BiggerPockets Podcast 126 with Brian Murray Transcript

Link to show: BP Podcast 126: From 0 to 400+ Units Through Value-Add Investing with Brian Murray

Josh: This is the BiggerPockets podcast, show 126.

You’re listening to BiggerPockets radio, simplifying real estate for investors – large and small. If you’re here looking to learn about real estate investing without all the hype – you’re in a right place.

Stay tuned and be sure to join the millions of others who have benefited from BiggerPockets.com/. Your home for real estate investing, online.

Josh: What’s going on everybody? This is Josh Dorkin host of the BiggerPockets podcast here with my co-host, he’s not really here, he’s not really where he’s supposed to be, nobody really knows where he is – its Brandon Turner.

Brandon: What’s up everyone how it’s going?

Josh: Where are you today man? You were supposed to be somewhere but you’re not there. Yesterday you were in New York the day before Washington and Seattle – what’s going on? What’s this thing you’re doing?

Brandon: We started in Seattle, drove up to Minnesota up to Michigan down to Detroit down to Lime Ohio. I actually saw some $500 houses it was pretty awesome. I didn’t see dollar ones but whatever. I deliberately was I’m going to try and find the worst neighborhoods in all Detroit. My wife is like “Where are we going?” I'm just like “Oh I'm going to find us a Starbucks.” I'm deliberately trying to find terrible neighborhoods. Then I went over to New York City, did a meetup with bunch of BiggerPockets people there so shootout to everyone who showed up for that. Then down the east coast and now I'm in New Orleans right now headed up back to your way, to Denver, I’ll be there in couple of days.

Josh: Awesome. Sounds like it’s been phenomenal trip and you’ve got to meet with BiggerPockets people throughout the country which is pretty amazing.

Brandon: That’s been awesome. Taking the online world to the offline world and meeting people from BiggerPockets and going to coffee and going for drinks, it’s really enjoyable meeting people from sites. People who aren’t actually doing that, if you are only online there is 300,000 members that we just crossed. There are people in your area, in your backyard, well hopefully not in your backyard that would be creepy, go meet with those people. It’s amazing the learning and growing you can have when you get out there in the real world and build some relationships.

Josh: Great advice. We are on for yet another episode of BiggerPockets podcast. We’ve got a really cool show this week. I'm exceptionally excited about this one. It’s not often you get a show somebody is just on and the tips are just nonstop and the genuine desire to just share everything is there. Obviously on the BiggerPockets podcast we get that with most of our guest but this one is really awesome. I really enjoyed this one. Today we’ve got Brian Murray. Brain is commercial real estate investor and he’s also sorts of great stuff that we are going to get into. Before we do let’s get to today’s Quick Tip.

Brandon: Todays Quick Tip we talked about it in the past but I want to rehash it here. If you guys are not listening to AskBP podcast you should definitely check that out. The one I put out today is different than any other one. If you listen if your first one it’s totally different but I recorded video in the car while driving. Something that I learned in the car. Like a concept that came to me and totally changed the way I think about real estate and investing. It’s called one thing you need to do to achieve your wilds goals and dreams. It’s really cool. I wish someone explained it to me ten years ago it would have totally changed how I do everything. Anyway its 20 minute video/mp3 if you are listening in the car or if you want to watch on YouTube. You check that specific episode at BiggerPockets.com/AskBP039 or just go to BiggerPockets.com/AskBP and its episode 39. Check it out, I think you’ll like that one a lot. It’s on YouTube, it’s on iTunes.

Josh: That’s great. I’ve got a quick tip which is we’ve got this great new feature on BiggerPockets – live chat. You can essentially go click on profile of any of your colleagues and start chatting with them live if they are on the site. Have a conversation back and forth in real estate with the chat. You’ll see there is a little thing in the bottom right of your BiggerPockets window once you start connecting and this whole chat window pops up. It’s pretty awesome. If you see someone on the forums that your colleagues with you’ll see little green dot which means they are online or red dot which means they’re offline and you can literally just start live chatting with the BiggerPockets are connected to BiggerPockets in real time so definitely check that out. Its great feature. People are really starting to love it and use it a lot. With that why don’t we get to today’s sponsor?

This episode is brought to you by RealtyShares.com. RealtyShares is real estate crowdfunding platform that allows a credited and investors to invest in pre-vetted real estate deals online. Investors can browse and invest in both residential and commercial properties that yield returns of 8 to 16% annually. As RealtyShares member you can also pass invest in professionally managed real estate investments in variety of asset types and geographies for as little as $5,000. All from convenience of your living room. To learn more and to get started with a free account visit realtyshares.com/BiggerPockets.

Josh: Big thanks again for our sponsors. We really appreciate their help to make this show happen. This is show 126 of the BiggerPockets podcast. You can check how notes at BiggerPockets.com/show126. Let’s bring on Brain. Brian is great guy, really excited to have him so let’s do this.

Brian welcome to the show it’s good to have you here finally.

Brian: Thanks Josh, thanks Brandon. I'm glad to be here.

Josh: Third time is the charm, right?

Brian: Yes. Let’s do this.

Josh: Tell us about yourself. What do you do in real estate?

Brian: My name is Brian Murray I own a company called Washington Street Properties that I started back in 2007 and I primary invest in commercial multifamily. Definitely more focused on multi families right now. Mostly value add investment.

Brandon: I want to know more about value add but first how did you get into this? What was your beginning into real estate?

Brian: I bought my first investment property back in 2007 and in terms how I got to that point I always had an interest in real estate and I had some luck with my primary residence. I moved a lot and done some transactions that went pretty well. I always like to fix up my properties and a couple of years prior to my fist commercial investment I had change in careers. I want from step off corporate track and took a little time off and started to teach.

