Brandon: This is the BiggerPockets podcast Show 285.
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“When I went and studied all the demographics and all the underlined reasons that apartments were doing so well. I realized that I in my mind has found the perfect investment. So I plowed myself at that point into Class B multi-family and that’s what we’ve been working on for the last four years or so”.
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Brandon: what’s going on, everyone? This is Brandon Turner, today’s host of the BiggerPockets podcast. I’m done yelling. How are you doing, David Greene?
David: How am I doing? I’m doing freaking fantastic. I’m the host of the best podcast on all of iTunes so how could I be any better?
Brandon: You’re the host of The Tim Ferriss Show? Oh, wait.
David: Oh, God. No. Tim Ferriss just appears to be what we have here.
Brandon: He wishes he could be as cool as David Greene and Brandon Turner. No, besides how are you doing, what are you doing? What’s up with real estate these days for you.
David: Well, I wrote an offer two days ago and I’ve been waiting to hear back on a property in Jacksonville, Florida. It ARVs around $160,000. Looks like it needs between $20,000 to maybe $30,000 rehab if I go big and I wrote it arounf $86,000. So I’m waiting to hear back if the seller would want to counter me, accept, or reject.
Brandon: Is that going to be a BRRRR property?
David: It is going to be a BRRRR. Pretty much everything is BRRRR at this point in my life.
Brandon: Nice. And hey, speaking of BRRRR, if you guys want to know more about BRRRR, I’m going to be talking about it this week on the BiggerPockets webinar. You can sign up for it at BiggerPockets.com/webinar. You like that little plug like that right there?
David: That’s an amazing plug.
Brandon: You know a couple of weeks ago we did an amazing webinar. 8,000 people signed up for the webinar. It was insane. Like, that’s gotta be getting close to like world record, people attending or signing up for these webinars. Anyways, show up, they’re fun. Yeah, I put in an offer.
Well sort of, we’re putting an offer on a 61-unit mobile home park that when I ran the numbers, it’s like stupid good. And so I’m trying to figure out like I’m nervous because I’m like what am I forgetting, what am I doing wrong? Because it’s so good that something has to be wrong. So I’m going to be asking for some help from some friends of mine on that. So maybe you and I will have to run those numbers together so you can tell me what I’m doing wrong.
Which is actually, we talked about that on the show today, about not falling in love with a deal but falling in love with numbers, right? And sticking to the math. That’s actually a big part of today’s show on multi-family properties with our guest, Paul Moore.
But before we get into that, let’s get to today’s Quick Tip. Quick Tip for today is very, very simple. If you do not have your BiggerPockets profile filled out, you are missing out. We talk about this on the show later today about the importance of putting yourself out there to the world and potentially raising money or finding partners or whatever. And if you have a lame-looking BiggerPockets profile, people aren’t going to be as willing to work with you, right?
So make sure all your goals are filled out there, who you are, your experience level if you’re new. Say that. That’s okay. Get a good-looking photo of yourself. If you’re a BiggerPockets Pro Member, you can actually upload a video to your BiggerPockets profile, an incredible way to build trust and credibility. Whenever I find somebody with a video on their BiggerPockets profile, like I love learning more about them that way because a video will tell you a hundred times more than a text or a picture will.
Anyway, Quick Tip today is get into your BiggerPockets profile and make it look good and complete because you never know who’s going to be looking at it, unless you’re a BiggerPockets Pro Member, you can see who’s looking at your BiggerPockets profile. I don’t know. Did you know that, David?
David: No, I did not know that.
Brandon: Not many people know that but if you’re a Pro Member, you can actually see who’s looking at your BiggerPockets profile so you can actually reach out to people and have warm leads. Anyways, that was like five Quick Tips in one. We’ve got to move on to today’s show sponsor.
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All right, thank you to our sponsors as always. Now I will put out the call to action one more time. Is that the word? The call of action or call to action? One more time, make sure you guys subscribe to today’s show. Make sure you leave us ratings and reviews. Those things help and get more people to hear about the power of real estate investing and financial freedom and rentals, flips, all that good stuff. So subscribe and help us out. And with that, let’s get to today’s show.
Our guest today is Mr. Paul Moore. Paul has an incredible story. He’s been in real estate now for a couple of years. He’s done everything from flipping to building new to hotels, which is kind of a cool, sad story. I guess you’ll hear about that. He’s had a very good head on his shoulders about looking for multi-family properties and what to buy, what not to buy, we spend a lot of time on that, about value add. So you guys are going to love today’s show. So without further ado, let’s get to the interview with Paul Moore.
All right, Paul, welcome to the BiggerPockets podcast. Good to have you here.
Paul: It’s great to be here, thanks, Brandon.
Brandon: Yeah. So I’m looking forward to hearing your story. Especially, I read in your notes here that you did something in North Dakota that I think is pretty cool that I want to hear more about. We’ll get to that later. But first, why don’t we just start with—you’ve done a ton of stuff but we’ll start at the beginning. How did you get into real estate? Or more like, what did you do before real estate and then how did you get into it?
Paul: Okay, well I’ve got an engineering degree, which was my first mistake. And then I went on to get an MBA at the Ohio State University. After graduation, I went to work at Ford Motor Company. I loved Ford. I loved everything about it but I was kind of bored and I started doing side gigs. I was trying to start an oil change shop near Dearborn, Michigan.
Then I was doing a property tax consulting gig, and about five years into Ford Motor Company, I ended up getting an opportunity to, with a partner, start an HR consulting, an HR outsourcing firm and we did that and we had that company for about five more years and we sold that company to a publicly-traded firm and you know, going into semi-retirement in your mid-thirties sounds incredible. It was awful. It was miserable.
My wife and I wanted to get away. We were kind of reacting to being near inner city Detroit so we moved to the top of a mountain in the Blue Ridge Mountains of Virginia. We bought 120 acres. We had two kids. We had friends that moved there with us and it seemed great on paper but I was a high-energy entrepreneur. I got bored really quick. We started a non-profit organization to come and outreach to international students studying in the U.S. I loved doing that but it was only occasional.
