BiggerPockets Podcast 014 with Ben Leybovich Transcript

Ben Leybovich Podcast BiggerPockets

Link to show: BP Podcast 014: Cash Flow, Creative Finance, and Life with Ben Leybovich

Josh: Hey everybody, you’re listening to the BiggerPockets Podcast Show 14.

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Josh: Hey everyone, welcome to the show. This is Josh Dorkin, your host. I’m here as always with that little gnat that won’t leave me alone, Brandon Turner.

Brandon:I’ve never been called a gnat in my life. I’m six foot five.

Josh: I thought you were like six foot 12. Otherwise known as gigantic.

Brandon: Not quite. Though I did play the mayor of the munchkins in my high school senior year musical so.

Josh: At six foot five?

Brandon: At six foot five. I was six five in my senior year and I was the mayor of the munchkins.

Josh: Let’s here that munchkin voice man. Come on.

Brandon: Alright. Do you want to hear my line? This was my line, “As mayor of the munchkin city.” That was my line. “In the county of the land of oz.”

Josh: Give Brandon a round of applause. Alright. Enough of that. Well, it’s good to have you Brandon. Today—today..

Brandon: Thank you.

Josh: …we’ve got a. Keep it real man. Come on. This is a serious podcast.

Brandon: Very serious.

Josh: Yes. Listen. Let’s jump into our quick tick. Our quick tip. I’m losing it here. Let’s jump into our quick tip for the day. Alright guys, when you’re on BiggerPockets or any other social network, but really BiggerPockets, don’t just read. You know you’ve got to interact. When you read a forum thread, a discussion, a blog, an article, add your thoughts or add questions. You know reading blog posts, let the blogger know you agree, disagree, just share something.

BiggerPockets is all about having conversations so jump in and be a part of it and by doing that people are going to get to know you. You’re going to get to grow your network and you will grow your knowledge as well by getting into these conversations so we definitely recommend it. That’s just a quick tip. We’ve got a big ole show today full of amazing, amazing tips and you know let’s get into that.

Let’s bring our guest out. Today we’re talking to a guy, Ben Leybovich. Ben is an investor in Ohio, who’s got a fascinating story that you guys are really, really going to want to listen to. He’s an incredible guy. He’s very active on BiggerPockets, both on the forums and on the BiggerPockets Blog. He is also a writer on his own website, JustAskBenWhy.com. With that, please, please get ready. Get your pens out and get ready to learn a couple things and also to be inspired because Ben’s story is really an inspiring one. Ben, welcome to the show man. How’s it going?

Ben: I am well. Thank you for having me guys. It’s a pleasure to be with you.

Brandon: Thank you Ben, I am really looking forward to today’s show because I really like your writing style. I’m a big fan of yours on the blog so this is going to be a good show.

Josh: He’s a funny guy at that as well. Isn’t he?

Brandon:He is.

Josh: He is. Alright man. Let’s get into Ben a little bit here. Ben, what’s your story man? You’re a real estate investor, you’ve got a background in teaching, Tell us how it all kind of came together. How did you get into real estate?

Ben: Well, this might take a minute so interrupt me if you have to. I was born in Russia when it was still Soviet Union. Now the two of you babies are not old enough to remember those days. Listening. You probably won’t remember.

Josh: We want a Soviet on the show? Do we really this guy? Oh my goodness.

Brandon: I was too young. Josh is old.

Ben: I’m a proud American. Please people. With an accent. Okay, an accent. I share a birthday with the infamous Mikhail Gorbachev, the guy responsible for Perestroika, the famous adversary to America back in those days.

Josh: He’s also the guy who helped destroy the Soviet Union so we’re a big fan of his.

Ben: That was the hint, hint kind of thing. I was a trained violinist. I started playing when I was five. When I was three, my grandfather who is no longer here gave my parents a book about a famous Russian violinist named David Oistrakh and he wrote inside the cover to my grandson Ben, the future violinist.

Josh: Nice.

Ben: My fate was sealed. Then I had no other options as far as I was concerned. Everybody in the family knew I was going to be a violinist. I started studying at the age of five. We arrived to America in 1989. We watched the Parliament being shelled from the tanks in the Red Square on TV, the winter of, when we came in 1989. It was a very surreal kind of experience. I was a 13 year old so I wasn’t really able to put much of that together, at that point. My parents certainly was very surreal to see that. I finished high school and I attended the University of Cincinnati College of Conservatory of Music on a full ride. The undergrad wasn’t anything out of the ordinary. Everything went according to plan. In the first year of my master degree program, things happened though that caused me to re-evaluate everything and eventually led me to real estate.

Josh: Okay, so…

Ben: What…

Josh: Apologies. Apologies.

Ben: Well, I was going to take you right into what happened. Again, if it gets dragged out, just interrupt me and fix me, but it’s important I think for people to hear this because I think a lot of people will be able to relate to a certain extent. It’s got everything to do with why I do what I do and why I am who I am.

Josh: That’s great.

Ben: I was sitting on the sofa one evening watching TV and I felt that a funny sensation in my legs. I can describe it as something between like a tickle and a kind of a buzz feeling. Well it came. It went. A couple days later it came back and then it was accompanied with some vertigo. Then some kind of loss of coordination in my right arm. By then, I was obviously pretty freaked out. I knew something was wrong. I drove to the hospital as quickly as I could. I got there and I can tell you, I remember, I remember laying in the bed, they had done the MRIs a couple days earlier.

When this first happened I saw a doctor, they did the MRIs. I was supposed to see him back in a few days and of course, I didn’t make it. I made it to the hospital instead and he was approaching me and he had those MRI images that I hadn’t had a chance to discuss with my doctor yet. He ordered those and I’ll never forget that look. He kind of looked up from looking at the MRIs. He looked up at me. He said, “I don’t want you to panic, but the images here are consistent with multiple sclerosis. I didn’t know what multiple sclerosis was.

