Brandon: This is the BiggerPockets Podcast. Show number 275.
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Rob: You don’t always have to know everything before you actually get the deal. There is actually time to research it.
Sometimes if it doesn’t pan out, and you find something you don’t like, and the seller won’t work with you, or if you want to cancel the deal, then you cancel it. You don’t have to be at a 100% on your offers either. Like I said, if it was a one in ten I got an accepted contract, there are probably 20% of those deals that I also cancelled too. It is a numbers game. Each deal that you cancelled, you’re going to have learned something.
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Brandon: What is going on everyone? This is Brandon, today’s host of the BiggerPockets podcast. Here with my wonderful, awesome co-host, Mr. David Green. How’re you doing, David?
David: I’m doing great, man. How is Hawaii treating you?
Brandon: Hawaii is treating me well. I got one more month here. Then everyone will, they would have stopped listening to me, talking about awesome Hawaii is. So we’re heading back in-.
David: I know that you’re buying a house, right? You’re trying to buy something and move out there permanently.
Brandon: I’m exploring the idea. At least having a property, like a second property I can rent out when I’m not there. I can go back and forth. That would be ideal. I put an offer on a house last week actually. Was it two weeks ago now? We’re in negotiations. I actually don’t think it’s going to go through, but as we talk about on today’s show, that’s fine.
This is a numbers game. I’m not emotionally attached it. I was a little emotionally attached, but I’m not that emotionally attached. If they end up accepting my offer, it’s going to be a great deal, as an investment property even. In Hawaii, which people say it’s impossible to find. It’s not. If they don’t take it, I’m going to keep looking.
David: That’s how the master buys real estate.
Brandon: That’s the master real estate strategy. No, it really is. We talk about that in today’s show. Our guest talks about how 90% of his offers get rejected. That’s about my number too. I typically lose about 90% of my offers. He talks about why that doesn’t matter.
Before we get to today’s show, I don’t want to talk too much about it. I want to get to today’s quick tip.
Today’s quick tip is- I want to tell you guys a little bit about BiggerPockets landlords forms. If you are a real estate investor who owns rental properties, or you plan to, you need to pick up some of our landlord forms. We have currently 34 different states that we have, state specific landlord forms that have been looked and prepared by attorneys in those states, which is super cool. There is eight different documents, including a twelve page lease and application, addendums, etcetera. It’s way more comprehensive, and way more legal than you’re going to find like some free form online.
As you’ll hear today on today’s show, having a good lease is so important. In fact, our guest today tells a story about how you can lose 15 grand, if you would just have the wrong lease. Don’t have the wrong lease. It’s not that expensive to buy these leases on BiggerPockets. I think right now when there’s a sale, you can get it for like a 100 bucks. I don’t know when that sale ends,` so pick it up today at BiggerPockets.com/llforms.
With that, let’s get on with today’s show. DG, today we are talking with a lawyer. That’s always fun, right? Talking with lawyers.
David: Yeah, that’s one of the things that I wake up every morning and I’m upset if I don’t have a lawyer to talk to. I know the day is going to be boring, because I don’t have any legal advice.
Brandon: There you go.
David: They’re like vegetables. Nobody really wants to learn the law, or talk to lawyers, or eat vegetables, but you need to do it. It’s good for you. It’s healthy. Just go through with it. When you’re done, you actually feel really, really good. I’m ready to go take on whatever I have coming up next. I’m a big fan of learning as much as I can. When it’s a topic, that’s really boring that I don’t enjoy learning, I enjoy listening to someone else give me the quick condensed, version that I can learn from there.
Much like these forms on BiggerPockets, I’m really not going to want to go have to go try to figure out how do I drop a bulletproof lease. I just want to click a button on BiggerPockets because someone who likes that boring stuff, some vegetable eater, has already made it for me. I can just go get it from them.
This show is actually, it’s very entertaining. It’s a good show. I’m not trying to say it’s not. It’s great. Where else can you find a lawyer where you guys are going to be entertained, while listening to them? That’s what’s awesome.
Brandon: Yeah. He’s had an awesome story. We don’t sit there and drill him on legal stuff all day. We talked to this guy today. His name is Rob Oliver. He’s an attorney. He just happened to go from one condo to 300 condos in a short period of time. I don’t even think he realizes how awesome that is. He’s just like, ‘This is what I did. What’s the big deal?’
You guys are going to love this story. Again, Rob Oliver is amazing. Lots of good advise in there about being a landlord, about buying rental property, about why condos might need- I shied away from them, but after talking to Rob now I’m like, ‘Maybe I should have looked more into them. Maybe I should-.’
David: I know. I’m thinking that too.
Brandon: I’m like, ‘This is cool.’ Anyway, he’s got a [inaudible][00:05:13] story. Enough about Rob. Let’s hear from Rob, but before we do, let’s hear a word from today’s show sponsor.
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Brandon: Alright. With that, let’s get to today’s show. Again, today’s show is with Rob Oliver, an attorney from the Chicago area who went from buying nothing or having nothing, to 300 condos. He talks about this journey there today. With that, let’s get to the interview.
Oliver, welcome to BiggerPockets podcast. Good to have you here. How’re you doing?
Rob: What’s up, guys? How are you?
Brandon: Good. Good. This should be a lot of fun today. I will be honest. I know pretty much nothing about you whatsoever. We’re going to start very early in your journey. Tell us about yourself. How’d you get into real estate?
Rob: Alright, sure. Yeah. I got an uncle that is a real estate lawyer and owns a title insurance company. After being a caddy at the golf course for about seven or eight summers, I graduated high school. My uncle says, ‘Hey, listen. Why don’t you come work at a real job and stop carrying golf bags around?’ I showed up to his title company, rolled in the door, saw a couple of real estate closings going on. Quickly got assigned some duties as a clerk, paying water certificates, and recording deeds, like an assistant around the title company for a summer.
It's one of those things. It's like a full transformation. You see the lawyers. You see the brokers, the buyers, the sellers. They all walk in and they're all walking out smiling or yelling. They've got big checks and wire transfers are coming in. It was a nice welcome change. I did that. I worked my way up to a closing agent at the title company. Did that in summers and holiday breaks from college. I also, after college ended up going to law school. I got a degree in college in Real Estate Finance.
I was pretty interested after seeing all the lawyers come through the title company, so I enrolled in law school. I had job as a closing agent. I worked as a real estate broker in law school, and was pretty fortunate to be able to pay cash for law school, not have any loans.
I had my own internship, instead of working at a big law firm. It was a good learning experience. It paid pretty well. It got me going as a real estate lawyer. It was a nice head start.
Brandon: Okay. Okay. You went from lawyer to eventually investor, correct?
Brandon: Walk us through that transition. How long did that take? Why did you decide to make that jump?
Rob: Yeah, sure. The practice I started at was, again the same uncle that owned the title company, owned the law firm. Small firm. Only four lawyers. I wasn’t given a book of business when I walked in. They basically said, ‘You eat what you kill. Whatever you bill, you can take half of. The other half goes to the office for support staff, malpractice insurance, stuff like that.’ I was on my own. I linked up with some real estate brokers I knew, and some other real estate clients. I started practicing law.
For the most part, I was interested in doing real estate transactions. I knew I wanted to become a real estate investor at some point in time, but I didn’t have any money. I didn’t have any experience investing in property. I certainly didn’t know what the correct pricing of properties were. I went about practicing law. It was ’07 I got in law school.
The end of 2008, I’d been practicing maybe, a year and a half, the recession hit. Transactions came to a screaming halt. Prices were going down. I had very little business. I was put in a situation where I needed to adjust and become a litigator, or I needed to find some other way to make money. I stumbled upon a foreclosed condo with a gentleman who is now my business partner. By happenstance found a deal that had the perfect fundamentals in terms of rental income, acquisition price. The rest is history.
David: Rob, one thing I know is that lawyers make their living, they literally make their living by knowing everything there is to know possibly about what they’re doing before they get involved. If they’re a trial lawyer, they know all of the law. They know the judge. They know the jury. They know exactly where they’re going to go.
Real estate investors don’t get that luxury. A lot of the time, we are learning as we’re doing things. Sometimes we are only learning through doing things. Can you tell us how on earth you made that shift to get comfortable buying your first deal? What that first deal looked like? How it shifted your mindset getting into it? What that journey was like on your first deal?
