Escaping the 9-5 Grind with Just 2 Properties (in 2 Years!)

15:42Ashley Kehr:And he comes up with the estimate and breaks it down. Sometimes we've done it like room by room as to like kitchen remodel 7 ,500. And, you know, it includes the cabinet assault, countertops, whatever that may be. Sometimes it's a material and labor. A lot of the times it's just the labor cost and then it's up to me to, you know, do the materials based upon what I want. And that too, we do have to go over together, like, the tile I'm picking out. Is it going to be more labor because of the tile design that I want, which would increase his actual bid on it? So there's a lot of little nuances like that, that we have to make sure we're on the same page about too.

16:26Ashley Kehr:But that's pretty much the process. And then for apartment turnovers, I don't even go to the properties at all. I just have Daryl go there and he has a whole spreadsheet that he's created that is like every material that we've ever used in an apartment turnover. And then he just picks what he would need, how much of each, and he builds out the materials cost and then he adds in his labor to that. So for those ones, I don't even walk the property or go to them.

16:55Dylan Pettijohn:So moral of the story, everyone needs a Daryl, basically, so they can just do the work for you.

16:59Ashley Kehr:I help start the spreadsheet. I'm like, okay, this is how you link and then go ahead and pick everything I put in there. But I think that spreadsheet, and I'm pretty sure it's in the biggerpockets.com slash resources or the.com slash rookie resources. We've put a template up there of his creation that he's made. The rookies can use it too. And then you can just plug in, you know, if you don't like the LVP color, they're all picked for the apartments. You can just change it with something else in there.

17:29Dylan Pettijohn:Well, Dylan, I know the property that you purchased, not only were you doing these kind of like interior renovations, but the property itself was a conversion, meaning it wasn't built initially as a triplex. It was built as a single family home. And at some point it was converted into three separate units. And sometimes conversions can be great because if you've got a really big single family home. You're able to generate more revenue by turning it into three separate units. Other times, maybe a conversion can cause more issues if it was maybe forced on a single family floor plan that wasn't ideal or if the execution wasn't that great.

18:06Dylan Pettijohn:Which one of those two that you fall into with this property? Was it a great conversion that really supported the triplex or was it maybe a conversion that was forced?

18:13Tony J. Robinson:I would say this one was a pretty good conversion. I talked to my partner that owns quite a few single families and he was like, I've never bought these conversions because every time I walk into them, they're just terrible. Like they have, for example, like you may have electrical runs that go that are for one apartment that go to another apartment, even though the panels are split. So then you have to turn off breakers in different apartments if you're working on something or some of the water lines are all tied in together or the quality of it in general is just not very good. He did say that this is the best one he has ever seen as far as conversions go.

18:48Tony J. Robinson:So I'm happy about that.

18:49Dylan Pettijohn:Well, that's good news. So I guess were there any issues actually either performing the rehab or managing it once the rehab was done because of their conversion process?

18:59Tony J. Robinson:On this one, no. I have actually had a really good time with all of the people that live there currently. So one of the residents has lived there for a, I think it's 13 years. And what I did was, you guys know Dion McNeely's binder strategy? I've used that on literally every property I own. If I get inherited tenants, I'm not opposed to keeping the people that are living in the property because I know if it does end up being any issues that we can just take care of that down the line. But if it's somebody that's been there for like 13, 14 years, I can trust that they're going to be fine to continue.

19:36Tony J. Robinson:The other people I've had move in have been people that just knew me through the community and they they've been great so far too i will say that with some of the different units you you can notice like maybe there's sound that can bleed through into a different unit sometimes we don't have that issue as much because all all the people that live there are relatively quiet like they're not super loud they don't have kids running around uh so it's it's been pretty good to manage for me but i have seen some that i do not want to buy because i know that they didn't properly insulate everything. So you have sound constantly bleeding through and tenants complaining about that.

20:16Tony J. Robinson:Or there's an upstairs neighbor and they didn't plan that out to where you're going to have the flooring dense enough to cancel out the sound and stuff like that.

20:25Ashley Kehr:Tony always loves the story of an apartment I used to manage where the tenant sent me a video and it was a video of her wall, but it was the noise was the tenant upstairs slamming her toilet seat down after she went to the bathroom. And that was like, that was when I would rip my hair out and cry because I couldn't handle the tenants anymore and decided to outsource it to property management. But yeah, like that, you think it may not be like a big thing, but like that to me was the worst part of property management was dealing with tenant issues between tenants. And like, if you're able to prevent some of those things from happening, it can save you a lot of headaches down the road.