I was teaching as a professor at local college and got excited about what I saw and thought real estate would be a good fit that it might be a change to supplement my income a little bit and I started to look around and I looked at commercial and multifamily and eventually came across a 50,000 square ft. office building which was little more than I intended to buy at that time but the more I looked into it the more I trusted in my gut. It was a property I eventually put under contract and it was a long drawn out process. I put it under contract in September 2006 and I ended up closing in a May or June of the following year.

Josh: What were you teaching?

Brian: I teach business. I was teaching Marketing and Entrepreneurship.

Josh: You basically decided real estate might be the way to go and instead of going out and buying a houses, buying a duplex you decided to buy 50,000 square ft. office which is not a typical path of average BiggerPockets member. Why commercial and why office?

Brian: I think just having dealt with my single family residence and I had done a little bit of leasing when I moved in one point in time and I just said if I'm going to investing into real estate m going to do this I felt that buying that larger property would give me better return. Still today I feel like a lot of basic principles behind it are basically the same. I just started to read a lot of books, I started to talk to a lot of people and I did a lot of learning along the way but I also did a lot of careful research and the more I looked into this property the more excited I got.

It was a property that had been on a market for a few years and price just kept dropping. It was last property and the company that owned it was from outside of area. They originally held entire portfolio in upstate New York which is where I live and this was their last property that they hadn’t been able to sell and it was losing money hand over fist. Sounds like a great property to buy, does it?

Josh: Yes. A few years someone in residential they are going to lose their mind why would a property take a few years to sell? Obviously price has something to do with it but was there something else going on?

Brian: The number one thing it was actually losing money for them. Nobody wanted to touch it. They kept dropping the price and I walked through and I was amazed at things I saw right out of the gate. It was architecturally it was a great property it was well located, it had huge parking lot in downtown area where there was very little parking. There was trash everywhere, there was signs all over the place that it wasn’t taken care of and from talking to local realtors they refused to show space there because they didn’t think they were going to get paid.

When I first started negotiation it was late summer id go there and days it was really got outside and all the windows would be wide open. Air conditioning would be cranking and I looked in the line items in the expenses and I’d see utilities right up there, I’d see labor right up top and I got to meet the maintenance guy who was hard to find but I tracked him down and he was on his woodshop on the property refinishing furniture. With his playboy pinups on the wall and I had asked him about all that trash outside and he didn’t want to be bothered.

Josh: Keeping it professional.

Brandon: He’s your long term employee.

Brian: He almost made it thought the first day.

Josh: All this bad stuff, you talked about being excited…

Brian: I did. Every time I saw something that was mismanaged I got more and more exited. It’s the same today. In the winter time it was exact same thing. I had to figure out when the winter time came he would crank up this massive boiler and turn it on high. The way the temperate got controlled was each tenant was supposed to open their window and adjust the temperature. In spring time you turn the boiler off, you turn the AC on and then everybody does the same thing. I had a lot of people try to talk me out of doing it and I'm not going to say there wasn’t some concern and some fear because I’m really trying to figure everything out but I went through that expense line and I got pretty excited that I can get that property cash flow positive on first day.

On that first day I had that maintenance guy walk me over the thermostat and I said “I need you to show me how to program this” he told me it was locked and he didn’t know how to unlock it and that was pretty much the end of him. Called the manufacturer of the thermostat, they told me how to unlock it, I programed it so that it would be actually run off the thermostat and just turn down at weekends and evenings and I cut utility bill in half in first year. Dropped expenses by $40,000 a year by letting him go.

Josh: Letting him go and the thermostat. I'm guessing the utilities alone probably brought you close to break even.

Brian: Actually letting him go on day one got be able to cover the bills and I knew that was going to happen. Everything after that was on the plus side. As soon actually it was reported in the papers that I had purchased the property calls were coming in because people were interested in space there. The prior owner didn’t take care of it and once people knew it was under local ownership they had an interest. Property was about half full when I bought it and within a year I had it full.

Brandon: That’s awesome. What size town is this in? Is it a big area or small one?

Brian: It’s pretty small. Water Town we actually year or two ago became metropolitan statistical area you have to hit 50,000. I think the city itself is probably over 30 but with surrounding areas it’s about 50,000 population metropolitan area. There is a huge advantage of doing business here. I don’t have to face the competition that I would face if I moved into larger metropolitan area. I would get properties with superior returns that I might not be able to find at more competitive place.

Brandon: The town I live in has 3500 people and my county has 50 or 60,000 but little town I live in if a person buys commercial building downtown some of them have been empty for ten years. For rent sign in the window and that is my fright why I don’t want to buy commercial in my area is I worry it’s going to sit there forever. How did you overcome that fear of not being able to get it rented?

Brian: I think one of the biggest ways was looking carefully at competition. The way I financed this I assumed sellers mortgage and in order to do that I had to write business plan for the bank and convince them that I could turn this property around. As part of that process I went out and looked all the competition, knew what they were charging and knew how this property compared and I felt pretty confided that I could compete and fill up the tenants.

Brandon: That’s fascinating. First off all could you explain what that means to assume the loans and then did you have to put down payment as well?

Brian: Initially I thought this property would be beyond my reach but that didn’t deter me from digging into it and looking around. In the course of negotiations I think they were asking 1.3 to 1.4 million dollars at the time and I had negotiated down to around maybe 1.1 somewhere in that range. In the course of that I learned a little bit the sheer situation and sellers financing and that’s actually a pip I would share with your listeners. The more you can learn about financing of the seller the more that opens up opportunities for you to explore ways to finance yourself or understand the seller’s motivations.