Rob: Yeah, sure. It definitely helped because I had a background in title. Working at the title company, I understood how to research properties, how to go through the public records which I would recommend to any new investor. If you’re trying to get your feet wet, you want to get in there, just soak up as much information as you can. The public records are- although you can find somethings on Zillow or Redfin, or these various websites out there, I think they’re somewhat inaccurate. You’re not verifying with the actual source.
What we did, in terms of research is, review the public records in the recorder’s office on the particular condo unit I’m talking about. We researched. I knew what it sold for before, I knew what it sold for before then, what year it was, what all the other units in the building were selling for. It provides a good road map and comparisons. You know, ‘Hey, here’s what I’m getting into. I stand to make a good deal, because my discount is this compared to the other units.’ It fell into place.
You can’t just stumble around and say, ‘I’ll just make an offer. I think I’ll get lucky. I think it’s a good price.’ If you don’t really know anything, you’re basically doing the same thing as if you’re walking into the casino and playing a little Black Jack. This particular unit, we ended up buying a condo. I paid $30,000 for it. It had previously sold about five years earlier. This is ’09 when I bought it. It sold in ’04, ’05 for $140,000.
I'm thinking, âWow, this is an incredible discount.' It was 20 cents on the dollar. I'm thinking, âOkay, wow. If it goes lower than 30 grand, the whole world is done for, so it doesn't even matter. I'll just go with them.' Okay. My partner and I walked in. We made the offer. We got it. I'm thinking, âNow what do I do?' We found a contractor. We paid some closing costs, finished the closing. Called them all in for 35 grand. Had it rented for $650 about a week later. I ran the numbers, said, âOkay, this is a 12% cap rate.' The cash on cash return. Assuming we pay cash for everything, it's 12%.
I thought, ‘Okay. I’m getting a 12% yield on my money. I just bought for 20 cents on the dollar. These are good fundamentals. I just don’t see what’s going wrong.’ That was a cool first deal. It was definitely small ball. It’s not sexy or glamorous, but that’s why I attribute it to why it was such a good deal. No one wanted it. It was just a crappy, little condominium.
David: Where was this at? Where do you find a $30,000 condo?
Rob: Albany park. It’s in a neighborhood of Chicago, on the northwest side. Working class neighborhood. At the time, it was not a favorable asset class, so it didn’t trade for a high number, but all the sharks, the institutional money at that time were chasing after distressed apartment buildings that were selling at, call it 80 or 100 grand a door, and also had inferior finishes than what was an older or converted condominium.
David: Okay. If I hear you right, Rob, you took the knowledge that you had working at a title company, which was a unique set of knowledge that, many people might not understand, would help you with the investment, but that’s what you had. You dug in and you did a research of the history of this property. You found that at the peak it had been selling for 160,000. Then it was listed at 40,000. You offered 30. Is that correct?
Rob: You know, 140 I think, was the prior sale price.
David: 140. You felt confident to jump in because you knew the history of this thing is crazy. It was so much high. This 30, 40 grand is a deal. You knew it was a deal because you knew the history of the property.
Rob: If you just walked up and looked at a listing and said, ‘Hey, this condo is listed for 40 grand,’ you’re just thinking, ‘It’s junk. What am I doing here?’ You don’t have the vantage point of knowing, ‘Hey, here’s what it previously sold for. Oh, by the way, there’s 30 other units in the building. Here’s what they all previously sold for. Something is wrong here.’
David: Yeah. That’s really good.
Whether it’s broker mis-marketing, there are a lot of different variables as to why you can find the price. Just in general, it seems like you got to have some skill to bring to the investment table. Mine happens to be in title insurance and law, whether you are broker or a lender, I think you have to have some kind of angle to approach the deals from, so you’re not just an outsider. It’s equivalent of looking at a stock and saying, ‘Oh, I like the Microsoft logo looks. I like the way Google looks.’ Now, you don’t know anything. You’re just throwing darts to the board.
David: Yeah. That’s great. I love that you said you have to have a skill that’s totally true. Not everyone needs the same skills. Some people can analyze a deal. Some people are great with finding other people and building relationships, and they can find someone that finds a deal. Some people are contractors and know how to estimate rehab costs. There’s all kinds of skills that you can have. You use the ones you have to get you to move forward.
Then you said something else that was really interesting I want to dig in on. You mentioned that nobody else was looking for those deals. Institutional investors were looking for something much bigger. You were flying under the radar going for these condos. The rent you were getting was putting you out, like the 2% rule.
Rob: Yeah. Again, it was totally a random occurrence, but it fell into through it. It was awesome with fundamentals, and I said, ‘Hey, this is good model. No one wants these.’ Everyone’s going right. I just said, ‘Okay, we’ll look left and see what we can do here.’ It’s not a sexy business model. It’s not glamorous.
It was very programmatic. I was able to replicate it over, and over, and over. At the end of the recession with that same strategy, I amassed about 300 condo units, buying them for the most part one at a time. We did some small packages, but a lot of small dollar transactions.
Brandon: Did you just say 300 condos?
Rob: Yeah. Yeah.
Brandon: Holy cow!
Rob: They’re probably spread out through, call it 250 different condo buildings.
Brandon: Wow. I want to dig on condos. Something that I’ve generally been avoiding in my investing is condos. Condos freak me out a little bit because of HOAs. I’m like, ‘Well, what if they raise the HOA fees? What if they suddenly do this?’ You’re finding a lot of success with condos.
Brandon: Alleviate my fears here. Am I justified in being afraid to condos? Am I just not focused on that so I shouldn’t get into it? What do you have to say about condos?
Rob: Yeah. Again, everybody in the investment world doesn’t like them. I think it creates opportunity. There’s gaps in that which make it inefficient, like you just said. You think the average person that says, ‘Okay, I’m going to buy $200,000 condominium. I’ve saved up 20% to put down. Now I’ve got $160,000 on mortgage.’ A working class person or someone living in that unit, it’s going to be big burden to pay a large special assessment.
If there's a whole building full of people there has to deal with this, I can deal with it too. It's not going to be totally detrimental. It maybe a little bit of a cashflow hit, but a lot of times special assessments are financed over periods of time. Also, I can attend a board meeting and provide a contractor or provide some input as to what's going on.
On the flip side, what you don’t realize for new investor, the condo association manages everything outside the primer of the unit, from the walls out. I don’t have to deal with rust. I don’t have to deal with shoveling. I don’t have to deal with common areas, mowing lawns, any of that stuff. All I have to do is maintenance on the inside of the unit. I pay a monthly assessment which covers the insurance, covers the water, covers some utilities, and then overall management.
My calls from my tenants are, ‘Hey, I’ve got plumbing issues.’ I send a plumber. Turnover. I’ve got to send a painter. Otherwise, it’s just general maintenance, or you send a pest guy to clean up bugs, or whatever. It really eliminates the size and the frequency of maintenance calls. It just allows you to be very programmatic.
Also at the time of turnover, like on a single family house, you could have a rough go out. You could have to paint the whole house. You could have structural issues. I don’t have to get involved with any of that. I may have to pay if there’s a special, but for the most part, you can underwrite these bills. You just see if they’ve got reserves or a good board that’s running it.
David: Okay, Rob. You said, you went from buying that first condo, realized you had found something, and then somehow went from one condo for 30,000 to 300 units.
Brandon: That’s amazing.
David: There’s a lot that you learned in that process.
Rob: That’s right. That’s right.
David: That’s incredible. Can you share with us a little bit about what that process was like? How did you fund these deals? How did you do this while working a full-time job? Did you put a team together? Give us some of an idea of how you structured this whole planning, and what your thought process was where you said, ‘I got a good thing. Let me multiply it, times a 100.’
Rob: Yeah, sure. Like I said, the fundamentals were great in the first deal. We’re at a 12% cap rate. I was buying at 20 cents on the dollar. I said, ‘Okay, We need to do some more of this.’ I got one business partner. We both have full-time job. He was working as a real estate broker, an acquisitions guy for local, larger-scale investor, who happened to be going bankrupt at that time. He was looking for a little bit of transition as well. Sort of replicated that first unit. Not exact numbers, but very close.
We did that about 30 times with friends and family money. We would call up our- we got some people to take a leap of faith with us. We said, âHey, I'll give you first position mortgage on our condominium that we're purchasing. I want a 100% loan-to-value,' which was sort of wild. We did have a lot of trust from some friends and family, but I was paying 10% interest. I'd give them a first mortgage.
