Quickly analyze a property address or ZIP Code to compare your rent in your neighborhood.
Written by financial journalists and data scientists, get 60+ pages of newsworthy content, expert-driven advice, and data-backed research written in a clear way to help you navigate your tough investment decisions in an ever-changing financial climate! Subscribe today and get the Oct/Nov issue delivered to your door!
Josh: This is the BiggerPockets podcast, show 66.
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 co-host dressed in a fancy coat Mr. Brandon Turner. What’s up Brandon? Why are you all decked out in that willy coat there?
Brandon: We had spring for like five minutes but it’s gone already.
Josh: I’m so sad for you.
Brandon: Sad guy in a little coat.
Josh: Earlier in the week it was 77 and that night it was 17 degrees and I turned my sprinklers on and one of the sprinkler assemblies in the morning had exploded and there was water shooting all over my front lawn. Thank god for my neighbor who laughed at me.
Brandon: Besides that how are things?
Josh: Things are good. Working out in the new office here in Denver. Loving that, it’s going well. BiggerPockets headquarters is fun. How about you, what’s going on?
Brandon: All is well. I’m almost done with my fence. My dog can no longer escape out the back.
Josh: That’s great. I’m glad you’ve been employing slave labor to get that done.
Brandon: Child labor not slave labor.
Josh: Brandon’s got his neighborhood children painting the fence, hammering it in.
Brandon: They do good work.
Josh: That’s great. You should send your little crew my way I could use their help.
Brandon: No way.
Josh: Show 66 of the BiggerPockets Podcast we’re pretty excited about this one. For you guys who are listening definitely make sure to jump on the show notes if you’ve got questions or anything it’s at BiggerPockets.com/show66. Before we move any further I just want to make a quick plea to our listeners. You guys we definitely appreciate all the feedback you give us and we do take it all into consideration even when we disagree with it. In order to better get the word spread about the BiggerPockets podcast we really ask you guys to help us out and to do that all we ask that you do is jump on iTunes and leave us a rating and a review. It shouldn’t take you more than two or three minutes and give an honest rating and review and that will help us climb in the charts and get more people listening and more helped out at the BiggerPockets podcast and ultimately more people involved in the community. Please help us out and do that.
Before we introduce out guest let’s do todays Quick Tip.
That was like the angry tip.
Brandon: That was my ACDC quick tip.
Josh: Todays quick tip is little self-serving but we are again asking for your help you guys. If you could od us a favor and check your email spam or junk folder and look for any messages from BiggerPockets and click the button on your email that lets your email provider know that it’s not spam. We’re testing out some new email software and we want to make sure that the new system doesn’t end up in the wrong place and you can all help us make sure that the email providers know that we are only sending good stuff and not ads for fake mortgages and other unseemly products that Brandon is a regular user of.
Brandon: Just the mortgages.
Josh: With that why don’t we introduce our guest today? Today on the BiggerPockets podcast were chatting with Michael Blank – restaurant entrepreneur turned house flipper turned apartment investor from the Washington DC area. Michaels got a ton of wisdom to share about rising private money, finding good deals and tells a really important and shocking story about the worst tenants I have ever heard of and the legal problems that the tenant caused that almost destroyed Michael’s first apartment deal. You definitely want to hang around for that. If you don’t know how to be aware of professional tenants or what a professional tenant is you really have to listen to the show. These guys can cause you a lot of problems and this story is going to educate you like nothing else. That’s pretty much it. Again, check us out on the show notes on BiggerPockets.com/show66 and with that lets bring this guy in.
Michael, welcome to the show man, good to have you here.
Michael:> That’s for having me, really appreciate it,
Brandon: Thank you. Michael I think you are like 15th Michael we had on the show since we stated. Somebody is going to correct me in the show notes and tell me how many we really had but yeah were glad to have you anyway even if you’re not quite original.
Michael:> Starting already, 30 seconds into the show.
Josh: This is abuse you signed up for man, you knew it was coming.
Brandon: How did you get started investing in real estate?
Michael:> Good question. I have a software background. I have a masters computer science which I feel is a qualification to get into real estate. That’s the route I chose and if you don’t have that you won’t be able to successes in this business.
Josh: I’m sure mom and dad were so proud when you decided that you’re going to quit.
Michael:> I read the Rich Dad Poor Dad when I was 35 years old and I’m like “I’m such an idiot, I’m wasting my time here! I need passive income.” Two things I did is I got started with real estate and I got started with what I thought was a cash flow business which was restaurants and well talk about that later.
Josh: Somebody told you that the restaurants was a cash flow business?
Michael:> They are. They are definitely not appreciation play they are definitely cash flow but on a real estate side it was definitely flipping houses it was the first thing I started doing.
Brandon: How did you get from Rich Dad Poor Dad to flipping houses?
Josh: I want to know why you chose restaurants, actually. From my perspective I hear getting into the restaurant business and I think “My god this is the biggest nightmare possible.”
Michael:> I had a little bit of a leg up because I made some money in the software IPO and I wanted to parley that into cash flow producing business. I met a few other franchisees of a concept and they described the business to me and it was perfect. It’s going to cost this much to open, were going to hire a guy to run everything and were just going to count the money. I said “That’s perfect. That sounds just like what I’m looking for.” That’s what I did. I basically plowed my net worth into what basically became three restaurants and I did hire a guy and he was with me for seven years and it worked out really well for me for about five and a half years. It really did. That’s why I got into that.
Brandon: Are you still doing the restaurant business than?
Michael:> Yes. That’s kind of my job, if you will.
Brandon: You do that as a full time gig for the most part or kind of self-managed?
Michael:> It’s not full time but it’s close to full time. I parted ways with my operating partner I talked you about year ago and since then I kind of have a job. I’m so proud of my managers, they’ve stepped up and I’ve been able to delegate more and they’ve been able to take more responsibly and so the job is not as nearly as full time as it was six months ago.
Josh: Nice. Do you want to plug your restaurants while we’re here? Give it a shot. Anyone in DC can come and check out.
Michael:> Yes sure. It’s a franchise in Southern California called Z-Pizza. About a hundred locations nationwide.
Brandon: I’ll have to check that out next time when I’m in your area. Hopefully you’ll buy me a pizza. I got to get perks when I can, right?
You went from the restaurant industry, read Rich Dad Poor Dad in there and started flipping houses. Can you walk us thought that transition?