So a friend of mine and I had never heard of house-flipping and I don’t know if the term had ever been developed but in 2000 we heard you could get houses real cheap on the courthouse steps, so we made a pact that we weren’t going to buy. We were just going to go to the courthouse steps auction just to observe. We didn’t take any money with us at all.
And we got there. It was a snowy, icy day in late December of 2000. We were the only people there. We evaluated this house. We looked in the windows. It was vacant. And we thought this house is probably worth about $65,000. It might only need to be swept and maybe painted on the inside so we’ll go to the auction.
So we went and we were the only people there and it rolled out at $34,000. So we begged the auctioneer to go to lunch. They never do this, right? But we begged her to go to lunch. She did. We came back. We ran across town in the ice and snow, came back with a check for $3400 as a down payment. We bought the house for $34,000. Three weeks later, we put up a “For Sale By Owner” sign on the yard, sold it as planned within four hours for $65,000.
I thought this is easy. We can do this over and over, right? So we thought well, we’ll do a couple of these a month. This will be amazing. And we lost money on two of our three next deals. So it wasn’t as easy as I thought.
Brandon: Let’s go in that. Why? Was it just beginners’ luck that the first deal worked out so well or did you do something right on the first deal that you didn’t do on any other ones?
Paul: You know, I think what happened is one of my tenets now is I never ever want to fall in love. Don’t get me wrong. I’ve been married for over 31 years. I’m all about love. My wife and I love each other but I do not believe you should fall in love with any real estate property. And I think that’s what I did on the second one that we lost money on.
I was crazy about Cape Cod style homes. And I still like them now. But I found this beautiful Cape Cod in a declining part of town and I thought well, it doesn’t matter if the neighborhood—it’s the nicest house in the neighborhood. It doesn’t matter that the incomes are low and all that. Everybody can see the beauty inherent in this home.
Well, that beauty cost me about $10,000 and eight months of agony. So that didn’t work out so well. So we went on and decided to do 50 more flip homes and we were much the wiser for these few failures we had along the way.
Brandon: Wait, 50 more flips after the two that didn’t really work out well—and then you went on and did 50. How did that transpire?
Paul: So we began to do all kinds of things. We did direct-mail. We looked for foreclosure sales in the newspaper and walked up and knocked on people’s doors and asked if they wanted to sell before the foreclosure. We would go to the courthouse steps. We bought a lot of houses there. We learned about how to buy houses through HUD. And frankly, we had a really good run. I don’t think we lost money on more than one house out of the next 50 or so.
I had this thought. I was like hey if we can make this much money flipping houses, we can make a lot more money building houses. And I ignored the small fact that I didn’t know how to hang a doorknob. And so I thought well, we can be a builder. So we set up a company to do that. We actually built seven homes. The first six were modular. And they actually went really well. And the seventh one was a sick built and I don’t really want to talk about that. It went that well.
We should have made about $100,000 profit on that. It was a lakefront home on a beautiful lake and we lost about $40,000 on that deal. So I went from there to actually flipping high-end waterfront lots that same lake. It’s mountain lake in Virginia and we did about two or three dozen lots and it went very, very well until the recession and then it didn’t. As you can imagine, we were holding about eight lots at that point.
Brandon: Yeah lots suffered a lot especially vacation style properties. What does that mean, can you explain what that means by you’re flipping vacant lots? How do you buy them for one price and then sell them for more without actually doing any work on them? Or did you do work on them?
Paul: A little bit. Smith Mountain Lake started about 50 years ago and some of these folks have had these lots for maybe $5,000 or $10,000 or $50,000 in the ‘70s or maybe even the ‘80s. And they were completely overgrown. You couldn’t see the water in some cases because of all the growth and the woods and these people may have inherited these lots.
So we went in and we thought, what could this be at its best? And let’s say it was $400,000 because the lots went up like, they doubled twice since about between 1998 and 2005. So we went in and we just offered them a fair price based on the fact that it was overgrown. We went in and cleared the lot, left some trees here and there. Put a park bench out. We set up a beautiful website just for marketing lots. And we were able to make up to $100,000 each, flipping these lots.
David: Wow, that’s incredible. Can you tell me, Paul, you flipped a lot of houses and then you tried the new build strategy and you got a little bit of variety in how you were doing things. What did you learn during this process of flipping 50 houses? Did it change the way you approached real estate going forward?
Paul: Well, what I should have learned was not to fall in love with a property. And what I should have learned is the difference between speculating and investing. And I have learned those things since but those experiences that I’ve had have really, those and a lot of other experiences doing multi-family and other things in the years since then have really taught me some lessons especially in the area of risk versus return, speculating versus investing and the importance of location. I know we’ve all heard that for decades but it really is important to objectively do that without falling in love with the project in advance.
Brandon: I was going to say can you explain what the difference is between speculation and investing in case those people listening have no idea?
Paul: So here’s how I would define it. I would say that investing is when your principal is safe and you have a chance to make a return. Gambling or speculating is when your principal is not safe and you have the chance to make a return. And the difference between those two means everything because over the years, I did all kinds of things that I didn’t mention here.
Where I was actually speculating, and I considered it investing, and that mistake cost me a lot. I mean, hundreds of thousands of dollars, like the time—I mean I had a petroleum engineering degree so I thought hey, this oil well opportunity in North Dakota is amazing and so we invested, a lot of friends invested with me in that, and we lost all of our money because again, the principal wasn’t safe.
Sure we could have made ten x when they hit oil, but they didn’t. It was all kinds of things like that in my life that I can point to where I didn’t know the difference and it cost me a lot.
Brandon: It reminds me a bit, the oil thing you mentioned—it reminds me a bit of like how people view cryptocurrency or how I view cryptocurrency. It could very much take off and be worth a hundred times or a thousand times more than it is today, right? There’s also a much greater chance of it dropping to nothing.
But I’m not saying your person shouldn’t have part of that portfolio unnecessarily—I don’t but how do you view that? Where should speculation—where or when should it play a role in an investor’s life?