What I found out was that the seller had an ugly mortgage that seller would incur about 150,000 penalty for paying off early. They had priced that in because they knew they needed that. When it started digging into it I asked them – well is there any way you could assume this mortgage? They were like yeah but you have to go through this lengthy rigorous process, you have to pay for these reports to be done and appraisal and environmental and all these steps and you would not know until the end if the bank is going to approve you or not.

I decided to give it a try and I said if I can get the bank to let me take over your mortgage and they approve that then I want price knocked down by what I saved you. They agreed to that. I looked around and I said “It’s pretty clear this place hasn’t been taken care of. Under the terms of their mortgage they had reserve in place that bank had required that they build up over time which is designed the bank to insure that you are setting money aside to make repairs” I said I want a balance of your reserve account. They agreed to that as well. By the time I assumed the mortgage and got a credit for their reserve account I did have to come up with some money out of pocket but not a lot. I bought the property but the cash, in order in to purchase this million dollar property I put down less than $100,000.

Josh: You talked about all the paperwork and the things you had to do – what did that cost?

Brian: We are looking at probably $20000.

Josh: 20,000 into that and the rest was down payment. You’ve got this seller, they have this need, they’ve got this 250 reserves that they are supposed to maintain, they couldn’t maintain it and you talked them down and said basically if they were going to sell it they have that 250 to pay is that wat it was?

Brian: Exactly.

Josh: Did they give you that 250 credit or did you less for 250. If you sell it right now it’s going to cost you 250 I want 200 as a credit.

Brian: It was a little bit less. I made sure we both benefited and that way they came out a little bit ahead and I came out a lot ahead.

Josh: Sounds like a great negotiation. You’ve got this property, you come in day one, you fire the guy, you figure out that heat and everywhere else and how did you get building back into shape? Did you hire new maintenance guy to take over or did you do the work yourself?

Brian: Did it myself. One of the benefits of having teaching schedule its little forgiving. I purchased property right around when school let out so for that initial period of time I could work full time on real estate and I did once room at a time. I go out and find that tenant and each time I identify a tenant it was a separate project. I would fix the space up to meet their requirements and I just little at the time turned everything around.

It was noticeable because it was smaller community just by going up front cleaning up the trash, doing the landscaping I was in there first thing in the morning before anybody else was there. I would walk the enter property, pick up every little piece of trash right down to cigarettes buts and I made sure that people could see that it was under new ownership and that I was going to be taken care of professionally and almost all of my tenants came from word of mouth.

Josh: Nice. What kind of returns were you looking for and are you getting them? I'm also going to ask for the numbers if you are willing to share them on this property.

Brian: That first property was greater risk than I'm normally willing to take at this point. I really want strong cash flow and even with this property not being cash flow positive before I agreed to move forward I knew I had to identify a way to make sure it was cash flow positive right out of the gate. I like to have capitalization rates, I know some of your prior guests has talked about that, that’s basically your return not including your mortgage payment. Once you subtract your expenses out of your rental income. I like to have capitalization rate ideal of 10% or higher although I did as lows a 9 when I identified opportunities to dramatically improve the property right out after closing.

This property it did go up in value right away. I own it today. I now have my companies headquarter office located in that property and so I haven’t sold it. I have refinanced it. I'm a buy and hold investor and that’s part of how I finance my other deals is I refinance properties that I improve values on.

Josh: What are gross rents on that property?

Brian: Gross rents are around $700,000 which is over twice what they were when I bought it.

Josh: With 100% occupancy?

Brian: It’s not a 100% right now but it’s in the 90s.

Josh: Do the math. What’s this property worth today then?

Brian: Not sure. Substantially more than I paid for ill say.

Josh: If you are caped it worth what?

Brian: It’s probably around 3 million dollars.

Brandon: That great. That’s power of that value add investing stuff. You mentioned that earlier and I want to come back to that. Idea of when you can improve income on the property or decrease the expenses or both. You add value to those commercial properties.

Brian: Value add has two sides. The great thing about commercial properties and multifamily properties is that you have very clear way to calculate what it’s worth. You don’t have to necessarily rely on comps or things like that. When you can boost the income of the property then you improve the value of that property. You have two sides to that equation. You have income and you have expenses.

What you want to do as much as possible identify ways to boost that income or lower those expenses before you pull the trigger on the property. That said you shouldn’t count on that, you shouldn’t pay for that. If seller says, this is really common one, you get it before market rents you can just bump rents up you should pay more for this property. My answer is go ahead and bump them up and come back and talk to me when you get it done. Buyer shouldn’t pay for what’s not there.

That said you value property based on what’s there but if you are value add investor you identify ways that after the transaction you can go in and make those changes. Sometimes they require a lot of hard work and they are often times reason someone hasn’t done it. The best investment opportunities that I’ve done are usually from out of town investors. You can skip properties, you have absentee landlords and so when I look at property I look at things like on the income side maybe the rents aren’t where they should be for that market place, maybe it’s not being taken care of really well, maybe it doesn’t show very well. Maybe it could command rents if somebody just took care of it. On the expense sides a lot of times you can find you see waste that is not taken cared of or you know that right away you can step in and unlock thermostat and program it so it turns down at night.

Josh: That was a tough one.

Brian: It is funny because people think just because you are buying large commercial property everything has to be all complicated. It really doesn’t. When I walked into the utility room in that property it might as well then be inside of the spaceship for what I was concerned. I was looking around I didn’t know what any of it was. It was really impressive looking but I do know once you really call out and really add out the windows shouldn’t be open. That’s why I'm looking for and as a value add investor once when you step in and I try to mitigate my risk by buying properties that are cash flowing but then have that upside and I have been as my portfolio has grown I stepped out and been taking bigger and bigger risks in terms of tackling properties need a lot of work.