Michael:> There’s two things I want to do. Latterly I wanted a cash flow business and real estate. For some reason I dismissed the buy and hold thing, I really wanted to get in to flipping. At the time I flipped couple of houses. I signed up with a local mentor and I setup my postcard campaign and I setup a 800 number and whatever. From first set of postcards I got ahold of one landlord out of state who was marketing to. He had a house about hour west of here from where I was marketing that geography and he had two houses and I bought both of them. Made like a $110,000 on these two flips which was about the same amount of my salary before and I was like “Holy crap this is amazing!” Obviously I wasn’t spending 40 hours a week on this stuff and I was like “Man there is really some truth working not necessarily harder but smarter.” That really opened up my eyes.
Brandon: When was that? Was that before the crash?
Michael:> Yes, exactly, it was before the crash. It was 2005 and early 2006 and then I stopped doing it. I did three houses and I stopped doing it because I was getting very busy on the restaurant side of things. In hindsight I look like a genius because I missed the entire recession. I got little lucky and I resumed in 2009 I did a couple in 2009 and then in 2010 my goal was to really build up a business. Tats when I started raising money and I hired a project manager assistant and we were buying two houses every month. That year we did about 24, did about 32 total. In 2011 that was my primary business at the time.
Josh: On these first properties – where were those?
Michael:> No, these are all in DC area in PG County Maryland most of them. Some of them are Northeast DC. These are all blue collar neighborhood. Very unique market at the time where the retail market was really coming back strong in 2009, 2010, but there was huge supply of foreclosures. You can get them for cheap and you can sell them quick for a lot. The spread was just incredible and very unique. That has now closed in this market so it’s very difficult to define deals now.
Josh: You were finding these deals, all the deals you’ve done from then to today primarily trough mail marketing?
Michael:> No, I got little lazy. I did that in the early days when the market was hot. Obviously you couldn’t find anything on the MLS that’s when I had to direct mail and I sent postcards and letters and thing of that nature. The second time around, 2009-2010, I built up a network of wholesalers and I got basically almost 90% of my deals trough wholesalers. I got “lazy” because there was such supply of foreclosures and people that knew what is as looking for. 65% of RIE minus repairs I was buying. I don’t care how much the wholesaler made.
Brandon: Lets actually dive in that a little bit because there’s a lot of people who listen to the show who are wholesalers or who want to be wholesalers so what kind of advice you can give to people who are trying into that field? What did you look for in a good wholesaler? How should someone approach that?
Michael:> That’s a great question Brandon because out of every 10 wholesalers there’s maybe two that good. Meaning they’re consistent, they know how to estimate the after repair value and the repairs and they put together a package. The vast majority will send an email with an address and an asking price. Do your own diligence – that kind of stuff. To me that’s not really valuable, that’s not really valuable at all but good wholesalers I would buy from over and over again because they were much more diligent in putting together their numbers. They knew what rehabbers were looking for.
Josh: What exactly do you want to see in the package from these guys? Obviously you want to see more than an address. What do you expect?
Michael:> I want to see what their asking price is. I want to know what they thing what the after repair value is and what the estimated repairs are and also what the scope of the repairs is. That way I can see whether their estimated repairs are actually ballpark. Photos would be nice. The more I can do without going to the property the better because I got to the point where I didn’t drive out there unless I got the numbers to work on paper first. If a wholesaler can’t let me do that then chances were slim that I actually went with that deal. It would have taken too much time to do.
Josh: Presumably those photos and all the data are really just going to make your job that much more easy.
Brandon: If people want to listen to another show that we did back on episode 33 with Sam Craven. He talked a lot about it. He’s a wholesaler, he does a lot of flipping, too. He prepares these packets of information and that was his golden information. When I heard that I never heard it quite like that before. People when you’re done listening to this episode go listen to number 33 if you want to know more about that.
Josh: If you’re a wholesaler pay attention and don’t be that guy that just shoots out the email saying “I’ve got properties.” Be diligent and people are going to take you a lot more seriously. I think that the problem most new wholesalers deal with is they don’t know what the heck they’re doing and I think most professional investor like somebody like yourself doesn’t take them seriously when they don’t know what they’re doing.
Michael:> In this changing market you probably need to include the market rent in there because the lot of wholesalers at this point are selling to landlords. They’re going to care about that market rent.
Josh: That’s a good tip.
Brandon: That’s a great tip. A lot of times people just thing about wholesalers working with flippers but it’s a lot bigger than that.
How were you funding your flips back then? I know you had some money from IPO but was that your finding yourself or?
Michael:> At the end of my run I had basically deployed all my money in restaurants and some real-estate that I held. In 2009 when I restarted I really had no more cash left. It is much easier to use your own cash. Easier meaning you tend to do less due diligence in the opportunities that I feel were strong pressure to deploy the cash I had so that it would produce more cash. I think it made me sloppy. When I run out of my cash I had to raise money that means that I have to convince other people that what I’m about to do is a good idea. You get much more discerning on the kind of deals that you do. On the house flipping side I found it remarkably easy to rising money because I was raising it with minimum of 25,000. I told people that we could IRA and it would be secured by real estate and they would get a promissory note from the title company and the title company would handle everything. That was paying 12% interests at the time. I could probably get away with paying a little less now but it was such a no brainer given the fact that it seemed like a relatively low risk investment and a high return that I had no trouble raising that kind of money from friends and family first and then getting referrals to other people. I just got a lot of yeses.
Josh: How’d those first conversations go? We talked with a lot of people about raising money and getting out there and telling folks. You just let them know what you do and suddenly they get curious and say “Oh how do I get involved?” Is it that easy or what does one of those conversations go like to your cousin John who is potentially curious what you’re up to?
Michael:> They’ll ask “What new in your life?” I’ll say “You’ll not going to believe it I’m flipping houses right now and its 25,000 minimum and its secured against the real estate and you get a promissory note and you’re payed 12% interest.” People are really excited about that. “By the way you wouldn’t happen to know someone who might be interested?” they go “Well I might be interested.”
Brandon: That’s my favorite question to ask. I think all of my private lenders have come that way – “Do you guys know anybody that would be interested?” I love that question.
Michael:> If they don’t then they might refer you to somebody. I know my brother might and you talk to the brother and he’s very interested and he will most likely know someone who is also.
