Do you have a property manager? Do they do a good job? If the answer was yes to both questions then it’s time to throw a pizza party! Joe shares that he threw a pizza party for the property management company that manages his three single-family residences. This will not only put him in a positive position with the firm, but also reestablish trust and a positive relationship that must be present when expecting quality.
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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’ve spoken to Barbara Corcoran from Shark Tank, Robert Kiyosaki, the author of Rich Dad, Poor Dad and a whole bunch of others.
Today is Friday, I hope you’re having a best ever Friday. We’re gonna do Follow Along Friday. I am with Theo Hicks. Theo, how are you doing?
Theo Hicks: Doing good, Joe. How are you doing?
Joe Fairless: I’m doing well, nice to partner up with you again and dive into it. Follow Along Friday, in case you’re listening for the first time – it is what we’ve got going on in our entrepreneurial endeavors. We’ve got a whole lot going on, that’s for sure, and it’s not to talk about what we’re doing, it’s to talk about the lessons that we’re learning along the way, so that we can apply it to what you’re doing; that is the most important thing out of this. How do you wanna approach today’s conversation?
Theo Hicks: I say we start with the pizza party.
Joe Fairless: Pizza party, yes!
Theo Hicks: Explain that.
Joe Fairless: Everyone loves a pizza party, right? I was interviewing Marco Santarelli… His episode will air way down the line, because we’re booked 60 days or so out, so whenever I actually do an episode and I record it, we have guests who I’ve already recorded 60 days out. So anyway, his episode will air later, so you’re getting a sneak peek right now.
He was talking about an experience he had where a property manager essentially stole $6,000 in red checks from him, and he said how you really make money on the operations – and I agree… We have to buy it right, we have to have the right business plan, but ultimately if the business plan isn’t executed according to how our spreadsheet says it should be executed, then everything falls flat. It’s like the Mike Tyson quote, “Everyone has a plan until they get punched in the face”, right? Same thing.
And as I was talking to him – I normally don’t multitask during interviews, but I also am wired to take immediate action if I have an idea. I’ll either write it down, or I’ll do something towards executing on whatever the idea is. And while he was talking, when he said that I was like “You know what? I have a phenomenal property managing company for my single-family owns, AND multifamily, but for whatever reason single-families came to my mind immediately… I said “I’m going to do a pizza party for the property management company.”
So I made a note of that, and then after the interview I sent an e-mail to the property management lead – it’s Emerald Property Management. There are two Emerald Property Management companies in Dallas. One’s got bad reviews, this one has good reviews. This one is in Colleyville. So the good one that I use, single-family homes, in Dallas-Fort Worth, Colleyville specifically, is Emerald Property Management. I sent an e-mail to the gentleman, his name is Ford, and I said “I’d like to throw you all a pizza party.” He’s like “You don’t need to.” I said, “Whatever, I am”, and I copied my assistant and she’s coordinating the details.
The pizza party is probably gonna be $100. Well, they are managing my three houses, and I don’t have to do anything with those houses ever, because they’ve got it down… They have the houses filled, they address the maintenance needs, we retain the residents, they’re really good about late fees and charging them if the residents are late, they’re by the book… And that to me is incredibly valuable, because everyone’s time is the most important resource that we have. So from a business standpoint, I definitely see the ROI on a hundred-dollar pizza party, because no one else does it – most people don’t do it – and it makes me stand out, so I guarantee that my properties will get a higher degree of attention that someone else’s properties would; that’s just human nature, that’s the case. Even if they deny it, it’s gotta be the case.
And if my properties don’t get a higher degree of attention – which they will – it made me feel good doing it, and it makes them feel good when they receive the pizza. So it’s a hundred-dollar investment, but guaranteed, it will have ten times return on that investment, whether it is they find a more resourceful way to get a vendor to negotiate their price down, and that will pay back itself, or they will find a resident faster, or they do a little bit more work on tenant retention.