Paul: So Paul Samuelson, the first U.S. Nobel Prize winner in Economics, said investing should be a lot like watching grass grow or watching paint dry. If you want excitement, take $800 and go to Los Angeles. Now, I think it’s fine to speculate as long as you’re aware that that’s what you’re doing.
It’s fine to gamble as long as you’re aware that that’s what you’re doing and people make a lot of money. A lot of the famous investors in the world started out that way. And I think it’s fine. But I actually wouldn’t want to be in a position where I was putting money I needed to live on or anymore than perhaps 10-15% of what I have into an investment or a speculation like that.
David: You make a really, really good point because I agree with you 100%. It’s okay to do things that are somewhat gambling as long as you’re aware that that’s what you’re doing. You haven’t tricked yourself into thinking, oh, I’m investing money in this thing because I think it’s going to take off in rent.
In 2005-2006, there were a lot of investors were doing, is they were buying properties. They know how the fundamentals of real estate worked. They were hoping that the market would continue to appreciate and they would sell later. And we thought that all these people were smart because they were making money and they were lucky but when the music stopped, there were no chairs left to sit in and they lost a lot of money.
And I really like your definition of that. Investing is making an investment that you’re not likely to lose capital in while expecting your return whereas gambling like when you go to Vegas, you go to play Roulette, you could get a return on your money but your investment is not safe.
So it sounds like that kind of set the foundation for what you went onto do in your investing career. Can you tell us a little bit about what your next step was in your evolution?
Paul: So we were actually going to North Dakota. My business partner’s from Colorado and he would fly up. He has a small jet and he would fly up to North Dakota to check out these oil and gas investments we were considering and he could never find a place to stay. And so I went with him and there were trucks, generally pickup trucks, and some cars parked all along the road, all along rest stops, etc. around Williston and Watford City, North Dakota because these guys had no place to sleep.
There was no housing. Tens of thousands of oil workers descended on a town like Watford City that had a population of 3500. And so we realized hey, he had to fly his plane back out to Bismarck or back home to Colorado when he went to look at these oil and gas things. So we said hey, we’re both involved in real estate. Let’s open up a hotel or an apartment, furnished apartments for these workers and we were able to do that very quickly.
We bought 75 acres of farmland on a main road and we opened this quasi-motel, quasi multi-family and rents in middle America generally are let’s say about $1 per square foot per month. Well we were charging $13 per square foot per month and we were almost always full. It was amazing.
So we were charging about $4000 a month for a 300-square foot beautifully furnished modular cabin. And they would put two guys in there. The oil company would pay the bill and we stayed full and we did that for a number of years and my partner and I operated that and we sold that in 2013.
Brandon: When I heard that you did that, back when North Dakota was going nuts, I thought about that exact same thing. I totally want to go there and build something. But my fear was what if one day the oil just stopped and the government changes some regulation and they stop drilling or whatever, I’m going to be left with this property that actually makes no sense whatsoever because it’s in the middle of nowhere. Was that a fear for you? How did you view that and how did you get out of it Is it still doing well?
Paul: So I think it was just dawning on me the difference when we were in the middle of the difference between investing and speculating because that was around the time that we lost the money in the oil and gas. Oh, and did I mention we set up a wireless internet company to serve the northwest North Dakota and we lost money in that.
So I think I started to see the difference in investing versus speculating around that time and I realized oh my goodness, we are in a very, very difficult and vulnerable position. We’re making all this money but you know, if oil prices drop, and of course, they won’t, they said. But if oil prices drop a lot, we have an albatross on our hands. So we sold it at the height of the boom. The oil was still probably about $90 a barrel and of course we had no way of knowing that a year later, it’d be down to the mid-thirties per barrel.
The buyer was a very large company and they rode it out and they’re doing fine now. They’re actually one of the few companies in that area that withstood the storm. Our theory there was to build the nicest place in town and if these other man camps, if they folded and left town, they’d still be there and that’s how it worked out for the buyers. But it was speculative. I just want to be clear.
Brandon: Yeah I actually love that philosophy, too. If you build the nicest one in town, it is kind of a hedge against bad things happening. I bought a property and it wasn’t in a great location. It’s not in a growing town.
It’s a fourplex but I was like, I’m going to make this the nicest fourplex in that entire area because every other property will fall first and every other one will have—at the end of the day, if people are going to live somewhere, they’re going to live in mine because I have the best-looking one and the best management, best look. So I like that a lot.
Paul: Exactly. And our thought with that is even if all the people drilling wells and providing water and providing sand and all the chemicals and all this stuff, even if they left, there would still be production people left behind and that’s exactly what happened. And those production people are still staying in the units now.
Brandon: Okay. So you were able to exit that successfully. What came next?
Paul: Well we decided it would be a good idea to go to a neighboring larger town, a town of about 75,000 mine in North Dakota and build a Hyatt hotel. So we built the nicest Hyatt House Hotel that we know of in the U.S. And I think Hyatt told us that it was.
At about the time it opened, oil prices dropped. We were also counting on the fact that a new Wal-Mart and a hospital and all this was going to open right across the street. And so we bought the land for a great price before all that happened and taking that risk really shot us in the foot. Thankfully, I was not a financial investor in that and I wasn’t one of the folks on the loan. My partner did all that. But yeah, it did not end well.
David: What did you learn from that experience? You realized it didn’t go well but you’re someone who just continually pushes forward. You always just move forward. I really respect that. Tell us what you learned from this that our listeners can hear and say okay, I want to make sure I don’t make that mistake.
Paul: Yeah, so I backed up to what we had done before, which as I mentioned was a quasi multi-family and I realized, hey, I really realized, I think, the importance of market selection. I realized I didn’t want to be a developer. I realized I did like multi-family but I didn’t want to develop it from the ground up and get caught in the wrong end of the cycle there.
About that time, I turned 50 years old. Now, I know you guys are thinking this guy doesn’t look a bit over 40. Right? But about the time I turned 50, I thought, what is something that I can leave my kids? I don’t want to be on the bad end of a cycle. We made millions of dollars and then we lost millions of dollars and I don’t want to be on the loss part if for some reason I can’t work again in the future.