Josh: It seems pretty darn easy. I think a lot of people have this big fear “What does a pitch look like and what do I need to have?” It’s pretty simple and ultimately fairly convincing. You didn’t really tell me much about what you’re working on but if you continent in what your opportunity is and what you’re looking for, I think for those people listening, its fairly straight forward what you might want to ask people.
Michael:> Hers one more tip Josh. As someone who has never done this before, they don’t have a track record. You basically just make up a deal. You create a flip from nothing and you say “I’m going to buy for this I’m going to put this much in repair.” You’ve got photos and you putt this little package together. That’s what you show investors. “Look, I haven’t done a deal yet but I’m going to do one and it’s going to look just it.” That will make it more real to you and it will make it more real to investor. Obviously when you’ve done a deal you start building up portfolio and you show that to investor. But in a very beginning that is my advice in how to get over that.
Josh: That is a great idea as long as you’re straight forward and don’t lie. Don’t say “This is a deal I did” and it’s some b.s. deal that you’ve made up.
Michael:> Exactly, right.
Brandon: There’s a book I’m reading right now called Pitch Anything by Oren Klaff and really good book all about making pitches to people whether it’s for financing or whatever. It’s not a real estate book, just some general. One of the things he talks about in this book is always position yourself as the prize. You don’t go to somebody saying “I need money because I’m desperate for money.” You position yourself as “I’m the prize, I’ve got something worth investing in - do you want in on it?” Just a mindset shift if you can do that and become the prize it’s kind of revolutionary thing right there.
Josh: Michal you’re more of a prize than Brandon at this point just so you know.
What are some of the big mistakes you made while you were flipping?
Michael:> I really haven’t made any Josh. I’m just kidding.
Josh: Moving on to the next guy who’s not lying.
Michael:> You approach this a little bit like a portfolio approach meaning that you are going to make some mistakes, you might even lose some money as long as you’re making more than you’re losing that’s kind of what counts. You try and minimize your losses but of top of my head some of the things I did wrong was overestimating the after repair value. One example. Especially when the house is maybe smaller or it’s got a funky layout or it’s on a major street or it’s bordering a questionable neighborhood. Stuff like that it makes it harder to comp. It always makes it difficult. In hindsight you could have said “I should have walked from the deal or I should have lower it.” It’s sometimes hard to do but that’s one mistake. On the construction side of things not puling permits for everything probably is one mistake. Sometimes its ignorance sometimes you’re just trying to see what you can get away with but it’s the small cosmetic project and then you get caught. Either way the consequences are the same whether you knew it or not now you have expenses and fines and stuff. Basically what I’m saying is do it by the book.
Brandon: Couple of weeks ago I had some sighing work done on my apartment and it was just a repair. I replaced couple of sheets but the guy was working on the weekend so he just did the whole thing. Well you don’t need a permit for two sheets but they thought six sheets will need a permit. Now I have to tear down all the sighting that we put up, all six sheets and have them inspected and then put up back again. If it’s even borderline like that, like I should have gotten the permit for just the two and then I would have been fine.
Michael:> Doing it by the book is probably good advice. It will cost you more money in the short term but in hindsight cutting corners basically hurts you at the end of the day. Same goes with basements. These older houses have wet basements put in drain system up front which is very expensive. Underwriting a deal with something like that in there if there is any question whatsoever about the basement is a good idea because it will bite you in the butt later.
Josh: Sounds like you’ve been there.
Brandon: What are some of the things you think you did well then? What caused you to successes so well at flipping?
Michael:> I think I did thing well after I did a pulley which is a building a good team. I did well but only after I screwed it up first time around. Meaning when I got stated in 2010 I wanted to go big but I had an untested team. I had a project manager who is a friend of mine and he did one of my houses but he couldn’t handle the administrative side and people skills. He was overwhelmed. I hired new assistants I had somewhat new real estate agents and I just had an untested team. Should have been more tested. Half way through it I made some changes and replaced those team members with those that were very competent. Everything you do in business – it’s all about the people. If you don’t have a good team I’m place you’re going to have problems. On the other hand if you have a really good team that really firing on all cylinders it’s amazing what you can do.
Brandon: Let’s talk a little bit more about that team then. Who did you all have on your team at the time and how did you bring those people together and find the right people?
Josh: Before that, at what point did you realize it was time to build a team? How did you know “I’m not going to handle all this.” Was that just an upfront?
Michael:> I knew what I was doing before so I knew what that would involve with and the first thing I did was I hired an assistant to help me with the paperwork. There was a lot of paperwork involved with buying property and selling the property. Dealing with title companies, dealing with the investors – lot of paperwork there.
Josh: Where did you find the assistant?
Michael:> This one I found her locally. She was starting to come one as a bookkeeper and she could handle a little bit more and since then I hired several virtual assistants to do that and there’s no reason why one of my VA’s couldn’t do some of the stuff. There’s no reason for them to be locally where you are.
Josh: Are these VA’s in the US or are these overseas?
Michael:> I have mostly hired in US and I usually use Elance.com. I’ve used it over and over. Sometimes it takes a while to find a right person but you will find the right person with some persistence and I’ve used that with great success.
Josh: You’ve got the assistant, you kind of get the processes going, you said you had fiend of yours become project manager. What about everything else?
Michael:> He was my “General Contractor” who managed others and I did replace him with another general contractor. In my mind there’s a lot of investors that do this themselves and you can do it to a certain point. I did not want to be that hands on and at that volume there’s no way you can do it yourself. You’re going to need one or maybe two very strong general contractors that handles all that.
Josh: How hands on where you? Were you the guy who pulled the trigger on the properties and then pretty much once you’ve got it systematized turn the reins to your people and maybe went to walk the sight once in a while just to answer questions. What was your job in the whole process?
Michael:> What I would do I would make sure the deal worked before on paper then I would go out and look at it with my contractor and them within the day he would give me the estimate back and at the same time I had my realtor give me the after repair value. If you’re going to do that you have to trust your realtor. A lot of realtor tend to over-estimate. Mine, I always fought with him on the other way around. He was very conservative, really knew investments and after one or two deals I simply said “Just tell me what your number is.” Then my contractor “What’s your number?” I put it in my spreadsheet and if that worked out I would then negotiate the price, send the contract over and the assistant would handle the rest really.