Once we’d get to the point where we had, call five to 10 units aggregated, we’d find some local community banks that were willing to refinance, based on appraised value. We’d buy, rehab, rent some. Then we’d bring them just to stabilize package this thing, ‘Hey, we’ve got this much income, we’d like a first mortgage to cover all these.’ Then we’d use the mortgage proceeds to repay investors, and then further recycle the proceeds, recycle the money and do it that over, and over.
When we got to about 30 units, we realized we need to step it in gear. We need to move quicker. We couldn’t recycle and refin fast enough. We weren’t able to offer fast enough. We’re coming in the office on Sundays at noon and leaving at two in the morning. We were just analyzing deals on paper. Title research of public records. We could determine how healthy the building was. We’d look at pictures of the listing to see generally what it looked like. We’d look at the location on the map. We’d know pretty much what we needed.
On those Sundays, we’d put in 100, 200 offers some days, strictly off MLS or through public listings that we saw. We’re probably striking out 90% of the time, but we were offering what we saw fit. We had a lot of angry responses from brokers. Batting 10% was fine. We knew we were alleviating a lot of the risk, and the deals we were buying were in good fundamentals.
Brandon: You know what? To jump in real quick, I think you said something super, super valuable here is that, you’re striking out 90% of the time. A lot of people get into real estate and they make an offer, and they don’t get it accepted. They’re all disheartened and they’re like, ‘Ah, man! You know I tried, and they didn’t my offer.’ Most investors I know typically will strike out 90% of the time. They lose over, and over, and over, and over, and over.
I just think that’s like a testament to your, I don’t know what you call it, grit maybe. The fact that if you’re striking out 90% of time, that also means you’re achieving success, or at least getting closer 10%. It’s just a big numbers game. For people who are listening to this show right now, who maybe made one offer and got rejected, can you talk to them at all? Anything that helps you get through the hard times of getting rejected.
Rob: Yeah. You know, it’s patience. A lot of these deals, you got to fight for them. You got to just offer what you’re comfortable with. If you’re putting in a number because your incentive is to beat your competition, then you may end up in trouble. I think generally you put in the offer you’re comfortable with. You find exactly what you know and what you can do, and then make the offer.
It’s a lot better to get one in ten deals, then to get five in ten and then have four out of those ten, be deals you are going to spend months or years, tens of thousands of dollars getting out of it. I’m generally of the opinion that if you have one loser deal, it’s going to take at least three or four good deals to work your way out of that. Also your morale is going to be low. You’re crushing your own ability.
Brandon: I love that. I love that.
Rob: Quick example on just staying patient and hanging in there. My partner and I bought a six flat in Chicago just this year. It’s not totally different strategy than our condo portfolio. Our buying opportunities on those condos have pretty much been closed. Now that the stress market’s gone after the recession, we’re just looking for new strategies and new asset classes to buy.
Back to staying patient, there’s a deal that was listed on the MLS. It had an asking price, $595,000. My partner and I looked at it. It’s very close to our office. Six units. Two retail units. Four residential units. One store was empty. One where there’s a local grocery store. The four apartments up top were in terrible shape, but nice size and good bones to the building. It’s for sale for $595,000. We toured it. We looked at it. We talked to the broker and we said, ‘Look, you’re overpriced. I’m willing to give you $300,000.’ Think about the reaction I got. 300 bid on a 595 ask. It’s like, ‘Beat it.’ Okay.
Fast forward six months. They’ve lowered the price. They’ve had a contract fall apart. They lowered the price 50 grand. He says, ‘Hey listen, you guys, you were in the initial group of interested parties. Come tour it again.’ We tour again. 300 grand. That’s our number. He says, ‘No, sorry.’ Lower the price again. They’re at 475-ish.
We said, ‘No. 300. That’s it.’
Three contracts fall out. Then finally the broker calls back and says, ‘Okay, the deal’s yours. Do you guys want it?’
We said, ‘Yes.’ Okay, great. 500 some days, the property is on the market by the time we got it. It ended up working out. The deal, it needed a new roof. There is a gas tank in the backyard that required to be dug up. It’s a underground gas storage tank, which is typically a nightmare for most people. We had a ton of time. We were able to get a couple of opinions that, ‘Hey wait, we can dig it up and get you all clean [inaudible][00:25:01] from the Illinois EPA within the next three to four months.’ We had one store to rent, and we gave four apartments to rehab.
We’re almost done stabilizing it. I think our numbers are penciling out to being about 13% cap rate. It was deal that sold in 2008 for 535,000. It sold in 2002 for 495,000. I think when we’re all done, we’ll be in it about 450. It’ll be worth about 750 once we’re stabilized and then we’ll be able to refinance all our capital out, and just hold it as a long term investment paid on debt. Practice old man real estate, where you hang on to stuff for life and pay it off.
David: Rob, one thing I want to call out about what you’re doing here is, Brandon Turner talks all the time about the more tools you have in your tool belt, the more projects you can take on on a rehab. If all you have is a hammer, you can put in a loose nail, but you can’t take out a screw. If you don’t have a saw, there are certain things you can’t do.
You describe how you went from one to 300 units. You mentioned several strategies that we talk about on BiggerPockets to help people to grow and get into the game. The first was the BRRRR strategy- the buy, rehab, rent, refinance, repeat. You mentioned several times, we bought a house at a very discounted rate, or not a house, a property. Then we made it worth more, and then we refinanced and got our money back. That allowed you to now go reinvest that same capital so that you can grow at a much faster rate than having to save up 40 grand for every condo you want to buy.
You mentioned syndication. You were gathering other people together and getting money from them, and going in investing that money. You mentioned private money, which is how you got started. Friends and family. Then you talked about making several offers. You’re just going to keep offering and offering. I just want to highlight that’s how you go from 1 to 300, is you master all these tools that real estate investing provides. You combine them and you can scare really fast.
Can you tell us a little bit about why you think you were successful raising money from your family, for the listeners who want to do the same thing and they don’t really know where to start? They don’t know what they need to say, or how to propose this, or what language to use? Can you share a little bit about tips you would recommend?
Rob: Yeah, sure. For starters, you can’t really get 10% in any sort of CD or a non stock market. If you get 10% at the stock market, you’ve found a good investment guy anyways. If you offer your friends and family, any trusted person and say, ‘Hey, I’m going to pay you 10% interest. I’m going to give you a first position mortgage on the property as collateral. Hey listen, not only my guarantee I’m going to pay you, I’m going to pay you 10%, which is a large number. That means I’m going to want to get you paid back as soon as possible. If I don’t pay you back, or if I get hit by a bus, or something catastrophic happens, you can go foreclose the property and take it back. You’ll be able to sell it and recoup all or very close to all of your money.’
I think the downside risk is pretty low. There is a leap of faith to get some trust, but you got to go to a close friend or family member. If you can't, you don't have capital available, go find a real estate professional, that kind of mentor and gain their trust, so you can get a small loan. I also think that when you've taken the time to perform the diligence, and you've got the facts, and you can clearly explain to somebody why it's a good deal, you haven't answered any negative feedback that you get, you're going to exude confidence and that's kind of what gets you the money. It's just- be prepared. You have to know all the facts about what you're buying, why you're buying it. Soak in as much of the public data as you can.
David: Confidence comes from preparation and education. That confidence is going to be how you win the people over, when you’re giving them an opportunity to invest with you. That’s what I wanted wanted you to highlight. The more you understand about this whole real estate investing thing, that more likely you are to have someone else that puts their trust and confidence with you, and gives you money. Then you can go from one condo to 300. That’s crazy.
Tell us. You scaled big. You did very, very well. I’m sure your portfolio has a ton of equity and caps was really strong. Can you tell us what are you doing now? What’s the big picture of Rob’s life? I know you’re involved in more than just real estate investing. You wear many hats. That’s part of why you’re successful as you see this from many angles. Can you share with us the different hats you wear, what you’ve learned from each one, and how they all play into this big scheme of what you put together now?
Rob: Yeah, sure. I love being an active real estate investor. Unfortunately, the market is not totally right for it right now. I think there’s very little supply. I think there’s a ton of cash on the streets that are looking for deals. It’s not impossible to buy. There are still great deals out there. It’s just a little bit more competitive and it takes more time. At the time being I’m not pedal to the metal, but I am always looking at deals, and I’m practicing law. I’m a real estate attorney. I focus a lot of time on managing and making our existing portfolio more efficient.