21:09Ashley Kehr:Because like, who wants to live next to someone that's making noise? And then who wants to live next to someone who's complaining? Like if you can, you know, and I think of that with common areas too. When you're buying small multifamily, if they're sharing a common area, are you going to have a cleaner come and clean it? Are you going to make them both responsible? Are they going to get upset because one person cleans it and one doesn't? So there's a lot of things that I've learned along the way to actually think about these people are living together. What are some of the issues that could come up with this property that I want to be proactive about and maybe prevent or possibly not purchase the property?

21:51Ashley Kehr:Because I already know it's going to be a headache down the road.

21:54Tony J. Robinson:I was just going to say, as of late, I've just tried to avoid anything that's like an over under unless it's a purpose built multifamily property, because I don't want to deal with anything like that where there's sound bleeding through both ways or one neighbor is smoking in the upstairs apartment, not smoking inside that that'll get you kicked out, but smoking on the porch and outside and it's, you know, going downstairs or vice versa. Like I just don't want to deal with that.

22:21Dylan Pettijohn:Now on the topic of tenants and managing those tenants, what policies and maybe like paperwork have saved you from rookie mistakes when it comes to tenants and deposits? And I guess, is there anything that's maybe burned you that you changed moving forward?

22:35Tony J. Robinson:I should not lock people in on one year leases when I first get the property. And that's something that I learned on the 12plex because on the triplex property that I bought, I locked the lady in that was living there currently for another 12 months just at what she was at currently. So it didn't shake anything up. And instead, I would start to do those either on a month to month or maybe a six month. So I do have the opportunity to do that bump within that year because now I've gotten to the point on that one where the property taxes have chased up to where I bought it at, but I've needed to raise her rent.

23:16Tony J. Robinson:And then I had to do that after I had already gotten billed for the property taxes. Luckily, I did get the other two units up just because I had rehabbed those two. So those are up to market currently. But yeah.

23:29Ashley Kehr:So with the tenants and the renting, you mentioned doing the binder strategy to slowly increase the rent or make it their decision, as Deanne says. What are some other things and lessons you have learned along the way now that you've become a property manager and landlord? Are there certain systems and processes that you've put into place?

23:50Tony J. Robinson:Yeah. So as far as late fees, I used to be more of a stickler on this kind of thing and just saying, hey, if you pay late, you're late and that's that. What I've started to do more, because it doesn't happen often, but people have situations where they do need somebody to work with them and actually care. And that's something that I've tried to do with all of the people that do live in the properties is understand the situations, but then also So whenever any issues come up, that's the number one complaint I get from residents that live at my property that have lived at other private landlords' properties is they just don't care and they don't fix stuff quickly.

24:31Tony J. Robinson:So a month might go by before something silly gets fixed, like their stove isn't working. Like I've had to replace two of those in the past week just because the property I bought there, they're getting relatively old. but yeah just actually care and take care of people quickly and I feel like they've all really appreciated that and I think that's reflective in the fact that everybody always pays rents on time and if they're not going to they actually will let me know ahead of time like hey I'm switching jobs so I might be a few days late and I'll say okay I just went and talked to the other guy that owns the property.

25:10Tony J. Robinson:I got the late fees waived for that. Just pay it when you can, you know, provided that it's that day that they're telling me they can pay by.

25:17Ashley Kehr:Yeah, I think like, and not only like moving fast on the maintenance, but just communicating. Like if you can't get a contractor out there right away, but you are constantly communicating as to like, thank you. I've received your maintenance request. I'm going to contact the vendor. I contacted the vendor. They said they could be there Tuesday. Does this work for you? Just a reminder, today's Tuesday. The contractor is coming in, following up. The contractor didn't have the part. I am so sorry. We're doing everything that we can for him to get the part or whatever. And I think that goes a long way.