I want to leave my kids a legacy. I want to leave them something. I want something with demographic trends that I can look out decades in advance and see where it is going. And I was looking for the perfect investment. And that’s really, really a tall order.
But when I went and studied all the demographics and all the underlying reasons that apartments were doing so well, I realized I in my mind had found the perfect investment. So I plowed myself at that point into Class B multi-family and that’s what we’ve been working on in the last four years or so.
David: And that’s exactly what I want to ask you. What is it about multi-family investing that actually makes it the perfect investment?
Paul: Well, you know about 1995, the government began tampering with home ownership and as we all know, they loosened up the loan restrictions and lots of people, as you can imagine, bought houses that probably shouldn’t have. And so home ownership skyrocketed from the low to mid-60s up to 69.3% by the year 2005. As we all know, the house of cards came tumbling down and with that, home ownership dropped to about 63% in the next ten years up to about 2015.
Now, every one percent drop represented a million new people in the renter pool. So this decline in home ownership and this increased desire to rent made apartments have a great swell. Now, during that same time, during the crash, there wasn’t a lot of new apartments being built so the supply and demand got way out of whack and for apartment owners, that was a great benefit because they did very well during after a little dip, they did very well during the recession and they continue to do well now.
I believe there were 90% lower foreclosure rates with Freddie Mac in multi-family than there were in single-family but I think that even though they’re in some private banks and CMBS loans, there were up to 9-10% foreclosure rate. Freddie Mac did very well. They were in the 4-4.5% foreclosure rate for homes but multi-family, including Nevada, California, Arizona, Florida, had a lot of foreclosures including some mom and pop operators. They were only at .4% so 4% plus for single-family, .4% for multi-family.
Now the rates have dropped and single-family is—excuse me, multi-family is about 98% lower foreclosure rate today in 2018 than single-family. No, I think there’s three underlying demographics that are underlying a lot of this number.
Number one, the smallest but fastest-growing group of people who are renting now are the Baby Boomers. Of course, that’s people who are generally in their mid-50s up to their mid-70s and that area is growing and statistics say that when they rent, they’ll never return to buying again.
Number two, of course we’ve got millennials. They don’t see the value in tying themselves down to a 30-year contract on a seemingly overpriced piece of real estate. Millennials want more flexibility, a chance to move across town and across the country, new job next year. And frankly, a lot of them have a lot of student debt and so they’re not able to purchase a home.
The third groups are immigrants. Immigrants are playing an increasing role in home-buying versus renting economics. And typically, immigrants tend to rent more than buy. So for those three reasons, I think we can look out decades and see that the multi-family business will be very strong.
Brandon: Yeah, I like that a lot and I agree with 100% of all of it. Which is why I buy multi-family and why David Greene is working on it. David, are you gonna get you a multi-family by the end of the year?
David: I think more than likely yeah. That’s the same thing I’m seeing. Not only for the same reasons you’re saying, Paul, I think more because I am just so busy that I can’t keep continuing to buy single-family homes. It’s a lot of work.
And part of the benefit is it’s more flexible. It’s easy to sell off a single-family house and you’ve got ten single-family houses, you can parcel out four of them. But the downside to that is way more work managing it and acquiring it but Brandon is always telling me that the 24-unit he bought is just as much work as a regular house that you could buy.
Brandon: Actually, it’s less. Most of my apartments, my apartment and mobile home park, they are less work than what I typically do on a single. Now that $15,000 house that I bought at the courthouse steps was far more work than the last apartment complex I bought or the mobile home park.
Because the larger deals have the work built into them where they have systems and stuff already in place because the previous owner had run it that way, too. So yeah. Definitely agree with you there.
All right, so you’ve decided multi-family was where you’re going to head. So what did you do? What did you buy?
Paul: Well, the first thing I did is I decided here I am in my 50s and I have a brand new business to learn. I decided that the best thing for me to do would be to get a mentor. So I looked a few of the mentors up there and I got a business partner. This is a guy who’s a doctor and he’s real smart and he has said no to a lot of speculative investments I’ve thrown in front of him for years.
When I told him about multi-family, he was in. So we jumped in and we actually hired a very expensive mentor. We spent a year in their mentoring program and it was awesome. Then we spent the next year after that, we both had other income sources at the time and we were both busy with other things and we fiddled around doing a website then redoing a website and we each ended up setting up some marketing systems.
We started figuring out how to get investors, how to try to do acquisitions for these larger multi-families. Then we brought on a partner and redid the website again. And each one of us wrote a book about multi-family investing because we had researched the heck out of it. We finally got around to buying a multi-family. The problem is, by that time, who knows where we are in the cycle?
It seems we are at the peak. They thought that in 2013 and 2014 and 2015. I don’t know where we are but I can tell you this—the demand and I think everybody knows this, the demand for multi-family is so voracious now. It’s very hard to find a good deal. So that’s where we’ve been.
David: Brandon and I have preached very consistently that in this market, you are not going to find a good deal. You need to make a good deal. You need to understand the fundamentals of what makes an investor profitable and you need to recognize when there’s an inefficiency at the way something is being run, something about this being overlooked by an investor. So tell us a little bit about your study of this and in the book that you wrote, what are some things that you look for to add value to a property, to make a good deal where somebody might have missed it?
Paul: Well the obvious thing is of course doing interior renovations. A lot of apartments were built in the ‘80s in particular and some of them out there are still not renovated. So that’s the obvious place to do value add and then increase and do the renovations, increased the rent, increase the net operating income. But the less obvious areas are where we need to be looking now.
You talked on a couple of podcasts to go about hitting value add opportunities and we found one on a recent purchase of an apartment complex in Lexington, Kentucky. We looked at the numbers when it was still not even on the market yet and the broker was showing us some of the numbers. We said these utility costs seem wrong.
And so we went to a utility consultant and he confirmed that the water and sewer alone were about 110% higher than they should have been. So over double. So we went ahead and got estimates, figured out what it would cost to put in water meters. All the water was being paid for by the owners but we thought even if we don’t pass or until we pass the water costs off to the tenant, we can still dramatically reduce this because this was a 1960s apartment. We figured there were leaks.