He explained it to me the way I’m going to explain it to you now. If you think of electrical wiring, there’s a couple of wire on the inside then the plastic tubing on the outside. That’s what protects the wire. If it gets damaged or cracked or whatever then the electrical signal, you know we have all kinds of problems with, sparking and everything else. Well, in the human physiology, the nervous system is much the same way. The nerves are covered with a protective sheet. That’s kind of a fatty tissue called myelin and if that gets damaged then the signals coming from the brain through the nerves to your body get interrupted, basically. The sensations that I was feeling which included things like, by the time I got to the hospital, the right side of my face was numb.

Josh: Wow.

Ben: My arm, I lost considerable coordination in my right arm. I, my tongue, and this is a little graphic, but it was twisting and turning inside my mouth uncontrollably. I couldn’t control it.

Josh: Oh wow.

Ben: It was like having a snake in your mouth. You know. It’s a weird feeling. You don’t forget it. You don’t forget any of it. This is why I don’t drink, because I hate to lose control of my body. Just takes me back to that time and those feelings.

Josh: Yeah. Yeah.

Ben: Not having coordination. This why. You know. This is why. You know, he explained to me, we don’t really understand MS all that much. It takes very quick path in some people and others are able to have productive lives for a long time. It’s an auto-immune disease whereby your immune system attacks itself. What happens is, my immune system attacks that myelin that protective sheet, shielding against—you know on my nerves, kind of damages it. Every time it’s damaged, that’s why I was feeling those sensations, the buzzing, the tickling, and the numbing, and all that stuff. That’s exactly why that was going on. Well, when the damage is extensive enough you start losing control of your body.

Josh: Yeah.

Ben: Then it’s just the question of how long does it take? Does it take two years 2 years, does it take 15, does it take 30 years. You know, me being a violinist, I am hyper sensitive to fine motor skill a lot of people out there have MS and they don’t even know it if it is not a very exacerbated version of MS then there’s a lot of people out there who don’t even know it.

Josh: Wow.

Ben: In my case, you know some people are not so good with fine motor with their fingers. You know holding little bitty things with their fingers and things like that. Arguably a lot of them have MS and they just don’t even know it. It just kind of sleeps dormant, but once, let’s remember, I am a violinist. I need my arms to work in order to make money, in order to make a living, in order to be who I was. I’ve been playing the violin since the age of five. It’s who I was, it’s what I was, I didn’t know anything else. I didn’t want to know anything else so that was kind of a bomb shell. I was scared for two reasons, one, obviously my health, and two, I didn’t know what to do next because it eventually sunk in that I can’t be a violinist which is the only thing I’ve ever wanted out of life…

Josh: Yeah. Yeah.

Ben: …is to be a violinist. You know, it took me a couple of months, six months or something to kind of put pieces together and begin to think rationally, but eventually, I did start to think rationally. The problem I was trying to solve in my life, fundamentally, was income because if I can’t play music to make money, then I have to have another way of making money so I started to do research. My research led me to a realization of several very important things that I think everybody needs to know.

According to the IRS, and for our practical purposes, there are three types of income, earned, passive, and portfolio. Earned income is where we trade time and skill for income. It’s W2-1099 income. Okay. Well, that was a none starter because that was the whole thing I was trying to avoid. I wasn’t sure how long my body was going to work for. I was hoping for the best. I was hoping it was going to be 20 years, 30 years, 40 years, but I didn’t know how long so I certainly didn’t want to put my financial well being—well being on the band wagon whereby I have to show up, punch the clock and trade dollars for hours. I just didn’t know how long I had. Okay.

Josh: Yeah.

Ben: Being I had an open slate in front of me and I can make any choice I wanted to, I certainly didn’t want to make that choice. Okay, well, that left passive and portfolio, which belonged to the world of investing so I researched those. Portfolio income is basically a paper asset income and the problem with it I discovered, two problems really. One, there are very precious few opportunities to make income. Portfolio investing is basically equity investing. Okay, unless you trade, which is a whole other conversation.

Josh: Yeah.

Brandon: Yeah.

Ben: It’s basically, equity investing. I didn’t need equity. I didn’t care about equity. I still don’t care very much about equity. I cared about income and so that was a problem. The other problem was is that, leverage, there’s no leverage in paper assets. In order to have $50,000 a year, of 5% dividend, you need a million dollar investment base and you can’t leverage it. You have to actually pay a million dollars for it. I didn’t have it, obviously. You know, trying to graduate from college being a musician who can’t play. You know. It’s funny, but it wasn’t at the time.

Josh: True.

Ben: You know. I didn’t have it so what were—what were my options then. My options were passive cash flow and that’s business and investing and you know, I’m a smart guy, but you know most businesses fail in the first years. I just didn’t want to take those chances while real estate has been making fortunes big and small for as long as there’s been dirt. That’s how I arrived at real estate. That’s when I understood that one way or the other, real estate was going to have to play role in how my financial future was going to shape up.

Josh: Wow. Well that’s an incredible story man and I’ve got about a million questions to ask you and if this was the Oprah Winfrey Show, I think we’d go on and on and we’d cry together and--I’m sure people are fascinated and will reach out to you, but certainly, we’re here to talk about real estate a little bit. I think we should jump right into that and anyone who thinks I’m a jerk for jumping into real estate. It’s Brandon’s fault. First off, we’re really are really glad to have you here and I mean, the story is pretty amazing man. You know it’s—it’s—we all, we really do wish the best to you and your family and we know how hard the journey probably is and will be. Just up front I do want to say that. You know we’re really—we’re here for you. We’re here for you.

Ben: Thank you. You know, the thing of it is, successful people march towards the blazing guns. That’s just a fact of what success is all about and you know, there are good days and there are days where I have to play head games with myself. You know you feel a tickle here or there and you ask yourself, what just happened. You know is everything cool? You know, but everything is cool. You move on. We’re resilient human beings you know. It’s a fact of life and I consider myself to be very lucky because it could’ve been a lot worse and I’m able to be productive. I’m able to have a family, two kids, beautiful wife, and it’s wonderful.

