With over 30 properties under his belt and starting at a young age while being a firefighter, our guest started his real estate career buying duplexes. He took the advice that was free from his friends and family and ended up paying a fortune in expenses, mistakes, etc. He talks about what his buying criteria is and a unique county hack when purchasing property.
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Jack Petrick Real Estate Background:
- Licensed real estate agent and full time real estate investor for over 15 years
- Currently have 32 buy and hold properties
- In the process of transitioning into commercial multi family deals
- Started building new homes, rehabbing, flipping
- Additionally he is a FireMedic at Strongsville Fire Department
- Based in Cleveland, Ohio
- Say hi to him at firstname.lastname@example.org or 440-552-8483
Click here for a summary of Jack's Best Ever advice: http://bit.ly/2rwk5A6
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Joe Fairless: Best Ever listeners, 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 podcast. We only talk about the best advice ever, we don't get into any fluff.
With us today, Jack Petrick. How are you doing, Jack?
Jack Petrick: I'm doing well.
Joe Fairless: Nice to have you on the show. A little bit about Jack - he is a licensed real estate agent and full-time real estate investor for over 15 years. He currently has 32 buy and hold properties. He's in the process of transitioning into commercial multifamily deals. He started building new homes, rehabbing and flipping them. Additionally, he is a fire medic at Strongsville fire department. Do you wanna give the Best Ever listeners a little bit more about your background and what you're focused on?
Jack Petrick: Yeah, absolutely. About 15 years ago I started off going a couple different directions. I had an interest in being a firefighter paramedic, so I went to school and got through with that at about 22 years old. I also had an interest in real estate, so I kind of kicked off both at the same time. I started off as a general contractor, building custom homes. Nobody in my family had this background or necessarily interest. I just basically went on Amazon and purchased every book imaginable. I went on OwnerBuilder Forum and I just kind of [unintelligible 00:03:28.02] myself into it, and pretty much spent the next year going to every single model home, [unintelligible 00:03:32.29] homes, and going to every construction site possible. By doing that, I would just pick up phone numbers from various subcontractors.
I did that for a number of years until the housing market kind of wiped out. In about 2006, that's when I first picked at my first buy and hold property. Didn't really have any interest in rentals... I just heard all the free advice from friends and family and I've come to learn that free advice is sometimes the most expensive advice, and just talking about the [unintelligible 00:04:00.20] the tenants, the six month evictions... Everybody trying to play down at this area, when in fact they'd never experienced it before.
So I started off, did my first deal - it was a duplex, and from there I just did about seven houses, took a break... I did a lot of remodeling during that time. Then the housing market near me - I'm in Cleveland, Ohio, and the housing market in a couple of suburbs completely wiped out. I've been picking up houses for like $5,000. The cap rates are insane.
Having that back on it, I go into these houses, we completely rebuild them and run them out, and I'm making like 25%, sometimes 30% cap rates on the returns on these properties. That's kind of how I got into where I'm at right now.
Joe Fairless: You have piqued my curiosity about these homes that I'm buying. $5,000 - some of them, perhaps not all... Well, first off, before we get into a specific example, what are the acquisition prices, low to high, that you've done?
Jack Petrick: In my market - I've got a really unique market, but I like to have an all-in number between 35k-40k - that's purchase and renovations. There was a period where I was able to pick houses off of the HUD Homes store for like $25,000, maybe $30,000. These houses were completely rehabbed, and prior to the mortgage meltdown, these houses were selling for 120k, 130k. So we're talking completely new on the exterior, interior, new garages, new driveways... But the we lasted for a short amount of time.
The HUD Homes store is definitely still an option for picking properties off, but the deals aren't quite as aggressive. There's still some stuff on [unintelligible 00:05:45.16] which is our real estate listing service. There's a lot of deals off market, but I've been picking up a lot of deals off of the county LandBank, and there's actually a website - I'd have to look it up, I don't remember it right now, but there is a general LandBank website that will locate every LandBank throughout the entire country. These are properties that I've been able to pick up very inexpensively. They were completely wiped out, but as long as you hold to the specifications, you rebuild them, it provides years of passive cashflow without the capital expenditures that you would normally have to do on a typical property you would buy.
Joe Fairless: Now, educate me on the LandBank, with what you've just said as far as years of passive income from what you typically buy. When I hear LandBank, I'm thinking it's just vacant land, is that not right?