Josh: We’ll chat about that in a minute. I just want to go back on the value stuff we talked about. You can actually calculate value based on gross rents you have to calculate it based on income but we didn’t go there. It is basically multiplying your annual times your cap. Assuming you are running about 50% expense ratio on this property then yeah.

Brian: Something like that.

Josh: Which is interesting because we talked about 50% rule on BiggerPockets and there is people who freak out and say “No, 50% does not make sense” I think it is pretty safe bet and I think it does apply even across commercial where I think you will see 50 to 60%, plus even, on lots of properties. Would you say that the bulk of the commercial properties that you are working on are in that range?

Brian: I think 50% is a good number. I think there is a lot of variables. In the commercial side a lot of times you see things structured differently so for example if you have one investor call triple net property where all of the expense gets passed down to the tenant then your expanse as a landlord can be substantially lower. It really depends on the property and I think 50% is a good number. When it gets dropped below that I tend to find that maybe the owner isn’t spending money on things they should be. If it get stood much higher than that they might be places to save.

In my portfolio we do run higher than that. We do it intentionally. We have very firm commitment. I am religious about investing almost all of my income back into my properties and my portfolio. That’s kind of ironic since I first got into this to maybe get some extra cash flow but when I actually took a leap and took my savings and put it into this property I just could bring myself to bring money out because I knew that if this is going to be successful every dollar I put back in would improve the likelihood in the performance and it’s something I follow to this day.

Brandon: I love that.

Brian: I invest vast majority back in. If you actually sit down and run numbers and calculate what your return could be if you are to plow money back into your portfolio you’ll realize how costly is to pull money out. I understand people have a lot of different motivation for investing in real estate but people should never forget because of the leverage you have in real estate and compound interest that you have you can active in real estate by investing back in long term when you take a dollar out now you may be taking $50 away from yourself 5 years down the road.

Josh: Where does that money go? At some point this building has been improved, tenants have great place, offices that they want, how do you keep plowing money into the building? Where does that actually go?

Brian: The money goes to couple of deferent places one of the large ones is it grows portfolio. At some point you do reach point where you get diminishing returns by plowing that money back into the same property but if we go back to that first property that I bought at different points I came back in there I converted to old locker rooms into offices. I converted cold storage into Class A office space. I found ways to improve property and get decent returns by putting money back in. At the same time that’s how I pay for my next deal. That money I can step in, get a property appeased again and refinance it and pull some cash out and make that next investment.

Brandon: When I was 27 I quit my job because it was like I have enough money and I don’t have to work anymore. I wasn’t rich but I had income coming from the properties and I could just maintain it myself. It took me a few weeks or a month where I started doing the numbers and I realized if that is what I did for the rest of my life I would never build any greater wealth or at least very slowly because all of the profit was just going into my pocket and paying my utility bill and mortgage. I wasn’t taking that and plowing it back in.

That’s when I said it is stupid to live off my cash flow all the time especially behind young person sitting there I wasn’t in retirement watching soaps all day. That’s when I decided I'm not going to live off my cash flow anymore I switched my strategy a little bit so now I'm going to plow everything that I get either into improvement properties, paying off mortgages or buying new properties. One of the three.

Brian: I kept my day job for the first seven years of investing and by that point I had a lot of properties. It consumed a lot of time. I just held off as long as I could because I knew if I wanted to continue growth it’s going to pay me back later and like I said everyone’s investing in real estate for different reasons but if you can delay that gratification and really be disciplined about inversing back in it puts you in tremendous advantage over other investors.

The truth to the mater is the vast majority of people investing in real estate do not invest back in. It gives me a huge competitive advantage against, say, an institutional investor because when they raise money to do deal they are counting on pulling money out and giving back right away. That money if they were to turn around instead and invest back in that can grow and active returns that are far superior then when you are siphoning out cash.

Josh: I love that. What a great philosophy. Let’s shift over to management. Are you managing yourself, do you have in-house management? You were doing your own maintenance back in the day tell us about the management picture.

Brian: It was interesting because one of the criteria to assume that initial mortgage the bank came back and said you don’t have any experience. We require you to outsource management. I had a lot of trouble finding qualified management. In the end I found the firm but I ended up doing almost all of It myself. It was because I care too much. No one looks at your bills and no one negotiates deals the way you would have if it’s your property. As soon as I could I negotiated a deal with management firm. I said “Listen I'm doing it all anyway you are just here for the bank’s purposes and I renegotiated it down and as soon as i could I switched completely to self-management. That’s what we’ve done ever since. I just don’t think that you can expect that anyone to treat your property as you do yourself.

I find it all fascinating because coming out of bossiness world into real estate and I still think it was a benefit in disguise that I didn’t know what the heck I was doing. What I did know is how to run a business and I knew about customers, I knew about customer service, I knew about product that people wanted and its fascinating in real estate people think that you can it’s so broadly accepted to outsource management and it’s really a business. If you are doing what I'm doing and what a lot of people in real estate are doing you are running a business and you don’t see people who own flower shops outsourcing to flower shop management companies. In my eyes some of the people with greatest experience in this area are franchisers. If you look at requirements that franchisers have very few of them will allow absentee ownerships. There is reason for that based on seeing thousands investors they know there is much higher likelihood to failure if the owner is not present.

You are going to see better refunds if you invest yourself in your time in your properties and you take care of them as your own. It’s super hard to find people that have the pride to just do things you would do them yourself. For that reason I'm not big fan of it. I understand why people do it, I respect why people do it but people have to understand when you outsource management you have to accept that you are going to get lower return. You are not going to get the level of management that you yourself would provide and you are also syphoning more cash and send it on the management.