Josh: It sounds like a lot of the more experienced flippers that we’ve talked to and that we know from the site tend to do the cookie cutter approach to their flips. Kitchens, they’re pretty much the same. The scale of repairs is pretty much the same, the paint color is the same. It seem like your team knows at this point what you want and you don’t have to do too much work at that point just a lot of checking the numbers, approving what people are deciding to do and letting them run with it.
Michael:> In the beginning clearly you’re going to be much more involved. But if you play your cards right you’re going to start pulling back from that and that allows you to do more.
Brandon: Do you see the connection between the entrepreneurship and the business world and the real estate world?
Michael:> I really do. I think we call ourselves real estate investors but at the heart of it really entrepreneurs and we have a lot in common with almost any other entrepreneurs. Its juts the details today are different but the mindset, the challenges the goals there’s a lot of commonalities.
Josh: What would you tell somebody who wants to get into flipping houses, who may not have the experience in that industry, how would you tell them to start out ?
Michael:> My approach is to first educate yourself. Read books, sign up with a mentor, and take a seminar. A lot of people end there and what I’m seeing is that most people fail to take action. They feel like they don’t know everything, they’re afraid of failing and they just sit on the sidelines and that kills me. Because I say “Look, you can read this book, you can buy this seminar and then you just got to do something. Just start doing something.”
Brandon: I think there’s a so many people that get trapped in that continuous state of learning and paying more to learn and more to learn and it’s never ending cycle where they never actually do anything. Get out there, do something.
You flipped houses and whenever we talked about it we kind of talked in the past because you’re not flipping houses anymore, right?
Michael:> Less so, no. Focusing on other stuff.
Brandon: What’s your current focus of your business now?
Michael:> My focus really is commercial real estate - specifically apartment buildings. I always felt that the problem with flipping houses while it generates cash its noting passive about it. You can certainly leverage your game but if you’re not looking for deals, managing your contractors etc. you’re not making money. It’s really a job at the end of the day. What I really want to do is go back to building that passive income which in my opinion there’s nothing better in the world than doing it with an apartment buildings.
Josh: The nice thing about is presumably at scale you’ve got management in place, you’re not dealing with the headaches of tenants and toilets and other joyous things.
Michael:> Exactly. The whole outsourcing is built into the deal. Apartment buildings is only business where you can get financing for it reliably. Every bank will give you financing. You can say that about any other business in the world so there’s a lot of advantages.
Josh: That interesting, it’s something I don’t think we’ve actually talked a lot about but I think investors are always complaining how hard it is to find money but coming from somebody who’s got experience in other faces of fundraising and raising capital I guess it’s kind of cool to hear that it is that much easier to raise money for real estate.
Let’s talk about your first apartment. Your very first BiggerPockets blog article was titled “How I bought a 12 unit apartment building with no money down and how it nearly bankrupted me” Why don’t you tell us a little bit about that story?
Michael:> I started looking for apartment buildings back at 2011 and this one actually came through a wholesaler. It’s not the primary way that I have been looking for apartment buildings, we’ll talk more about that, but this one came from a wholesaler who referred me to house to flip and he knew of another wholesaler who was marketing this building and I was listed on the MLS I believe. It’s been on a market for a while. That’s how I initially ended up finding this particular deal.
Josh: You find the property, the title of the article is kind of interesting - you did this no money down. How did that work?
Michael:> When I first started out I wanted to use investor money to do that. This no money down, I was going to put my money into it but I had found five investors who we’re very interested in participating in this deal and I needed 250,000 or 50,000 each and I said “Shoot, I have five guys that want to get in this I just won’t put my money in.” That’s how that happened. No money down part of it.
Josh: What was your percentage as the arranger of the deal?
Michael:> The way I structure each deal is I need the investors to make between 12 and 15% average annual return over life of the investment which I’m telling people is five years. To achieve that based on the cash flow and the appreciating of that I could retain about 50% of the building and still get that from my investors. So retain 50% of the building which is a little unusual. Normally it’s between 25 – 30 % that you retain depending on how you structure the deal. This one just happened to work out that way.
Josh: That definitely sounds a little bit high. Were they hesitant in the approach it seems something that they won’t take kindly to. I’m not trying to insult you at all or the deal but I think people might be weary of 50% and you not putting anything in.
Michael:> You got to understand also it depends on who your investors are. These are friends and family so they’re going to trust me. I said “It’s important that you guys make your 12 to 15% and this is how we’re going to do it.” There’s a chance that if they don’t make that I may give up of some of my equity to make that happen. If you have other kind of investors let’s say little more sophisticated investors the deal will change quite a bit. You may have to do preferred returns, they’re going to question your equity in the deal so the deal will look certainly differently if you have a different set of investors.
Brandon: It kind of comes down in the end you get what you negotiate. There is no book that says “This is what a real estate deal should be split.” There’s no rule, there’s no law that says this is how it should be done. It’s whatever you negotiate.
Michael:> That’s right. When you’re first starting out the way I do it is I’ll sit down the investor and I’ll say “Look, here’s kind of what I’m thinking. I’m thinking this kind of return, what do you think?” they go “That sounds about right. –I’m thinking it’s got to be at least five year hold.” They’ll go “Ok, it’s a bit long but ok. I’m thinking this kind of cash flow, we pay once a year, what do you think?” they go “Ok” or they give you feedback. You do that versus you going to your investor going “Here’s how it’s going to be.” You do that with handful of investors and you kind of see what people are and then you go back to them saying “Based on what everybody is saying here’s how we’re going to do it. What do you think?” You make it a little more interactive at least with a family and friends round, actually, with any round really. You kind of poll your investors and you kind of see what’s reasonable and what’s not.
Josh: For those people who might be looking for apartment buildings how would you recommend they start looking for good deals? What do you do?