So that was the pizza party idea… I just happened to talk to Theo about it earlier today, and he said “We’ve gotta mention this on Follow Along Friday” and so there you go.
Theo Hicks: Is it like a one-off thing, or are you thinking of doing it frequently?
Joe Fairless: Don’t do it frequently, because the best gifts are the ones that are unexpected… With certain exceptions. I send flowers to my 101-year-old grandma and my 94-year-old great aunt every month. That’s because they’re lonely and they deserve the flowers, and that’s something that they look forward to. But most of the time, the unexpected gifts are the best. That’s why I believe it’s much better to send people gifts around times that they’re not expecting it, versus the holidays.
I don’t send out holiday cards, but we send out signed copies of our book to my private investors. They end up receiving them on some random Tuesday of a month, and they don’t expect that, and that’s something that goes a long way. I got a lot of e-mails back from investors saying, “Hey, thanks a lot for sending me a signed copy of your book. I appreciate it.”
That stands out a lot more than sending a holiday card when everyone else is sending holiday cards, and your holiday card probably isn’t that much different.
One quote that stands out to me in this is Tim Ferriss says “Be unique before trying to be incrementally better.” Because if we’re unique and we stand out, we’re much more likely to get more deals, get more business, get more leads, whatever, than if we’re trying to simply be incrementally better doing what everyone else is doing.
Theo Hicks: Something else that comes to mind, too… You’ve interviewed so many people that I’m sure you’ve heard of a ton of different unique ways — you throw a pizza party, you send out a book… Something else that comes to mind now is I know someone said, instead of sending out the holiday card, they’ll send out a custom stationary that will have their name on the top… So whenever you’re writing your notes, you’re constantly seeing that person’s name, and you associate that with whatever kind of investor they are.
So if something comes up where they need an investor or they wanna invest in a deal, or if it’s an agent and they find a deal, they’re constantly flipping through this stationary pad and seeing your name constantly, and it’s at your top of mind. I feel they all kind of fall into the same category.
Joe Fairless: Yeah, I agree. It has staying power. The stationary has staying power. A book has staying power, because when we send that book out and it’s signed, we’re infiltrating someone’s house with our names, and now assuming that they don’t immediately throw it away, which they might do, that’s possible… But if they don’t throw it away, then at a minimum they’re going to put it away on the bookshelf, and it’s still there with their other books, and when they’re flipping through books they’ll see it.
But best-case scenario is they read it, and it’s right in front of them for a decent period of time. The stationary thing is the same thing, it has staying power.
Theo Hicks: Alright, let’s transition over to the other topic, maybe the meat of the podcast, which is tax benefits; I think yesterday was tax day, so I was just thinking it would be good to explain what the potential tax benefits are from your perspective as a sponsor or as a syndicator.
Joe Fairless: It’s the same benefit, and I don’t know if this is going to be the meat of the podcast [unintelligible [00:10:15].16] The benefit is really simple – it’s depreciation. The depreciation of the property, and the pass-through of that depreciation. Commercial properties depreciate a certain period, a certain amount over time. I think it’s 27,5 years, I believe, and therefore we’re able to depreciate the value of the property… Value divided by — if it’s 27,5 years, which I think it is, that’s how much money you can depreciate on paper, and that gets passed through to myself and the investors. Therefore, when we receive our K1 or our returns (investors receive K1 at the end of the year), it shows a loss on paper, even though in reality they have received money, the quarterly or in some cases monthly distributions from the property. And that’s amazing to high net worth individuals because it lowers their taxable income for the year, and it lowers the amount of money that they have to pay for taxes.
Now, the catch is – there’s always a catch – when we sell the property, that money is recaptured by the government. So you have one of two options: you either have to pay the taxes on the final distributions that you receive from the property, or you can 1031 into another deal. We’ll always seek out another deal to have to 1031 into; we don’t promise investors that we will have something, but our intention is to be able to have an opportunity to 1031. That way there’s not a taxable event for investors, ourselves, because we invest alongside investors, therefore we have limited partner dollars, just like they have limited partner dollars, so we have alignment of interest there.