Brandon: I fully agree. What odes management even look now for you? What does that that looks like to manage that property now that it’s full when you’re not fixing toilets anymore?

Brian: I’ve got 11 employees, five of them are on the maintenance side of the house, two of them are on leasing and the rest are different administrative functions. We manage we’ve been more focused in the last couple of years on multifamily, I’d say over the last three years that has been our primary focus, we’ve got about 400 units that we manage and commercial is probably 40 to 45% of our portfolio right now and we manage all of it with a staff of 11.

Brandon: You kind of transition to larger multifamily, big apartment complexes I'm assuming?

Brian: we have a handful of smaller ones but most of them are anywhere from 20 to 70 somewhat odd units. We do have one hot property and that is multi-site property. That’s the only property we have that we outsource management because the knowledge and specialization for hut is something that we decided we just aren’t keeping in-house. We work really closely with them and keep an eye what’s going on there as well.

Brandon: How do you find them, how do you finance them? Are they all your money or are you raising money? How does your business work now?

Brian: In terms of finding them we’ve got great relationships with area brokers. We worked hard to get a good reputation with them, pay them well, value broker services. I found that it’s a strategic advantage to me to not be a broker. I like to go directly to the selling brokers and I found that they are highly motivated to strike a deal with you when they get to keep the entire commission. I think that once you gain some experience you can do that and I find that as soon as I tell a broker that I'm not a broker, that I'm an investor, I'm a buyer they treat me in different way and they are more responsive and they fight harder to make a deal. By allowing them to get that extra money I get better deal.

Brandon: That is typical for anybody whether you are residential or commercial. Sometimes you want to have your own agent but sometimes it can be extremely beneficially to just work with selling agent because of that double commission. They are making twice as much money. Twice as motivated to sell to you.

Brian: Absolutely. I get some of my properties through brokers but actually more of them I get on my own. Of course I monitor all the typical ways people get properties. I watch for new listings, I sight up for alerts etcetera but what I do that might be little bit different I am constantly looking for properties that I would like to own and I don’t care if they are for sale or not.

As soon as I identify property that I want to own I find out who the owner is and I counteract them and I introduce myself and I left them note that I have an interest and if they ever reach point that they are willing to sell I’d like to talk to them. I’ve got a lot of properties that way and its great way to get that perfect property and a lot of people they think the property is not for sale – everything is for sale. Very few people have said they have someone come up and say I like your property if you were ever interested in selling I might be interested. Most people are warm and receptive to that. They take it as a compliment, they take it as I’ve got something you are interested in.

Brandon: Especially in commercial field because its business. I can’t go buy house across the street because there is no number. There might be a number but he is not motivated. Investor’s generally are willing to sell. People that are listening to this if you are trying to buy multifamily of any kind or commercial it’s all for sale. Just look it that way.

Josh: It takes emotion out of the picture.

Brian: Find the property that is in the best location and find the property and look for those signs that it isn’t taken care of or see that upside and reach out to whoever the owner is. Same thing with tenants. You don’t have to wait for someone who’s looking for a house or an office or retail stance. Go to the tenant that you think would be perfect and say “How would you like to come live here?” or “How would you like to move your office here?”

Brandon: I once read a book, guy talked about putting overalls or like a work jumpsuit like he is a maintained guy and he would go to larger complexes and ask tenants things like “I heard there is problem here I'm supposed to be looking at, do you know where is that?” then they just tell them what the issue is. “Oh yeah the thing is broken over there and thing sucks over there” they think he is a maintained guy and find all the problems and then he can go and make an offer biased on “I know this is wrong, this is wrong”

Josh: What a great idea.

Brian: I haven’t broken out the overalls yet but maybe I will.

Josh: That’s a great tip Brandon.

Brian: In terms how I finance them the majority of deals the cornerstone is bank financing but I work really hard to try and make sure I'm putting as little cash as I can. There is lot of different ways you can go about doing that. Working with the bank it could be difficult or it could be great. After I assumed that first mortgage I spent next two years trying to get mortgages, trying to refinance property and I got nothing but no’s. Eventually on my second property I actually got that trough owner financing and still wasn’t able to get bank to work with me. Wasn’t until my third property that’s I actually got a bank to say yes.

Once I got fist bank to say yes it became easier for other ones to say yes. I’ve got great working relationship with a local bank and it’s great to work with them. If you want to maximize your returns you need to look for ways to reduce the amount of cash you are putting in and you need to be careful about that. Remember I am value add investors so I usually identify a handful of ways to improve value right after closing and keep my equity where it needs to be and not over extend myself. That’s another advantage of commercial and multifamily projects is that it’s more accepted, or expected or even customary that they may extend a piece of owner financing.

A lot of times it’s hard to find somebody who will say “Yes, I will finance the whole thing” because not a lot of people own the property outright but when they are trying to sell and you are prepared to secure 75% bank financing and you ask them to carry 5% or 10% or even 15% a lot of times people will be much more receptive to that. Even if I don’t lead with that in negotiation ill often counter with that. Ill lead with more aggressive price and they counter and when I come op I say “I’ll come up but maybe you carry a note for 5% or 10%”

Another thing I do is I try to understand their financing. I’ve done multiple deals where I’ve got a credit back because they are caring a reserve account or differed maintenance and timing can be important on a commercial or multifamily deal In terms of what time of the month you are closing the deal. For example if you can close on the 4th or the 5th of the month standard terms of agreement would give you credit at closing for the balance of that moments rent. If its commercial deal you don’t need to keep deposits separate. Whereas in an apartment or in a residential transaction you actually have to take those security deposits and you can’t touch them. You put them in separate accounts. If you do a commercial deal and sometimes between the pro-rated rent and a security deposits you might get 5% of your deal covered at closing out of pro rented security deposits. That could save you a lot of cash.