Josh: Yeah. For sure. For sure. Alright man, well then how did you decide which strategies you were going to focus on with your real estate investing. You know, you talk about income so you know, how did that decision come to be?

Ben: Okay. Well, I am a buy a hold guy. I have a specific criteria for what I do and how I do it, but ultimately, I am a buy and hold guy and I prefer multi-family. I don’t typically do flipping, I don’t do wholesaling and all the rest of it and only in some specific cases. I’ll tell you that if it makes sense, with respect, if I have so many write offs that I don’t pay any income tax on a flip then I might consider doing a flip, something like that. In combination of strategies, but buy in large, I am not interested in doing those things. Here’s why.

Brandon: I was going to say, why don’t you?

Ben: Here’s why, because, three reasons, both flipping and wholesaling is really hard work. I don’t think people understand this. I’ve done enough of it to know it’s really hard work. Anybody can get lucky here and there, but to be consistent, it’s really hard work. Anyone who tells you otherwise is just lying to you.

Josh: Come on Ben, it’s really easy, Ben. You just…

Ben: It’s really hard work, but apparently, this message has escaped most newbies because everybody, and their mother, father, and uncles seem to be doing flipping and wholesaling which brings me to the second reason I don’t do it, I believe that I can find fertile ground where stampede hasn’t been yet.

Josh: Yeah.

Ben: While all these guys want to take each other’s heads off, over there, they’re trying to compete for the same REOs. I go in a different direction. I zag when they zig.

Josh: Nice.

Ben: I think it makes sense to me, but fundamentally, you mentioned you know income. I’m in real estate for one reason and one reason only. Stable passive cash flow. That’s it. My medical condition demands that this is what I do. I don’t want to build a business around something that I have to be present each moment. You know, you cannot do flipping and not be there. You just can’t. I’ve done it. You can’t do it.

Josh: Yeah. Yeah.

Ben: I don’t care who says what. If you’re going to do it right, it’s a job and I don’t need a job.

Josh: There you go.

Brandon: Yeah.

Josh: There you go. That’s awesome. That’s great. Definitely. Definitely. Alright, so you get started and you decide hey multi-family. Was that your first deal? Or—why don’t you tell us kind of how you got started?

Ben: That’s funny, cause my first deal was a flip. I just said I don’t do flips.

Josh: No flipping.

Ben: Here’s what happened. It wasn’t a flip, it was a simultaneous closing just like you discussed with Sharon a couple of weeks back. What happened was I got a little house under contract. I think I got it under contract for 32 grand. I figured it was an 80 to $90,000 house. It was—got it pretty much, but had a lot of things in it so it was a remodel. Somebody started, ran out of money and wasn’t able to complete so the kitchen cabinets were sitting right there in the kitchen. All I had to do was put them up so was the kitchen countertop, okay. I kind of figured, that’s easy, a $30,000 flip right?

Well, I had a line of credit established. That’s one of the first things I did. I put a line of credit against my primary residence in order to get into real estate because I didn’t have any cash. I used all my cash as a down payment for my personal residence because I didn’t know anything better back then right so it was enough to buy a house or to rehab a house. It wasn’t enough to do both so what I did was I approached a friend of mine who was a highly paid professional and I said, “Look, if you buy this house, I’ll give you a note and a mortgage for whatever, four months or six months, whatever we did. I’ll give you 15% when I flip this thing. I’ll remodel it and use my equity to do it.” Well, imagine my surprise when he offered me some money. It was 20 grand to just walk away. He said, “I want a rental. I want another rental. This is perfect. I can remodel it. I’ll hold it forevermore as a rental.”

Well you know, you don’t say no to 20 grand. You know, in a space of two weeks so I went ahead and did that without a closing. I bought it in one room, sold it in the other room, did one of those simultaneous closings that you can only do with an investor because you can’t—you know you can’t do this with financing or anything like that. That was the first deal and it was the easiest deal I have ever done by far and I tell you the money was gone because there were student loans involved and all the rest of it. As soon as the money came in, it was gone, the cars were paid off, the student loans were paid off, and I started from scratch again.

Josh: Nice.

Brandon: Wow. That definitely leads us into something I want to talk more about is creative finance because anybody who reads your stuff on the blog knows you are the creative finance guy. You’re always talking about no money down or trying to buy something with nothing. Definitely that first deal you got a little bit creative with and you already kind of hinted at that so why don’t you tell us a little bit more about creative financing. Like what is, let’s go basic, what is creative finance?

Ben: Okay, if Josh Dorkin was going to post a bulletin on the homepage of BiggerPockets.com asking people to vote what is the biggest problem in real estate investing for real estate investors, I think he would find a consensus that access to capital is by far the biggest problem, whether it is purchase capital, down payment capital, rehab capital, whatever.

Josh: Of course.

Ben: Access to capital. If we had more money we could always do more, faster, bigger, all of that stuff. Okay? With this in mind, I define creative finance as a combination of two techniques, terms, and approaches, which allow us to gain ownership of assets without needing cash. Simple. I mean you can add credit to that because to some extent, credit is a problem so if you can bypass having to rely on credit. That’s not the biggest problem. That’s a problem you can fix a lot easier than access to capital, okay, so a combination of tools, techniques, terms, and approaches, which allows us to gain access—ownership to properties without access to cash. Now, I have to point something out. I need you to notice that I said ownership of assets. I am fully aware, just as you are there are a ton of techniques out there to gain control, contractually of properties without gaining the ownership.

Brandon: What are some of those?

Josh: What do you mean?

Ben: Lease options, land contracts, you know, all of that stuff, options. Just you know, you can wrap things. You can do a lot of things. Here’s what my perspective on all of that is. I am in this for stable cash flow. Yes I could lease option and then rent it out. I could work on the spreads; however, I would be hard pressed to call that stable because a lot of things can go wrong and your response capacity and time is limited when you don’t have the ownership of the assets. If you go in and put in $20,000 into a lease option, you could lose it. You could lose all of it because basically, you don’t own the place. You have an option on it. You have some interest in it, but you don’t own is so as far as I’m concerned, I want the simple absolute title to the property. I want the deed so whenever I talk about zero money down or I talk about 100% financing, I’m talking about really buying, owning, I’m the owner of record on record of this property. What is creative finance, well you know, coming up with money and ways to buy property.