Some of the ways you do that are by sharpening up your systems. I’m constantly updating to deal with new laws that are coming out, or experiences that I’ve had that I think can streamline our tenant relations. That’s property management and practicing law is what I’m most focused on at the moment.
Brandon: How do you do your property management? What’s that look like? You’re not out there, swinging a hammer, fixing plumbing under a house. Are you taking phone calls? Do you have a property manager? What’s that look like in real life?
Rob: Sure. I’ve got an excellent in house property manager. Believe it or not, my business partner and I are both actually involved in property management, but we do have one gentleman who’s our full time property manager. Works in our office every day. He is sort of the front line, taking calls from the tenants, doing leases, collecting rents, and dealing with all the rehabs.
For the most part, it sounds made up that you can have one employee to manage 300 units, and my partner and I don’t have to do it full time. The reality is with technology today, it’s amazing. We can DocuSign leases. I can collect rent payments via Venmo, Chase QuickPay, or ACH. We’ve got portal setup for placing repair calls, or repair emails. Then we’ve got a very tight list of vendors. Like I said, for rehabbing the inside of a condo unit, there’s only a list of five or six things that can go wrong. I’ve got two or three professionals in each sort of rehab category that I send for different tasks. It becomes very repetitive business.
David: Okay, Rob. What you’re saying sounds too simple. I know that that may be the case, but I’m still scared. I still just feel like having 300 units would create so much liability, that I could never grow that big. Can you tell me if there is an answer out there, how I can feel comfortable enough to grow a portfolio that big, without worrying about being sued, having my places burned down, having somebody throw a huge party in the condo and trash it? How can I know that this is a good idea?
Rob: Yeah. First you get a monster umbrella policy to back everything up. Okay?
Rob: No. Just enough that, something that's adequate. Your insurance agent can always help with that, and it helps you sleep at night. You need to segregate liability with LLCs. I've got the different limited liability companies, not for each property but I group them up depending on how I finance them, or the asset size. It's good to separate them. You don't want to have all your eggs in one basket, and you want to make sure you got enough insurance.
On condos, the association assessment covers the majority of the insurance, which is for the building, but then might carry a rental policy for the inside contents. I require the tenants also to get a renter’s policy for their own personal property. That alleviates things like, ‘Hey the unit upstairs flooded into mine. The pipe broke,’ or ‘I was broken into and you didn’t provide enough security.’ Things like that.
You build insurance. You need to build the cost of your premiums into your underwriting models and make sure that’s taken care of. Otherwise, there’s a lot of common sense. If someone emails you or calls you, and get back to him. Don’t put it off, and just be responsive, and be of service.
David: Okay. Is there anything that you can tell us specifically about the lease that gave you you confidence or a sense of security that, ‘Hey, I’m increasing my risk by increasing my size, but I’m also making steps to mitigate that risk?’
Rob: Sure. I own almost all my property in Illinois. I can’t really speak to other states, but in Chicago and I suspect it’s most of the larger metropolitan areas in the country, the laws are are heavily slanted in favor of the tenant. The person writing the laws or the legislators, they are under the assumption that each landlord is filthy rich. They own 5000 apartments and they don’t ever fix anything. They don’t ever respond to a call. There’s cockroaches all over the place.
That’s sort of what you’re dealing with when you roll into court day one, and the judge looks at you. He’s got to follow the laws. You may not agree with them, but they are written to favor the little guy. There is a reason for it, there was a reason for it, but it’s not always fair. If you don’t have the correct lease, or if you don’t have the right disclosures in your lease, or if you collect a security deposit, there are many different circumstances where you’re coming into court and your tenant’s 10 steps ahead of you.
For example in Chicago, there are a whole handful of tenants rights attorneys. Part of the court fee, when you pay to file eviction funds the tenants attorneys. It’s a nice service. It’s necessary and it’s good for social purposes. When you’re a landlord and you have a non paying tenant, and you haven’t done anything wrong, you need to be in a position to protect yourself.
In the city of Chicago, the biggest issue is security deposits. Believe or not, I maybe have three or four security deposits on all 300 hundred of my units. Those are tenants who haven’t moved out since 2009 or 2010, therefore I haven’t had a reason to refund the security deposit, or they haven’t accepted a refund when I’ve offered it back to them. For the most part, that’s the biggest no-no in the city of Chicago.
For any of my clients I recommend not taking a deposit, for the simple reason that you have hold it in a segregate account. You have to give them interests which could amount to 12 cents a year, and you have to do it by a certain deadline. The list goes on. There’s probably 20 different things you have to do correctly. I’m an attorney, and I would a need a full time, extra property manager or two, just to figure out how to deal security deposits correctly in each circumstance.
The penalty, if you don’t do that, is three times the security deposit plus the attorney fees for the tenant. It totally puts you behind the eight ball when you’ve got a non-paying tenant. Quick example. One of my clients comes into my office and says, ‘Hey, I’ve got a tenant. They’re not paying rent. I need you to do an eviction.’
I said, ‘No problem.’ I gave them a notice. They came back a week later and said, ‘Hey, I gave them the notice. They still haven’t paid. Why don’t you go and file?’ Basically, I’m walking into court. I know their lease is bad. There’s nothing I can do about it. They’ve already broken all the security deposit violations. I didn’t write the lease for them. They pull it off of Google. It may be wasn’t even written for the state. It was a rough lease.
I’m hoping, ‘Okay, let’s hope this tenant doesn’t get a lawyer.’ Sure enough, lawyer shows up to court day one. I’ve got counterclaims. ‘You didn’t pay interest on your security deposit, and you know, we’re coming after you. By the way, my tenant’s not leaving.’ Fast forward to the end of the case. I’m in court probably five or six times dealing with these tic tac violations.
It takes six months before the sheriff actually goes out and evicts this tenant. It’s 1000 a month, was what the rent was. No rent was paid for six months, so landlords out six months for $6,000. I’m into them for $1,000 for court costs and fees. That’s $7,000. They had to pay the tenant’s lawyers fees. That’s $8,000, another 1000. Then there’s a $100 penalty for the violations that they had. Now they’re in almost about $10,000.
Tenant’s just out. Place is trashed. They’ve got to do turnover. It’s unbelievable because all of this is avoidable. Had the tenant done it correctly from day one, not taken the security deposit, I could have gotten them out of the unit in probably six to eight weeks, or negotiated with their lawyer to get rid of them, because they’d have no leverage in court. It’s one of those things where for one or two billable hours, you can hire the lawyer in the front end. You’d never have to deal with this.
This is not something that I see sometimes or on occasion. Invariably, eight out of ten clients that come to my office have a terrible lease. They’ve broken all the rules. Everyone’s intimidated to go talk to a lawyer in the front end. It’s really, you meet a new person, you got a new advisor. The lawyer’s going to want to do closings for you, and do legal work. They’re going to like to meet you as an investor, and for call it 500 or $600, you’re going to have a bulletproof lease for whatever city you’re in. It’s, in my opinion, a no brainer. You got to get a tailored lease for your property on the front end.
David: Yeah. I think the biggest mistakes I’ve made in my own career have been, because I was trying to save money upfront, like not using a property manager for instance, when I was not in position to do it myself. Then that led to a horrible eviction, and lost rents, and all kinds of problems because I didn’t want to pay upfront. I think having a lawyer in your corner is really, really valuable, even if for nothing more than just your own sense of confidence that comes from knowing, ‘Hey, I got big brother behind me, flexing his muscles, and he can take care of me when something goes wrong.’
Can you tell us a little bit about what you would recommend for an investor to do? How does this whole process look to get a lawyer? Do you just start calling people and say, ‘I need someone on stand by?’ Is there an agreement you fill out? What does that look like?
Rob: No. I think it's just a referral. If you've gone as far as to buy a property, depending on what state you're in, you may have used a lawyer to buy the property, or you probably worked with the real estate agent, either listing broker or if there was a broker who found it for you. You've met a few people. You've gone that far. Ask around for recommendations.
The other thing that’s interesting, in the past, even though I am a lawyer, what I’ve done is I’ve hired other lawyers in my city who specialize in representing tenants and evictions. I’ll pay them 300, 400, $500 to draft a lease for me. It accomplishes two things. One, I see how they attack it from the tenants perspective, and if there’s other laws or angles that I haven’t considered even though I am a lawyer and understand generally how it works.
