Brick x Brick Podcast

David Richter is a former real estate investor who now runs a fractional CFO business for real estate investors. He started his CFO business because he saw a need for real estate investors to have a better understanding of their finances. Richter believes that it is important for real estate investors to know where their money is coming in from, where it is going out to, and how much they are keeping. He says that this information is essential for making good business decisions. Richter also believes that it is important for real estate investors to have a system in place for managing their finances. He recommends the Profit First system, which is a way to allocate money to different areas of your business, such as taxes, profit, and operating expenses. Richter says that the Profit First system has helped him and his clients to become more profitable and to have more control over their finances. Richter says that many real estate investors are struggling with their finances because they are not taking the time to understand their numbers. He says that it is important for real estate investors to know where their money is coming in from, where it is going out to, and how much they are keeping. Richter also says that it is important for real estate investors to have a system in place for managing their finances. He recommends the Profit First system, which is a way to allocate money to different areas of your business, such as taxes, profit, and operating expenses. Richter says that the Profit First system has helped him and his clients to become more profitable and to have more control over their finances.   Ryan Goldfarb (00:05.322) Welcome back to the Brick by Brick podcast. I am John Errico here as always with Ryan Goldfarb today We are extremely excited to have a special guest David Richter David is a many was many hats but is also a podcast host as we are for the profit first for our podcast right i have appeared on david's podcast i don't know when that will be released relative to when this is being released but please check us out on that podcast and check out the podcast in general uh... is great information but david uh... first of all welcome thank you for being on our podcast yeah thanks for having me and always it's always a pleasure to get on and spread the message as much as possible so they want to start uh... if you could give us sort of the high level of review of what you currently do and that I would love to kind of drill down into your career, how and why you are doing what you're doing and then branch off from there. So currently I'm the author of Profit First for Real Estate Investing, a book out there for the real estate investing community. But I also run a fractional CFO business, so part-time chief financial officers, because everyone has a sucky bookkeeper in CPA usually, and they don't have anyone to be the glue there to actually say what's actually going on the financial side. So where are they making it, spending it, and are they keeping any of it? So that's what we really focus on to make sure people are keeping more of the money that they're making. That's what I'm into right now and trying to spread the message of profit first as well too. Just making sure people make profit a habit inside their business. Ryan Goldfarb (01:41.174) That's awesome. So I would love to hear how that I, you know, I believe if I'm not mistaken that your path to that involved real estate, right? Owning real estate, closing deals, wholesaling, et cetera, et cetera. I would love to hear a little bit about that, that journey. First of all, do you have a background in finance? Is that how the CFO fractional CFO business kind of generated? If you can see me, I don't know if people are just listening to this or can see me. I know I look like I should have a background in finance and then I have a I'm a fractional CFO company, but I have zero background in finance. I wasn't a bookkeeper, wasn't a CPA, didn't get my accounting degree or anything, but I run a fractional CFO firm. But the reason I did, I started that because my background is as a real estate investor. And so I started about 10 years ago, bought my first house on 12, and have never looked back. I read Rich Dad, Poor Dad, someone gave me that in college. That's what changed everything for me and my mindset. So it was a very typical story there. Ryan Goldfarb (02:41.408) The deal flow from about five deals a month, about 25 deals a month, doing wholesale, fix and flips, turnkey, rental, short term, long term, everything in between, lease options, subject to deals. I got to learn a lot in the five years I was there. And then one of the things I did learn, I did get to sit in a finance seat there even without a financial background because they must have looked at me too and said, you should fit in this seat. But then I sat there and I was like, okay, now that I understand because I literally sat down with our CPA for like six months and said, tell me everything. Like I want to understand how the money flows through here and what does all these mean on the profit and loss, the balance sheet, everything. Once I had that, that power in my hands, I could like tell the full story because I had worked in sales and acquisitions and selling the properties and property management and a lot of different seats up to that point. And now I understood how the money flowed through and if we were profitable or not. So I'm like, this is good stuff. But then at the same time, we were doing 25 deals a month, but spending 26 worth out the door. This is not working. So that's where it was like, okay, this sucks. So that was my first eye-opening experience to where it didn't matter that we did more deals that we had grown that much. If we weren't gonna keep more of it on the way up too, then I would go to these other events and hear on like different places, like whether it was a mastermind or a meetup or whatever, that people were like, oh yeah, we just did our most deals ever. We did a million dollars last year, whatever it might be. And then they're crying at the bar later. because they're like, yeah, but I don't know where any of the money is. You know, like, all the money goes in, money goes out. Have no idea what's going on. I just kept hearing that story over and over again. Then I moved across the country after five years of working there. I moved to Virginia, started with another guy, and since I had the power of seeing the numbers