Michael:> There’s so many gurus teach different things – sending letters and probates and networking with attorneys. Those can also yield results but I would say number one way to find deals is trough commercial real estate brokers. You got to find good ones and you’ve got to convince them to take you seriously. Especially if you don’t have a track record nearly every professional you deal with will not take you seriously because you’re like 99% investors out there who are wasting their time. The first step really is to identify the commercial real estate brokers, contact them, tell them about what you’re doing, what you’re looking for and convince them to an in person meeting for a coffee or lunch. Then In that meeting you basically tell them about yourself and obviously you have no track record and its surprising by the way how little your house flipping track record counts for apartment buildings. People could care less. What you’re basically doing is you’re trying to show a track record of success. I have software startup, I do pizza restaurants, I flipped houses, I haven’t done any apartment buildings, sorry about that. Then you talk about your success in other areas, you talk about other team members you’ve been able to build up. If you have a good real estate attorney bring him in. If you have some investors on board bring them or if you have a lender, anyone on your team – you highlight the team and you make up for your weaknesses in that way. Then you just stay in touch with that broker and the key is when they send you a deal you’ve got to turn around quickly. You’ve got to respond to that broker because 98% of his customers never look at any deals they send out. You want to be the guy or gal that says “This deal won’t work for me like this but this would and here’s why.”
Josh: That’s really good advice.
Michael:> Now the broker knows that you’re serious because you’re actually cracking open his email in his marketing package and he’s getting a better sense of what you’re looking for.
Josh: How do you find him? I’m looking here we’ve got 50 real estate brokers in this part of town and how do I choses between all 50? It’s going to be a headache or is there some kind of easy way to decide who’s good and who I don’t want to be working with?
Michael:> I don’t know if there’s an easy way, I think there’s a system way. I’ve always used a LoopNet. I’ve done this twice now. I’ve done it before I bought this building I’m looking for apartments in Texas so had a team on a contract before I pulled out because of the restaurant side of stuff but I did basically build a team in Texas. I used LoopNet – loopnet.com. I normally don’t use it to find deals because normally that’s where the deals go that nobody really wants. What you can do is look for kind of asset you want to buy and area you want to buy it in and you can contact the broker on those. I started spreadsheet where I track all of brokers and you can then click on that brokers profile to see all the listings. The more listings that broker has in my mind the more experienced and the better they are. Then you start reaching out to them and building a relationship in that way. I use LoopNet. It’s a little bit numbers game. I say call 10 brokers and see where it leads you.
Brandon: I love that tip. I think I read on the blog couple articles about that and I just thought that was fabulous. Just contacting the brokers who may not have the exact deal right then but they might have other deals coming down the pipeline and if you can get in that pipeline then you can do well.
What kind of condition was it in when you took over?
Michael:> Again, this is a blue collar neighborhood built in the sixties so it was in fair condition. Meaning that the windows were outdated, the roof was leaking in places, the units were cosmetically outdated but it had good bones. The condition was okay. What I did for the deal was I estimated about $90,000 in repairs for new roof and as we turned over the units to turn them over and make them nice and shiny in the process – that was kind of the condition of it.
Brandon: When you took over what kind of challenges did you have? Did you have to do a lot of work to get it fixed up to fully rent it? What kind of work did you do at that point?
Michael:> We had two units that were vacant so as soon as we got in we were able to renovate those and in hindsight being a rehabber I over renovated them. They were probably a little too nice. Didn’t have to be as nice as they did because the tenants are pretty rough on the units as you know so you want to make stuff not necessarily nice but sturdy. I made things a little dainty and shiny maybe. Then we replaced the roof. Made some improvements to the common areas. A lot of it was done over time. I got to say one of the reasons I got into this property was because the rents were low. The previous owner was getting an average of 550 per one bedroom but market was really at 750. Once I saw that I saw the opportunity but the problem is in Washington DC there’s rent control. You can just say “Today your rent will be $1,000. Take it or leave it.” You can only raise rent very systematically and very incrementally. I knew to get the units to market rate would require turnover as well as time.
Josh: What’s your take on rent control? It’s a topic that I don’t think we’ve actually approached in 66 shows and I’m curious about it. Do you think rent control holds property values down? Do you think it potentially keeps properties renovated to a lesser extent than they might normally be? What’s your take on rent control and its effect on rental properties?
Michael:> It always depends what’s your perspective is. If you’re a capitalist you have one perspective. I actually have interest in transitional housing and affordable housing. I do have interesting in that. If you look from that perspective I can see the purpose of it. It keeps affordable housing for people so they can live close to their jobs. I can tell you in DC if that were not the case the city would look quite a bit different and you could be certain that rents would be much higher and buildings would be nicer. I would say from a capitalist perspective it certainly keeps rents down it keeps the quality of the buildings down for sure. From a profit making perspective not having rent control would be much better.
Josh: Was there onsite manager or who took care of that?
Michael:> Property manager who I interviewed in the process leading up to this who was in Washington DC. He basically took the building over.
Brandon: Let’s get to the story of how did you nearly get bankrupt on this thing.
Josh: He’s avoiding the topic Brandon, clearly.
Brandon: I want to know the sad story.
Michael:> The wound has just recently healed.
Josh: Wait let me get Ben and his violin.
Michael:> People have warned me about Washington DC. Everybody warns you. Actually what happened was much worse than what people warned me about and it went something like this: There was a tenant in there who for some reason or other was disgruntled in some way. He wasn’t just disgruntled he actually knew the system, he knew the law very well, he knew landlord tenant law.
Josh: They all do. They always do, the professional tenants.
Michael:> When It started I thought his mission was to bankrupt me. I think he felt that I was a capitalist pig and he wanted to show me what happens to the people like me. What he started doing, well he wasn’t paying the rent but that was the least of things, he was basically calling the authorities for real things and primarily made up things. But when you do that authorities normally respond and when inspector comes to the property they will find something. Normally they won’t find just one but a dozen things. What started happening was as we were doing renovations he was calling the government office that enforced work permits and issued permits and things of that nature. DC is very strict, the law is very strict. You need a permit to replace a light fixture, to replace a toilet you need to pull permits and it has to be done by licensed contractors. It can’t be by plumber who has a license in Maryland that is perfectly qualified to do deals got to be licensed person. That person will charge you 500 for walking to the permit office whether the permit cost $25 or not. All these laws aren’t enforced to the letter, normally. Because he was calling the office every second day and emailing - he wasn’t just emailing the inspector he was emailing supervisors and people in charge and we had basically a laser on this building. At one point they called for a hearing and it was me and my property manager, the inspector, inspector supervisor and the number two in command. I’m wondering why is there so much firepower in the room and the guy was “What is going on over there? We’re just getting barraged with emails and phone calls.” They fined me $25,000 which I “settled” for $5,000 so I didn’t have to go to court but I was my right to go to court for that and that really opened my eyes to how strict the laws were and not that we we’re trying to get away with stuff it was largely ignorance I suppose. Then he called other authorities like Lead Paints people and local associations and he made it difficult for the contractors to work there. There was stuff they were dealing with there.