25:54Ashley Kehr:Instead of just you say, submit a maintenance request. They don't hear anything. And then randomly, they get a call a couple of days later. a contractor is coming on their way to their property to check it. The contractor leaves. They don't really know that much. The contractor doesn't communicate what's happening. So I think a lot of that follow-up and communication and there's a lot of property management software that has you can add notes. You can indicate every step of the way of this maintenance request from it being submitted to completion as to what happened. And that's not only nice for your tenants to know what the process is and where it's at and what's happening.

26:34Ashley Kehr:But also, if there are any issues down the road, I just went to court to small claims court and having these logs and logs of records of being extremely efficient with maintenance on the properties, it saved me to show that I definitely was taking care of things when this tenant didn't try to pay rent. So not only just communicating with the tenants, but also for your own protection too.

27:03Dylan Pettijohn:Yeah. And Dylan, you're, you're self-managing all of your units.

27:06Tony J. Robinson:I will not pay a property manager because it may be 10 % of gross, but if you actually do the math, a lot of the times it seemed like it's 40 to 50 % of net if I'm paying a property manager.

27:18Dylan Pettijohn:Yeah, that's a very valid point. And actually we talked about this in a previous episode, but a lot of times two PMs will have like their own maintenance company, right? And maybe they're, charging a little bit more than what going rates are. And you start to realize, man, that's really eating into the bottom line here. So interesting. Well, up next, Dylan, you jump into a 12 unit and strangely, it feels easier than the triplex and created four times the equity. So we're going to unpack the financing, the partnership, and why commercial maybe isn't as scary as a lot of work you think it is. But first, we're going to take a quick break to hear a word from today's show sponsors.

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30:49Dylan Pettijohn:All right, guys, we're back here with Dylan. So Dylan, I just want to jump in. Why did the 12 unit that you purchased feel easier than the triplex?

30:57Tony J. Robinson:Because less of the attention to detail was on me. If you've gone through, well, you've definitely gone through, but going through a residential transaction, everything is focused on you and your ability to pay for that property. Now, they may factor in if there's leases, I think it's 75 % of the gross rent for the lease. With the commercial property, they're looking at the deal specifically. And if it's something that they want to be part of, they look at the debt service coverage ratio of the property to make sure it's something that's going to be safe for them to give you the money for.

31:33Dylan Pettijohn:And when you say they, Dylan, who are you referring to? The bank.

31:37Tony J. Robinson:So do you want me to clarify that?

31:39Dylan Pettijohn:No, yeah. How you said it was fine, but you can continue.

31:41Tony J. Robinson:Oh, no, no, no. I was just going to say that the bank looks at the debt service coverage ratio, so it makes it a lot easier. As somebody that definitely did not qualify for that property, I was able to bring in somebody else that could sign on the debt with me. And yes, we both had to sign personal guarantees, but we were able to get the deal done, and we've created quite a bit of equity from that deal, too.

32:02Dylan Pettijohn:So I definitely want to break this deal down, but you said that you couldn't have afforded it by yourself. What was the purchase price on this? Because you said the triplex was$300 or$250, somewhere in that ballpark. What was the purchase price on the 12 unit?

32:15Tony J. Robinson:So the triplex was$250. And then we got the 12-plex under contract for$775. Initially, we started at$950. And then we just negotiated it down based on our rates being higher. This was last year. So rates were still in the sevens is what we were looking at. We ended up getting a rate a little bit lower than that. But still, we were using that as a point to leverage against the price to get the price lowered.

32:41Dylan Pettijohn:So just quick math, right? You said you picked it up at$775. That's about$65K a unit compared to, you know, what is that? $75K a unit, maybe almost$80K a unit on the threeplex. So significantly cheaper on a per unit basis. And in terms of actually getting approved, you said that it wasn't just you, but you brought in a partner. I want to drill into that a little bit because I think that's an approach that a lot of rookies like the idea of like, hey, I want to take down this bigger deal, but I don't necessarily have the ability to do it by myself. Ash and I wrote a book for BiggerPockets called Real Estate Partnerships.

33:19Dylan Pettijohn:We believe in the power of partnerships. But I think the million-dollar question, Dylan, from everyone is where do I go and find this person who's going to help me buy these properties that I can't afford? So how did you find this person?

33:30Tony J. Robinson:So I had pre-negotiated the deal with the seller of the property, and we had gone back and forth, figured out a price that they were approximately okay with before I was willing to go out there and start talking to other investors to see who would be willing to do it. luckily at the company I was working at, there was another guy that's been buying real estate for quite a while. He's been buying since 2019. I just started, you know, when I bought that triplex in 2023. So I showed him the financials and I said, is this something you'd want to be part of? Because I didn't think this guy was going to want to sell this this year.