on the back end, I immediately asked him like... I don't care anything that you tell me how many deals you're doing, what's coming in, I want to see your books. Like I want to see your numbers. The numbers will tell your story." And he didn't have books. Like I mean he had books and a bookkeeper, but they weren't real estate investing bookkeepers. So it was like it was a mess. Like the story that I got was just a jumbled mess where I couldn't read it at all. So I'm like, we have to clean this up. We have to get it to where you know and are very confident. What are you making, spending, keeping? Ryan Goldfarb (04:55.642) on a monthly basis, like I need to get that. So got that within three months. And then from there, I wanted to make sure that he had a good system to like, you know, know where all the numbers were. So then we went through and was like, here's where all your cash is, it's in your rentals. Like it's over here because he had bought a bunch of rental properties and all of his equity was tied up there. He only had like 30% loan to value. So it was like, that's where all his money was. So that's where now I was able to just help him understand where the money was. So to me, He said to me at that time, just knowing what I make, spend, and keep, then from here also knowing where the money was going inside of my business has been life changing because now I can make better decisions around my money. So that's where to me I felt called to do the company that I have today, to start Simple CFO because I'm like I have a real estate background but so many people I know are struggling with they think income. solves all problems and it's like we're not taking the root cause and really knowing what's going on. So that's where I'm like. Yeah. So there's a lot there. Yeah, a lot. So thank you for that. Yeah, there's a ton of unpackers. So my initial impressions, first of all, I hear that. That strikes a very chord with me about money coming in, money coming out. One of the things I was shocked before I went into business for my own at all, right, is I worked a normal job. probably like most people have at some point in their life. And when I went into business, I sort of had this naive assumption that every business that I had interacted with before as a W2 earner or would start, knew exactly how much money they were making. They had everything buttoned up. It was just this kind of magic thing that every business had. And I was shocked to realize that even something like. For example, as we talked about in this podcast, Ryan and I have operated and currently operate a construction business, right? But even determining something as, shall we say trivial, sounding trivial, sounding as saying like, did I make money on this construction project, right? Period, like as a general contractor, right? Did I pull in more money than what I made? That itself is not. Ryan Goldfarb (07:09.346) One, that's not a trivial question, and two, if you ask general contractors, no one knows the answer to that. That's like, I don't know, maybe. And if so, how much? Did I make a lot? Did I make a little? Is that good? Is that bad? I don't know. We encounter that a lot. With our affiliated businesses, for a construction company, it doesn't really matter how much we make, because we don't really take any money out of that business. But even something like that is, it's like, It's almost like forensic accounting type of stuff, right? It's like going back being like, well, I bid this up and then I had this over to this and that and then I rented this car and that was kind of for this, kind of for, you know, it's just like, oh my God. Yeah. So I feel that pain a lot. And then the secondary question to that is, if you made money, was it worth all the time? Exactly. Yeah. Yeah, exactly. Very much so. One thing that you said that I found interesting and I want to drill down on too is, when you were doing real estate investing and now you're kind of interfacing with real estate investing, I'm sure you're still investing, but interfacing also with other investors in a different way. Is it the case that... A topic that comes up a lot in real estate investing is, do I make money through cash flow, through rental, revenue or whatever, or do I make money on appreciation? Why am I doing it? Am I making money so I don't have to work a day job? Am I making money so that I can retire? I think that those distinctions are pretty important, and I'll just say candidly from my own experience in real estate, I've made money through cash flow, through rents. Ryan Goldfarb (08:51.412) a lot of my real money, like the money that I would actually go into real estate for from like selling properties, right? Like from appreciation. So I wonder what your, A, what your background for the five years that you were working in this company was with that and B, what are your opinions on that today? Oh, sure. So back then I was buying my own rentals and I like the cashflow game, but I also like the appreciation game as well too. I mean, my first house was a home run where I like rented it out, then lived in it for a lease option on it and then the tenant cashed me out six months later so there was like no capital gains because of the tax law. This was a great deal. I got everything from it. I got cash flow, I got rent, I got the lease option, then I got the actual cash out. So that's where in the business too we were doing a bunch of different exit strategies. So we were doing wholesale and flipping and rentals and so I liked all of that so we had a mixture. I also feel like too at that point, one of the reasons why we were doing 25 deals but too unfocused. We had too many exit strategies, so it was too much overhead and the people that we had to employ to do the different types of exit strategies and growing that big. So I feel like that was part of the downfall. If I had my way, we would have kept growing the lease option portfolio we had. We had about 80 lease options in Indiana and like a Michigan area and then we had about 20 year long term rentals and the lease option properties were really good and because this was like 2014, 15, 16, a lot of people still couldn't get a loan or because of the bankruptcies of 2008, 9, 10. So it was like we were helping people that were good people that just couldn't go out there and get a mortgage at that point. So it was like I really like that and they paid better as well too because they had an option to purchase the