Brandon: It’s basically being creative with finance.

Josh: Thus the name creative finance. Okay, so what, of creative financing, you know, there’s various ways to go. Do you have a preferred technique of choice? Is there one path that you utilize most or--or do you kind of, does it just depend on the deal?

Ben: That’s a good question. My perspective on real estate is that our success is a function of our capacity to do certain things. One is to recognize the problem that we can solve, and two, is having enough tools in our tool bag to cater a solution. What I don’t like is the approach of here’s a lease option, here’s the paper work, go and do ten million of them. Well you know for one person that would work, but for another person that wouldn’t work so this same size fits all kind of mentality. I don’t buy into it, it doesn’t interest me. It bores me. I look at real estate as solving problems. There’s problems everywhere. People need to sell, people need to buy, people need to put money to work.

Josh: Yeah.

Ben: That’s a big point with creative financing. People don’t understand often times that there’s money out there. There’s a lot of money out there. It needs to be put to work. Whatever that problem is, you have to have the tool as an entrepreneur to cater transactions so that everybody is happy. Do I have my preferred methods? Yeah, sure I do. You know, I’ll use cash with a private money to buy something. I’ll refinance it and get the private money out or else I’ll move the collateral on the private money or a portion of it or whatever. It gets quite interesting and complicated as you dig deeper. Let me give you—let me give you—I’ll just give you a transaction. I just bought a tenplex two months. Let’s just talk about this one because it just makes sense. It’s going on right now.

Josh: Sure.

Ben: I bought a tenplex. It’s actually two units, two fiveplexes sitting next to each other. Same deal so I call it a tenplex. Okay?

Josh: Sure.

Ben: Purchase price was $373,500.

Josh: Only in Ohio man.

Ben: Well, I got—that’s true, there are better areas to invest for cash flow and there are not so good areas to invest for cash flow.

Josh: Absolutely. Absolutely.

Ben: You know when I spoke earlier about flipping, if I could get a hundred thousand dollar spread in Lima, Ohio, perhaps my approach would be different, but my spreads is you know, 10 or 15 grand pretax and to take on all the risk and all the work that is involved with flipping, that’s why I don’t do it. It’s just not enough to interest me.

Brandon: I’m the exact—I’m the same exact way in my area. Our spreads is 10-15 thousand and over on the blog, Danny Johnson wrote a post the other day that was about are you thinking about doing a flip with $15,000 profit? Think again. We’ll point to that in the show notes, but it’s the same idea. When you have that small of a spread, it’s just not always feasible to do a flip like that.

Ben: Yeah. You got to work that hard. You got to find it right. You got to pay the right amount. You got to make sure you estimate your repairs right. You got to not overspend on contractors. You got to qualify our buyer. You to sell it right then you have to pay your taxes on it and then you have got to redo the whole thing over and over and over. Yeah. You know, it’s just not. It doesn’t float my boat. For [Inaudible] [28:51] I would do it, for 15 maybe not so much. Coming back to this deal, the financing package on this deal was a 70% commercial note, a 25% private note, and I needed to bring 5% down to closing, which after the proration of rents, an assignment of security deposits, I ended up bringing $5,300 to closing which is 1.5%.

That’s creative finance my friends. That’s $5,300 bought me a $373,000 purchase price asset, but lets go on from there because that’s not all of it. The NOI at closing on this building was $3,400 a month. You know I looked at the rent, the scheduled NOI was $3,400 a month. Okay, now I go into this with wide-open eyes. I know the building is mismanaged, I’m writing a couple of articles for BP blog where I am going to be walking through this transaction. We don’t obviously have enough time to do all that. I knew I would be evicting people. I knew that the building was mismanaged. It’s not a function of the building itself, where it sits and what it is, a 1980s structure, it’s the fact of how it was being managed or lack thereof so I knew I would have work to do, but $3,400 a month is the—was the NOI. My cash flow on this building after purchase with my financing attached to it is a thousand dollars. I put a hundred dollars into it.

Josh: Right.

Ben: There are a few things that I knew, one, rent is too low, two, the water service, which is separately metered, the previous landlord paid for it out of rent. He included it in the rent. That’s about a hundred and fifty dollars a month that needs to be passed along the tenants and that you better believe that when the leases are restructured, it will be passed along to the tenants. Three, property taxes on this building are entirely too high, I’ve applied to have those lowered and I believe I have a very good chance at having those lowered. All in all, I bought a building for $373,500, with NOI of $3,400 a month, and I believe I can create additional NOI of approximately five to $700 a month. Because there’s no additional expenses associated with creating that NOI, first of all, it flows directly to my cash flow.

Josh: Yeah.

Ben: So I just increased my cash flow by 50% to 70%, but let’s also talk about something else. I think I’ve already said today that I don’t care much about equity. It’s true and it’s not true because I leverage equity so I want to grow equity so I can leverage it so I can buy more—use the money to make down payments to buy extra buildings.

Josh: Yeah.

Ben: Right? So what’s the deal with this? You have to know that a building like this of this character, in this location, commands a pen cap, which means most investors will deploy capital based on a 10% capitalization rate. The NOI such as it was at closing of $3,400, which is a little less than $41,000 a year should justify a value of $400,010 on that building. I paid $373,500, there’s a reason—I got a little bit of a discount, nothing to write home about, a little bit, and there’s a reason why which we can come back to later if you want to. The point is I got a little discount, okay.