34:06Tony J. Robinson:I was thinking the conversation I was having with him was maybe in two years, three years, five years, I could buy your 12plex from you. But he was like, no, I want to sell it right now. So I talked to this other guy and he luckily had the money for it because he's been investing for a lot longer than me and he's just let the cash stack up on the sidelines. So he was able to be a large portion of the down payment and I came in with a smaller portion of the down payment just to get the deal done. But it's been great thus far.

34:33Ashley Kehr:Now with the commercial side of lending, you mentioned that you have a personal guarantee on this loan. Can you explain what the difference between doing the commercial loan, getting the personal guarantees, and then the residential loan? You talked a little bit about the debt service coverage as to what it looks for. What are some of the other key differences? Because as a rookie investor, you don't have to do the residential. Even if you're not buying a 12-unit and it's just a single family or a duplex, you can still get the commercial side of lending. Can you give a little more insight about the differences between the two and maybe why a rookie investor would want to choose that option.

35:11Tony J. Robinson:Commercial is going to be really good if you're trying to qualify a property just from an income perspective instead of just buying a property that's going to need rehab beforehand. We had proof that this property was already able to cover the debt. So it was something the bank was willing to lend us the money on. Now, there may be some projects where you can give the bank an estimation of what you think everything is going to be like after a few months. I've talked to them about doing deals like that. But it's just going to be significantly easier to get financing this way. And also, it keeps the debt off of your personal credit statement.

35:52Tony J. Robinson:So when I pull up Credit Karma, this debt doesn't pop up like my other mortgage does because it's under an LLC. So it's our company that owes the debt. I signed the personal guarantee, though, So personally guaranteeing the fact that me and my partner will cover this debt over time. Another key difference between commercial and residential financing is on the residential financing side, you're blessed to have 30-year fixed rate debt. We just don't have that on the commercial side. There are some DSCR products that you can find, but for the most part, in my situation, working with a community bank, and that's who I try to work with because I like to build the relationships with the banks around us.

36:33Tony J. Robinson:You're going to be looking at 20 to 25 year debt, and it's going to adjust after a period of five to seven years. In our case, after five years, we have to go get a new interest rate with the bank. Now I'm hoping that's going to be in the fours or fives in five years and not the sixes, but we'll see.

36:49Dylan Pettijohn:So there's a lot of flexibility. You talk about building the relationships with the local banks. And that was actually my next question, Dylan, was how did you find this bank? You just did a Google search. Did you know someone who was already using them? Where can rookies go to find these small local community banks to lend on their deals?

37:05Tony J. Robinson:Yeah, so I would honestly just go on Google Maps and search for, you could use ChatGPT. That'd probably be faster, to be completely honest. But search for local community banks in your area and then just call all of them. That's what I did to figure out who was going to be willing to give me the money for this.

37:23Dylan Pettijohn:And when you say call them, let's say you call, they pick up the phone. What exactly are you saying to them? Are you saying, hey, I've got a deal. Can you give me money? Or how does that dialogue actually flow?

37:36Tony J. Robinson:Yeah. So just calling the bank, asking them to transfer me to the commercial loan department. If they have one, some banks will just say that, oh, we don't have that because I was just going down a sheet calling the people that would potentially work with me on that. and then letting them know what you have in mind for the deal beforehand. Since it was off market, it wasn't anything that was urgent. And then generally what they'll do, and in this case, what my bank did is they'll send me a term sheet, which is essentially like my pre-approval letter to say that they will do this deal with me. And then that's when I can finally get the offer submitted with the seller.

38:14Tony J. Robinson:And then we can start going through the due diligence process, which is quite a bit more expensive than if you've done a few residential deals, paying for some of those commercial things.

38:25Dylan Pettijohn:It adds up. And we can talk due diligence, but before we leave the topic of the community banks, how many do you think you called in order to find the right one to fund your deal?

38:35Tony J. Robinson:Yeah, luckily, this is one that's right up the street in my town. But I called at least 20, 30 banks just around town to see who was going to have better products. And it just turned out to be that this bank that is local to my town has been here for 200 years, has the best product because they hold the loans on their books.