property. They had first rights to purchase it. So it was like... We did a lot of good stuff back then. So that's probably what I leaned a little bit more towards because it was, you got the cash flow, but then you got the option. Ryan Goldfarb (10:48.234) to sell it to them as well too. And then to capitalize on that appreciation at some point of like, okay, I know I can at least make this much on this house and lock that in and maybe give them a good deal if it does keep appreciating, they're going to have some equity too. So I felt that was a win, win. Then in today's market, I am all about what is the best thing for your business? What can you capitalize on and be intentional about? That's where even when we were talking on my podcast and Ryan, I had asked him, I had you like you've done a lot of things in real estate like why'd you pick the different things that you're doing it's like Finding what doesn't work, you know Like what doesn't work for me because like what you can do and your expertise is gonna be different than someone else's So I feel like in today's market, of course with higher interest rates It might be difficult to do like the burr strategy as much as you were doing it a year or two ago So it's like some of those strategies you're gonna just have to pivot into something different Maybe subject to is a lot better acquisition strategy at this point because maybe you could get one of those two three four percent that someone has locked in so you're so that way you have more options when you acquire that property to can I sell this can I just keep it because it's such a low interest rate and then I could do a short-term rental or a long-term rental on it Or like whatever it might be but there's just it's you know Just in this environment with a higher interest rates it the strategies just change. So that's why I also like teaching the proper first methodology to because it's like it no matter what the market does elisa don't have to worry about even if it crashes you'll still have cash you'll still be okay you just have to pivot to what works for that market and what you do as well to because a lot of people can make it just making sure you're keeping is as well so that way you can you're not going down when everyone else is you know it's jumping ship on the titanic so let so let me take you to the moment we decided to start simple cfo You know, you obviously, so that's a business, right? That's its own venture. Did you think? Ryan Goldfarb (12:50.21) Maybe the way I envision that you might have started is you said, I see this problem that you describe, which is that from my own experience, it's this problem that no one knows where their money's going in real estate, which absolutely is a problem. Did you then go and say, OK, I can solve that by being a consultant. I can solve that by starting a business that has a process. I can solve that by offering, like selling a good. I know that you've also given the book that you mentioned and all of that. What was the, how did that come to be? I guess and what were your thought process behind it? My first thought process was just going into these businesses and do the same thing as I did with that first guy and say like, okay, here's where your money is going and just giving them that clarity. So more of consultant. I guess from the beginning, even though I didn't even think of it then, I was thinking more I want to create a business eventually and have systems and processes. But I got a call from my mentor and I called him and had a good conversation when I first started it and told him what I was doing because he was in the real estate world and coaching and consulting but he was doing it for operations and not the finance. So I was like, hey, you see a lot of businesses. Are you seeing the same things that I am? And would this be a … a good business to start. So I had a good mentor who was like, yes, I could even refer people right away to get in there. So that was a good in and a good confirmation. But then he told me the biggest piece of advice that I'm still using today. He said, you need to read the book Profit First. If you're going to start a financial company to help them, it's a great framework. So I read that book that evening when he told me, took 10 pages of notes and said, this is incredible because it speaks to me as the entrepreneur. And like this, you don't have to be a numbers person or a financial wizard or guru, like you just, or have any accounting degree, but this system will help you know where the dollars are going in your business. So that's when I started incorporating it. So there was like that product as well of like implementing a cashflow system with an actual framework that Profit First teaches. Then eventually once I was implementing Profit First for about a year, I went to Mike Mikalowicz, the original author of Profit First and said, I have a real estate background. Ryan Goldfarb (15:02.474) And now I've implemented Profit First successfully and see people going from like out of business with their hair on fire to like nice, orderly, calm, have money in the bank, you know, and like actually see that transformation. So I just asked, could I write Profit First for real estate investing? That's how the book came to be as well too. So then from there, I knew I couldn't just be a consultant anymore either, like it was just me because I was going to have too many requests to work with us because of the message that we were getting out there. So that's when it started scaling as well. started bringing CFOs on the team and just growing from there. So that's kind of how the progression went. you know, of like that metamorphosis of the business. So what is that business look like right now, that simple CFO business? Is it how many people do you employ? Like how is that structured? How does that work? So we have about 25 CFOs, have a leadership team of six people, and then work with over 100 real estate investors on a monthly basis where the CFOs are going in there and helping them make real decisions on the money and just get a good, we call it the very first 90 days, we call it laying the financial foundation. the one on one stuff you need as a business owner, like getting the cash in order, getting your books so that you can get a clean P&L balance sheet, cash flow statement right from the beginning. We implement a dashboard with all of our clients that's customized to their business. It's a simple Google sheet, because