Jack Petrick: No, that's not correct. Basically, LandBank is a government nonprofit entity that receives Federal funding. As there are properties that are bank-owned, they're distressed, they can't sell them, they can't turn them over for whatever reason, these are properties that are then donated to the LandBank. Say bank XYZ has a property and they can't sell it. They will donate that property to the LandBank, but they're on the hook in the event that that property does not sell, they would have to participate towards the demolition cost of that property. So during that time, the LandBank will go in the house, they'll clear it out, they'll gut it out, and they'll build a specification sheet of everything that that house needs, all the renovations.
So generally, I'll go through the house and I'll take a look at the renovations spec sheet, and 90% of the time they're straight on point for all the renovations they want. They sometimes want the whole house to be rewired, but that's not necessary. So knowing this now, I'll scratch off a few things off the list to kind of get my rehab price down, and I'll go in there and do a full rehab, top to bottom.
Most people, when they're looking to pick up an investment property, they don't actually take a look at simple numbers like return on investment, or what's the cap rate that that property is gonna produce. Just a couple simple calculations - most people won't run those numbers, and they will buy based on how they feel about the property, they feel about the area, and we can't purchase based off our feelings; we have to make purchases based off of numbers.
Joe Fairless: So going back to the LandBank, you find the properties through your county LandBank - the county meaning the county that you're in or that's close by. You find the property through your county LandBank, and... What does the process look like? Let's say you're online, you find the property, it looks good - now what do you do if you wanna buy it?
Jack Petrick: Most LandBanks have an application period for you to submit your information, and it takes 1-2 weeks to get approved. Once approved, you can just go off the website and you can e-mail the main coordinating party for the houses you wanna see, and generally they will have an inspector meet you at the property. There will be a renovation pack that you will have and you'll go through and you'll agree or disagree with the specs of work that you're gonna perform; I'm able to negotiate to some extent some of those larger ticket items to bring my acquisition price into a target range that I'm trying to achieve.
Once I have that done, I'll submit the debt on the property. Recently, there was one house they were asking $45,000 for and the numbers didn't justify and I offered $6,000 on the house, and we picked that for $6,000.
Once I actually have the property in my possession, it's a deed in escrow program, so the title company holds my purchased funds check, and they will also hold the deed of that property. Once the house went through a four-month renovation and the house is completely rehabbed and all inspections are passed, at that point it will allow the money to transfer and the deed to then transfer to me.
Joe Fairless: Simple as that, huh?
Jack Petrick: Yeah, that's it.
Joe Fairless: Once the deed transfers to you, you've now got a property. Do you then go post on Craigslist and try and get a tenant, or do you have a different approach?
Jack Petrick: Great question. A variety of options. For a while I had my property manager putting ads out on Zillow, Trilio, Craigslist. For a period a while ago we were also running to some CMHA section 8 tenants, but our market in this area improved to a point where I'm able to receive significantly higher cash offers and I can with a [unintelligible 00:10:20.11] voucher. I've just recently hired a gentleman to come in and least out the properties, like a leasing agent. He's been able to push some extremely high rent values. For example, CMHA for a period of time was getting us anywhere from $770-$850 for a three-bedroom one-bath property, and this leasing agent has been able to get us to the point of almost $1,100 for this fully rehabbed property.
Joe Fairless: What's CMHA?
Jack Petrick: CMHA is our local section 8 in the Cleveland, Ohio market. That's just called CMHA, which is just short for basically the HUD section 8 program in Cleveland, Ohio.
Joe Fairless: Okay. So you hired a leasing agent to lease out your rentals.
Jack Petrick: That's correct. For a while I was resisting against that, because a lot of them will charge one month's rent to lease a property out, and I thought that I could save money by having it done in-house, but there was a term that was taught to me a while ago that a lot of times people bend over a pick of nickels while dollars go over their head. That was so true. That full month's rent for a leasing fee is worth every penny if you can find a reliable and efficient and aggressive leasing agent. They're worth every dollar.
Joe Fairless: So I'm guessing that you don't have a third-party management company managing your rentals, but instead you have an individual property manager managing your rentals?
Jack Petrick: Yes, that is correct. I have that service in-house, but the leasing side of it, we were able to get much higher rent offers and faster turnovers utilizing a third-party service.
Joe Fairless: Okay, how did you find the third-party service?
Jack Petrick: Just with networking. Just finding other investors in my area that do deals and just asking to take them out to lunch and just talking to them... It's amazing the wealth of knowledge that other investors have, and I've just really been blessed by how open other investors have been to actually sit down and meet with somebody like myself... Meaning, the gentleman that I met with, Paul, he has a thousand units, I have 32, so I'm pretty small in comparison to his achievements, but I think a lot of times guys that have a lot of success will take the time to meet the people that are up and coming, because they never know when somebody like myself will bring a bigger deal to them to partner up on.