Two, the second best part is, now I have an attorney client relationship with that tenant lawyer. If I have a tenant that I’m suing and this shark tenant lawyer tries to represent them, they’ve got a conflict of interest. Now they have to back out of the case, or the tenant has to find a new lawyer. That’s decent strategy too.
David: Me as an investor, do I want to call a lawyer and say, ‘Hey I’m an investor. I need a lawyer. What can you do for me?’ Is there specific questions that the listeners can know, ‘Hey this is what I need to call a lawyer and ask him?’ How does that process work with you, when you’re working with the lawyer before you’re being sued?
Rob: Yeah. You want to get the lease done. Are you talking about before you sign the lease? I think that’s the best timing. If you don’t have direct access to the lawyer, just don’t go on Google and look it up. There’s probably a lot of other trusted sites where you can buy tailored forms. That’s the next best thing. If you are intimidated, or don’t want to spend the money, or your budget is too tight to hire a lawyer, then you can probably buy a custom, tailored form from various sources online. At least it will be specialized to whatever state or city.
Brandon: At BiggerPockets, we actually like launched like state-specific legal forms. We went and partnered with a lawyer, I don’t know if partner is the right word, worked with a lawyer in every one of those states. I think we’re at 34 right now, and talked with that lawyer and said, ‘Hey can you review this? Can you make it state specific?’ Make it look good as way for our members who don’t want to to go an attorney, who want to save some money. They can buy legal forms directly from BiggerPockets. It’s our new feature. Just FYI, everyone. I think it’s at BiggerPockets.com/llforms, like landlord, llforms.
The legal thing, it is important, but also super intimidating. Like David said. Yeah. I don’t even know where to start most of the time. When I was starting with real estate, I was like, ‘Well, I’m broke. I’m poor. I can’t go to a lawyer. That’s going to charge me tens of thousands of dollars.’
If I were to book out an hour of your time, or two hours of your time, and I’m just getting started with real estate. I’m just about to buy my first property we’ll say. We’ll go to the very beginning. What do I asked you? Am I going, ‘Hey, can you give me a lease?’ Is that all I’m asking you? What else are you going to help me in that hour of time to do?
Rob: Yeah, sure. Look, if you came into my office, I’ll be billing at, depending on what the matter is, somewhere between 250 and 300 bucks an hour. Compare that to what you’re going to spend at the title company, fees, brokerage fees or whatnot. If you have real questions, it’s not really all that much money so that you can extract lot of info in an hour. If someone came to my office and they said, ‘Hey, I’m a new investor, what should I do?’ I would help them in terms of structuring contracts, when they’re making offers, and making sure they got the right contingencies.
In Illinois for example, there’s an attorney review on most residential form contracts. You sign an offer to buy something, if you know that there’s an attorney review provision in there where once the seller accepts the contract, you’ve got, call it five or seven business days for the lawyer to make modifications. Then you can offer with confidence, and when there is a deal, you can start investing money into the deal at that point.
Whether it be on the contract, or preparing a lease or helping you research. Not everyone is experts at analyzing recorders websites, or the Assessor's websites to determine what the taxable history is, or how the taxes on the property will change in order to help underwriting. A lot of lawyers, once you do have a contractor, or once you do have a tenant you're looking for, the lawyers can help guide you through that process.
David: That’s so valuable, what you just said right there. For people that may not understand the legal jargon, what you’re saying is that you can go put a property under contract and have a contingency to back out based on the fact that your lawyer looked at this, and didn’t agree with the way that the contract was written or the condition of property. That’s so valuable for people that come across a deal and they want to buy it, but they just don’t know what they don’t know, and they’re afraid to pull that trigger.
You go write your offer. You put it under contract. Then they call you or another lawyer and say, ‘Hey, I need you to look at this. Am I missing anything? Find the holes in this.’
If the guy said, âNo, it's good to go,' or the gal says it's good to go, you go back and you show your agent, âYep, let's stay in this thing and let's move forward.' Brandon and I talked about that all the time. Newer investors think that, you take down a property with one swing an axe. You better be sure before you swing that thing. You're getting into it. When in reality, it's like 30, 40, 50 very small steps that you take, and you don't take this one until you've already taken this one.
The due diligence process does not have to be done all at one time. It’s a process as you move through. Understanding the contract is another tool in your tool belt. It lets me know I can go this far and I can still get out of this thing if I don’t like it. Now I know I need to look at the next step. I just love that you’ve dedicated yourself to understanding real estate, and to being a lawyer, to working in title services, to being an investor, to managing a fund all these things you’re doing, you know what you can and can’t get away with, and how to navigate in this world.
That’s why you have so much confidence. I just want to stress to people that if you’re feeling fear, you’re feeling anxiety, it’s probably a result of your own lack of education and knowledge. If you can gather more information and learn more about what you’re doing, you will feel more confident. You’ll put yourself in the arena more often. You’ll get more victory. Listening to you talk it just inspires me, ‘Man, I want to go learn as much as I can. I want to have a tool belt that’s just incredibly big, like Inspector Gadget. Running around with a tool for every situation that you could find.’
Brandon: I love that show.
David: Brandon, do you have anything you want to add before we go to the fire round?
Brandon: No, just that I want to just encourage people. One of the mistakes I made early on was not going to a lawyer more often. What I found is that lawyers are good for, obviously, a lot of things. What I didn’t realize that they were good for was knowing the right questions to ask.
I recently I sat down with a lawyer when we bought our mobile home park out in Bangor, Maine. I sat down. Ryan Maracus was one of my partners on the deal. Mindy and Carl Jensen who are the other ones, and lawyer. I sat down in this room, well, Mindy and Carl were on a phone. The lawyer just asked us questions, after question, after question, after question, especially about partnerships. Technically, it’s not a partnership, but anyway. We didn’t even know the right questions to ask.
He asked things like, ‘What are you going to do if one party does this?’ Oh, I don’t know. I never even thought to ask that question. ‘What do you do if this thing comes up?’ I don’t know. I never thought about that. That hour we spent with that attorney, will save us tens of thousands of dollars potentially, hundreds of thousands of dollars potentially down the road. Again, my advice to people would just be, don’t be afraid of a lawyer. Just go in there, asking the right questions, or asking the attorney what are the right question to ask.
Anything you want to add to that, Rob?
Rob: Yeah, yeah. As David was saying, a lot of times you don’t have to do anything until you have a contract that’s accepted, because you’re going to have certain due diligence clauses in the contract, inspection, attorney review, title review, whatever it is. Like I was saying in the beginning of the show, I’d come in on Sundays with my partner. We’d make 100 offers sometimes in a day, and I hadn’t looked at any of the properties. I did research the heck out. I’m in the front end. I knew that I liked everything on paper, but I hadn’t actually viewed the properties because it was crazy labor-intensive. There’s no way I could have done it. I knew what the investment parameters were, but I hadn’t actually inspected them.
Okay. Fast forward a week or two after negotiating, and going back and forth on counter offers, finally getting accepted contract from a seller, and I'm saying, âOkay, cool. They accepted the deal. Now I've got five business days to go out and inspect these properties.' I'd go tour with my partner and my contractor, and then we'd figure it out.
Sometimes we’d go back to the seller and say, ‘Listen, I didn’t know that the furnace doesn’t work. There’s no way I could have known because I didn’t bring my furnace guy in there before the contract was signed. Now I need another $5,000 to fix this furnace.’ Most of the time they tell you to pound sand, but sometimes you get 1500 bucks or two grand, and you may have already had some fund set aside or built into the deal for that purpose. You don’t always have to know everything before you actually get the deal. There is actually time to research it.
Sometimes if it doesn’t pan out, and you find something you don’t like, and the seller won’t work with you, or if you want to cancel the deal, then you cancel it. You don’t have to be at 100% on your offers either. Like I said, if it was a one in ten, I got an accepted contract, there are probably 20% of those deals that I also canceled too. It is a numbers game. Each deal that you cancelled, you’re going to have learned something. You cancelled because you figured it out there’s something wrong.
There was one condo I was trying to buy one time. It was a bank owned property. I went in there with my inspector. It was a killer deal. It was 40 or $50,000 in Cicero Avenue, in Chicago. Oh sorry, it was Skokie, Illinois, just outside Chicago. The property was rehabbed. It was foreclosed. The lender was selling it. When we went in there, you wouldn’t believe this, the electrical outlets were screwed into the wall and there was no electrical behind the outlet. The plumbing fixtures look like they were there. I went and turned the sink on, as if it was a regular pedestal sink and you’d open up the cabinet below, and there was no plumbing fixtures in there.