we want it to be very easy working back and forth, but it's tailored to the real estate investing industry. So that's what they get up front. And that's where I'm just trying to get them to know three simple numbers. What are we making, spending, and keeping on a monthly basis? And which dials do we need to turn? Ryan Goldfarb (16:38.582) Are we not making enough or are we spending in the wrong areas? Like, do we get to keep any of it? And like, or is my hair on fire in my personal life? Like, I can't keep living like this because usually like we've talked about here, people think income is always the answer, right? More income solves all the problems. And then they get to six figures, six, you know, then the 500,000 mark and then the seven figure mark. And it's like, the problems are just that many zeros bigger. And it's like, that's where the true financial freedom comes from knowing I can also make the money. keep it as well too and have a system for it. So that's what we're trying to impart to people, is helping them become that savvy business owner. And that's what the business looks like today. That's great. What is the average profile look like of your clients in terms of real estate experience, scale, financial experience, et cetera? We have two main programs. We have one where we just lay the foundation. So if you've done five deals or less, we're usually, that's where you are. You know, like you've, you're starting to ramp up. but you're like I need the foundation but I don't need other things. So that's where we have one but the one that we work with the people the most is when they're either doing five to ten deals on a yearly basis or up from there. So usually that's 200,000 in gross profit a year or up and then probably five million and down because once you hit five, seven, ten million depending on what type of business you have and the margins that you have. Then you can have a full-time CFO, which we've actually graduated some people out of the program of the part-time CFO to a full-time CFO But that's kind of like the client profile But then we in the real estate world we work with since my background is real estate investing We work with a lot of people in the single-family side where it could be short-term long-term Could be the you know rentals it could be also the fix-and-flip or wholesale We work with some multi-family some with debt funding, you know and have the big funds that they put together So there's a lot of different types, but a lot of real estate investors what about ten percent is other businesses usually because the real estate investors have the other businesses like we have a jet ski rental company like just some random stuff that they have as well and then we work with some marketing coaches and stuff like that as well too but that's kind of like what makes it up now and like who we're trying to serve do you see patterns I think it sounds like you have a lot of exposure to you know city of a hundred plus investors that you work with real estate investors work with every month you see patterns in those clients where it's like hey you know every Ryan Goldfarb (19:02.864) and flips is blank or whatever. Is that like the... Fix and flips, they're out of money all the time. They're usually either using their own or if they're using private money, they're getting into Ponzi schemes because like, hey, I've used project A's money already and it's gone and now I'm already on lender C for project A and then it just keeps going and going and going. So that's something we try and get people away from with this system and like, okay, how much money do we need? versus how much is coming in versus how much is going out. I want people using as little of their own money as possible to be able to use to either grow the business or to provide a good life for them. So it's like, how much can we get from other people and does it make sense with the interest that. You're paying them versus what you can pay out for yourself. For the flipping side, I feel like everyone's always running out of money just because they don't have a good system to know where every dollar is going. That's why I love Profit First because it solves that problem big time of giving every dollar a name in your business and being able to see it from a high level. I would say on the rental side that a lot of people over there, when they come to us, I feel like their hair's not as much on fire. Ryan Goldfarb (20:29.325) the Ryan Goldfarb (20:42.846) or even sell something on land contract or whatever one entry might be five lines worth but you don't have a real estate investor bookkeeper they might just market as income all income it's like well no in order to get the best tax strategy here. We need to put it to where it goes and to be compliant as well too. Not to mention just that, but that's where as well. That's a lot of the things. Everyone who comes to us, I would say, and probably 97% of the entrepreneur community just don't have a grasp on the business finances because a lot of us in our personal lives never got this. If you went to a Dave Ramsey course or a Red Suzie Orman or some of those people, you're probably ahead of most people. if you follow some type of personal finance program but a lot of people have it or they've made their ever at rich at port at but that's not a good enough education to know what to do with the business finances So it's like, I feel like that the business finances are just personal on steroids. So like if you have good discipline habits and stuff in your personal finances, it usually translates to the business and we can get it under control faster. But then a lot of people that come to us don't have good habits in their personal life, so the business is a mess. And then it's like we have to unravel some of that. plus implement the systems and habits that are going to help them for the future. So everyone, no matter what side of the fence they're on, the long term or like the fix and flip or whatever, most of them come with one of those two in their background as well too. But those were some of the things that I've seen from specific niches. Ryan Goldfarb (22:11.022) Do you see, how do I say this? I feel like the nature of the problems, as you said, can be driven by any of those three buckets. Does it tend to be more of people having a liquidity problem or is it oftentimes more of just an underlying profitability problem where they just, they're doing that as just something