Michael Morawski’s seemingly normal life was turned upside down the day he was charged with fraud. After ignoring some red flags from those around him, he ended up making business moves that he later found out were unlawful. Tune in to find out how overscaling, overpaying, and overleveraging landed him in prison, what he learned in those 7.5 years, and how he’s scaling his business now.
Michael Morawski Real Estate Background:
- Coaching and training businesses in the multifamily investor space
- 30 years of real estate experience
- Has previously raised $18MM, acquired $60MM in assets, 4,000 apartments in 5 states, & managed 7,500 units
- Based in Chicago, IL
- Say hi to him at: www.mycoreintentions.com
- Best Ever Book: The Millionaire Real Estate Investor
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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. 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 fluffy stuff. With us today, Mike Morawski. How are you doing, Mike?
Mike Morawski: I’m doing great, Joe. How are you?
Joe Fairless: I’m doing well and looking forward to our conversation. A little bit about Mike, he has 30 years of real estate experience. He has raised 18 million dollars, acquired 60 million in assets, 4,000 apartments in five states, and managed 7,500 units. He came across a major challenge in his life in 2010, which he’ll talk about. He’s based in Chicago, Illinois, and his website is the best website, mycoreintentions.com.
Mike Morawski: That is, Joe. Yeah, that’s [unintelligible [00:01:16].
Joe Fairless: Cool. Well, with that being said, Mike, do you want to get the Best Ever listeners a little bit more about your background and your current focus?
Mike Morawski: Sure, absolutely. Thanks for having me here, I appreciate it. As you said in my bio, I’ve been in real estate for 30 years. I started out as a sales agent, and it’s funny how I got into the space. I’ve always felt success leaves clues… And I happened to be in the construction business, and I woke up one morning and I was just burned out. I couldn’t do what I was doing anymore. I was still banging nails, we were doing room additions, and kitchens, and bathroom modeling. I decided to sell my company, and I took a year off. During that year, I house-hacked a couple of houses. Joe, this was long before house hacking was sexy, or the thing to do.
Joe Fairless: When was this?
Mike Morawski: This was 1990.
Joe Fairless: Oh, yeah.
Mike Morawski: Maybe 1991. So it was not the thing to be doing. So during that time I house-hacked, and met a real estate agent who was extremely successful back then. I went to him and said, “Hey, Todd, I’d like to get in the real estate business.” He goes, “Man, I think you’d be great at it. I think you have great skills and good sales skills.” I said, “Well, listen. Can I shadow you?” He said, “No.” He goes, “I’m not going to let you come into my office, walk around, and follow me around.” He goes, “What I’m going to do is make a cassette tape for you.” I said, “Okay.” This dates me a little bit.
Joe Fairless: I listened to cassettes back in the day, too.
Mike Morawski: Yeah, but I don’t think we could find something to make one on today.
Joe Fairless: No, probably not. Nor would we want to.
Mike Morawski: Right, exactly. Anyhow, I equate that cassette to these podcasts just like this, Joe. Because you can go back, you can listen to it over and over and over again. But I listened to that tape over and over, and I wore it out. But I went into the real estate business, and my first nine months in the business I sold 78 single-family homes, all for sale by owners. I went on and built a team selling over 125 homes a year. I did that for seven or eight years consecutively. In 2005, I saw the market starting to shift.
When the market started shifting, I said “Man, I’m going to have to go do something else.” I always wanted to be in the apartment business. I’d done a lot of work when I was in the construction business for Inland. Inland back then was just in the apartment business, just getting started, and today they’re the largest REIT in the world, a real estate investment trust; they’re in 80 countries. Anyhow, I understood the model, Joe. I understood that if you raised private equity from family, friends, individuals, married it with a great real estate deal, that you stayed in the middle, and as long as everything went well, everybody made money and everybody was happy.
So I went out, I raised 18 million dollars, bought 60 million dollars’ worth of real estate, 4,000 apartments in 30 months. I went and built a property management company managing 7,500 units. As a result of that today, fast forward, I’m in the coaching and training space. I think I’ve taken all my wisdom, knowledge, experience, good and bad along the way, and put it on a platform to give back and help others.
Joe Fairless: You’re at 4,000 units, and what year was this?
Mike Morawski: This was 2008 or 2009.
Joe Fairless: 2008 or 2009. Was it from 2005 to 2008 or 2009 where you got up to 4,000 units?
Mike Morawski: Yeah. And a couple of things along the way. First of all, I grew way too fast. I over-scaled. In 2007, I bought 17 deals for 2,700 units, and we never took the time to stabilize the deals. Plus, I overpaid and I was over-leveraged. So I had 60 million dollars’ worth of real estate that I was leveraged at 85% instead of 65% or 70%. I can’t even understand why the banks would allow me to have done that when I look back. But they were throwing money at us back then.