This is a total fraud, and the bank that is selling it has never been there. They don’t know. It was like the craziest thing ever, but whatever. I was justified in cancelling the contract. What am I going to do with it? I’m not doing an entire build out, and putting electrical and plumbing on a $40,000 condo. Sorry. Next up. I don’t know what happened to that unit. I wasn’t prepared to do that much work.
David: I’ve heard of staged furniture in a listing before. I’ve never heard of staged plumbing and staged electrical.
David: That’s hilarious. It’s a Barbie Dream home or something. They just bought the sink and plugged it in there.
Rob: Don’t live there. You can go hang out in the couch and look around. Don’t live there though.
David: One thing you mentioned is you don’t have to get a hit on every at-bat. You’re a 100% right. What I found is that, the more at-bats you get, the smarter you get just from getting up there. You’re seeing pitches. You’re getting to know that pitcher. You’re figuring them out. You may not be getting a hit, but you’re getting closer to a hit with every at-bat, and you’re learning something.
I buy a house. I buy it unseen all the time. I buy houses in different parts of the country and everyone wants to know how I feel comfortable doing that. The answer is just what we’re saying. I’m not just committing completely the minute I write that contract to buy the house. That’s a step in the direction of a purchase. Now I have a time frame that I’m negotiating that contract, to go get an inspector to go. I don’t need to go look at the house to make sure that the sink is actually plugged into plumbing. I need my house inspector to go do that and read his report, because he’s going to find that much better than I would anyways.
That six-plex that you mentioned that you bought, you had to dig out the gas tank, I believe. There’s a lot of people that hear that and say, ‘I could never buy that. What if I didn’t catch it?’ Well, your inspection would have caught that if you paid for one. Can you tell us a little bit about, the last question before the fire around, what’s your future look like right now in real estate? You mentioned that you bought a six-plex. Are you focusing on multifamily? Are you waiting for a market correction? What’s Rob doing now?
Rob: Yeah. I’m actually looking at deals. Anything that makes sense. I would love to have another programmatic strategy like I did with the condos from like ’09 to 2015, and buy them, or have some sort of strategy in any asset class where I can master one little niche and exploit it, and build a system for it. It’s one of those things where if I had to go back and look at it again, and I didn’t have any hiccups or learning curves, I would have bought 3000 condos, but that’s the equivalent of Back to the Future II, where Biff gets the Sports Almanac.
It’s learning as you go type of thing. I want to find new deals that make sense, but I’m not rushing into them. I’m still making a lot of offers. I’m not getting many, but I’m hanging in there. I’m still trying to get a lot of at-bats. The other thing in terms of learning, it’s only when you’re offering too, the learning curve is there on the property management side. As long as you’re a property manager, as much experience as you have, you’re always going to learn some sort of angle or way to managing your properties better.
I happen to self manage because I think it’s nice. I want to control the cash register. I want to know what’s coming in and coming out. I’m of the opinion that no one watches your money like you do, but there is something to be said about also having a huge scale of thousands of properties, and have someone else manage it. Then you manage the manager. I’m not quite there. I don’t have institutional type capital where I want to do that, but in terms of the management, I had my cousin call me about a month ago. I was just there at their wedding. She got married, and said, ‘My husband and I, we need to get out of the apartment. We hate it. I’m ready to move. Can you help me get out of my lease?’
I’m thinking, ‘Okay, great.’ I hate representing tenants. It just kind of goes against what I do, as a landlord. However, I said, ‘Send me your lease. I’ll take a look.’ She’s in the city of Chicago. The landlord followed absolutely none of the landlord tenant laws. I’m looking at it, saying, ‘Okay, if you want to sue your landlord, you got the right to get about three times the security deposit, plus my attorney fees.’ It’s 15 grand plus attorney fees. It’s totally harsh and outrageous.
The woman who owned her condominium that she was renting, had owned it for 20 some years. She’s never had a problem before, and obviously didn’t know about any of the laws because it was an old town, in a nicer area of the city, but she still didn’t know that you got to follow these the security deposit rules. After a couple of conversations with her and her attorney, they realized, ‘Okay, it’s time to let them out of the lease.’ The tenant walks. They’ve got to turnover. They’ve got to find a new tenant. It was big learning lesson for them.
My cousin, thank god, didn’t want to sue them for that money. All she want to do is move, and she didn’t want to exploit or take advantage of them, but there’s a ton of lawyers out there and that also have to make a living, and then they view it as being, ‘Hey, it’s the law. I’m going to enforce it.’ The judges have no choice. They have to enforce it too. We could have rolled into court and gotten a $15,000 judgement against this woman, who’s maybe invested 100 or 150 grand into her condo.
That’s a catastrophic event. If you’re a first-time landlord, or newer landlord, or a not informed landlord, you don’t know about stuff like that, you can cruise by for a long time but at some point in time- you can’t always dodge every bullet. This woman hopefully, became informed and won’t make that mistake again, but it was wild situation. Unfortunately, I think there’s probably a lot of municipalities in major metropolitan areas in the country where you’ve got rent control and things like that, that exists. Kind of harsh story, but good to realize how you can alleviate all that on the front end.
Brandon: To sum up, I think what you’re saying, there are very severe laws, every state. Even tenant friendly states, or even landlord friendly states, there’s laws everywhere that govern what we do. This is not the wild west. There are in most areas, it’s governed pretty well. If you’re not willing to go and learn exactly what your landlord tenant laws are like, then you need to either hire a lawyer and have them consult everything, or hire a good property manager who can take that. Don’t just wing it. This isn’t a wing it kind of a game. Would you agree?
Rob: You could do it for may be short period of time, to think that you’re going to build a sustainable business without having the correct lease, and lease forms, and tenant forms is beyond reckless.
Brandon: Yep Totally agree. Super, super cool. Before we get out of here, we’re going to head over to the next segment of our show which we lovingly refer to as our Fire Round.
Fire Round. It’s time for the fire round.
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Brandon: Alright. Let’s get into the fire round. These questions come direct out of the BiggerPockets forums. We’re going to fire them at you, Rob. You ready for this? Can you handle it?
Rob: Sure. I’m ready. Let’s hear it.
Brandon: Number one. Appliances. What exactly is the landlord’s responsibility to repair or replace? Specifically, I’m going to add a little bit. It was a long question, so I’ll summarize. Basically, this woman owns a duplex. For one of the units, when the tenants moved in, she supplied a washer and dryer, basically because it was there when she bought the property.
Well, now the washer or dryer broke. Does she have to fix the washer or dryer? It’s not anywhere in the lease. What does she do? Can she just say, ‘Hey, sorry. Well, now you got to go get your own,’ or does she have to supply a new one now, because it was there when the tenants moved in? What do you think?
Rob: Yeah. It depends what the lease says. If the lease says it doesn’t include a washer and dryer, and one happens to be there, then there’s an argument you don’t have to fix it. The most common circumstance you’ll see this in is, window air conditioning units. You can say property comes with no air conditioning unit. If there happens to be one there, I’m not liable for it. However if it’s unclear in the lease and it doesn’t specifically state that the tenants liable for it, then it is going to fall on the landlord to fix and/or replace it.
Brandon: Alright. Good answer.
David: Alright. Okay. The next question is about going from a year contract to a month-to-month lease. This forum guest says they have good tenants whose lease is up for renewal soon and the tenants want a month-to-month situation. The landlord’s instinct is to say no. They wanted insist on a full year renewal, even if it means losing them as tenants. They don’t like the idea of going to month-to-month because the tenants can leave during a time when it would be hard to put a new tenant in the property. What are your thoughts on this? Do you have any experiences going through something like this? How would you advise someone to handle it?
Rob: Sure. There’s a couple of factors that go into it. Most important, in Chicago, it’s seasonal. Leases that expire in December, January and February will have the longest vacancy period. If someone says in the middle of December, ‘Hey, I need one more month. My lease is up 12/31. I need till 1/31.’ Yes. No problem.
In the middle of the summer, spring, fall, when the lease up period is good, I’d customarily will not do it, unless there’s some special circumstance. If the tenant wants the flexibility or a termination option within a short horizon, they need to pay a temporary rent bump. You know what if there’s a good reason, ‘Hey, I think I’m moving. I’m waiting for job. I’m not going to renew a one year lease.’