that is fundamentally not profitable? Yeah, I was gonna say it's usually that. And usually that's driving the liquidity problem. It's like fundamentally they don't know how to be profitable and there's so many reasons for that in the past whether they've not No one usually talks about it like I do where or like the profit first message talks about the financial usually It's someone boring, you know It's like someone that's gonna put him to sleep a bookkeeper a CPA who talks about the stuff That's not relevant to what's happening in the day-to-day business. That's actually gonna help them That's where a lot of people just don't have that background or that knowledge. So it's like, can we just give this knowledge at a base level? That's what drove me to profit first and why I preach that message so much, because it's such a simple system and message where it's like, I can understand this, get a good system in place. And at least that's one step closer to profitability. Like knowing that the business is profitable. Cause I say this a lot that the purpose of the business is to be profitable. So many people lose sight of that and become an accidental nonprofit. It's like, please don't become that. Be intentional about where the dollars are going. Become a profitable business. Your purpose might be different. We were talking about on the podcast when you came on with us that you want to make an impact in Atlantic City. You want to make the nice things and the dollars and cents are really nice, but then it's making sure also that you're... living a fulfilled life and you're actually helping people and getting that out there as well too. So it's like you're not able to do that if you're always just running around with your hair on fire, worried about the money. Where's it coming from? Where's it going? You can't put as much emphasis on your purpose if the business's purpose of making money is not happening. So that's where we just talk about that a lot. So that was a great question because most people's underlying problem is they just don't have a profitable business and don't know how to drive. Ryan Goldfarb (24:22.37) profitability and the margins and the safety net and getting that all in place. Yeah. When you, when you get to the point of having, sorry. Ryan Goldfarb (24:32.586) So when you get to the point of having something that at least has the foundations of something profitable, I assume the next step once you've checked that box is to understand how you're going to maximize that profitability or sustain that profitability. I assume there's a pretty substantial kind of planning and budgeting component to this. Can you speak to that and how you guys try to address that need? Sure. So that's where we drive. Once we get the baseline which is like the envelope system, but for businesses. You can pick up the book and it goes into great depth there. We can talk about that a little bit if we want to, but then also we set up that dashboard, and that dashboard drives the rest of the conversations. It's like, do we need to focus on make, spend, keep, because we want to make sure you're keeping enough because those keep numbers of like, what's the profitability, what are the owners taking, do we have enough for taxes next year, and we're thinking about it this year. Like those keep buckets, like are we making sure And if they are on track, then we get to talk about, are we spending the money in the right place, or are we making enough to keep the keep buckets filled? You know, like making sure that we have enough for ourselves and for the business to be profitable. So yes, it's like setting up that system, but then all the conversations are driven around, how do we make sure that those three are in alignment, what you're making, spending, keeping, and maybe you say, it's time to scale up. So you say, I still want to be profitable, but maybe I have to take some percentage points from profit and put it towards OPEX, but then you're still making sure you have profitability. So that's the thing too. You're just protecting that at all costs, even though you might be intentionally taking a little bit less profit, but then you're still putting towards that for a new hire or a new system or whatever. But then at least now it's intentional. versus what most people do is build their business on the hope and pray plan. I hope I make enough and I pray there's some at the end of the year. It's like now I know what I need from my business and I'm gonna aggressively attack that and if I'm going to make it, you know, like take some percentage points from profitability, I'm going to put them towards OPEX but I'm still going to have. Ryan Goldfarb (26:37.298) at least this amount of profitability, even if it's a lower percentage than it was, because you have to protect that. So that's what we do with people, and it depends on what they want to do. Some people, we've worked with some people, they finally get profitable, and they're like, yeah, maybe I don't want to scale, because it's really nice having a lot of this profitability come to my pocket and be able to be where we are, and it's not too much headache now. We had one guy who was trying to do three to four deals a month in 2019. And then at the end of that year, he lost $70,000. Like a CPA told him that. And the CPA said, it would have been better for you to work at McDonald's. You know, like then your real estate business. And he told me, this was the year I did more deals than ever and lost more money than I've ever lost. And that's where I'm like, oh my gosh, like just having a system like this can turn around. So he's still with us three years later. And last year, with the system and everything, he had all of his accounts and like everything for his business for the rest of the year by June. Meaning he funded his whole entire business like the operational expenses his profitability goals The amount he wanted to pay himself by june of last year Because he had a simple system to know where every dollar was going to know where those dollars were and being able to direct them He even gave from one account last year $70,000 to a camp for kids like he set up a giving account and that's where he was like two years into this He was almost like where was this money going before? You know, like, because in the last three years, he's done less deals than he did in 2019. So he's done less deals, yet he's had more money in his accounts because he's been more intentional with