We found out one of the leaks, we actually went there and we noticed every day that the pool seemed to drop six inches in level and this was in the fall. But we said, what’s going on with the pool, and the maintenance guy was like I don’t know, we just fill it up every day. So we thought oh, that’s a good sign. So we bought that apartment before anyone realized there were utility issues.
Now the great news is by installing these water meters, we’re able to get for about $70,000 installation costs, we were able to get it theoretically and we were just fairly new to this. We expect by the end of the year to have saved $65,000. So that’s over 90% ROI each and every year. And that’s something that generally value add people wouldn’t have caught that and so we caught it and we feel very fortunate we did.
Brandon: That’s cool. I like that. I was going to go—sorry, go ahead. I thought you were going. Take it.
David: I like that when you’re buying a multi-family property, it feels much more like buying a business than when you’re buying a single-family property. And if you retrain your brain to look at it from that perspective, this is my business, this is my income, these are my expenses, how do I lower my expenses and raise my income as much as I can? You can have a much more direct impact on the bottom line than with a single-family house. It’s just very hard to generate more income from a single-family house. It’s very hard to decrease expenses on a single-family house.
You don’t have the variety of expenses and opportunities to save, right? I’m not paying for landscaping and water on my single-family house. I’m paying tax, insurance, a mortgage and repairs and vacancy. And that’s it. There’s very little I can do to lower those and conversely, I can’t really do much to increase my rent either. It’s going to go up every year when the lease ends. It will only go up what the market will bear. Well, multi-family property, you can rehab the properties and you can charge them more for rent.
You can see that like this area is booming and there’s not enough housing so rent is going to go up a lot. You can do things like look and see the pool wasn’t being run well. Who would have thought to look to see if the pool was being maintained efficiently and save yourself a lot of money?
There’s just so many more opportunities to run it like a business and with single-family and you’re living proof of somebody who you went and bought your first property and you crushed it on your first one. How many of us can say that about many things in life that the first time we did it, we did really well.
Paul: Yeah, that’s true and you talked about this on the show before but the opportunity to force appreciation through value adds in a commercial level multi-family, anything five units and up, it’s phenomenal because as we’ve talked about before, the value is not based on comps or comparable properties.
The value is based on the income divided by the cap rate. So the income, I mean if we’re able to increase the income $65,000 at this property and the cap rate is let’s say 6% more or less, you divide $65,000 by 6% and we just increased the value off the top of my head thinking about a million dollars by making that $70,000 change. That’s pretty big. And that’s really good for us, really good for our investors, and it’s obviously great for the environment as well because we’re wasting less water.
Brandon: So how do you, when you install sub-metering and you allow the tenant to go in and start paying their own water, how do you get them to do that without just leaving? Or are there other ones in the area that have it that way or how does that transition go?
Paul: Yeah, first of all, there’s others in the area. They all, generally, the tenants pay the water. We actually have not passed it back to the tenants yet because there’s a flat fee for water, sewer, trash, termites, and that’s being passed back already.
So effectively, because it’s a flat fee, the company is paying it if the water is double this month, that’s on the company. If it’s half, that company saves it. But when we do pass it back, I don’t think it will be that hard because by reducing the flat fee and increasing their personal responsibility, I think it’s going to be about a wash in the end.
Brandon: Okay, cool. What did you pay for the property?
Paul: We paid $8.85 million dollars for the property.
Brandon: And how did you finance that?
Paul: It was through Freddie Mac and we actually got a green loan and same thing, the sub-metering actually gave us a qualification to get a Freddie Mac green loan so we saved 20 basis points of 0.2% on the interest rate which saves us about $12,000 a year on the loan as well.
Brandon: I have not heard of green loans. That’s like a Freddie Mac product then?
Paul: Yeah, Freddie and Fannie both have a green loan program and it’s basically if you can document that you can change showerheads or ask sub-metering or whatever you can do to document that you can help the environment, they’ll let you qualify for a green loan.
Brandon: Yeah, that’s super cool. I did not know that. All right, so you did that. Did you put just normal 20-30% down payment? Did you raise the money? How did that work?
Paul: Yeah, we syndicated this deal. We were able to get a 72% loan on value loan on this. Then we raised the rest of the money. We raised about $3.8 million dollars in total for this and that included the equity we needed to raise to buy the property as well. That included another million dollars or so for some changes, reserves, other things that we needed. Fees, loan fees, closing costs, etc.
Brandon: Super cool. So where did you raise that money from? I mean like, is this family friends? Do you—because a lot of people want to do real estate like larger deals and they don’t know how to start the syndication process. Obviously you have some experience. Can you kind of walk us through that journey?
Paul: So in 2008, I didn’t mention this but when the real estate market was tanking and we were—I don’t know if I mentioned it but we had $2 million dollars in the bank in 1998. A decade later, we had $2.5 million dollars in debt and that was all tied to real estate thankfully. But 13 months later, through some prayer and a lot of hard work, we were actually completely debt-free. It was amazing. That was in 2009.
But during that time, it was kind of a dark time for me and I actually went and learned copywriting. I went and learned marketing copywriting. And I spent a couple of years doing that. I actually made quite a bit of money doing copywriting, believe it or not. And I was still doing real estate on the side. But I learned to write well and I also learned a lot more about just how to work with people. It’s basically sales writing if you will.
So I learned a lot about sales and then here I am years later, scratching my head about three years ago wondering how are we ever going to get investors? We have a limited number of friends and family. We have a limited reach. Both my partner and I are in fairly small towns in central Virginia. And I heard this concept and there’s a book by Vern Harness called Mastering the Rockefeller Habits, I believe.
And in that book, he talks about the different—he says if you are up north in northern Canada or whatever and you need to survive, you can choose to become a spear fisherman and you can learn to throw a spear really well. You’re hoping it’s sharp enough, hoping the fish swims by at just the right time, hoping that when you throw it, the fish doesn’t turn or you know, the spear ends up angled in the water. And you’ll catch some fish but it’s real hard and it’s real uncertain.