Theo Hicks: Yeah, with the 1031 I know that — we talked about this last week when we were talking about preparing for an investor call and how one of your main focuses is on capital preservation. And I think it was Frank Zaccanelli who was also talking about that and saying how his mentor (I think it was Ross Perot) always said “It’s all about getting your capital back first”, and that’s what I was thinking about when you were saying that.
If the investor gets all their capital back in that first deal and they 1031 it and they move capital to the next deal, then it’s like infinite returns at that point. That’s a smart way to invest.
I can’t think of any other tax questions, [unintelligible [00:12:44].14]
Joe Fairless: We’ve interviewed a lot of tax experts, CPAs who have talked about this. If you wanna dig deeper in this, Best Ever listeners, you can go to BestEverShow.com and search depreciation or 1031, and the episodes that have that in there will come up. We mentioned this a couple weeks ago, we have a transcription of every episode starting two weeks ago. It’s not retroactive, but for the last 20 or so days (plus or minus) and then moving forward, there’s a transcription of every single episode at BestEverShow.com. It will allow you to easily search for things that perhaps you heard on a previous episode but you don’t remember what the episode is. You can just search in the little search tool at BestEverShow.com.
That also helps me because we receive e-mails like “I heard you on an episode about three months ago, and you said something about a house. Do you remember what episode that was…?” I’m like, “No!” My assistant’s like, “Do you know…”, and I’m like “I have no clue.” Now they can search at BestEverShow.com and try to find it.
Theo Hicks: Especially since it wasn’t three months ago, it was like six months ago. There’s just no way you’ll remember.
Joe Fairless: I know… Yeah, exactly.
Theo Hicks: Alright, so we’ve got two questions from listeners. One is from Brooks, and this was based off of last week’s Follow Along Friday when we were talking about how to prepare and structure your investment call. He was asking “At what point do you talk about money/splits in it for the investors?” So when do you talk about the money and splits with the investors?
Joe Fairless: That’s a pretty important component to the deal, knowing that the investors know what the structure is… Therefore we have it on our summary page, right after the table of contents. It’s the investor summary and it says whatever it is. In all cases so far it’s been an 8% preferred return, and then there’s been a split after that. Sometimes we have a 70/30 split until we reach 18% internal rate of return to investors, and then 50/50 thereafter, or sometimes it’s 15% internal rate of return, and then 65/35 at 18%, and 50/50 after that…
The project dictates the performance hurdles, but his question was “When do you communicate that?” and the answer is when you talk to them about the deal for the first time.
Theo Hicks: And just for clarification, the 70/30 split is after it hits 8% [unintelligible [00:15:30].00] on top of that. So it’s 10% and that 2%, with 70% to the investors and 30% to the sponsors.
Joe Fairless: That’s correct.
Theo Hicks: Okay. I think we addressed that one pretty well. The other question is similar, and it’s from King. He says, “Joe, I’d love to learn more about how to structure equity partners in regards to paying them their returns. Do you have a podcast episode or blog post to point me to? That would be great.” He says he currently owns a duplex and a 12-unit, and has his sights set on a larger syndication deal this year. He’s looking forward to learning…
Joe Fairless: Well, congrats on the 12-unit and the duplex. What’s the question?
Theo Hicks: The question is how to structure equity partners in regards to paying their returns?
Joe Fairless: Okay, well I think I just answered it. Let me back up. The structure depends on what your business objectives are, what the investor’s business objectives are, and what the project can do. You need to look at those three things. I’m throwing out my structure just to give you an example, but it doesn’t really matter what my structure is, because it matters what fits your needs, your investor needs and what the project makes sense.