38:57Dylan Pettijohn:And we interviewed my lender, Jeff Welgin, on a recent episode. And in that episode, and really in a lot of episodes, we shared that different lending institutions offer different products. And obviously, they're all going to give you a mortgage. but like the terms of that mortgage and how much creativity and flexibility they have, it does vary and sometimes significantly from one lending institution to the next. What Chase or Bank of America can offer is probably very different than this small community bank that Dylan went to for this deal. So just a reminder for all of our rookies to shop. And, you know, Dylan said he called 30 different banks.

39:34Dylan Pettijohn:So you got to put in the legwork. One last question for me, Dylan, on the 12 unit here, we talked earlier about you increasing the value. Walk rookies through what that actually means on commercial real estate, because for a traditional single family rental, the value of that home is 99.9 % of the time tied to what other comparable homes in that area have sold for. So it doesn't matter how much revenue the property is generating as a rental, it's how much did John Doe's house sell for next store. How is that different on the commercial side? And what specifically did you see for this property once you took over ownership?

40:14Tony J. Robinson:I think this is the beauty of the commercial space and was probably going to get people to want to go out and do a commercial deal after this is the fact that commercial properties are valued based on the income and the trading cap rates in the area. And all a cap rate is, is if you bought a property for a million bucks and it was making $70 ,000 a year, it's a 7 % cap rate. So if all properties are selling for a 7 % cap rate, what if you raise the income from$70 ,000 to$100 ,000 a year? Well, it's got to get reassessed back at that 7 % cap rate. So you just increase the property in value by whatever that difference is, that could be like 30%, 40 % in value, just on moving the income on the property.

40:57Tony J. Robinson:And what that looks like for these apartment buildings that we look to buy is we find owners that have a property, they've owned it for a really long time. They've kind of got stagnant with the rents because they've owned it for so long. They may even own this in cash. It really doesn't matter to them whether they're charging$700 a month or$800 a month for an apartment. But when we look at how that affects the value of the property on the back end, that's really where you can take advantage of that as an investor in commercial real estate, unlike the residential side, because we can go add that value to the property simply by increasing the rents that we don't have to do renovations or anything.

41:38Tony J. Robinson:Generally, we are doing renovations to maximize how much we can get. But if you just simply increase the income on the property, you can add substantial value. And that's why I'm trying to focus most of my portfolio on commercial real estate.

41:52Ashley Kehr:Along those lines, what did you do in this deal or maybe you're doing forward to get more creative with using the commercial lending? Are you incorporating any other type of creative strategies?

42:04Tony J. Robinson:So something that I always do whenever I'm talking to sellers of a commercial property, apartment building or otherwise, is I'll try to find a way to give them multiple offers. Generally, the price that they start out with is substantially higher than makes sense to pay as an investment. A lot of the times, I mean, I've talked to some of these people. It's just like, well, my lucky number is a million, so I want a million. And I'm like, okay, but it just doesn't make the money to support that. We can try to figure out how to make that work. But what I'll try to do is if they have a number that I can try to get close to by doing creative financing, I'll try to give them a few different types of offers.

42:45Tony J. Robinson:Like one might be a interest only loan for seven years and then it balloons out after that. Or I might do something where they sell or carry back 40 % of the loan. The bank gives us 50 % because the bank always has to have more and they need first position on the loan to be willing to lend on it. And then we'd only need to bring 10%. If you find a home run deal, even though you're, what is that, 90 % leveraged on the property, that could end up putting you in a situation where you turn that 10 % you put down into like 30%, 40%, 50 % or more. It just depends on how good of a deal you can negotiate.

43:22Dylan Pettijohn:The last thing I want to hit with you, Dylan, is the actual partnership itself. So you told us how you found this person, a coworker, which is great. You've kind of already built that relationship. But how did you guys actually structure the deal?

43:34Tony J. Robinson:Since I didn't have all of the money to bring to the deal, I was willing to take a smaller piece of equity in the deal. So in terms of equity, we have a table that's split 80-20. But in terms of decision making, I have 50-50 with him. So anytime either one of us wants to make a decision on the property, we have to both okay it. And I just had him agree to that if he was willing to do the deal with me. because we both need to participate in the management of the property. And just overall, I don't want to be put in a situation where one of us thinks we should do something on the property and they have all of the rights to just say, yes, we're doing that because I own 60 % of the property.