Josh: That’s a great tip.

Brandon: I love that. I always hear about that but I never done a deal big enough to think that’s really important to do. I guess maybe on a 24 unit I did a little bit but when you schedule days correctly you can get credited back and some cool stuff there.

Brian: Anything you can carve out if you look at terms of a closing if there are any pieces of it that you can as part of your negotiation place onto the seller. Cash is precious. Just by not pulling that cash out you improve your long term return the same thing goes for closing. It’s not just ongoing managing that property in that cash flow it’s also that the initial transaction, you want to minimize that cash.

Like I said you got to be really careful. Youi don’t want to leverage yourself to point that you dig yourself a hole and so I'm trying to be as careful as I can to make sure that I have something tangible to identify that’s going to improve my equity position after closing.

Josh: What would be your best tip for somebody who’s relatively new to this space and looking to get commercial financing? What steps should they take to make sure that ducks are in row? Obviously you tried and you couldn’t get typical financing you said in early deals, now that you learned the ropes a little bit better what can you do to be more successful or what could have you potentially done?

Brian: That’s a really hard question. I'm a huge reader, I listen to podcast, I listen to BiggerPockets, I love it. I like to learn and I like to devour as much as information as I can and that’s probably my number one tip – Learn because you need to be able to speak the language, do your homework. A lot of it you can do on your own and you can get out there and talk to people and find somebody who’s done what you want to do. I didn’t have that luxury and I really wish I was able to find somebody who had been through that I have been through back then I think it would have helped a lot. I say take advantage. Most people who had some success in real estate are willing to help. Somebody reaches out.

Brandon: Perfect.

Josh: Biggest mistakes. One or two. Where did you really screw up?

Brian: It’s a long list actually. I had two projects in a row last year that the first one just really pushed the boundaries of adding value and the second one I sort of assumed it would play out like the first one and it didn’t. Let’s tell the first story first before we tell the second one. We had property I guess this was 18 months ago, came out of foreclosure auction locally and it was six story apartment building. Right adjutant to couple of my other properties. Right on the edge of the nice part of town but this had been completely let go. Drug activity openly taking place in the hallways, lights all smashed out, scary palace. My staff was actually forbidden from going in there alone. We saw all the potential so we ended up going to the auction, we were the only ones that showed up, and we got the property. We got it at bare minimum I think we literally bid one dollar over the banks’ reserve. I think we were going in one dollar increments until the bank representative said here it is. We have a closing and we ae all nervous and my staff was just pleading lets outsource the management on this one. I'm like “No, no it’s going to be fine. Nothing to worry about. Look at it – its beautiful architecture, it’s going to be good we just have to clean it up.”

We go through closing and on that very first day my property manager gets a call less than an hour after closing. The center of this apartment building had an atrium that was five stories tall up to the windows skylights. Right in the middle of it was exposed elevator to go up through the floors. The call came in, complaint, tenant said there is somebody standing on the fifth floor at the railing and they are urinating down on the top of the elevator. There is open vent in the top of the elevator and there are people in the elevator.

Right then I was like “Oh my god what have I got” what do we exactly do in this situation again? Oh yeah we haven’t encountered that before. That was the first afternoon. The next morning I went in to tour the vacant units and we start to hear just blood curdling screams from the floor above us. Woman screaming “Help! Help!” of the top of her lungs. I race up the stairs and there is apartment with door wide open and there is guy standing there, this wiry skinny guy and he’s got jagged yellow teeth and he’s got no shirt on, baggy pants and he’s got baseball bat in his hands and he’s like “What the blip are you doing in here? Get the heck out of my apartment” Meanwhile the woman who had screamed for help had stopped. My property manager called 911 and I stayed in the doorway until the police showed up.

I got back downstairs, police come out five or ten minutes later and they are like “His obese wife had fallen in the tub and got stuck and could get out so she started to scream for help to get out of the tub.” I was like “That’s not what I expected” same say we had drug raid. That’s kind of place we bought. What we did is we went in, we put lights up everywhere, we put surveillance cameras all over the place, and we put a key filed lock system on the front door with security cameras facing both ways tracking activity. We actually took our management offices and moved to vacant ground floor space and stayed in there while we refurbished each unit one at a time and dealt with tenants. After six months of the stories like the one I just shared and all kinds of crazy stuff that I probably never needed to see or learn about we turned the palace around and it’s beautiful.

Josh: What percentage of tenants did you ended up evicting?

Brian: Probably 75%. There were still a handful of really good tenants who were just so grateful that we came in and did what we did. They were living in fear but it was their home. They lived there for a long time and they stayed. They are paying rent. That’s the other thing that’s fantastic about this project we actually had significant rental income coming in entire time that was helping fund all he improvements we were able to make. The project was just a huge success.

Josh: How much did you need to rely on authorities to help you? I would think project like that surely there will be a lot of situations “he said she said” verifications of who people are and drug dealing. Day one is “Hey officers I'm the new owner we are going to try to clean this up but we are going to need your help.”

Brian: We actually went into the police station and met with some folks there before we closed on the property and said “This is what we are doing, we are going to need your help.” and they were great. Surprisingly even things started off really scary and exciting once the cameras went up and lights went up everywhere and we were there on the site a lot of the worst tenants left on their own. They didn’t like the idea of cameras. All the stuff we were putting in made it not a good place for them to live anymore. A lot of problems just went away on their own. We had some really bad tenants that we had some trouble getting rid of and it wasn’t pleasant experience. We evicted a lot of tenants but the worse of it was probably the shock both on our parts and the tenants for those week or two.

Josh: Good job Joe Pesci.