Then you can say, ‘Great. You have a 7.5% rent bump while you’re month-to-month.’ That way you get some compensation for the lack of stability. The other thing you could do is, you could build into your lease agreement that says- sometimes Illinois law provides it, or the Chicago law, if the tenant is able to find a suitable subleaser, then you got no choice.
Suitable means, you run credit. They’ve got good enough income. They can sustain the rent payment, no criminal history. Things like that. Usually, the tenants won’t go through all the steps to do that, but that’s an option.
The other option’s a buyout. I’ve got [inaudible][00:59:00] leases. If you want to terminate mid lease, it’s three months upfront. You prepay three months rent, then I terminate it. It sounds like it’s a windfall to landlord but when you think about it, it’s not entirely because you’re going to have some turnover costs. Minor paint. Minor fix up. If you got to have a realtor re-let your place, you’re going to usually pay a half a month or month commission. You’re short spec-ing the risks for whatever vacancy might exist.
I think it does compensate you adequately in an efficient market, but if you’re in a time period when the economy is bad, or you can’t rent really quickly. You may want to reconsider that. From my experience in Chicago, the three months lease buyouts been pretty good.
Brandon: Alright. I like that actually, a lot. I think that’s cool, sort of a compromise there. Alright. Next one. I purchased my first rental property at the end of December. It was a foreclosure. I purchase it from the bank with cash. Now after the closing, I received the credit for the sanitation bill, but now two months later I’m receiving a water and sewer bill that starts from way back in October. How did that happen? I had a realtor. I had a lawyer. I had a title company. Now what do I do? Who’s responsible for that?
Rob: Call the lawyer. Your contract said they were supposed to have real estate tax prorations. The lawyer’s in charge of seeing that all the conditions of the contract were performed at the closing. Unfortunately, lot of contracts have a merger clause which said, once the deed is received, all the pre-closing conditions have deemed to have been agreed upon and satisfied. There’s a possibility that you’ll get a seller that is cooperative in a bank owned or a real situation. I think your request will probably fall on deaf ears.
If I was in that person’s shoes, I’d call the lawyer and say, ‘Hey, here’s my bill. Why didn’t I get the proration?’ Maybe the lawyer’s not going to write you a check to cover whatever the loss was, but maybe you can work out a deal, ‘Hey, next time I have some sort of legal work, you’ll give me this much credit off my bill.’ Something along those lines.
Brandon: That’s a great idea. Yeah.
David: It’s very good.
Rob: You got to get the big picture too. Unless it’s an astronomical bill, you bought at foreclosure, there’s going to be some expenses. It sounds like the big picture everything was good. You have one little issue. There’s always going to be little hiccups in the deal. You got to keep going forward too.
Brandon: That is fantastic advice. There’s always things that are going to go wrong. People always think, ‘I don’t want to invest in real estate because might go wrong,’ Well, yeah. Something will go wrong.
Rob: Yeah. It cuts both ways. Sometimes you do a closing, the seller says, ‘Hey, this tenant has not been paying.’ You say, ‘Okay, no problem. I’ll assume the risk. I’ll evict the tenant.’ Hopefully you get the right price in the building where it’s worthwhile to assume the task of dealing with that.
I’ve had times where the tenant comes into our office, two, three weeks later, and says, ‘Oh, here’s my five grand back rent. I just got my tax return. Sorry I couldn’t pay it.’ There’s situations when you come up to- it works both ways.
David: Yeah. Nobody complains when that happens. You don’t hear those stories. ‘Real estate is horrible. I got more money than I expected to get. This is ridiculous. I don’t know what’s going to happen.’
We definitely tend to focus on negative and that becomes an excuse not to go. When the positives happen, we just assume it should have happened that way. It does cut both ways. Training yourself to recognize that is a good way to keep your own confidence levels high.
Alright Rob, last question. I’m asking for a friend. What is the best way to invest $500,000? A good friend of my owns two units for the past 15 years. The stock market is leveling out and will not be as exciting as last year, so he’s looking for a new way. What do you think or recommend would bring the safest ROI?
Rob: It’s a loaded question. It depends where you’re at. It’s different in different areas in the country, and what you’re used to it. If you’re not a seasoned real estate professional and you’re not going to do all the research, study the data, like we talked about throughout the show, and really immerse yourself, and have some other real estate expertise, and stay involved and active with it, then you should invest in a passive fund.
You can find REIT or institutional funds that will take your money and have a good track records, give you a good return, whether you’re investing in a limited partnership interest or publicly traded REIT, it’s whatever your flavor is. Half a million dollars, you can do some damage. That can be a downpayment on a pretty big building. If you want to manage it yourself, and jump into the arena, $500,000 is a lot to play with. Study the data and make 10 offers. It’ll help you get one.
Brandon: There you go.
David: What do you think about the investment strategy of watching Billions on HBO and copying whatever Bobby Axelrod does?
Rob: Yeah. He’s good. It was a big learning curve, switching from Homeland to Billions, but he’s pretty good. He bought up all the bonds in the one city, and then foreclosed all the real estate. Basically, took down the government. It’s totally wild.
David: I saw an episode last night and there’s some tsunami that came because of an earthquake. The person running the fund was expected to have seen that coming and known what to do.
Rob: It’s interesting. There’s people in Chicago that play that strategy, that, ‘Hey I’ve got enough money. I’m going to buy the market.’ There’s a couple of landlords that own thousands of units and they say, ‘Hey, I can’t really get the return. I don’t see the yield anywhere else. I’ve got this big platform built already. If I add another 500 units to it, it’s no big deal, and there’s nowhere else I know that’s I’ve got a patient enough, long-term enough expert strategy where I’m going to clip 5% a year or 5.5% a year.’
They’ll buy deals that the general market considers to be overpriced, but if it’s in the location where they already manage other property and getting more scaled does good for them, then, like I said, each deal is different for each investor. Some deals make sense for some people and they don’t make sense for other people. At the end of the day, you got to know why you’re comfortable buying whatever asset that you’re going to buy. You have to have strategy and stick with it.
Brandon: Yeah. I love it.
David: Yes. Today’s quick tip. Don’t bother learning real estate. When Bitcoin lets you down, just copy what they do in the show Billions and you can [inaudible][01:05:16]
Rob: Yeah. Go learn from Bobby Axelrod.
Brandon: Yeah. There you go. Alright. Moving on to the last segment of the show, which we lovingly refer to as our Famous Four. Yeah. Way to go. Way to screw that one up, DG.
David: I did.
Brandon: Before we get to today’s Famous Four. Let’s hear a quick word from Mindy and what’s going on this week over on the BiggerPockets Money podcast.
Mindy: Thanks, Brandon. On this week’s episode of the BiggerPockets Money podcast, we talk with Alan Donegan. Alan watched and helped his father run a super successful sportswear company, until the economy shifted and they lost everything. Determined not to follow this path, Alan got a job, then another, and another, and another. He couldn’t find anything he wanted to do. He created his own job, teaching people how to create theirs.
Taking lessons from his father’s experiences, Alan teaches entrepreneurs how to start really small and test the idea before jumping in with both feet. If you have an entrepreneurial itch, this is a can’t miss episode. Okay. Now for the Famous Four.
Brandon: Alright. Now let’s get to the Famous Four. These are the same four questions we ask every guest every single week. We’re going to throw them at you, Rob. Number one. Do you have a favorite real estate, specifically real estate-related book?
Rob: Yeah. I liked Rich Dad, Poor Dad a lot. I think the follow up book was, The Cashflow Quadrant. It’s not deals specific to real estate, and doesn’t analyze all the real estate deals and not totally real estate focused. I thought it was really helpful for me because it helped analyze the tax perspective of being a business owner versus self-employed versus employee.
At some point in time, I think that in everyone’s career, if you can get to either the self-employed or the business owner phase, the tax benefits are insane. You can run a lot of your life through your business. You’re using your car for business. You’re using your phone for business. If you work at a company, you may have phone or have a car but if you don’t, you are buying all that stuff at post tax dollars. I thought that was a pretty cool takeaway. It showed me the way real estate can help you get there.
David: Very nice. You wear many business hats, Rob. What is your favorite business book?