every dollars going. That's where I became a believer, like through him and other stories that I've seen through him and like through other people now of like, it doesn't really matter as long as you're making a certain amount of income. it really doesn't matter how much you're making it really depends on how good are you at catching those dollars on the back end because you're probably missing out i'm not only you know the money that you could be make it there the opportunity cost but then like just all the stress and headache comes with that and not being able to fulfill it so that's where feel like a lot of people get into that group of just it's just the income let's go after the income let's keep going but that's where see a lot of people that have that Ryan Goldfarb (28:52.704) I mean, we actually did a podcast episode recently on, which has spawned a lot of things that we've been implementing. But our business, I think probably like many other businesses in the real estate space has relied on expanding, right? Buying more stuff, doing more things, whatever else. And the premise that we did this episode on was, well, what if we could buy no more properties, do no more things? We just had our current portfolio of stuff. What would we do to really... maximize essentially the portfolio of assets that we had. And we brainstormed collectively about it. And it was a really valuable exercise for us. And we've ended up implementing some of those things. It was like, well, yeah, we could capture more bookings. As I think I mentioned on your podcast, we have this direct booking website for our fundamentals in Atlantic City. That idea was born out of that conversation. Because we're like, well, we're leaving a lot of money on the table. you know, are the people that stay with us are spending, you know, double digit percentages to Airbnb and we're getting charged with Airbnb, 20% of the amount of money that is being spent is going to Airbnb, right? So like, how hard is it to start a direct booking website? We already pay for Gasti, right? Which offers that functionality. You know, how hard is that, right? So that, you know, that among many other ideas was sort of the genesis of it. And I think that mentality, I think when you're... maybe more speak to myself but like you know like that kind of entrepreneur mentality always want like go bigger go faster go you know, whatever and I think that works for some people, that works like if you're kind of, like a lot of startups basically it works for because they never make any money, right? They're just funding their operations with investor funds or debt or whatever. But the reality is that, I think to your point, David, if you don't have a foundation that actually makes you money for whatever reason, and it sounds like in your experience that reason is because people just have no idea how to manage those businesses, but you have a business that doesn't make any money at all, Ryan Goldfarb (30:57.248) that business or quadrupling that business is not going to make you any money, it's just going to quadruple the current situation you're in, right? I think one cool thing that you're doing, and this is something that has occurred to me a lot too, is that when a lot of real estate investors I find are... You know, one way to look at a real estate investor is that you're just operating a small business. Your small business is that you buy real estate or whatever you do in real estate, that's the business. But like, you can say you're a real estate investor, but you're really a small business owner. You just happen to be operating in the real estate domain. And I think an issue that a lot of small businesses have, perhaps this is the entire premise of your company, is that I don't have the money to... hire a CFO, right, like a treasurer, like I just don't have the expertise, I just don't have, like my business makes $100,000 a year, $300,000 a year, or whatever, like how am I gonna spend $100,000 in a CFO, right? And the same is true, I think, for, you know, my background as an attorney, like I'm not gonna hire an attorney, right, I probably make $100,000 a year, I'm not gonna spend $25,000 an attorney to do whatever. So I think, like, you can pile that up about everything, right, and so at the end of the day you get people that are. these real estate investors, small business owners who have really, maybe they have expertise or whatever in a small domain and that's what they do, but they don't have the business acumen to actually run the business. So, having a fractional CFO business seems to make a ton of sense in that context. It's like, yeah, great. I can't afford to actually pay a CFO if I need that service. Yeah, exactly. That's why it was born. Because I was like, I don't want to be another bookkeeper, another CPA. I don't want to have that type of business. that makes a difference in the business owner's life. And I feel like that's had to be a higher level service and something where we could talk as actual equals. Like if you're the CEO, we're the CFO, we're coming to you as being like, okay, you're gonna make the money? Like for the love of God, have a system to keep it as well too. And like, let's talk about that. So like that's where I, you know, this was born because now we could work with people a lot smaller than people that. Ryan Goldfarb (33:07.19) work with full-time CFOs. So it's like being able to actually work with a group of people now that have access to someone like that, but they don't need a full-time person. They only need that access to them on maybe a monthly, bi-weekly, weekly, depending on where they are of this is how much that they would need someone like that in their business life. And like you said, to get a lot of just the traditional like the... business acumen of what do we do with the money and here because a lot of people just say like we've talked about it's the income like Let's just do more deals and then they end up living deal to deal even though they lived paycheck to paycheck before, you know It's like trading one rat race for the other. So that's where it's like, okay, let's slow this down Let's make sure we're getting to you to what your actual goals are A lot of people haven't even sat down to say what are their goals in their personal life? Like what do we really need from the business? That was that one guy that was seventy thousand in the hole He was doing a great thing doing the three to four deals a month. The