Joe Fairless: What type of loans were they?
Mike Morawski: They were all commercial. You could go in and just basically say what you own. Especially after I had my first 500 to 700 units under my belt, the same bankers, the same lender, just over and over again.
Joe Fairless: Were they the local banks?
Mike Morawski: No, actually I used a lender out at Cincinnati, a broker, and we went to a couple of regional banks. I did a bunch in the Ohio Valley; one was a regional bank, it was Huntington National. Then I had a big footprint down in the Dallas Fort Worth market; that was agency debt that we did down there.
Joe Fairless: Okay.
Mike Morawski: And then in the Alabama market, where I also own property, that was all local. I had one agency debt deal down there though.
Joe Fairless: We have the benefit of knowing what happened, now, looking back, in 2008 or 2009, to most of the investors in the country, and it wasn’t good. Sp what happened to you then?
Mike Morawski: As I said, I was unstable. 2008 came around, I’m having lunch with my CFO, we’re sitting, having lunch and watching. The news happened to be on and we’re watching people carry boxes out of Lehman Brothers by the droves. I looked at my CFO and I said, “Man, we’re screwed aren’t we?” He goes, “Yeah, we’re in big trouble.”
Joe Fairless: Why were you screwed? Were the properties not cash flowing?
Mike Morawski: Well, very unstable. We knew that the markets were going to change, and we knew that there was going to be some kind of an impact in the market, but didn’t really know what kind of an impact. I was heavily invested in markets that were propelled by the car industry, by the transportation industry. Those were two of the biggest industries to get hit.
I’ll give you an example. I owned a deal in Anderson, Indiana. Anderson, Indiana when I bought this deal was the number one city in the country to raise your family in. All these little small businesses in town supported the automotive industry. What they did was they made parts, so they made radio knobs, dashboards, they made seats, seat liners, and beading. When the market went away, these people all went out of business. They rolled up 30% of the businesses in town. My occupancies dropped from the low 90s to mid-70s. I couldn’t substantiate the drop, I couldn’t pay the bills, we couldn’t do the repairs, and people moved out. I had a property manager call me one day, Joe, in tears, Monday morning; he says, “I have 32 moving trucks in the parking lot today, and I have scheduled move-outs for 45 days.” How do you survive?
Joe Fairless: So lack of diversification for the employment industry in the market that you picked.
Mike Morawski: Right. I had a number of deals that went bad. Instead of letting them just go to foreclosure and letting that handful of investors get hurt, I wanted to try and save everybody. I had been involved in a recessions before. You see a recession, there’s a 10% correction in the marketplace. It lasts 17-18 months. This thing was 40%, Joe, and it went on for seven or eight years. As a result of that, I tried to balance the ship, so I started to move money from companies that were operating really well into companies that weren’t operating well.
I had 38 different companies and started moving money back and forth. And I did it under the auspices that my attorney and my accountant both said it’s okay to do it, just leave notes between the companies, which I did. Well, that was all fine, and that wasn’t the problem. The problem was, I didn’t disclose it to my investors. And because I didn’t disclose it to my investors, I ultimately was charged with wire fraud and mail fraud charges and sentenced to 10 years in federal prison.
Joe Fairless: Of the 38 companies, were they all real estate deals?
Mike Morawski: They were all real estate deals, except for the property management company.
Joe Fairless: Got it. Okay. And how many years did you serve?
Mike Morawski: I served seven and a half, and then home confinement for about another 10 months. So I went to prison thinking, “Oh my goodness, my life is over.” Joe, I went from this upper-middle class, I had a house, a car, and a company that I was trying to keep afloat, and never changed my lifestyle. So I never flew private, never bought big boats or big houses, big cars. I just tried to save everything, but lost everything as a result. So I went to prison after having this success, and losing everything, to now being in prison in a 12 by 12 room with three men I don’t know, living on a two by five locker with three green uniforms and five pairs of underpants.
Joe Fairless: What surprised you about prison?
Mike Morawski: [laughs] What surprised me about prison? I think the biggest thing that surprised me about prison is how everybody in prison will come around you and support you, help you, will lift you up, and will help you through. Because as mean as it is, as evil as it is, as dark as it is, and as much bad stuff that goes on behind the wall, people are generally good people. They come around you and they help you up. Here’s what I mean, I’ll give you an example.
So I go to prison and I think my life is over. “How the heck did I get here?”, “What am I going to do now?” I’ve gone for 17 days, then my wife decides to leave me. She tells me she’s divorcing me. Now my life is really ruined. I walk around every day wondering how I got here and what am I going to do.