He said, or you can be like a grizzly bear. You can be the grizzly bear standing in a waterfall with your mouth wide open letting fish jump into your mouth. And I thought oh my goodness, I heard this on a podcast, and I rewound it several times and I realized that’s it. I want to be the grizzly bear in the waterfall.
So what that meant was being so compelling and having such a platform that people come to you and they want to invest with you. And so that’s what we’ve done. That’s why I’ve decided to write a book. That’s why we redid the website. That’s why I started blogging on BiggerPockets. That’s why I set up a podcast. We have a podcast called How to Lose Money. Trust me, it’s a wealth-building podcast but we set up all that and what I found was that a year later, we had literally a couple hundred people asking if they could invest with us.
And so that was the key to us finding the investors and we actually sold out on that investment in about ten days. We had quite a few people including a good friend of mine who had $200,000 to invest who didn’t even get in on time. So that was very fortunate and that’s how we raised the money.
Brandon: That’s a cool story. I like that a lot. You know, if people want to raise money, let’s just even go a step back from raising money. If you want to work with people, you want to bring in a partner. You want somebody to lend you money. You’re not going to do it sitting on your couch watching Dancing with the Stars every night. You’ve got to go out there. You’ve got to meet people. You’ve got to connect. You did blogging. You did podcasting.
A lot of people wonder why they should engage on the BiggerPockets forums. That’s a really good reason why because where else are you going to go that there’s thousands or hundreds of thousands of real estate investors just gathering, talking, and hanging out. It’s not because we just want to go to the forums because we like talking about real estate. We do. But there’s another agenda behind everything that people do as well and it’s not a bad thing.
It’s a good thing. So I love that your story did that. You just went out there and you provide good value, good content, and now you’re all over the site. I see your name all the time because you understand that there’s value in giving back to people and providing value. So nice work.
Paul: Thank you. I really appreciate that and I will put a plug in for BiggerPockets. I know a guy who actually doesn’t write for BiggerPockets but he goes in daily, goes in every forum imaginable, answers questions, engages people, and just long, meaty answers. Throws his phone number in. And he’s engaged with hundreds and hundreds of people. And he’s actually raising capital on his own. He doesn’t even have his own deals. He’s raising capital for other people’s deals. He’s done a phenomenal job and it’s all been through BiggerPockets forums.
Brandon: Yeah. That’s super cool. Yeah there’s a lot of money that is spread around like naturally in BiggerPockets. People make the mistake, right—they go to forums or they go to the Marketplace and I’m looking for money. Who’s got money? Give it to me, right? And then of course, everyone laughs at them and somebody will write something rude and the person will get mad, leave the site, and never come back. But it’s a giant room where you go and talk with other investors and you build your reputation, you build your conversation.
So I guess everyone listening to this, get involved. Start talking to people. It doesn’t cost anything. It doesn’t take a Pro Membership to even post in the forums. It’s totally free. Go post in the forums. Ask questions. Even if it’s as simple as welcoming new members. We have a new member forum. There’s hundreds of people in there every week that are joining the site and saying well—hundreds a day that are joining the site but that are saying, hey I’m brand new here. Hey, welcome to the site. Glad to have you here. Let me know if I can help you. Like little things like that make such a difference.
Brandon: Yeah, super cool. All right, where do you see your future headed after this in terms of real estate? You wanted to keep syndicating multi-family. How big do you want to get? Where do you see yourself?
Paul: So we want to syndicate multi-family and that’s our desire and like you said, you make your own deals but we might—all of us are in our mid-50s and all the partners with Wellings Capital, my company, have decided that we’re not going to do deals that don’t make sense. Duh.
But we have realized that a lot of syndicators or at least some syndicators out there either for whatever reason are overpaying for properties. And I think one reason, I think, is there is international money coming into the space and I heard this quote from a guy who’s raised literally over a hundred million dollars internationally.
He said my international investors, if they can get from their currency which in this case was China, if they can get from their currency into the U.S. dollar and break even in the investment, they’ll be okay because they’ve protected themselves against the drop in the Chinese currency. Guys, think about that.
Brandon: Yeah we’re competing against them.
Paul: We’re competing against them. And so I mean, I’m not saying that’s on every deal but there are people out there bringing money like that and there’s no way to compete. And so some of those folks, there’s other people with 1031 exchange, tax-deferred money, there’s people with IRA money and frankly there’s probably a few syndicators out there that are not on BiggerPockets, of course, but a few who might do a deal just to make the feast.
And it may or may not be a great deal or maybe a deal where they’re counting on appreciation and we all saw how bad that ended for people back in let’s say Florida or California in the last recession. And so it’s critical to have sound economics. It’s critical to rely on cash flow, not just appreciation.
And so we’re having trouble finding deals right now so I think, my book’s called The Perfect Investment and I think when the perfect investment is not perfect is when you can’t find deals in good markets. That makes sense. It’s kind of where I and a whole lot of other syndicators that I know in multi-families are, that’s the problem we’re facing right now.
Brandon: Yeah, so do you think just hold off or are you still running numbers on deals? Are you still looking, trying to find something?
Paul: So in January this year, there was the NMAC Conference in Orlando, Florida and that was around January 20th. We’ve run numbers on or at least looked at the demographics, crime scores, etc. on a 180 deals since then and that’s been about five months. We’ve only found a handful that it made sense to make offers on and we’ve been beat out on those by people who, in my opinion, or at least with my numbers, it looks like they’re overpaying.
So yeah, we’re going to continue and we are actually, I mean I’m not looking forward to anybody ever hurting or anybody ever losing their property but it’s going to come a day when, it probably won’t be as severe as last time because the loan to value ratios have not been as high as they were pre-2006. But there’s going to come a day when some of these folks get in trouble and they have to refinance or the interest rates or higher or the rents haven’t gone up.