next year I said, after knowing what you need, because we go through this process of like how much do you need for your personal life and for your actual from the business. He figured it out. He figured it out in deal total and he said, I only need to do five deals. I'm like, that's a lot different than three to four a month. Like you realize that, right? And he's like, that was just freeing to him of like, I don't have to work 80, 90, $100 weeks to do five deals this year. You know, five of these fix and flips and, you know, making sure that I close these. It was like, just having those numbers at the palm of your hand, you know, and right there at your fingertips to be able to say, okay, this is what, that's why, like I said, the fractional CFO, I wanted to give a cost-effective option for the people who couldn't go out there and hire a full-time, you know, I'm a chief financial officer. So with your business as it is right now, I assume when you started, I'm guessing you had just you. It was just you in the business. Now you've grown to these employees and whatever else. What's the plan? Do you want to keep expanding? Do you want to keep growing? I'm assuming you're implementing the profit first stuff in your own business, right? So are you hoping to, would you want to get? Ryan Goldfarb (35:16.734) from a hundred to a thousand is that the goal or you know what what's the what's the end game the end game because yeah i love when people ask me this question because i'm honestly like i'm not sure how far i can take it i've got a i've got a background of faith so i'm like how far does god want me to take it before he says you're not the leader to do this anymore so like for me i want to keep expanding but i also want to keep expanding at a rate that doesn't blow up the business and i also want to expand at a rate that makes sure that we're helping the people that i can make an impact on So it's like, is that the real estate investing market this year? Because we have a revenue goal for this year and over the next few years here. So probably in the next. you know, probably three to four years, we want to be at like the 500 client mark, you know, so that's probably of a more realistic timeline over the next three or four years to be at there and working with that many on a monthly basis. But that's where I'm like for the long term, I'm not sure how far I can take it or like how, cause I've seen it. I've had to level up to from a six figure business owner, you know, like to the seven figures now. And it's like, okay, can I, what about being an eight figure leader? And then from there, how far can I take it once we're at eight figures? And like it, that. how far do I want to take it to because I also have a wife and a daughter and I don't want to miss out because She's six years old now and I'm like, this is the best time of life I love six years old so like this is stuff that I also don't want to miss out on so I'm like how far do I really want to take it without giving up my you know, my family life as well to just throwing that all away I can relate. Yeah, I have a three-year-old and a one-year-old. Oh, yeah Yeah, it's a fun time. Those are a bit fun. Yeah, I'm not going to say I miss those ages completely, but I love six. Six is amazing. Yeah, well, I'll let you know in three years. Yeah, I was going to say, just stick it out. Stick it out a few more years. It gets 10 times better. Do you still do real estate investing on your own, or has this consumed your... This has consumed the last three and a half years of my life, so this is what I've been doing for three and a half years, and so I sold everything back then. But now... Ryan Goldfarb (37:14.774) I'm actually working on some deals with my brother-in-law who just got married last year to my sister. He he's young, early twenties, but now I'm like mentoring him. He's doing a lot of the work going out there, talking to the sellers, that type of stuff, and I'm like, I'll fund the deal and make sure it's a good deal on paper and like that. guide you to make sure we're actually making money in this thing and we'll set a profit first and we'll do all this to make sure that we're not running around like chickens with our heads cut off. So getting back into it finally again, because I felt like I was like my head down and was buried and now that I'm not doing the CFO work and I've got a great team and a lot of good people that we're working with, it's like now I can pop my head up a little bit and get back into it. But I've been head down focused. What are the constructs of most of your clients' teams look like? one of their first hires or first main consultants that they would hire? Or do they generally have an existing team of some kind of COO equivalent bookkeeper and all that? Yeah, some of them have a small team. So they have maybe a bookkeeper and they have some of the people we work with have been solopreneurs. They're just making, in real estate, you can make great money. You know, like you could do a flip and do 50, 60, 70, $100,000, depending on the market, even wholesale deals that much. So it's like we work with some people that man, woman operations, but then most of them have a small team. Some of them have had maybe operational consultants before. Now they actually need some systems in place and they need the right things and the right systems processes. But then we're usually the first one that made it where they're like, holy crap, we've never been talked to before like this on the financial side. Usually they have a bookkeeper or CPA, but never the conversations that we're having. So it's definitely a wake up call for a lot of people we work with of like, oh wow, we've I love what you said about the question you asked, John, when you and Ryan had that meeting. How do we, if we weren't to take any more properties on, what do we do? It's like asking good questions like that. Questions that the owners sometimes just don't even know to think about to ask themselves. It's like making sure that they know, okay, what do the numbers mean? Yes, but then what are the questions that they unlock once you know what the numbers mean too? Ryan Goldfarb (39:26.05) What, what's the typically the dynamic between you and the bookkeeper or the CPA? Are you guys generally working in concert or is it more adversarial because you're trying to usually in concert because if the person hires us, they either have an issue with one of those people that they want us