Now, if I’m able to achieve—I should say when I’m able to achieve and this may take two or three years because I have to cycle out leases, I have to obviously spice up the apartment, I have to put new countertops on, put a little money in. Right? Okay. Obviously, we have to manage these things right? You either have money or you have to manage so I manage. The extra $700 of NOI, $8,400 NOI, if I am correct that capitalizes at 10% to $84,000 of value because the next guy coming along is going to look at the NOI of the building and base his offer on that NOI. Well, if most people are willing to deploy capital at 10%, relative to cap rate, then I just created $84,000 of value in this building. I bought it for $373,500 and the building is worth $100,000 more in a couple of years.

Josh: Yeah.

Brandon: That’s awesome.

Ben: While I’m financing a 100% of the purchase price, I’m not even close to touching 100% of the value that is going to be there when I’m done doing what I got to do.

Brandon: This is definitely one of my favorite things about real estate investing is that exact strategy of finding multi-family properties, adding value, making it worth more money because the value of a property, like you were saying is based off the income. If you can add some income or if you can take away expenses, you can add value on it.

Ben: Right.

Josh: That is on commercial of course. Not on a house.

Ben: That is exactly, this is—this is why. This is the main reason why I stay away from singles because you can’t increase value of a single. All you can do is bring it back to the value that the market establishes for it.

Josh: Right.

Brandon: Right.

Ben: Because of course the value setting mechanism, in the single family market is a comparable market analysis.

Josh: Yeah.

Ben: If you have a three bedroom two bath house, it could be Taj Mahal, you could put gold toilets in there, but it’s a three bedroom, two bath house and the market has spoken and decided that in this location, a three bedroom house with two baths, and these set of amenities is worth in the range of between of 150 and 160. You are not going to jump over that meter mark, you know, no matter what you do. In multi-family and in commercial, though, because value is a function of income, more specifically, NOI, like Brandon said, by increasing income and by decreasing expenses, we can increase the NOI, which then backs into the value, which gives us a lot more options.

Josh: Tell us about deal, how did you actually—how did you find it? Then you talked about financing it with the five down and the commercial loan and then the second loan, how did you actually come about getting that loan, was that just through your network of folks?

Ben: Sure. How did I find it? Well, that goes back to why I was able to buy it for a little discount. I had first found out about this deal about nine months prior to being able to consummate the deal. The purchase price back then was 475, that’s what the seller wanted that time.

Josh: Wow.

Ben: I worked with him. We worked on some creative options. We thought about wrapping. I knew the bank that he was dealing with. You know I explored a couple of different scenarios, it didn’t work out, but in the process, we established a good solid rapport, you know, mutual respect, and certainly no dislike or anything else. It didn’t work out, but nine months later when he was truly ready to sell, I was the first to know and so before anybody else knew, I had the thing wrapped up under contract. Okay, so that’s how—that’s how I do most things that I do. Word of mouth. I’m sure one of the questions you’re going to ask me is how I come up with deals in the market and all that stuff later on cause it would make sense to ask that question.

Josh: Yeah.

Ben: Well, I’ll just answer it right now. Inbound market, I—I used to send out letters, direct marketing. I used to send out, put flyers—and you know, I’ve had success with all those things. The beautiful thing about being in a place where I am now is that people bring deals to me because they know that if I say something can be done, it’s going to get done 99% of the time and so, you know, they bring me deals and I kind of sift through them and pick out the ones I want. By the way, I only do about one deal a year because my criteria for pulling the trigger is so specific on everything I do so—that’s, you know,—I just—I.

Josh: Let me—can I jump in really quickly on that? I think it’s so important you said that and that’s something Brandon and I talk about a lot and we talked about it in our Ultimate Beginner’s Guide and everything, you know, setting your buying criteria and sticking to it and making sure that you don’t flex because you know you get excited or worried that, “Hey, I haven’t done a deal in a year or in six months.” You know, you got to—you got to stick to those standards that you set because otherwise, you can get yourself into some really bad deals.

Ben: Yes, you can and having said that, you have to be aware of off ramps, because there’s always off ramps. It’s silly you know. I commented last night on one of the threads where a gentleman wrote like, you know, three and a half pages, he wrote out his whole entire plan, and Brandon you commented on that thread as well.

Brandon: Yeah.

Ben: I think it’s wonderful. My comment to him was that he will succeed because he is a thinker. I can tell he is a thinker in the way he wrote out that plan. It’s very important to have a plan.

Josh: Yeah.

Ben: It’s even more important to understand that plans are made to change.

Brandon: Yeah.

Ben: You have to have—you get on a train or a bus or a plane. It doesn’t matter how you travel to it and it doesn’t matter how many stops you make as long as it’s the same destination. You have to know where you’re going. That’s the whole purpose of a plan is to define the end point and to define the starting point, the middle will change many, many times before you get there. It just has to, but it’s very important to know. Yeah, I started with single family houses. I have four of them. Three of them I bought before, I say before I knew anything.

I studied for seven years before I did my first deal, that—that flip that I described in the beginning. I studied for a long time, but studying only buys you so much. You have to get out there and do it at some point and so you know, I got in just thinking, you know, it’s what I could handle. I have this line of credit with 30 grand on it. What kind of deals can I do, you know. It wasn’t until much later that my mind was opened up.

It doesn’t take any more time to put a deal together on a half million than it does on 50,000 period. It takes the same amount of effort, the same amount of knowledge. The numbers are bigger is all it is so I prefer to buy a tenplex for 375 than to buy a duplex. I just would.

Brandon: Yeah. I’m the same way.

Ben: [Inaudible] [40:28]

Josh: Makes sense. Makes sense.

Brandon: Yeah.

Josh: Really quick. This is show 14, the BiggerPockets Podcast and for those of you who are interested, you can find the show notes at BiggerPocket.com/show14. Hey Ben, we skipped over something really quick you know, you talked about the deal, let’s really quickly get into financing and then let’s move to some stuff. We’ve got a ton of questions we want to ask you and I have a feeling that this show could be a four hour show if we let it.

Ben: Sure. You want to know the private money, the 25% private money. Where that came from?

Brandon: Yeah.

Josh: How did that come about?

Ben: Relationships.

Brandon: Yeah.

Josh: That was a great answer. Cool moving on to the next question. No, I’m just kidding.