Josh: This guy was somebody who you inherited, correct?
Josh: Ultimately there’s probably very little you can do to avoid somebody like this if you’re inheriting a building, correct?
Michael:> Well there’s something that I was told to do and I didn’t do.
Josh: What’s that?
Michael:> I was told to search the court records by tenant to see what kind of legal activity there was.
Josh: That’s actually really interesting. I never thought about that.
Michael:> I did it after the fact and I discovered that two of my tenants that were giving me problems actually had the most active court record. You don’t really care too much about domestic and civilian disputes, you really care about landlord tenant stuff. If someone’s been in court for eviction or any landlord-tenant mater they’re going to know how to file a suit, filling up a one page form, they’re going to know how to get a free legal advice at the courthouse and they’re going to know all these things. Especially in DC and other jurisdictions its very tenant friendly and that may have made a difference, I don’t know.
Josh: I think that might be probably one of the single best tips we ever had on the show. I’ve inherited some bad tenants and I’ve dealt with that and it’s an absolute nightmare and I never even thought about that. You look at the rent roll, you look at who’s on it and if you end up buying building with one of these professional tenants you could really find yourself in a lot of trouble and costing you dearly as you’ve experienced. Now, in hindsight’s had you found these guys in your search would you potentially not done the deal?
Michael:> That is a big question. We are all so eager to do a deal and sometimes we have blinders on. Especially if were more inexperienced, it goes for rehabbing also. I would pass on deals now that I would have done two years ago. Would I have done anything differently? To be honest with you probably not. I would have said “I see it, I can handle it.”
Josh: Now if it happened today and you came upon the same building with the same numbers and you saw this guy and his court history would you say “I could handle it.” Or would you pass?
Michael:> It depends. I would probably ask previous seller about this guy because they’re not going to volunteer information. I’ll say “Tell me about this guy a little bit, tell me how he is.” Then I might pass, I don’t know. Based on what I now know I do not want to go through this again.
Josh: At least the law when you’re hiring employs references can’t really say much but landlord can certainly say so. But if they’re selling the bulling to you they want to get this guy and this building of their hands.
Brandon: Probably why they are selling. How did the story end, what happened?
Michael:> The only thing he did was he sued me in three different dockets, probably every six weeks for repeated things. I don’t like being in court makes me really uncomfortable, I get really anxious, I get out of there literally drained I have to take a nap. This was our fifth court appearance and the judge recommended informal hearing. It was me, my property manager, the judge and the tenant. He’s going through these things and judge knew that they were little bit made up and all of the sudden he gets up and he strand up and reaches out his hand. I have been quiet the whole time just watching this thing going down and he goes “I’d like to talk to Mr. Blank for five minutes.”
Brandon: This is the tenant saying that?
Michael:> This is the tenant. I was like “What?” I said “Of course” I made three attempts to communicate with him different ways that completely failed miserably, it was bad. He reached over to me and said “I’d like five minutes.” The judge and the property manager excused themselves and I’m sitting here – I can’t remember what we talked about. All I know we agreed to grab a cup of coffee afterwards. They come back in and the judge says “What do you want to do with this case?” and he says “I’d like to dismiss it.” they’re looking at me like what in the world did you guys talk about while we were gone? He signs the paper and we shuffle down and all of the sudden I’m having coffee in courthouse coffee with this guy and we’re talking about our life’s and our families and I was like “I’m sharing way too much stuff with him and so is he, based on our history.” We’re having this really cordial conversation and after 50 minutes I said “By the way, what about the rent you owe?” He goes “I’ll take care of it, you don’t have to worry about me anymore.”
Josh: What was it that put it over with him?
Michael:> Honestly you guys I do not know. I think the good lord had mercy on me. I still don’t know why, I do know that his motivation wasn’t entirely directed at me. He felt like the city was not doing their job and he wanted them to do their job. A lot of that was motivated by that and he wasn’t aware of all the stuff, the cost. I said “Look, the stuff I’m spending on this stuff I was going to replace the carpet and I was going to do this, I don’t have the money for it anymore.” He wasn’t aware of that. It was kind of one of those discussions that just opened both of our eyes I guess and he has not made a call since then. That was a year and a half ago.
Josh: He’s still one of your tenants?
Michael:> He is still one of my tenants.
Brandon: Have you considered just kicking him out?
Michael:> You can’t just kick someone out in DC. You can only evict someone if they’re not paying the rent.
Brandon: But at the end of his lease can’t you just ask him to “I’m not going to renew your lease we’re going to remodel your unit.”?
Michael:> No, you cannot. Month to month lease is same as the lifetime lease. Here’s the thing about DC. DC is extremely difficult to make money in, however there’s incredible opportunity in DC from a real estate perspective.
Brandon: How so?
Josh: What’s the upside?
Michael:> The upside is that it is very stable market. Vacancies are very low and there a lot of demand especially if you’re looking at areas that are improving – there’s lots of demand. There’s a lot of old buildings like this one that have been mismanaged for 20 years. Because of the rent control they’re basically undervalued. If you can get in there and for example if you put section 8 subsidized housing in there they’re exempt from rent control. If you can do that it will add value immediately. Unfortunately my previous property manger was against section 8 so we never did that and I now have a new property manager three months ago and he loves section 8. It makes such a huge difference because section 8 pays 845 for those bedrooms that’s the previous owner was getting 525. Now you add that times 12 and the building should be worth $1,000,000. I bought it for 475 it should be worth a million once I get there, I’m in year three now, maybe not in the three years but that’s the opportunity.
Josh: Something what Brandon and I had a discussion about a week or two – we were debating section 8 and rent control and we had said “Listen there’s areas where section 8 pays far more than market rent. And there’s places where it pays less” In this case there’s definitely huge opportunity for you and that’s fantastic.
Michael:> You need to have the right property manager I think that’s a lesson also and sometimes you don’t know that upfront. I know the questions to ask but sometimes you just don’t see how someone performs over time so you have to make a correction.
Brandon: Let’s talk about your property manager really quick. You said you had another one and then few months ago you switched. Why did you switch and how did you find your new one?