So there will be a time when multi-family investors will have an opportunity to scoop up some of these deals. And so we think that time is coming. We don’t know when. Until then, I’ve actually been pondering for about five months, the possibility, and we actually are in fact dipping our toe in the water into investing with an operator in a different asset class and we’re doing that now.
Brandon: All right, cool. All right, well we look forward to kind of seeing where you’re headed. But we’re not quite done with the interview. Before we let you go, we’re going to move over to the world famous Fire Round.
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All right, let’s get to the Fire Round. These questions come direct out of the BiggerPockets forums and we’re going to fire them at you right now. So Paul, number one. What is a good way to find the owner of a multi-family property when it’s owned by a corporation. Basically he’s saying you can’t just look up their information on the county assessors because it’s owned by some nameless corporation. How do you get in touch with that multi-family owner if you want to reach out?
Paul: So we haven’t done this yet but my son is actually buying—my son is 24. I’m really proud of him. He actually introduced me to BiggerPockets years ago and he’s actually buying and flipping farmland and large mountain properties, 100-200 acre timber properties. And from what I understand, you can use Skip Tracing to actually track down the actual owners. Sometimes get their cell number, sometimes get their e-mail address as well.
Brandon: There you go. All right.
David: All right, where do you get your numbers when it comes to multi-family units? I’m having a tough go when it comes to finding information on rents and the other numbers as it applies to multi-family.
Paul: So if they’re talking about a specific property, the current owner and usually through the broker, it should be able to provide those numbers. You should be able to get a T-12, create your own T-3s. You should be able to get a rent roll, all of that should be forthcoming. And if they say to you, just go ahead and write a letter of intent.
Just go ahead and write an LLI. We’ll give you those numbers later. Well, you can’t do that but what good, what worth, what value is that LLI to anybody if you have no numbers to base it on? I will say we have fired off a few of those just to try to get interest over the years and it just hasn’t gone anywhere.
Brandon: Sure. I agree. All right, number three. Question, how do you find a good broker to work with when looking for large multi-family properties?
Paul: So this is actually one of the barriers to entry for getting into multi-family and that is, do you remember—you guys are probably too young to remember this but there was a 1980s TV commercial where this scrawny guy comes in and he’s applying for a job and the guy stamps, REJECTED on his resume and he says, you need experience. Experience is required. And the guy turns around to the camera and says, where do I get the experience?
Well that’s actually very relevant to large scale multi-family. Brokers, owners, sellers, they’re going to be looking for experience. So it’s a real quandary to know how to get that experience so I’m actually working on a book right now, because I get this question every week—how do I get enough experience to get in front of a broker and get their attention? Which I think is the more relevant question here.
If you do not have the experience, and you do get the attention of a broker, a really good broker with a really good property for sale and they’re telling you hey, I’m going to give you a heads up on this before it hits the market. Chances are they’re looking for a sucker. They’re looking for someone who is willing to overpay. Be careful.
Brandon: Yeah, really good advice.
David: That’s really good. All right, what are the top deal killers in a multi-family purpose? What should I look for during due diligence?
Paul: Well there’s a lot of things. We had a property under contract in Chattanooga, Tennessee and we actually found mold and we couldn’t find this is in the pre-walkthrough but during due diligence, we found mold in about, I think it was 6 of the 16 buildings in the basement. And we talked to tenants who said hey, this is not only in the basement, I think it’s in my bathroom. I think it’s coming up through the walls, etc.
So that was one for us. Other deal killers, asbestos. You might say hey, I’m going to take out this wall to open it up here. You need to know or at least try to find out all the information you can on whether you can really open up that wall. Whether you can really make those changes you want to.
Other deal killers are you find out that the income is one-time income and this is part of that thing about not falling in love. If you fall in love with a deal, you’re going to look for all the reasons to do it before due diligence. But if you’re staying objective or at least you’re aware of the possibility that you could fall in love, you’re going to try to stay objective and you’re going to look for reasons to say no rather than to say yes.
So then you’ll find things that jump out at you like income that will be one-time income that you counted as an ongoing income or things like that. So those are some of the deal killers that I think are really important and learning not to fall in love is the key to due diligence.
Brandon: Yeah, that’s such good advice. I mean like, I know I’m tempted all the time to fall in love with deals. And I just remember, two things you said there. First of all, you look for reasons—it’s a good idea to look for reasons to back out. Let me find a few reasons why I shouldn’t do this deal because our minds tell us when we’re excited and we’re emotionally involved, especially when we’ve been looking for a while.
Our minds are like, you know what? It’s okay. That’s not a big deal but like, we should be looking at those things and asking other people to look at them as well, either with a partner or somebody who has zero interest in the deal at all. Ask them to look at your numbers or walk over with them.
They’re going to find those things that your emotion tells them. And also just do the math. Like if you do the math correctly, that can help you overcome emotions as well. At the end of the day, the numbers don’t lie if you do them right. So yeah. Really good stuff, Paul.
All right, well let’s shift gears one last time and head over to the world famous Famous Four. These are the same four questions we ask every guest every week, so I know you’ve heard them before, Paul, but what is your current favorite real estate related book other than your own?
Paul: My current favorite, I have two, it’s a little awkward title so I have to read it. It’s The Complete Guide to Buying and Selling Apartment Buildings by Steve Burgess.
Brandon: Fantastic book.
Paul: It’s not a really well-known book, honestly, not as well-known as some but it’s a great book because it just covers everything from small to large apartments and they cover all the different strategies, how to get in, how to exit, how to get debt and just really love this book. The only thing I would critique about it is perhaps the timeframes between flipping, getting in and getting out of large apartments are a little bit compressed. But other than that, it’s a great book.
Brandon: All right, I agree. I love that book. Number two.
David: How about your favorite business book?
Paul: My favorite business book is not necessarily the most exciting ever but it’s the one that’s had the most impact on my life and it’s called The One Thing. We’ve heard about it before, by Gary Keller and Jay Pappasan. I struggled all my life, guys. I’ve been a serial entrepreneur. I’ve probably done a dozen things I didn’t mention here today. And I have struggled with focus.