Brandon: You said a minute ago at the end you define it as a success. You don’t have to share numbers if you don’t want to but was it worth it of all the work and all that hustle? Did you have massive equity in it today or is it achieving a ton of cash flow?

Brian: Both. We’ve got ton of equity, we’ve got fantastic cash flow. It’s not all about the money. It’s rewarding, helps keep you motivated to go in and turn a property like that around. It’s fun. Maybe not so at the time but it gives you good stories to tell but it’s rewarding to go in and do something like that and its part of not just myself but the people on my team who do most of the work. They can take a lot of pride. They hold their heads high and they are glad they are associated with a project like that because everybody knows that place was not a safe place and place where people love to live now.

Josh: You had a bad story. That was a good story. Really quickly let’s get to the bad story.

Brian: I was hoping you would forget about that. Basically similar situation. Smaller project but in this situation we made decision to completely empty the property of the tenants because it was a smaller project and things had been pretty far gone. We got rid of the tenants but when we went in there and started turning the units we started to uncover problems with the infrastructure of the building. Started off with electrical, proceeded to plumbing and once we started to dig behind the walls we fond all kinds of structural issues.

The budget that we had set and the plans we had set for that property were gone quickly. There was another property that we purchased after that foreclose so it had a lot of similarities and I think coming off the project that was so successful right on the heels of that we just assumed we could do the same thing. We took a risk and that project is still ongoing but it’s definitely not going to be anywhere near as successful as the first one and we learned alto of heard lessons on that.

Josh: Is there a way you could have avoided those problems? Is there anything you could have done or not really because it was a foreclosure auction?

Brian: It’s hard to say. You don’t want to second guess yourself but I think my advice would be to go into foreclosure situation where you have limited access to a property and you pretty much have to assume the worst. Fortunately my company is at a point right now where we sustain a mistake like that. If it was my fist property or even my first five or six might have been my last.

Brandon: That’s for sharing that. I think this really helpful for people. Where do you see your business going in the future? What is next for Brian Murray?

Brian: So far we’ve been pretty concentrated geographically in our projects. When I talked time to talk with people who have done what I'm doing and have larger real estate portfolios they look at what my properties look like and say “You take a lot of risks being so concentrated geographically” that’s downside of my hands on management approach. I want to be there and as a result all of our properties up to this point have been where I can drive to and keep an eye on it and be actively involved in. there is a risk with that. If there is a downturn in local economy or something happens id be well served to look to expand geographically and I think in 2016 and moving forward we will be looking into other areas.

It’s time for the Fire Round.

How can I tell there is a demand for rentals in a given area?

Brian: Part of what I recommend is having some close familiar with where you invest. I know not everybody on your show is proponent of that but particularly as new investor I really recommend again you invest in area you know well. You can invest as far away as you want but your risks are going to be higher because there is more unknowns. Familiarity with that local market – there really is no substitute for that. If you live in an area you should know people and enough finger on the pulse of what’s going on and you should have idea what the demand is.

Josh: I agree with you completely.

Brandon: Josh you talked a lot about disaster properties you had that you weren’t local. Do you think it would have been differently if you were local?

Josh: Yeah, 1000%. Investing in your back yard you can go, you can walk the property, you can drive the property, and you can see what going on. If you have to get on the airplane and jump through hoops to go and see your property impedes your ability to quickly scan it – to see what’s going on, to see the neighborhood changes that you would normally see.

Brandon you own the town of Montesano, Washington. You know the neighbor, you see the changes, and you know what going on. Boots on a ground is so important if you can’t be there you need somebody that you can absolutely trust implicitly to be your eyes and ears. You got to be there.

New investors that are listening I know that it’s easy to say there is no properties where I live. I'm going to go invest thousands miles away in these other towns and I'm going to sue management company. That’s fine but you’ve got to still know the town. You’ve got to know if the management company is giving you up and up or if they’re folding. You’ve got to understand what you’re dealing with or you can find yourself in trouble.

I think that’s the best advice anyone can give is – Know the area very well. That’s what we talk about a lot on the show. You don’t have to invest thousands mines away there is not a single city in the United States where you cannot find deals within hour, two hours away. The need to go across the country just isn’t there.

Enough about me and my rant. Let’s get back to Mr. Murray here and ask him this next question.

What are the first questions to ask when speaking to a realtor or seller about buy and hold property?

Brian: I think the first thing you want to do is try to understand them and what are their properties and what are they looking to achieve from this. Why are they selling? I think that’s the first stem and that helps to establish the report and get an understanding of their situation. Then that sets you up to starter probing in areas that are interesting to you. Put yourself second for a few minutes and then you can ask about income, expenses, and things like that.

I think another thing to do is be careful when you value property make sure you using actuals, you don’t want to just take verbal’s. You want to try to avoid pro-formas which are the future projections for earnings and as much as possible get a current information on rental income and get actual expenses for at least prior year if not prior two or three years.

Josh: Good advice.

Brandon: I’ve got a real estate license, 10,000 and a good credit. Now I want to invest. How should I get started?

Brian: I think a lot of that depends on what your goals are. I do think that people are too quick to count out commercial. I think the obvious answer is quick answer is to look at residential rental property but I do think people should be open on commercial. I think it depends on what markets you’re in and then it depends how actively you want to be involved. There’s so many specifics that would go along with that but I think sky’s the limit. Don’t limit yourself. Go out there, do your homework and figure out what’s going to work for you.

Josh: Will the real estate market collapse in 2015? I actually read a very interesting article on Zero Hedge that they were just talking about. I agreed with much of what he was talking about I'm just curious what your take is.

