would say take it slow, do one deal, get it done, do another… Again, more people and more companies die of indigestion by growing too fast, than of starvation.
Joe Fairless: So, I imagine you see that a lot from the lending standpoint?
Jack Miller: Yes.
Joe Fairless: So tell us an example or two with as specific as you can get or remember about that.
Jack Miller: Over the past 30 years I’ve really had the privilege to work with some much more talented people than me. And I’ve seen time and time again, we have tremendous talent, tremendous well intent, and tremendous knowledge, and they over-expand. They’ll do one deal, they’ll do two deals, and they think they’re the best thing since sliced bread.
And all of a sudden they have four properties under agreement of sale. And inevitably, something happens that will tank them. It could be something like the coronavirus, it could be an economic meltdown, or it could be just the deals. You can’t do too many things at once. It’s just hard. It takes time to build up that infrastructure.
Joe Fairless: What’s the next lesson?
Jack Miller: A deal of a lifetime comes about every day. I hear all the time, “Oh, this is the best deal in the world. This is the deal of the lifetime.” I literally hear that just about every day from somebody. The reality is if you’re in there, you’re going to always find a good deal. And they’re all sort of interrelated, because people think “Oh, this is such a great deal. I can’t say no.” They fall in love with the idea of it. So with that comes the same thing as people are over-expanding. In order to do a deal, the deal has to be perfect, but your timing has to be perfect, too. You have to have the mental focus to be able to do the deal, the financial wherewithal to be able to do the deal, if something goes wrong. So again, don’t fall into that “This is a deal of a lifetime.” Because if you’re out there looking, they will come all the time. If you’re at home, sitting on your sofa playing video games, they’re not going to come all the time. But if you’re out there in the mix, they’ll be in there with you.
Joe Fairless: The first four lessons all relate to slowing down, be conservative about how you’re running the numbers, and make sure that you are not growing too fast. This seems like a consistent theme.
Jack Miller: Yes, it is, because that’s how I see people blow up. They want to do so much, because it’s so exciting and so energetic, it’s like a drug. But I see the need to slow down, they need to be more conservative. And those are really the same philosophies, by the way, that if you would read a book about Warren Buffett, or listen to him, he basically says the same thing. He says learn to say no. If you say no more, you’ll be better off. Because I’ve seen, and I see all the time, we have tremendously talented people who will explode and implode because they’re doing too much, or they’ve made the wrong decision.
Joe Fairless: What’s the next lesson?
Jack Miller: The devil’s in the details. We see all the time where people — especially now with the internet where you can be in one part of the country and see a property virtually in another part of the country. You could be in Texas and buy something in Des Moines, Iowa. And if you depend on other people to do the due diligence, usually something goes wrong. So my next one is, the devil is in the details. You need to understand the deal from every aspect. If the property needs work, how much work does it need? Don’t just take the realtor’s word that “Oh, he got you a contract.” Or how did you hear? He says ‘”Oh, the realtor got me a contract [unintelligible [00:10:33].26]” Or check-in with the township to make sure that you don’t need permits, or you do need permits. Factor it in.
A common mistake is when people buy properties, in some cities the real estate taxes are reassessed based on a sale. So a sale triggers it. So I see all the time the taxes are based on, let’s say $100,000 value, and someone’s buying something for 300,000, but they’re underwriting the deals based on the $100,000 taxes. They don’t realize that as soon as that deed’s recorded, the city’s going to triple the taxes. So it comes down to do your due diligence, know every aspect of the deal, again, from the buy, from the due diligence, from the contracting, from a zoning perspective, from a potential tenant perspective, read all the ordinances, read the leases…
I see it all the time where in a lease, a lot of times in commercial property, a prospective borrower, all they’ll read is the dollar amount the tenant’s paying and the lease term, but they don’t realize there’s co-tenancy clauses in there or other clauses that the tenant can leave for different reasons. So again, it comes to the devil is always in the details. That’s critical. You have to know these deals inside out and don’t depend on somebody else. It’s very easy to depend on someone else to do the due diligence; but you can almost bet that whoever you’re depending on is going to be long gone when the poopoo hits the fan.
Joe Fairless: Co-tenancy clause, for anyone who’s not familiar with it – will you elaborate on why that could be an issue?
Jack Miller: So co-tenancy is common in commercial real estate, it’s very common in retail. So what a co-tenancy means is, let’s say you have a shopping center, and you have a major supermarket in there, and you have five or six other little stores who are anchors. Those stores may come in and say “Hey, we’ll be a tenant as long as that supermarket’s there. But if that supermarket leaves, we could leave, too.” So a co-tenancy clause has to do with the tenancy of somebody else’s. And you see that a lot, especially now with Corona, with big stores going out of business. You have not only the big stores go out of business; if you have a co-tenancy in your lease, you could see the smaller stores leave or pay reduced rents. So you need to understand co-tenancy, and you need to understand if it’s in your leases.