Michael:> I generally don’t like to say bad things about anyone and it’s not the property manager was bad I think there was just not a great fit. What I mean by that section 8 is very problem in this part of the city and in some other cities so you really need to find someone who knows and specialist in section 8. For me also the property manager had a lot of smaller single family houses, duplexes that they were managing and this was a 12 unit which was little big for him but it was really my entry to the commercial world and I really wanted to go bigger so I was looking for more systems. I was looking for certain reports that he couldn’t provide, not without long emails and phone calls. If I contrast it with my property manger now the reports I’m looking for are just there in real time. I log in and it quickly tells me the story what happened last week, last month, whatever else. It was the reporting that I was looking for – that I was missing.
Josh: What reports were those? What was the information that you weren’t getting that you wanted to get?
Michael:> For example delinquency reports. When where the rents made what dates where the rents made, what was the current balance? That kind of thing. I want to know PNO I want to know was soon as they right a bill I should be able to get a PNO in real time or close to real time. I want to know what the work orders are. I want to know when they were open, when they were closed, I want to know what checks we’re written and I want to know what unit that was for. I say “Why are we spending so much on unit 202? What is going on there?” I can ask questions about why we’re spending so much money on 202. Well its maybe a pain in the ass tenant who calls in every week or what’s going on, what are we doing in there – those kinds of things.
Brandon: Let’s talk a little bit more about raising money because you raise money for this apartment deals. How do people start that whole process? We talked about flipping earlier. Let’s say I’m a new investor maybe done flips and I want to raise a $1,000,000 for an apartment building. Where do I start? My friends and family don’t have $1,000,000.
Michael:> Here’s what you do. First thing you start with your friends and family because you can always start with people you already know because that’s what you have. Some people are more fortunate in people they know and they could be less fortunate. If you live in a trailer park you can raise a $1,000,000. It may take a little bit longer but the methodology is exactly the same. You do two things. One is you create a sample deal. This is my secret, I have not seen this repeated anywhere else. First thing is you make that sample deal, similar to what I talked about on raising houses if you don’t have a previous deal you just make one up. Now you’ve got to tell you make one up but you basically create an investor package. The way you do it you go on LoopNet and you download a marketing package or you go to Marcus Millichap or CBRE because their marketing packages are so fantastic. They have everything, they have photos, they have information about demographics, they have rental comps, sold comps, they have as is financials, they have performance – they have everything you want in your package. You take that thing and you just repurpose it. You create your own deal package out of that. This takes a little time to do that but once you have that you can take that to your investors and say “Here’s a deal. When I get one it’s going to look like that.” You use that as a tool to talk to the investors. The second thing you do is you talk to everyone you know. Just like we talked about earlier “I’m doing this thing 12 to 15, whatever, 10% return, you know anyone?” Also mention the minimum investment because it qualifies people, don’t just say “I’m looking for money.” People say “I’ve got a $1,000.” You may not want a $1,000 you may want 25,000 or maybe 100,000. Mention that it’s a minimum investment and the return, do they know anyone. They go “I don’t know anyone but my boss might be interested.” They’ll make an introduction, you follow up on that person and you talk via email and phone and you do a meeting with that person. In that meeting you basically build credibility. Same thing you did with investors previously you talk about your ambitions and you talk about your team members.
Brandon: That’s really, really good advice.
It’s time for the Fire Round.
These questions all come from the BiggerPockets forums and we’re going to fire them at you and see what you say.
My tenant asked for a two week extension on the rent. Would you give it?
Michael:> I guess it would depend. Is this a chronic request or what? I don’t know. Previously I would have said “Yeah, I’ll work with a tenant.” Now I would say I work with it but I will file an eviction today. When you pay me that I will then cancel the eviction. You have to do that in DC because of the way the laws work, they get the clock ticking. In DC I would say “No, I’m sorry I have to follow the process.” But my nature is to try to work with someone.
Josh: I think anybody who’s going to cut somebody a break should probably follow that advice anyway and really follow the process. I think that’s where most new investors really stat finding themselves in trouble – they’re lenient or they don’t stick to it. If it’s time to file the notice, file a notice. If they come through afterwards ok then maybe we can pull it.
Brandon: When I first got started land lording people used to call all the time and be “Hey I’m going to be a little late on the rent is that ok?” at first I said “Yeah, that’s fine, I’ll work with you.” Then as I got more rentals I started saying “That’s kind of annoying” What I started doing was charging in extension fee. Sure, it’s going to be 25 bucks to extend it for five days. I had couple, 4-5 people every month do it and then that lasted a little while but then people I think they just got tired of paying that and then they stooped. Maybe two three four month they kept paying the extension fee, the same people, then they stopped. I don’t think that anybody has asked me on three or four years now if they can have an extension. That’s an idea somebody could try it. I don’t know if it’s worth the risk but it’s an extra 100 bucks.
Michael:> Hey Brandon it’s called the late fee.
Brandon: I would change the late fee if they passed the other …
Josh: This is an extension for you.
Brandon: Half way in between. The late fee was 50, the extension fee was 25.
Josh: $5 I don’t like you fee and you reel in money.
Brandon: We charge notice serving fee. We change the late fee of $50 and then if we have so sigh the guy out to serve him the notice, which we always do, we charge another 35 because that what we had to pay the guy to do it. It’s a hefty fee that they start getting. I was reading today that late fees were illegal in some places of the country which I did not know.
Josh: I was going to ask you that very question. I’m not sure that kosher everywhere and all the fees that you may be adding may work in your jurisdiction but I think listeners to check locally what’s allowed and what’s not allowed.
Brandon: We had it written in our lease what we’re going to charge them and haven’t had anybody question it yet.
Josh: Hopefully you’re lawfully putting it in your lease as well.
Brandon: I think so.
Josh: Michael, what would you consider a deal breaker when looking at multi-family? I’m sure you have more than one deal breaker so share a couple.
Michael:> There’s one in particular – not being able to provide proof of rent deposits. They say “10% vacancy” Great. “What’s delinquency? Show me who’s actually paying the rent. -I don’t want to give you my tax renter because I don’t have separate one for the building. Alright then give me your bank deposits.” You need some kind of proof of what’s actually being collected over the last 12 months. When you’re buying smaller buildings I just seen a lot of documentation missing because usually mom and pops smaller owners they’re not really that systematic but this is one thing I would insist on. A lot of other stuff you just kind of have to say “It’s not there I’m going to take a chance on it.” But you want to see what the level of delinquency is in the tenants. To me that is a deal breaker.