I walk in the gym one day – I’m there for about six weeks or seven weeks, and I walk in the gym and this guy walks up to me and he goes, “Hey, don’t let these people beat you. All they want to do is beat you. They want to take everything from you that you have. They want to take your apartment, your businesses, your cars, destroy your family… But you have a choice. You can either do the time or let the time do you.” I made the decision to do the time. As a result of that conversation, I started going to the gym, I started working out, I started losing weight, feeling better about myself. I wanted to go into college. I got a four-year bachelor’s degree in theology. I wrote two books while I was gone, one on multifamily investing, one on property management. I’d actually love to give your listeners a copy of my multifamily book.
I wrote an ethics study course, I taught real estate and ethics for five years, I taught Bible studies, I was on an outreach program, I went in the community, I told my story to small business owners, 40 times to local colleges. I befriended a professor from the University of Minnesota and we did a joint venture case study together, an ethical case study, and it gets taught at the college level. It just got published in the business journal of ethics and gets taught at the collegiate level in forensic accounting, sales and marketing classes. I really made the best of the time.
Joe Fairless: Yeah, absolutely.
Mike Morawski: I came home and that spurred me into the coaching and training space, because I want to be able to give back, I want to be able to help people… Because here’s why Joe, I think there are too many guys and women who are in C-suites who run companies, who own companies, who are under pressure every day, all day long. That pressure can cause somebody to make inappropriate choices, a bad decision; with all that good intention and meaning in the world, but that bad decision ends you up in a position where you don’t want to be. And you don’t necessarily need to go to prison, but you can very easily. I tell that because I want people to understand, to think things through. Everything that you do, your gut is a great indicator, and if you’re in a situation where you’re having a hard time making a choice or a decision, reach out for help and talk to somebody.
Joe Fairless: When you were transferring the money from one company to another, was your gut telling you, “I probably shouldn’t be doing this?”
Mike Morawski: Not really, because I had this guidance from my attorney and from our accountant. Big firms. They weren’t little firms, they weren’t little guys. I remember going to breakfast once a month with my accountant, asking him if we were doing anything wrong and he said, “No. If you were doing anything illegal, I’d have to stop working with you.” This was a big six accounting firm. Comedy of errors, Joe… Here’s what I learned. I was over-leveraged, paid too much for properties, didn’t pay attention to the red flags, didn’t listen to people around me when they were telling me that they didn’t like some of the practices of some of the people around me…
Joe Fairless: For example? I’m not asking you to call out people’s names or anything, but just what’s an example of that?
Mike Morawski: I’ll just tell this real quick story. I’m in Cincinnati in 2008, trying to close a 200-unit deal. The money’s not being wired from my company. Finally, I get my partner on the phone and he says, “I don’t know how to tell you this.”
Joe Fairless: You don’t want to hear that…
Mike Morawski: Yeah, that’s something you want to hear from your partner when you’re sitting at a closing at 10 to five waiting for 500,000 dollars to close a deal. I had to move money from the Escrow account to the business account. I thought I could have it back before closing, and things didn’t go well. I said, “I told you before we went into this business that you’d never move money from an Escrow account or between companies.” He said, “I know. But I thought I could do this.” I said “Okay.” So I dry closed on the deal, just signed all the paperwork, went home, and said I’d fund it by Tuesday. I was able to go home, raise the rest of the money, get that deal closed by Tuesday. I gave away some of my equity in order to do that, but that was Wednesday. I never talked to my wife about business, Joe, and I never told her anything. I might tell her, “Hey, we bought a couple of apartments” or “I’ve got a new investor.” But I never really got into detail. When we go to dinner on Friday night with my partner and his wife, and she doesn’t know what happened on Wednesday, but on the way home, she says “I don’t trust him.”
What do I do as a good husband? I say, “Oh, honey, don’t worry. I have this under control.” I didn’t have anything under control, Joe. What I should’ve have said was “Tell me more about that. Tell me why.” A week later after that, I’m having lunch with my attorney and he said, “Man, I don’t know what’s going on over there, but I don’t like some of the things he’s doing.” I said, “Oh, don’t worry about it.” I said, “I’m watching.” I wasn’t. So two things right in a row that I should have paid attention to. I can tell you five or six other times that things happened, not just with him, but in general, where we don’t pay attention. We get going so fast that we don’t take time to step back, think, and look at things from a perspective or a vantage point that could help you.
Joe Fairless: You mentioned the over-leveraged and overpaid part. But in the example that you referenced in Anderson, Indiana, it wasn’t either one of those, in my opinion, from the little I know from what you said; it was picking the wrong sub-market, because it was completely reliant on one industry. What are your thoughts?