Joe Fairless: Oh, absolutely. That could torpedo a deal quickly, and that could also bring in novice investors to buy a property who they think they’re getting a good discount, but in reality, they’re not getting a discount at all, because there’s no income that’s going to be happening in about three months after they buy it, because all the tenants are going to leave.
Jack Miller: People think I’m crazy, but I actually love reading leases; and they’re boring as could be, but you know what? I find it fascinating, and I tell buyers that you need to understand every clause in the lease… Because there’s a lot of times good clauses too, that you don’t understand. And it’s that way with every part of the deal – you have to really understand the deal. And again, don’t depend on somebody else to have your best interests at heart, because usually they don’t; they have their best interests at heart.
Joe Fairless: Lesson number six.
Jack Miller: Lesson number six really comes down to — I call it the three main parts of the deal. You think about every deal, I divided it into three parts. It’s the purchase, and maybe the fix-up if it’s a fix-up, it’s the management, and it’s the sale of it. And you have to really be an expert at all three parts. Again, if it’s not a fix up, it’s the purchase, and the leasing, and the management, and the sale. But we’ve seen so many people over the years who are really experts at one or two, but they’re not good at the third one, and the whole thing blows apart. Years ago – and I’m going back 20 years – there was one of the best buyers I’ve ever seen in the real estate business in Philadelphia. I’m going to call him Joe; that’s not his name.
Joe Fairless: Hey.
Jack Miller: He must have owned 100 or 200 properties, all in a prime section, and he bought them all for 30, 40 cents on the dollar. He was literally one of the best negotiators, and this guy could sniff out deals. Unbelievable. We have provided him financing, because every deal he bought was really a great deal. What I quickly learned was that this guy was a lousy manager. He couldn’t manage the property. He couldn’t deal with the tenants in the repairs. And he unfortunately had, I’m guessing 150, 200, properties, maybe 100 properties, all beautiful properties; he ultimately lost them all, and gone out of the business because he wasn’t good at the middle part, the managing and dealing with the tenants part. And he wasn’t good at selling them, because he could never sell them, because he always thought it was worth five times what the market would bring.
So he was one of the most masterful buyers of properties I ever saw, but he really wasn’t good at the other two things, and ultimately that was his downfall. So what I call the three main parts of the deal – we all can’t be good at different things, I’m lousy at a lot of things, but you have to know what you’re good and what you’re lousy at, or not as good, and outsource that, find a good property manager, find a partner who’s great at the things you’re bad at.
Joe Fairless: We’ve got time for one more. What’s one more lesson that you’ve learned?
Jack Miller: Think long term. What encompasses that is the power of compounding. When we do a deal, we think on a 10, or 15, or 20, or 30-year horizon. A lot of people are thinking six months and a year. And I think that’s the wrong approach. I think people who want to get rich quick, they tend to implode pretty quick. I have a sign on my door, it says “Get rich slow.”
Joe Fairless: What about the business models where it’s a value-add deal and you’re looking to exit out after five years?
Jack Miller: Nothing wrong with that. We’re in the middle of doing a deal now. As a buyer, we think we’re going to exit out within six to nine months. But sometimes you can’t. And you have to be prepared for the long haul. Corona is a perfect example of it, nobody could have predicted it before it happened.
Joe Fairless: On that six to nine-month projected exit, what specifically do you do or how do you approach, thinking long term, since you’re projecting that short of an exit?
Jack Miller: A few things. One, we stress test it instead of selling it. If we rent it out, how’s that going to look? And can we rent it out? Is our financing or our capital stack prepared for a long term hold, as opposed to a short term hold? Do we have the cash to be able to hold it if it doesn’t sell right away?
So I think it’s just looking at the deal from a 360 degree and saying “Okay, if I can’t sell it for what I want to sell it or what I need to sell it at, am I okay holding?”
Joe Fairless: Very, very helpful. How can the Best Ever listeners learn more about what you and your team are doing, Jack?
Jack Miller: You can go to geltfinancial.com. That’s the easiest way. We have a YouTube channel, it’s Gelt Financial. And just check us out on social media.
Joe Fairless: We ended up with seven lessons that you’ve learned from your experience, and I’m grateful that you shared them. Certainly, be conservative, continue to be methodical about the acquisition process, and make sure that you have experts on your team to address each of the areas of the deal throughout its lifecycle. The acquisition, the management, the sale process of it… And to stress test deals to make sure that even if you are projecting, in your case, a six to nine-month exit, or a five-year exit, or some other exit, it doesn’t matter, look at the scenarios where if that doesn’t take place, what will you do? And do you have enough money to withstand that? And is there financing in place that will allow that? If not, what would be your plan for acquiring that during the ownership periods?
So thanks for being on the show, Jack. I really appreciate it. Hope you have a Best Ever weekend and talk to you soon.
Jack Miller: My pleasure. Have a great day.
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