Brian: For people who watch prices nationwide particularly in multifamily sectors prices are really high right now. People are paying quite a premium on income, capitalization rates. People are willing to accept very low capitalization rates right now – historic lows. I'm not sure that’s sustainable. My last project because I couldn’t find a reasonable returns we actually went out and bought a hotel that was in financial distress and converted it to apartments. We could get better price and get returns that we have to achieve.

We’ve been trying to be creative and looking to do things like that. It’s becoming a challenge and some of it will have to do with interest rates, as lending rates go higher and most people it will continue to rise you are going to need higher revenuers to pay your mortgages. When you demand higher returns and your investors demand higher returns than the asking price needs to drop.

My belief is that the current leaves are probably not sustainable but I don’t necessarily believe there is going to be some precipitous crash. I say go forward with caution but I'm still an optimistic investor.

Josh: You bought this motel – did you have giant black light as you went through it?

Brian: It was another turnaround project and its gone pretty well. We converted it to 48 studio apartments and we just finished the renovations earlier this month and we have 20 of them leased up so we are focused on that right now. It was interesting project and I think you’ll see other investors try do things like that if prices don’t start to come down on a multifamily.

Brandon: I love that.

Josh: Great idea.

Famous Four.

What is your favorite real estate related book?

Brian: I had a lot of trouble with this question so I’ll just tell you guys I read a tons and tons of books and I haven’t ever read a book that I don’t disagree with some of the stuff and agree with some of the stuff. Thought to pick one out but I decided to go with The Complete Guide in Buying and Selling Apartment Buildings buy Steve Berges. I personally found this to be very helpful resource as I learned about multifamily which my focus is more so over the last few tears and actually the fundamentals behind multifamily exactly the same as commercial so you can read books on one and learn a lot about the other.

Brandon: I have two copies of that book because I like to so much.

Josh: Why do we need two copies?

Brandon: I don’t know. I found them on my bookshelf.

Brian: Just in case you lose one.

Brandon: I must have bought them at different times and then not read. I bought a new book I was like man this sounds so familiar.

Josh: Favorite business book?

Brian: I'm a huge Rich Dad, Poor Dad fan but I'm not going with that because everybody has that. I'm going to go with Don’t Sweat the Small Stuff and Its all Small Stuff - Richard Carlson.

Josh: I love that book.

Brian: Great book to put by your nightstand and just flip open and read a few pages every day. Help keep you looking at things straight.

Josh: That is a really good book. Brandon you should probably read it.

Brandon: I will.

Josh: What about hobbies? What do you do for fun?

Brian: Loving real estate is fun. I'm a big distance runner.

Josh: How far do you run?

Brian: My wife and I run marathons. We try to do at least one a year and throw a few half marathons in there but its great way to get some exercise, clear your head.

Josh: You do triathlons? It seems just kind of weak to do just a marathon.

Brian: No, I float like a rock. I can’t swim. The running is fun, it’s easier. Can’t fall of anything.

Brandon: What do you believe sets apart successful real estate investors from those who give up, fail or never get started?

Brian: Best answer that I’ve heard I'm going to steal it from somebody named Angela Lee Duckworth. She is a psychology professor at the University of Pennsylvania and she actually dedicates herself to studding success and what makes people successful. She went out and did all these complicated studies that I'm not smart enough to understand and she came back, she looked at corporate sales people, west point cadets, school children and found out that the single most important factor in determining success was grit.

My answer is grit. She defines grit as “Grit is passion and perseverance for very long terms goals. Grit is having stamina, grit is sticking with your future day and day about not just for the week, not just for a month but for years and for working really hard to make that future a reality. Grit is living life like it’s a marathon, not a spring.

Josh: I love that. And I agree a 1000%.

Where can people find out more about you?

Brian: You can reach me on BiggerPockets, I'm also active on LinkedIn and so you can reach me through either of those. My company website is washingtonstreetproperties.com.

Josh: This is our third attempt at doing this show. The first one, we had some bad internet, second we had on another on last we had some issues today but phenomenal show. Absolutely phenomenal and I'm not just saying that because I’ve got you here. Thank you so much for coming on us really do appreciate it.

Brian: Than you guys so much. Like I said I'm a guide fan and it was a honor to be here today.

Josh: Thanks Brain.

Brian: Thanks guys, take care.

Josh: Alright guys that was Brain Murray on the BiggerPockets podcast. Good stuff, seriously loving the stories.

Brandon: I love that apartment complex stuff and do value add investing. That’s where I want to be some day. Someday I see myself doing 100, 200, 300 unit properties in a very similar manner so it’s very fun to learn differently from Brian on that.

Josh: Thanks a lot Brain we definitely appreciate it.

Thanks again fort checking us out. Again this is BiggerPockets podcast show 126 so you can check show notes as BiggerPockets.com/show126. If you are not active in BiggerPockets and you are not engaged in our community you are seriously missing out. There is no cost to this, there is no commitment, you literally join free website with hundreds of thousands of your peers and you talk to them and you learn from them and you’ve got this amazing groups of mentors that no guru or anyone else can possible even come close to having for you.

The BiggerPockets forums is single greatest mentor peer group on the planet. Grit on, ask your questions. We’ve all got question. I’ve got a question and I ask them on the forums, Brandon’s got a question he asks them on the forums. That’s what they’re there for – let your peers help you out.

Join toady BiggerPockets.com. If you are not following us on Facebook, twitter, G+, not so much G+ it’s kind of dying there, linked make sure to follow us – we share updates we share cool stuff, coupons, tips stuff like that so definitely be involved and check us out there. I'm Josh Dorkin, signing off.

You’re listening to BiggerPockets radio, simplifying real estate for investors – large and small. If you’re here looking to learn about real estate investing without all the hype – you’re in a right place.

Be sure to join the millions of others who have benefited from BiggerPockets.com/. Your home for real estate investing, online.