Ben: You know, it’s a short as that.

Josh: Yeah, for sure.

Ben: Where do you think money comes from? I mean, if you don’t have it, somebody else does. You got to ask.

Brandon: Yeah.

Josh: Yeah.

Ben: If you know what you’re doing and you can present yourself appropriately and people know you as knowledgeable, responsible, trustworthy, you know somebody who lives a righteous life, somebody who doesn’t lie, somebody who says what he does and does what he says. Eventually, if you can find deals that are good enough, money will come. It takes time. It takes time to develop relationships.

Brandon: Sure.

Ben: That’s why when people get in and say, you know, here’s my plan, two years. I just laugh because the plan is great and the numbers are great, but real estate isn’t about the numbers. It’s about people.

Brandon: Yeah. Yeah.

Ben: Fundamentally, that’s what it’s about and the further I go the more I understand this reality. Real estate is about people. You get good at solving people’s problems, you do well and if you can’t solve problems, then you’re out there chasing REOs.

Josh: Yeah.

Ben: Because the only option you have available for you. What hits the MLS. You know I haven’t bought a thing off the MLS in the past five years.

Brandon: Wow.

Ben: You know everybody looks in the MLS. It’s that zig zag idea again.

Josh: Yeah.

Ben: If everybody is going to look in the MLS then I better know how to some place else.

Brandon: Makes sense.

Ben: You know, to be effective, to be truly effective. Money is the same way.

Brandon: Yeah.

Josh: Alright, so you’ve got this portfolio and you know, you want the portfolio to start generating cash flow which it does and you know, you’re talking about this 10 unit building and you’ve got other multi-families with lots of units. Who manages your portfolio? In terms of the tenants and the day to day. Is that you?

Ben: Yes. I manage my own portfolio.

Brandon: Okay.

Ben: I believe that I’m paying the dues so to speak. I have no illusions about what it means to be a hands on real estate investor. Now, in saying that, you’re never going to find me on end dipper or a lawn mower. You’re never going to find me with a hammer or anything like that. I hire everything out that has to do with maintenance of my units; however, I do, do the management myself. That maybe something that I will change my opinion on as time goes, but my idea about this and remember I have kids. When we have kids we start thinking a little different…

Brandon: Yeah.

Ben: …because you have kids so our perspective changes, but I am trying to be out there to build systems and it’s difficult right now because, you know, I have 28 units. It’s not really large enough to really be able to hire full time people and, you know, build systems that way. Ultimately, because of MS and because I know I have kids and eventually, you know, if I can’t move then I’ll want to be doing it with my kids. If they’re going to college here and there and everywhere, I want to be there, I don’t want to be here. That requires me hiring, training, and managing managers.

Brandon: Yeah.

Ben: I’m not suggesting that I’m planning to be there myself all the time; however, I do have to take now, time to work very hard to establish systems whereby later on I could train and plug people into those systems to run the portfolio for me.

Josh: You know it’s interesting because frankly I don’t think I’ve ever spoken to somebody on the topic on who’s in your situation and you know obviously, the path that you face is you know, a scary one and a horrific one and you have to plan ahead because you know there’s kind of a given path.

Ben: Right. At least I have to make the assumption of the given path because you know that’s what the doctor are saying.

Josh: Right.

Ben: It’s a matter. I can’t function with that in mind Josh, you need to understand that, I have to look past that.

Brandon: Right.

Josh: Well, that’s not my point. My point is, you know, there’s so much value in that, I think for other investors who may not be in your situation. You know—who—who—you know—I think people need to look ahead and I think that’s one of the things that—that I see the most, with especially with newer investors, but even folks who’ve been doing it for little while, you know, they don’t look five years ahead.

They don’t look 10 years ahead and you know, by you creating those systems and by you saying, “Hey, you know in the next x amount of time, I’m going to need to transition this from me to somebody else so I’ve got to, you know, establish procedures and processes to make that happen.” You know, you’re setting yourself up for success and so I just want to make that point where, I think it’s just really important that people do that and get that plan together because you know that not only the written plan that, you know, as you said might change, but being able to systematize your business to the point where you can aim it towards the future.

Ben: You know, you should always aim for the stars because even if you miss, but you get somewhere close, you’re going to be a whole lot better off than otherwise you would’ve been so you know. I think my portfolio needs to be a 120 units in order for my life to do what my life needs to do.

Josh: Yeah.

Ben: You know if I don’t get past 70 you think I’m going to cry too much about it? No. That’s going to be enough money for my wife and I and my kids and for everything else, but we set goals so we have a measuring stick.

Josh: Yeah.

Ben: It’s a game. It’s all a game.

Josh: For sure. For sure.

Brandon: I always say the same thing. Yeah.

Josh: Yeah.

Brandon: I have a manager that I hired, not a property manager, but just a maintenance guy that lives at one of my properties for free in exchange for taking of the unit and that—that changed, like fundamentally changed my entire, like investing business. I mean, it was like the best thing that I’ve ever done because all of a sudden it freed me up because I was doing—I was doing the hammering and the screwing in the light bulbs. I was doing everything before and a couple years ago, I hired this guy and I mean, yeah, my role shifted, now I’m managing the manager like you said. It frees up my time, 90% of my time is freed up now to do other things and to find new properties and new adventures. Definitely, that was a really, really good point, but while were on that, I would love to get, since you manage your own properties, do you have any tips out there for landlords?

Ben: I, you know, here I am in the car, I’m going to look at a property as I pull up, I open the door, I ask myself would I want to be here? Would I want to live here? As I walk into the building, the front door, I ask myself, would I want to live here? As I walk into the apartment, I ask myself, would I want to live here because for me, if I don’t want to live here, then I’m going to have the hardest sales job ever and I don’t want that job. I want my units to attract people. I want the units to sell themselves. I don’t want to be out there trying to sell my units.

Josh: Yeah.