Joe Fairless: Yeah, it's interesting... That's a different approach, where you have your own property manager for your properties, and then you contract out a third-party company to do the leasing... And you pay the first month's rent to the leasing agent?
Jack Petrick: Yes, that's correct. They take care of the lease and they'll lock us in anywhere from a 12 to a 20-month lease. It's just a little bit of a different strategy. Starting off, I never had a mentor so I did everything wrong when I started, and I initially took on all those headaches on myself, and a lot of other individuals do... But it burns a lot of people out. Money really isn't made managing the property, the tenants, the phone calls, it's made finding capital, doing deals and focusing your time and effort on that.
Joe Fairless: You said 12 or 20 months - why 20 months?
Jack Petrick: I misspoke, I meant 12 or 24 months. My mistake.
Joe Fairless: Okay, cool. I was wondering if there's a method to your madness there. [laughs] On the note of finding capital for your deals, you're all-in price on average is 30k-40k, you've got 32 of them... That's $960,000 valuation - how did you buy these places?
Jack Petrick: I started off in the beginning like most people do, where they'll have equity in their private home and they'll just pull an equity line out. That's the starting point for most new investors. Once again, a few properties that are then paid off free and clear, you can pull equity lines against those. You can do that for a period of time, and the benefit to going that route is your rates are low, your costs are low... Generally just paying a couple hundred-dollar application fee with your local bank. Then as you get larger, you have to start expanding into private investors, the reason being most local banks will only allow you to do so many buy and hold single family properties, until you reach that cap. Then you have to start looking at private lending, hard money lending and also portfolio lenders, too.
Joe Fairless: And portfolio lenders are those private banks and credit unions locally, right?
Jack Petrick: That's one option, and there's also Lima One Capital. I just closed a deal with them. I believe they're actually funded by a hedge fund. They will take a group of properties, appraise them and then put them into a blanket mortgage. A lot of times, you have to do some creative financing to get a package of houses worth $350,000 - $500,000, and then at that point turn that into a larger refi or a blanket mortgage.
Joe Fairless: Lima has been a sponsor on the podcast, and for anyone who wants to talk to someone at Lima, you can e-mail email@example.com, and he'll talk to you about some of these programs. Because I had a guest on the show a while ago, and they talked about how they worked with Lima and did some wonderful things, so I was like "Well, I'm gonna reach out to them", and they ended up being a sponsor.
Let's talk about your hard money or your private lenders. How do you structure that with those individuals, since you're doing buy and hold properties?
Jack Petrick: Great question. On hard money lenders, the terms are pretty similar if I'm flipping a property or if I'm holding it for a buy and hold until I can eventually work myself into a position to refi. But the hard money lenders in my area are around 15%. I have one hard money lender that does not charge points, I've got another hard money lender that does - that's pretty aggressive funding, and it works for a short-term solution. On the private lending side, I've been able to contact a number of family and friends that have money in a 401k and it's not really doing anything, it's barely keeping up with inflation. Most people, once they get into their 50s and especially 60s, they just have to be very conservative to protect that principal, but yet they want to be able to grow interest and protect their yield. So what I will do is I will structure a note with that private lender, and I will provide a 10% annual interest rate and I will pay principal and interest over a five-year period. We'll sign the note that we'll turn into a mortgage to secure the note against the property; we will file that with the local county so we secure that investment with that investor. It's a very safe way for the investor.
The other thing that I do personally, once I have my properties completely renovated, they have an after-repair value of anywhere from $60,000 to $70,000, but I'm only pulling $35,000 of equity out of it in that loan, to protect them and to leave equity into the deal.
Joe Fairless: Did I hear you right, you're doing a five-year period with those private lenders?
Jack Petrick: Yes, that is correct.
Joe Fairless: What happens after year five?
Jack Petrick: After year five the loan and the total interest - everything has been paid back during that time, so we'll just basically use a mortgage calculator and we'll determine what the payment will be to pay during a 60-month period, with principal and interest.
Joe Fairless: So they get 10% interest rate over five years, and after five years you have it all paid off. How do those numbers look on a property? I guess the more direct question is does that property stand on its own two feet to pay all of that, or do you have some of your 32 properties pay off that one property?