Mike Morawski: Yes, some of it was sub-market. But I think some of it could have been helped if I wasn’t so leveraged. If I would have been 65% loan to value, things would have not been so expensive. The other thing is I didn’t raise enough money. So by being over-leveraged, by only having to have to put 10% down, I didn’t raise enough money. Here’s the other thing that I did. And Joe, I don’t know if you were doing deals; I think you were doing deals back then… But the market was so hot, and just going up so much in the multifamily space that it was like nothing was going to happen. I felt infallible. As a result of that, I put in my offering documents that I wouldn’t go back to my investors for a capital call.
Joe Fairless: Oh, yeah. No capital call clause.
Mike Morawski: Yeah. So my hands were tied. So my personality says, “Hey, you can’t fail. Don’t fail. If you fail, people aren’t going to like you.” As a result of that, I did not go to people and say, “Hey, this is what’s going on” when I should have. And if I would have, things would have been a lot different.
You know, Joe, if I would have come to you and said, “Hey, listen, here’s what’s going on. I think if we take the good positive cash flow from here, we move it over here for a period of time, we’ll be able to substantiate the storm.” You might have said yes or you might have said no, and let me take the deal… There were all kinds of things that could have happened differently if I would have acted differently. I take full responsibility for my actions, but boy, did I learn some lessons, and I hope people can learn from those lessons.
Joe Fairless: Thank you for sharing those lessons. There’s a lot of lessons packed into this conversation that you’ve led, so I appreciate that. Let’s take a step back and perhaps this reocurring theme or something you’ve already talked about will be mentioned here, but – I always ask this question to our guests, what is your best real estate investing advice ever?
Mike Morawski: Best real estate investing advice ever? I come from a background of being a carpenter, so measure twice, cut once. Check your numbers, double-check your numbers, make sure that you are looking at the early onset traps, make sure that your buying strategy is solid, and that things like population growth, job growth, and household income make sense.
The other thing is that I wrote this book Exit Plan, your complete guide to multifamily investing and why you need an exit plan. I wrote it because I’ve spent hundreds of thousands of dollars in coaching and training and books and tapes over the years. Everybody teaches how to buy a deal, find a deal, get in a deal, nobody teaches how to get out, and that’s the planning process. Know when to get out, know how to get out. And that doesn’t always mean selling. I always tell people, look at all your options, plan your exit… Because Joe, we have that saying in real estate that says we make money when we buy the deal. And we do. But you don’t realize until you sell, so you’ve got to get your capital right.
Joe Fairless: I agree. If you go to a meet-up, 90% of the conversation is going to be about acquisitions and what people have in the hopper. But the money is realized on the exit and the execution of the business plan. So that sounds like a much-needed book. We’re going to do a lightning round. Are you ready for the Best Ever lightning round?
Mike Morawski: God, am I…
Joe Fairless: Alright, let’s do it. Well, you can take a deep breath, and first, a quick word from our Best Ever partners.
Joe Fairless: Alright, what’s the Best Ever book you’ve recently read?
Mike Morawski: Well, I have to just say the Best Ever book I’ve read is The Millionaire Real Estate Investor by Gary Keller. I think that that book has, for me, over the years given me core principles to go back to and refer to, to build a solid foundation on investment principles along the way.
Joe Fairless: I haven’t read that one, but I read Millionaire Real Estate Agent, which is strange, because I’m not an agent. One thing I got from that book is that your first hire should be an administrative assistant, and that was very helpful for me. Another thing I got from that book was people aren’t in love with you, they’re in love with the service that you provide. Therefore, if you bring on team members who provide similar or better service, then you can start removing yourself from that piece of the process.
Mike Morawski: Right. He’s a very smart guy, Gary Keller.
Joe Fairless: Best Ever way you like to give back to the community?
Mike Morawski: I like to serve. I think that over the years I have coached Little League, coached kids sports… I like to be that guy that offers up just some knowledge and wisdom that will help somebody else get a little bit better at what they do.
Joe Fairless: How can the Best Ever listeners learn more about what you’re doing and check out your book, Exit Plan?
Mike Morawski: Thanks for asking. I’m all over social media. Follow me, love me on Instagram, Facebook, and LinkedIn. You can get a copy of Exit Plan at mycoreintentions.com/exitplan, go download a free e-book. You can reach me directly at email@example.com. I welcome any conversations, questions, thoughts, and dialogue. I’m a huge networker and a connector, so I love doing that.
Joe Fairless: Mike, thank you for being on the show, sharing your story, lessons learned, and talking about some challenging times in your life. I’m sure that’s not doing it justice when I say challenging times. But talking about that, where you went from there, what you’re doing now, and your book, Exit Plan, which, again, most people talk about the acquisitions, but it’s about the execution of the business plan and the exit. Thanks for being on the show. I hope you have a Best Ever day and talk to you again soon.
Mike Morawski: Thanks, Joe. I appreciate it. Have a great day.
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