Ben: You know, I haven’t placed an ad in the paper in the past six years. I have one unit that’s an efficiency unit attached to one of my buildings, that’s in the back, nobody knows about it. That’s the only unit I ever market. I stick a sign in the front of the building, maybe I put an ad on Craigslist. That’s it. Just because people want to be there. It’s a much easier job to landlord if people want to be there. You don’t have to convince people it’s good for them to be there. They already know they want to be there, that’s why they call you so the biggest tip I can give is exactly that.

I don’t—you know, I don’t buy anything that I wouldn’t want to live in myself. The second tip is, know your market. Before I bought this tenplex, I knew what the rent should be. I knew what the expenses should be. I knew what’s acceptable in my market. I knew the cap rate. I knew all of that stuff. Yes, I had to study this building in order to place it within the fabric of what the market is, but I already knew the market so it wasn’t a new thing to me, okay. I think a lot of people make that mistake, they look at a building and they don’t look at it from a prism of the market at large. You have to know what your market is to be able to recognize opportunities quickly.

Brandon: Absolutely.

Ben: That’s the key. The third thing is, I think you have to treat people with respect, whether it’s your sellers, your buyers, your tenants. You have to treat people the way you would want to be treated. I wouldn’t expect anybody to live in a unit that I wouldn’t live in myself. That’s just one way of me saying, I’m trying to do for you, what I would want to have done for myself.

I pride myself on fixing things very quickly if they break. I don’t procrastinate on those things. I pride myself on being respectful. Now, I do manage very, you know, iron butterfly kind of thing. Gentle and yet I know exactly what I need this building need to do. I know exactly how I need people to behave around this building and so—and I make sure that it’s known that people know that—but just the function of what the building is, is going to go 90% of the way to establishing this in the first place. I wrote a couple articles, you know, “It’s Not My Fault They Keep Trashing My Unit” or something like that, for BP blog awhile blog, you know.

Josh: Sure. Sure.

Ben: That’s—that’s the concept. Know your market.

Josh: That’s right.

Ben: It’s not to say you can’t be a—you can’t be a putz, but it catches up to you, you know. You can do it for awhile and you can screw some people, and maybe—but eventually—this business is about reputation and eventually it catches up to you. You’ll find it difficult to stay on top and to consistently do good business.

Josh: Now, that’s great. That’s great. Well, so we’re starting to come to the close here. Really quickly, on cash flow. That’s kind of the core of your—of your path, beyond the importance, we all kind of figure why cash flow is important, how do you go about determining if something is going to cash flow? You know—what’s—what’s the most, I’d say, you know, the obvious are rents and things like that, but what are the things that sometimes slip by people that you think—you know, but in particular, newer investors should look out for?

Ben: Well, I only buy a few things because I’m very aggressive as far as cash flow and I have to tell you, I’ve over paid for a property before. Sometimes—there are times when the purchase price—the purchase price is only one of the negotiable terms that establishes value in a real estate transaction. It’s only one. There are many. There’s a ton of them. Sometimes it’s advantageous enough to pay more in terms of purchase price if you know, if you know, something else is working right for them, but in terms of cash flow, you know, if you get on to BP, most people would probably agree that in a multi-family situation, a hundred dollars a door, is a kind of a reasonable bench mark to take action on, a hundred dollars a door. Of course, that presumes, 25% down, in my world, under a 100% percent financing, a hundred dollars a door, minimum.

Brandon: Yeah. I’m the same way. Exactly.

Ben: If I can do that—under a hundred—now you know people say, well you know, aren’t you concerned about a 100% financing, well, we talked about that, you know. A hundred percent of the purchase price is not the same thing as a 100% of a leverage.

Brandon: Yeah.

Josh: Yeah.

Ben: A hundred percent of the equity on the building, especially if you have expendability options to build that equity quickly within two or three years so my benchmark is a $100 a door, under a 100% financing.

Josh: Yeah. I think, you know, there’s some of the big guys on BP from back in the day like Mike Ohio and stuff. You know, the whole 50% rule thing. You know, a lot of that does actually presume a 100% financing and a $100 a door which is really hard to find in a lot of markets.

Ben: Yeah, you’re right.

Josh: If you can stick to that you’re almost guaranteed to have great cash flow opportunities.

Ben: Well, that’s exactly it. Here’s the thing, I mean the 70% commercial note, that’s the note that the bank is going to hold in their books. That’s not a sellable vanity for any type thing. Would they do that? Knowing that the thing is fully financed if they didn’t think the cash flow was there to substantiate the debt service.

Josh: Yeah.

Ben: No they wouldn’t and speaking of that, obviously it comes back to relationships, you’re not just going to walk in off the street, ask a banker for 70% financing, telling them that somebody else is bringing 25 and expect them to do it. It—it—that’s not how it works. It takes time to develop those relationships with people that are going to do this kind of a deal for you.

Josh: Yeah. For sure. For sure.

Brandon: That’s great advice. That’s awesome.

Josh: Alright. Alright man. I hate to do it. I hate to cut it off. Seriously, I think we could go on and on. This is definitely fascinating, but as we come to the close here, we’re going to. Let’s talk about your favorite real estate book that is not your own?

Ben: How I Turned A Thousand Dollars Into Five Million by William Nickerson.

Josh: Good book.

Ben: An oldie, but goodie.

Josh: There you go. How about your favorite non real estate business book?

Ben: I don’t have one.

Josh: Alright.

Ben: Sorry, I don’t have one. I read so much. It’s like one of my passions.

Josh: It’s okay.

Ben: I read so much. I don’t have one.

Josh: Okay, fair enough.

Brandon: If I could just jump in there real quick, since you didn’t have one, I’m going to tell people. This is a real estate book, but if people are interested in what you have to say, the what’s it called, Ken McElroy’s, The ABCs of Real Estate Investing.

Ben: Yes. Yes.

Brandon: It’s exactly like the thing you and I love. I mean you and I get along because we have the same strategy.

Ben: Right.

Brandon: We have the same mind on this so.

Ben: Right and I think that book was published as part of the Rich Dad, Poor Dad Series.