Jack Petrick: Only about half of my properties are leveraged right now, so I leave plenty of cashflow just for evictions and for just when life doesn't go as planned. But it's almost like a 1-2 ratio. For example, I've got a house right now that's completely paid off free and clear, and it's cash-flowing. My gross rent right now is like $1,050 a month. So I will secure a private loan against that property, and then by the time you factor in my income versus expenses, I'm pretty much at awash at that property, but I now have secured $35,000 of capital, which allow me to purchase and renovate my second house.
In this example, I'm now making $1,000/month again. I'll make $1,000/month as gross income on two properties, but at the end of five years, that number will double then to $2,000/month plus rent increases. So it's like a 2-1 ratio, that's how it works out.
Joe Fairless: How did you come up with the idea of doing the five-year period, 10% interest and then paying it off over that period of time with the help of some other properties?
Jack Petrick: This is kind of creative financing, because I have a lot of options to finance flip and funds. When you structure a flip, generally you're paying interest-only payments up until the 12th month, and then you're returning all the capital back. And because these are buy and hold properties, I just had to get creative on a scenario because there's not many options in this field for expanding on single family rental properties; there's not a lot of funding options, so it's just being creative, I guess.
Joe Fairless: Yeah, that's really interesting. Based on your experience, what is your best real estate investing advice ever?
Jack Petrick: Wow, best advice ever... I think I mentioned this earlier, but free advice is expensive advice, and there's a lot of people that have opinions on what we do. I would just really vet out the experience of those people that are providing that advice, because there's just a lot of naysayers that don't have necessarily the experience to be able to provide an input or opinion [unintelligible 00:20:15.27] "This is what you wanna do." This isn't easy; if it were, everybody would do it. But once you figure out the systems, the processes, the procedures, this is the best career that you could possibly do, in my experience.
We've done quite a few things, other businesses, and it's really provided the unlimited amount of cashflow, depending on how large you wanna grow your business, but also the quality and the time freedom that you generally cannot get as a physician, attorney, sales rep or any other high six, seven-figure producing positions.
Joe Fairless: I like the line "Free advice is often the most expensive advice", and it's certainly not one that I will repeat too often, because my podcast is called The Best Real Estate Investing Advice Ever... But I do agree with that, because the advice from someone can be very good advice for you, or it can be very bad advice for you, depending on what stage of the process you're in. So you can get the same advice, but it can be either good or bad depending on where you're at in your business cycle. Additionally, some of the worst advice I've gotten is from family members, people who should know me the best (but maybe not).
It's important, as you said, to get advice from people who have been there and done what you're currently doing, and are currently doing that. When we get advice from people who are close to us and who love us dearly, on stuff that they're not doing or haven't done, then it certainly falls into the category of "free advice is expensive advice", because it might be the worst advice you've gotten. I've experienced that, and fortunately I didn't take some of the advice that I got from those who were closest to me, and that's how I got to where I'm at. But I took advice from them on other things, and it helped out. It is important. So we've gotta pay attention to who's giving that advice and if they're doing what we're doing.
I wanna touch really quickly on these properties that are $30,000-$40,000 all in. You don't manage them, you have a property manager manage them, but the main stigma about properties at this low of a price point is the quality of tenants, and you get a lot of turnover, you get a lot of maintenance issues that come up... What have you experienced?
Jack Petrick: Good question. In the market that I'm in we have a couple different types of properties. We have properties that are built in 1910/20/30, and we have properties that are built in the '40s and '50s. I own both of them, but today I will only buy properties that are built in the '40s and '50s, because there's just 30-40 years of less neglect in those properties.
The properties that are built newer, we're dealing with drywall instead of plaster and lath. The [unintelligible 00:23:20.20] are in better shape, the foundation walls have less stress to them... The properties are just overall smaller to rehab and renovate. That house that I'm referring to might be 1,200 square feet, versus the properties built in 1920 that might be 2,000 square feet. They're both three-bedroom houses, but one's considerably more work to renovate and repair versus the other. So that's the first thing - I look for properties that are newer.
Joe Fairless: ...relatively speaking. [laughter]
Jack Petrick: Relatively speaking [unintelligible 00:23:51.09] Secondly, I have a background as a general contractor and I only purchase distressed properties, because that allows us to go in, gut the mechanicals, gut the roof, windows, bathrooms, kitchen, and put everything in new. That way I'm not having to be nickled and dimed with deferred maintenance as time goes on. We also will only put really the highest quality product in the houses, and that throws people off; like, it's just a rental property.