Josh: That’s good advice and I wish I had that nugget before I bought my multi-families.
Brandon: Should I ask my close family members to invest into syndication with me? Meaning my mom, my dad, my brother, my sister, my kids.
Michael:> The answer is yes but there’s a downslide to that. If a deal goes bad now you’ve got to live with that during the holidays.
Brandon: Can you pass the gravy and $25,000, please?
Michael:> That exactly right. I don’t know. I think if you don’t do it I think you’re leaving an opportunity on a table. I think my answer is yes. You just have to get over it and you’ve got to make it work.
Josh: What’s the most expensive item you ever put into a flip?
Michael:> I don’t know what this means. What do you mean?
Brandon: The person was asking have you do any repairs that were over the top.
Josh: Did you put a gold toilet or something?
Michael:> Not really. I would say that’s not been an issue. Expect for the apartments I think you can over improve rentals. If you’re doing that as a rehabber the standards are quite a bit different. I think the flips spin the other way its “What should I have done to try to cut and that’s now biting me in the butt during the inspection because I didn’t put that or the other thing. Replace the trim, everything else looks great but the trim not good.” That’s been error on the rehabbing side.
Brandon: Why don’t we move to the final section of the show we like to call Famous Four. These question we ask every one so we want to know the answers.
What is your favorite real estate book?
Michael:> I don’t know if I have a favorite real estate book.
Josh: There you go. It’s a good answer. You know what, probably my favorite answer of 66 shows. I love the fact that you dot have one.
Brandon: You did mention Rich Dad Poor Dad at the beginning so I’m going to say that one for him.
Josh: What about favorite business book? Surly you probably have some business non real estate book that you feel are valuable to you and your business.
Michael:> These are the kind of books that change your thinking. This is when they transform your thinking and Rich Dad was probably the first of those books that did that to me where I just said “Man I was so off.” That was kind of my first experience, such a little book, simple, yet it was so profound. Other one you’re going to know all probably say the same thing but E-Myth was kind of the next thing to me. It was one of those things “Wow, yeah, right on.” I think the other one when I read The 4-hour Workweek was the same thing. I’m like “Man, you’re right.” You just go “Wow”. They don’t necessarily teach specific tactic but they change your thinking.
Josh: What do you do for fun? What kind of hobbies do you have?
Michael:> I play competitive tennis. I played in college and I play USDA tournaments and I love doing that.
Brandon: What a coincidence because I play tennis in high school. I played one time ever in my whole life.
Josh: I would love to watch Brandon swing a tennis racket – a fun Vine video.
Brandon: You don’t want to see that. I do like Vine thought that is a fun thing. Come follow me on Vine.
Final question: What do you believe sets apart successful investors from those who never get started or those who fail?
Michael:> I think the secret to success, not just for the entrepreneurs but life in general, is to be intentional. I really like the word intentional. Here’s what I mean – majority of us including wannabe investors tend to drift to life. They’re very comfortable with where they are and house they live in and the house the have and they’re never compelled to do annoying different. There’s a drifting. And if you want to do something new you can’t be in a rot and the comfort zone – you have to get out of that. Successful entrepreneurs are ones who pay attention to their discontent and want something better and second thing they do is they commit. These are people who say “I want this and I’m going to commit to it.” Then third they take action. This is like what we talked about earlier a lot of people simply stop there. They never take action. They’ll buy another book, they’ll go to another seminar but they never take action. I think those are the three and once you’re in it as entrepreneurs you have to persist. There’s going to be challenging and if you’re going to give up on first challenge you’re never going to make it. Those are kind of four that I could think of.
Josh: Michal it’s been fantastic having you on a show I think we all picked up really cool nuggets, we definitely appreciate having you on. Where can people find more information about you - in 23 seconds or less?
Michael:> First of all on BiggerPockets. I’m writing articles on apartment building investing every single week, I appreciate the opportunity to do that. The website is michalblank.com and I have additional articles on there, I just launched a podcast as well, it’s on iTunes. I also have a YouTube Channel and you can find all that stuff on the michaelblank.com.
Josh: Thanks so much for being the part of the show we also appreciate having you on BiggerPockets. For those folks who are listening if you’ve got any questions for Michael you can ask on the show notes on the BiggerPockets.com/show66. Thanks again Mike.
Michael:> I appreciate it. Thinks very much.
Brandon: Thank you.
Josh: Alright everybody that was Michal Blank here on show 66 of the BiggerPockets podcast. We want to thank Michal again for all the information, the insight, the tips and hopefully you guys will avoid dealing with some of the chaos that Michael has gone through from listening to the show. That of course is the goal of the BiggerPockets podcast is to help you guys out to be a better investors. Thank you for listening. Another way to become a better investor is to jump on BiggerPockets.com to read our articles, to get active, engage in our community if you are not doing that you are absolutely missing out. The people who do get involved not only do they grow their business and get better at investing but they find apartments and deals and do all sorts of cool stuff. So get involved, get active – Join today if you already haven’t. Get on the site. Also want to remind you jump on the Facebook make sure to like is because Brandon really wants to be liked.
Brandon: I like friends.
Josh: Yes, we like friends. Like us on Facebook, follow us on twitter, find us on G+, do whatever you can to follow us we’re everywhere and we’re doing our part to help you out so jump in, be a fan, follow us, get on BiggerPockets and more importantly get out there and make it happen. Make your investing work, be active and that’s really about it. Thank you so much for being listener, we’ll see you on the next show. I’m Joshua Dorking, signing off.
B sure to join the millions of others who have benefited from BiggerPockets.com. Your home for real estate investing, online.
If you signed up for BiggerPockets via Facebook, you can log in with just one click!
Log in with Facebook
We just need a few details to get you set up and ready to go!
Full NameUse your real name
PasswordUse at least 8 characters. Using a phrase of random words (like: paper Dog team blue) is secure and easy to remember.
By signing up, you indicate that you agree to the BiggerPockets Terms & Conditions.
Receive a free digital download of The Ultimate Beginner's Guide to Real Estate Investing.
Connect with 1,000,000+ real estate investors!
Find local real estate meetups and events in your area.
Start analyzing real estate properties, we do the math for you.