For example, development deals tend to have a higher preferred return, because they’re not getting paid anything for the first 24-36 months, and that money is accruing until it [unintelligible [00:16:52].26] and it can start cash-flowing. Other development deals I’ve seen are like a 4%, 5% preferred return, otherwise known as a pref, and it’s 50/50, just a straight split after that. It depends on how you wanna do it. You can also structure it where — and this is how you make the most money; I don’t do it, but this is how you can make the most as a syndicator: you structure your investors so that they are exited out at a refinance. They get paid a fixed percentage, say 10%, 11% – basically, it’s debt investors. You pay 10%, 12% or whatever percent, and when you do a refinance, you pay them their 10%-12%, pay them back their money, and then that’s it. They exit, and you maintain all the equity for the deal and you hold on to it long-term.
If you’re talking about how to build a real estate empire relatively quickly, you bring only debt-based investors for the first couple of years while you’re repositioning the property, and then you exit them out, you hold on to it long-term, and holy cow, you could raise, say, six million bucks, buy a 20-million-dollar apartment community, increase the value to 40 million dollars, or more realistically, say, 30 million dollars, and then exit them out. Now you’ve got a 30-million-dollar apartment community that you only own.
So it depends on those three things that I mentioned before, that’s how you structure it… What makes the most sense. I can tell you an industry standard is to have a preferred return and then some sort of equity split above that, like we do. However, you might have investors who only wanna put their money in for two years. If so, then that could be more of a debt-based raise, versus equity-based raise.
Theo Hicks: Do you do equity raise?
Joe Fairless: Yeah.
Theo Hicks: Okay. Last week we did a blog post on the difference between debt and equity, so if you wanna learn more about that, just look at the transcription service, type in “debt equity” on the website and you’ll find that blog post.
I think that you had that question on there, “What’s the difference between the two?” and then “What’s the best to do and why?”, and he says it’s based off of a situation.
Joe Fairless: Yeah. You’ll make more money in the long run and you’ll have more ownership if you only bring on debt investors. It’s more challenging, because investors usually want the upside that real estate has, and that’s why I do that with our investors… Up until this point I have. But if I come across an investor who’s got 6, 7 million and they’re wanting 10%, 12% return and be exited out in two years, I’ll say “Hallelujah!” Because then we’ll go buy something with the majority of their equity, we’ll put our own money in it two, exit them out and then we’ll just own the thing ourselves, forever, until we 1031 it into something else and keep on growing larger.
Theo Hicks: Yeah. Well, those were the two questions we had. Is there anything else you’ve had going on in the business?
Joe Fairless: Yes, one deal we have pretty much closed the equity raise on, and then another that we should be getting under contract in the next day or two. It’s an off-market deal, so I’m excited about both of those. As you know, we just did our monthly e-mail to all of our investors on all eight properties — actually, six properties; two of them we’ve just closed, so we didn’t do a monthly e-mail.
That went well, we sent quarterly financials to the investors, and now it’s just a matter of making sure properties perform and seeing where these next acquisitions — just continue to do due diligence on these next acquisitions, so we should get back an appraisal in the next week or two on one of the properties that we’re closing in June. We should have that other off-market deal under contract in the next couple of days.
Theo Hicks: Have we talked about on the podcast or on the YouTube channel how we structure the monthly e-mails? I don’t think we have.
Joe Fairless: No, we should, maybe next week.
Theo Hicks: Yeah, we’ll talk about it next week.
Joe Fairless: Yeah, we’ll talk about how to write monthly e-mails. I do monthly e-mails; that’s not typical. Usually it’s quarterly… I’ve heard some stories of operators, syndicators not even communicating until there’s a refinance or something goes wrong. I do monthly, and we can talk about how to structure those monthly e-mails.
Theo Hicks: Alright.
Joe Fairless: You’re good?
Theo Hicks: Good.
Joe Fairless: Alright. Well, Best Ever listeners, I hope you enjoyed today’s episode. I hope you have a best ever weekend, and we’ll talk to you soon.
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