44:22Tony J. Robinson:And then the person owning 40 is just stuck dealing with it.

44:25Dylan Pettijohn:Since you're taking care of the management, are you also collecting a management fee?

44:29Tony J. Robinson:Yeah, so I'm charging back for management as well. And we actually have a different way that we've negotiated this because I've never really liked the idea of just a property management company that charges a fee on gross. So property management companies that charge a fee on gross income aren't really incentivized to save you as much money as possible. So we have a fee structure where I just charge him a percentage of the net income on the property. And I've talked to a few other investors in the area about that. And they're pretty excited about it. But I don't know if I'd want to roll that out to more people just because I'm trying to keep it like inside of our company where I'm managing that stuff.

45:10Tony J. Robinson:Like I'll totally help other people find deals, but I don't know if I want to manage anything for anybody else. Property management can be a headache.

45:16Dylan Pettijohn:Yeah, absolutely. And I think it makes sense on larger properties where that bottom line is bigger, right? Like 12 units produces significantly more net profit than one unit. So doing it there, I think, makes sense. But you're right. It definitely does incentivize the PM to not just focus on top line revenue, but also like, hey, are we conserving costs? Are we protecting the asset in that way? I think there's also something to be said. You said, hey, I just want to get this deal done. So I'm fine taking 20 % ownership. Because the true value, Dylan, isn't even necessarily in the number of units or the equity.

45:55Dylan Pettijohn:But it's A, that you're adding another property to your portfolio. So you're building your track record, which will make the next deal, I think, even easier for you. you're building a relationship with this partner who maybe you guys can go on to do more deals together. And in general, it's just making you a better investor. And I think sometimes rookies get so caught up on, I want to own the whole pie, but then they end up with the pie that's so small, like it doesn't even, you know, it doesn't even do anything. Right. So I just kudos to you for having a bigger picture view on the partnership.

46:26Tony J. Robinson:I had that conversation with him when we were first looking at doing that deal. And he was like, are you, are you, are you really okay with only taking 20 % of this? And I said, yes, because 20 % of doing a commercial deal is better than not owning a commercial deal. I would rather learn the process now with the money I have, and then we can focus on buying bigger deals later. Did I structure the equity wrong as the person that fined and negotiated the deal? Probably not. I probably should have taken a piece of the deal just for doing that piece, because what I've learned since then is that That's a really valuable skill to have.

47:03Tony J. Robinson:And people value that. Like I've talked to other investors. They're like, I would have probably just given you 20 % equity in the deal just for the fact that you found the thing in the first place and negotiated it. But I wouldn't go back and do it any differently because this gave me the opportunity to learn commercial real estate. And I'm happy to just keep this and continue to do other deals in the future.

47:24Ashley Kehr:I couldn't agree more, Dylan. My very first deal, I gave up a lot. I gave up equity. I paid a mortgage to the money lender, gave him interest. So he got all pieces of the pie, but I would not change that at all because it got me started in that first deal. So Dylan, thank you so much for joining us today. Can you let everyone know where they can reach out to you and find out more information about what you're doing?

47:51Tony J. Robinson:Yeah, of course. You can find me on YouTube under the same name, just Dylan Petijan. The easiest way to reach me is on Instagram. if you're looking at buying properties in the Indianapolis area. I am an agent and specifically work with investors. So feel free to reach out to me.

48:05Ashley Kehr:Well, Dylan, thank you so much. I'm Ashley. He's Tony. And this has been an episode of Real Estate Rookie.

48:13Dylan Pettijohn:Hey, rookies, if you're watching this, we want you to apply to be a guest on the Real Estate Rookie podcast. That's right. Ashley and I are looking for amazing stories just like yours to be a part of our Real Estate Rookie podcast. Now, look, you don't need to be an expert. You don't need to have done thousands of deals. Even if you've done one deal, your story could help inspire the next listener.

48:32Ashley Kehr:As a rookie investor, especially if you just got your first deal, it is all fresh in your minds and you are the best person to tell your story, give your experience on how you got it done to help someone else get their first deal.

48:44Dylan Pettijohn:So head over to biggerpockets.com slash guest. If you want to be a part of our show again, that's biggerpockets.com slash guest. And we'd love to have you on.