Rob: I like true stories and biographies. There’s a book that I read that I had a good impression. It’s the biography of Jesse Livermore. I think it was called The Greatest Trader Who Ever Lived. It’s not exactly related to real estate. Well, I guess not at all, but it was about a guy from the Great Depression area, who started off as a little kid working in trading shops, and became the biggest short seller ever.
He was the guy that shorted the market when the Great Depression stock market plunge happened, and became one of the richest guys in the US. He was someone who had very little formal education, became interested in the market, figured out his skill and exploited it as best as he could, and found out ways to make value as a trader. I thought it was pretty cool to show someone who came full circle. From walking in the door as the 10 or 12 year old kid, sweeping the floors to becoming the guy who, I guess there were no jets in the 1930s, but maybe limousines or whatever he had.
David: He had the nicest horse-drawn carriage.
Rob: [inaudible][01:08:46] pull them around.
David: I always love those stories. Those rags to richest. I wonder who the next listener of the BiggerPockets podcast is going to be that, what they’re hearing, it scratches that itch that they need to scratch. Then they become very, very wealthy, and go on to be really successful. They could come from anywhere. It’s so cool when it does.
Can you tell us a couple of your hobbies? What do you like to do when you’re not representing people, and then evicting people, and all the fun stuff you’re doing in real estate?
Rob: I play a lot of golf. In Chicago, you get 5 months year. I try to do that as much as possible, early mornings.
Brandon: Wait, a lawyer playing golf? Come on. Really? That happened?
Rob: It’s good though. For real estate, a lot time you get involved with deals. You want to have partners. You need to have partners. Someone has the deal. Someone has the money. You both have a reason why you need to partners. Golfing’s pretty good. You get four or five hours to hang out with someone. You can kind of judge character, analyze if it’s someone you want to be partners with. Once you get into a deal, you’re going to be in, usually for years. Picking a good partner, you get to vet him up pretty good. It’s better than going to ten dinners with someone.
David: When I was in Hawaii, Brandon was like, ‘David, when are you going to learn how to golf?’
I’m like, ‘I never want to learn how to golf. It looks so boring.’
He’s like, ‘No, you need to learn how to golf if you want to be a good business person. Your game will step up huge.’ Every good business person says what you just said. It’s like I can’t get somebody to come in for four hours and interview them, but I can go hang out and play golf with them, and they don’t know they’re being interviewed, and find out everything I would ever need to know.
Rob: Yeah. Get a few beers. You get a lot things, a lot of disclosure comes out.
Brandon: That you do. Alright. My last question of the Famous Four. What do you believe sets apart successful real estate investors from all those who give up or they fail, or they never get started?
Rob: I think it’s patience. You can’t exactly time what you’re getting into. When you wake up and say, ‘Okay, today’s the day I’m going to go look at a property, or buy a property,’ at that point in time, you probably know nothing about where the market was, where it is today, and where it’s trending towards.
Obviously you have to get your feet wet, and there is risk involved. You do need to take risk when you buy that first property. You also don’t have to rush into it. You can be patient and figure out when is the correct time. Just because you woke up and said, ‘Hey, I’m ready to buy today.’ You don’t have to actually buy today. You just need to start your process today, and carry on your process until you do actually buy.
Brandon: Rob, where can we find out more about you?
Rob: To be honest with you, I’m embarrassed by it. We don’t have a website, a public website. I think my email information is with Mindy, on the show. Apart from that, I’m not incredibly public with all our information.
Brandon: Are you taking more clients, if people in Chicago area might want to use you?
Rob: Yeah. We’re interested in clients. Our law firm’s called Beaulieu Law Offices. That’s b as in boy, e, a, u, l, i, e, u. You can find us at b, e, a, u, legal.com. Our information and attorney profiles are around there. If you want to reach out or whatever, we’ll be happy to discuss anything you’ve got on your mind.
Brandon: Perfect. We will link to that on the show notes at BiggerPockets.com/show275. Rob, thank you so much. It’s been awesome, super informational. I loved hearing your story. I just think it’s crazy, you went from zero to 300 condos, and just like, ‘We just did it. Not a big deal.’ I think that’s awesome. Thank you for telling us your story today.
Rob: Yeah. Appreciate it. Thanks for having me on. Appreciate it, guys.
Brandon: Alright, thanks. See you around.
Rob: Okay. Have a good one.
Brandon: Alright. That was our show with Rob Oliver, Attorney at large. Is that what they call him?
David: That’s what you called him.
Brandon: Attorney at law. Attorney at law. Not large.
David: Attorney at large would be the kind of guy that ought to have been arrested [inaudible][01:12:50]. That’s funny.
Brandon: Oh man, we should re-record that, but we’re not going to. That’s funny. Anyway, super cool show. Super important lesson. Like I said in the show, this is not like a flippant, just go and buy some real estate. There are legal consequences to what we’re doing here, which is why most people will never get into it. Get the right advice. Get the right attorney. Go out there and make some deals happen.
David: Yep. Try to find an attorney that invest themselves. That's so cool. I'd trust whatever Rob told me because he's got 300 condos. He's done this himself. When you're looking for an agent, when you're looking for property manager, when you're contractor, all the pieces you're going to need, a lawyer, find one that same perspective we are. The advice that they are giving you will be much more tailored to what you're doing.
Brandon: There you go. Rock solid. Rock solid. Well hey, I know you like analogies, David. I’m going to give you an analogy. My wife and I are re-watching lost right now. You know the show Lost, right?
David: Oh yeah. You guys tried to suck me into watching that, and I refused.
Brandon: Oh. Okay, so you haven’t seen Lost yet? You got to get that.
David: I don’t do drugs. I’m afraid to get addicted.
Brandon: Alright. We’re re-watching Lost. Probably because I talked to you about it and I was re-sparked to watch it. Anyway, I’m watching from the beginning. There’s an analogy that Mr. John Locke, who doesn’t mean anything to you, but he’s shaven head like you.
John Locke gives us a great analogy. He points out this moth. There’s a moth in a cocoon. He points it out. He goes over to it, and he says, ‘Right now this moth is inside here,’ this caterpillar, or whatever it was. I don’t know what pre moth is, but whatever it is. ‘There’s a pre moth inside this cocoon. He’s struggling and fighting right now to get free of this cocoon. He’s tearing at the stuff. It’s going to take him a few days to get through it. By the time he does, he’ll rip open that thing and he’ll fly out.’
He’s got this big, huge hunting knife in his hand, He’s like, ‘I could go over here and just very carefully create a little line here and free the moth from his cocoon, and he’ll not have to struggle at all. He’ll just come out, but if I do that, he’ll die. He won’t be able to survive because the cocoon is what gives him his strength. The struggle is what gives him the strength.’ Anyway, I was watching that and I was like, ‘That is such a good analogy for just life.’
This is hard sometimes. Real estate investing, or trying to build any kind of business, entrepreneurial thing. That’s what gives us strength later on in life. I thought you’d appreciate that little analogy for a non Lost fan.
David: That’s my favorite analogy, I think in the whole world. I usually say it with a little baby chicken trying to get out of the egg. Very same thing.
Brandon: There you go.
David: Yeah. When you’re feeling pain, when you’re feeling struggle, know that that’s for a purpose because it’s making you stronger to accomplish your goal. It doesn’t mean you’re doing the wrong thing, because it’s hard. Too many people quit because it didn’t come easy, and they think that’s a sign that they’re not supposed to be doing it. I’d say the opposite. If it’s coming easy then, there’s nothing for you to gain there. The struggle is what the goal is because that’s what’s going to make you stronger.
I’m very impressed. I don’t think I’ve ever been as proud of someone as Brandon finally embracing an analogy. I feel like my little boy just take his first step.
Brandon: I love analogies. I just make fun of you for being like the king of analogies. You’re the best person I’ve ever known at analogies. You just come up with analogy off the top of your head. Like right now. Give me an analogy. Go.
David: Okay. You telling me that I’m the best person you’ve ever known at giving analogies is like Tiger Woods saying that’s the best putter that I’ve ever met. You’re very good at it yourself. That’s a huge compliment coming from you.
Brandon: Well, that was a good analogy. Very well. Right off the cuff. Alright. Thank you guys for listening to the show today. Hope you enjoy it. If you have not yet left us a rating and a review in iTunes, please do so. We’ll give you a nice, big bear hug next time we hang out. With that, let’s get out of here. DG, anything you want to end this show with?
David: No, sir. This is David Green for Brandon investor at large Turner, signing off.
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