Brandon: Correct, yeah. I’m going to plug that one because it’s so good. It was, yeah. It’s amazing.

Josh: Brandon, you’re not a guest man. Come on. How about hobbies? Obviously, your kids? I would presume would be one of your hobbies, spending time with them and anything else?

Ben: My wife and I enjoy ballroom dancing.

Josh: Oh okay.

Brandon: Cool.

Ben: Specifically, Latin Dancing. We like that a lot. That’s something we do for ourselves. I enjoy reading a lot. I enjoy guns. Target shooting and things like that and I enjoy motorcycles. In fact, I had a big, burly, black, VTX 1300CCs Honda motorcycle.

Brandon: Nice.

Ben: My wife sat me down when the kids were born and said, “I worry about a lot of things, I’d appreciate not having to worry about your killing yourself.” The thing was sold, very quickly.

Brandon: There you go. There you go.

Ben: I hope there’ll come a time when the kids are older and I’ve taught them what I need to teach them that there will be a time to enjoy that one more time.

Josh: Nice. Nice. I had a picture in my head of you ballroom dancing with your wife, with a shotgun in your hand.

Ben: On top of a motorcycle.

Josh: On top of a motorcycle, exactly. Alright, Brandon, I know you’ve got your famous question here.

Brandon: Alright, last one. In this business, there are a lot of people who come and go I mean you see them everyday on BiggerPockets so what sets apart the successful, creative investors from those who just come and go and disappear.

Ben: Successful people refuse to fail. Now, I have the easy route to that because my medical condition ensures that I have to succeed. That’s the choice that life has made for me. A lot of other people have a much tougher path in that they have to make that choice for themselves. That choice is what keeps us in the game because real estate is really hard and you want to give up, many, many, many times before you succeed. You have good days and you have really bad days. What is it that’s going to help you hang on? That’s going to keep you in the game? Because staying in the game is the main part.

Successful people refuse to fail, not just in real estate, every place else. They just refuse to fail. Successful people are more willing to live outside of their comfort zone. To achieve extraordinary results, we have to take extraordinary actions. If we keep doing the same things that we’re used to doing, which is what’s comfortable, we’ll achieve the same comfortable results, but if we want more out of life then we have to step outside the comfort zone. Successful people will tell you, that the norm is outside the comfort zone. Comfort zone just doesn’t even happen for successful people.

Brandon: That’s awesome.

Josh: Preacher Ben. Preacher Ben. I mean, more sound bites out of this one than I think I can remember. Listen, a little bit about Ben here. Ben has written four eBooks and recorded 20 audio—let’s try that again. Ben’s recorded four eBooks and recorded 20 audio training seminars in which he covers topics ranging from creative financing, acquisition techniques, to property rehab management and negotiation. You can get them along with Ben’s cash flow analysis software on his website, JustAskBenWhy.com and I do have to say, again, Ben it’s—it’s a, it’s a really, really, really an inspiring story and you know, I do want—I do want you to know that our community is here for you. We’ve got your back, we’ve got your support and I do, you know, I don’t really do this often, but I would say if you’re considering, you know learning any of this stuff that Ben, you know, Ben’s educating, teaching people on. You know, I want to support you man. I want to support you. I want to support your family.

Ben: Thank you.

Josh: I tell people, definitely, let’s—let’s see what we can do to support Ben here. Otherwise, really quick, is there anywhere else that people can connect with you? Obviously on BiggerPockets. Are you on Facebook, Twitter, LinkedIn, can they reach out to you?

Ben: I am on Facebook, Twitter at forward slash JustAskBen and I am on LinkedIn as well, Ben Leybovich, but I’m on BiggerPockets more often than not.

Josh: Nice.

Ben: You know I have to tell you. I think I was searching for property management. I was looking, just doing Google search, maybe about six months ago on property management and just for kicks. You know, I just wanted to see who’s out there, what they’re offering and all. Qualifying tenants and all that kind of stuff, credit checks and I came across BP because you have this function on your website as one of the tools available and you know, I took a look. It’s nice. I forgot about it for about four months, but I signed up, I gave you my email.

I kept getting these things in my email. These articles and I can’t remember now which article it was that piqued my interest, but about four months later, I came back and I really looked at the forums and at the content, the quality of the conversation that takes place, the fact that real players are willing to take their time to answer questions in the way that they do. That’s very inspiring to me because being around people who know more can do more, half the guys on there have forgotten more about real estate than I will ever know. I appreciate that. It’s just inspirational.

Josh: Yeah.

Ben: It’s a great platform and so I end up spending more time on BP nowadays than any of the other social networks.

Brandon: That’s awesome. Me too.

Josh: Well, I’m certainly glad to hear that.

Brandon: It’s like a big ole black hole that sucks people in. It’s a beautiful thing.

Josh: Yeah, for sure. Alright Ben, well listen man, it’s been a pleasure, really enjoyed having you on the show today.

Ben: Thank you, it’s been a pleasure to be with you.

Brandon: Thank you Ben.

Josh: Alright everyone, that was our show today with creative real estate investor, Ben Leybovich, as always, we really encourage you guys to head over to our show notes page at BiggerPockets.com/show14 and check out all the links from the show and also as we mentioned in today’s quick tip, leave a comment on that page and let us know if you have any questions for Ben or just want to say hello. For today’s show, we actually also put some important links for you guys to check out regarding Ben, Ben’s story, and MS, where can learn a little bit more information. Definitely do go there and check that out.

Also, if you want to leave us an iTunes rating, we absolutely would love that. We are now up to a 182 five star reviews on iTunes and we certainly appreciate all your support so please leave us a rating. Leave us a review and of course, if you’re not doing so already, please do subscribe to the show over there on iTunes. Finally, be sure to connect with us on Facebook at Facebook.com/BiggerPockets and be sure to sign up for a free BiggerPockets account at www.BiggerPockets.com. Again, thank you so much for being a part of the show for listening and until next time, this is Joshua Dorkin, signing off.

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