For example, you could put a Moen faucet in, which has a lifetime guarantee, or you could get something from Lowes and Home Depot out of China, it's made out of plastic. One's gonna last for decades, one's gonna last six months. When you put the extra money into the property, you're not gonna get nickeled and dimed over the years.
Then as far as your question as far as the location, every area has areas which are just war zones, and I will not go into a war zone. There's no future, there's no hope, the turnover is horrendous... It's just not a good situation. I like to get into suburbs that are beat up. The outer ring suburbs of Cleveland is where I'm at right now, and I'm able to be in a community that's like a C- community possibly, but by the time we go on with your full renovation on these properties, they go from the worst houses on the street to the most desirable houses on the street.
So one option for us for years was to rent out, to subsidize tenants, and it provides extremely stable cashflow. Your sacrifice is your cashflow is gonna be a little bit lower than necessarily cash-paying tenants. But as the market improves, which it does in areas as the market income and households improve, then it will allow you to start to be able to tap into the higher-paying cash tenants as the area improves, which is the transition I'm in right now.
I think you have to know your market cycle where you're at, and you really have to know the market, the economies in the area that you're in, to determine "Are you in a completely beaten down war zone, or an area that's just going through some hard times?"
Joe Fairless: Are you ready for the Best Ever Lightning Round?
Jack Petrick: Please do.
Joe Fairless: First, a quick word from our Best Ever partners.
Break: [00:26:06.01] to [00:26:49.22]
Joe Fairless: Best ever book you've read?
Jack Petrick: There's so many of them... I'm gonna start off where my first personal development book was Rich Dad, Poor Dad, which really opened my eyes to the difference of a liability versus an asset, and that really was what kind of stirred things off for me. I've read better since then, but that was the starting point for me.
Joe Fairless: The best ever deal you've done?
Jack Petrick: A lot of them. Really, honestly, the last ten houses I've picked up for like 4k and 5k each, I would say they were pretty much the best deals I've ever got.
Joe Fairless: What is the best ever way you like to give back?
Jack Petrick: Teaching knowledge. I have so many people that I've mentored and I've provided my playbook, my handbook on how to do this, where it took me 15 years of mistakes to get to those points. My brother right now has done a second house, a total rehab in two months, and right on budget... I just love being able to mentor and provide those services to others, and be able to help people have a better lifestyle.
Joe Fairless: What's a notable mistake you can think of on a deal that you did?
Jack Petrick: Bending over to pick up nickels when dollars go over your head... Meaning trying to save money, but in the end you're really hemorrhaging out more money than you're saving by trying to do work yourself, by trying to bring in your own crew to do all the work at $10/hour labor versus getting professional tradesmen in. That's a mistake. Hire the right people to do the job and get it done right, because in the long run it's gonna cost you less money and you'll have a better quality of like and experience. Pay for it when you need to.
Joe Fairless: Where can the Best Ever listeners go to get in touch with you?
Jack Petrick: I will give my cell phone, and that's actually how I came across you, because in the podcast you had with Michael Blank...
Joe Fairless: I'll never do that again, by the way... [laughs] I gave out my cell phone three years ago, and he still plays that podcast episode... I'm all about people reaching out, but I can't do that anymore. [laughs]
Jack Petrick: Well, at the time of that podcast you were I think at like 167 units...
Joe Fairless: Yeah... Different.
Jack Petrick: Yeah, when I came across you again you were at like 1,500 units... I'm like "I don't think he's gonna take my phone call." [laughter] My e-mail address is PetrickBuilders@yahoo.com.
Joe Fairless: What's your cell phone? I didn't wanna scare you off...
Jack Petrick: I'll go for it... 440 552 84 83. And hopefully I can have your success, Joe, in three or four years and have the same problems.
Joe Fairless: There you go! This is how you get 100 million dollars right here in real estate - you give out your cell phone on podcasts.
Jack Petrick: Absolutely!
Joe Fairless: It's a proven technique. Well, Jack, I'm so grateful that we had a conversation. Holy cow... It really interest me about how you are structuring it with your private lenders on buy and holds, where you do the five-year period, 10% interest rate, where you pay the principal and interest and then use other properties and that property to just pay it down; it's just a snowball effect... As well as your $30,000-$40,000 all-in price and your very thoughtful approach on why you're going about it this way, versus other ways.
Thanks for being on the show. I hope you have a best ever day... I really enjoyed our conversation, and we'll talk to you soon.
Jack Petrick: Thank you for your time.