My business partner that did the hotel and the multi-family in North Dakota with me, recently ran for governor of Colorado. And he was in a position where he was rubbing shoulders with all these billionaires and uber successful people.
He called me a few months ago and he said, you know, I learned one thing. Those guys didn’t have any better education or any higher IQ than most of us but they did one thing really well. They decided in their early 20s typically what they wanted to do. They put their focus on that one thing and they said no to a thousand or perhaps ten thousand distractions along the way.
And so The One Thing even though I read it a couple of years ago and didn’t implement it, this last year, I’ve spent my life and my passion trying to implement the principles from the book, also joined their mentoring group and just been fantastic.
Brandon: That’s cool. Yeah, very, very good book. One of my favorites.
David: A lot of people picked that book. That’s a good choice. How about your hobbies? Paul, what do you like to do for fun?
Paul: So I am very passionate about changing the world. I’ve got this desire to funnel through relationships, through influence, through income—I’ve got a desire to funnel a billion dollars into changing the world and the rest of my life and I’m especially passionate about forwarding human trafficking and rescuing its victims. So as far as hobbies for me, I really am oriented towards serving non-profits that I care about, towards serving my local church, and to also getting really involved with my family.
I take fairly elaborate trips with my kids individually so for example, my son and I are going pretty shortly here to northwest Ontario where we’re going to have no cell phone coverage and we’re going to go fishing on a remote flying lake in northwest Ontario. We’ve done that three times before and we’re really looking forward to that. I love spending time with my wife and my kids and doing those other things that I’m passionate about.
Brandon: That’s super cool. All right, last question for me. Paul, what do you think sets apart successful real estate investors from those who give up, fail, or never get started?
Paul: I think the difference is something we’ve already talked about and that is inability to tell the difference between gambling and investing. And I think specifically with that thought in swinging for the fences. Now think about it. Here’s two guys. Let’s say we’ve got Gary and his son and Gary and his son have quietly built up a portfolio of quads and duplexes and single-family homes all around town over the last couple of decades. They’ve never been in the headlines. They’re not speaking at national conventions and conferences for the amazing thing they did.
And then you’ve got this other guy. He bought a single-family home and while he was renovating it, he realized it could be commercially zoned and he sold it for four to five times what he paid and now he’s the talk of the blogs, talk of the bars, etc. Which one do you think will be the one that’s richest in the end?
It’s likely the first guy and here’s why. Wealth buildups slowly over time is the key to success in a lot of ways. Because that second guy likely will think he’s got it now and he’ll swing for the fences again and I’ve got this saying that if you keep playing double or nothing with your investment capital, what are you going to do when you land on nothing? You’ll have no more to double.
So it’s really important to not swing for the fences. For me, by the way, I believe there’s all kinds of various times in your life where you should swing for the fences with relationships, with your time, with fighting human trafficking in my case, with my family. But I don’t want to swing for the fences with all my investment dollars. I’m looking to hit singles and doubles from here on out in the next 40-50 years.
Brandon: Super cool. That’s awesome.
David: All right, tell us Paul, where can people find out more about you?
Paul: Well, I’ve got a podcast called How to Lose Money and I’d love for people to tune into that. My company is called WellingsCapital.com and you can go look us up at that website address and that’s the best way to get a hold of us. WellingsCapital.com. How to Lose Money. I’ve got a book, it’s on Amazon. It’s called The Perfect Investment and it’s about multi-family investing.
Brandon: Thank you, Paul. This was fantastic and of course people can check out the Show Notes at BiggerPockets.com. This was fantastic and we’ll see you around.
Paul: All right, thanks guys, it’s been great.
David: Thanks, Paul.
Brandon: And that was our interview with Mr. Paul Moore. That was cool. He’s got quite the story, huh?
David: You know you don’t get to talk to many people that have kind of gone through an evolution of different various aspects of real estate investing. He’s really grown from where he started to where he went. Usually you hear somebody talk about their little niche that they know and they haven’t moved out of it yet but he’s somebody that can kind of look back over the last maybe 30 to 40 years and say, these are all the things I did and this is what I learned at every step.
Brandon: That is true and if you saw my eyes just suddenly go to the right immediately, it’s because I looked in my big table outside my window, it has a huge umbrella over it, just flipped over and flew. So I’m going to go chase a large seven-foot umbrella here in a moment. But anyways, back to the show, yeah. I love also his intentiveness, I don’t know what the word I’m looking for is there, about not falling in love with the deal.
That’s such a powerful piece of advice that people need to remember. The deal has to make sense and math can make it do that. So make sure you guys run your numbers and again, we do a live webinar every week. In fact, David Greene here is going to start helping out. There it goes. David Greene is going to start helping out with the webinar as well more often.
He’s done a few with me because we just believe so strongly that if you can just figure out how to run the numbers on a flip or rental or BRRRR whatever, if you can run the math and you’re really good at that, you can do a lot of cool stuff in real estate. This is very much a numbers game. So every single week we help people do that. We help people learn how to run the numbers.
So sign up for next week’s class. It’s at BiggerPockets.com/webinar. Again, BiggerPockets.com/webinar. They are live events and thousands of people show up every week. So be part of the club. With that, that’s all I got. Anything you want to add, DG?
David: Well I hope you catch your umbrella before we have the next webinar so you’re actually there.
Brandon: I will catch it. As long as it doesn’t flow down the hill. That would actually be really bad. I live on the side of a hill. If it just went up and over that fence, it’d be gone.
David: That’s a steep hill, I’ve seen that hill
Brandon: That’s a steep hill, yeah. I own five acres of land out here on top of a hill and four and a half of it is like useless because it’s like almost a death-defying drop. But you know, whatever. It’s fun to explore. I did drop my drone. I have a little drone and I flew it over there once and I bought a machete just so I could get back there and go look for it. I was scaling the hill with my machete. I felt like Indiana Jones.
David: That would have been a sight to see.
Brandon: Yeah, it was pretty cool. It was pretty awesome.
David: All right. Well thank you, Brandon. Let’s get out of here. This is David Greene for Brandon “Squirrel” Turner, signing off.
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