to either help or replace, or they come in and say, I have a great bookkeeper, a great CPA, but those are their lanes. They don't do the fractal CFO work. Can you work with them? And then we just help to manage that team. So it's more in concert than anything. making sure that the stuff is flowing. But if we ever butt heads, it's like we go back to the owner and say, hey, we're butting heads here. Would you like to retain us or do you want to not retain them? Because they're not wanting the systems that we're implementing and this is for your benefit. So if it ever gets to that point, just bring the CEO into those conversations. If you, when you work with a client, are you generally working with them on a holistic basis? Like are you working? them or are they bringing you on to work on, let's say their, their flipping business or their rental portfolio or like some subset of what it is that they do? Usually with the people that we're working with, it's if they, like a guy we just are working with right now, like he signed up today, he's got a wholesale and flipping company that are kind of like tied together and then rentals. And we're going to manage like both of those. So we want to do a rental analysis of his portfolio, but then we also want to see. He's switching from less to doing less flips and more wholesaling. to make sure like as I'm doing this, like, am I going to still be profitable? Are we doing enough of the deals? Like are the margins still as good and like how many deals do I need to do to replace like if this is my average wholesale, just a lot of the numbers that he needed on that side as well too. So we'll manage both of those as well. Like usually it's all one price unless you get to like five, six entities that are doing like six different major functions, but like if you've got a selling business and you've got rentals or long-term or short-term like. That's usually like, okay, we can manage both sides of that. Ryan Goldfarb (41:27.61) This is maybe a silly question, but do you encounter, I wonder, you know, Ryan and I encounter a lot of real estate investors in one way or another and like, you know, sometimes we encounter them, we're kind of like, how are you, like, how is this, you know, how do you make any money? Like, what is it that you, do you encounter businesses where you're sort of like, you look at the business and you're like, this is hopeless, right? Like, you know, your business makes no money and like, there's really, like, you know, the solution to your problem is like, stop doing this or do something vastly different from your current way. of operating. I don't think we've ever had it be that drastic. We've had people where it's been a rough time period for them or we can see a trend that it's bad. And so sometimes we recommend pause our services, pause these other things because we're in that seat of like, which is a very unique seat in the business. We're not just a marketing company saying, just spend more dollars. It'll be better. You'll get more deal flow. We're actually saying, you might need to pause some of these things in your business, take a step back to be like, okay. here's the next steps but not up to this point have we ever sat down and said like you just need a you need to rethink the whole thing you're doing what the worst scenario was two hundred eighty thousand i think in the whole for the last year when he thought he was profitable like he'd he didn't know it was that bad but and he thought he was in the black which was just not a fun situation but within he we worked with him for two and a half years and he was able to get not only dig out of the hole but like be able to have money for taxes at tax time and like do all this stuff and it was just being able to direct the money better of like where okay you have enough that's coming in we just have to stop spending the areas that are not returning you anything and really spending where it should go so that's what that's one of the worst situations we've come across where even then we didn't It was, he had some assets like rentals. So we were like, you might have to sell off some of the rentals that you've built. And he started crying on that phone call because he was like, you know, this has taken me, you know, a decade to build a lot of these rentals. And it's like, okay, we totally understand that. This, these are your options though. Like you could either sell some of these to get back in the black. You can do more of this wholesale, like this vertical here. Do you think you can hit this amount of, you know, properties or do you want to give up? You know, and like just turn it, turn the keys in. Ryan Goldfarb (43:46.11) so i for him he chose to sell a few the rentals state you know i go to only commission base for office you know the people the acquisitions people because he wasn't doing that before it's like to some big strategic things he was able to do start getting himself out of that hole did i know we are wrapping up here i wonder what if you want less personal different than what we're talking about for the people that are listening that are you know relating to what you're saying and what is there from that profit first mentality methodology is there uh... overarching piece of advice that you can impart and say like you're something you do you know i mean i'm sure they can contact you is that something they could do but you know i did addition to that you have something they can do to you know to kind of like take control of that right now so the whole system and i didn't get into it as much in the nitty gritty but the whole system is based on you look at your bank account on a daily basis usually like most entrepreneurs do and not at a QuickBooks system or something, because you'd rather stick your head in the sand or kick sand than do that. So it's like, hey, we'll utilize what you're already doing and set up the envelope system for your business, but with business bank accounts. So having accounts that are literally set up named different things like profit or owner's pay or owner's tax, making sure that the things that matter to you. also have a bank account name for them and you can see where the money is. What's to pay the bills versus what's to pay me and to make sure that I'm okay, to make sure the business is okay, like having those types of accounts set up. So I would just say from this one, go from this episode, open one new bank account, call it profit and transfer 1% to it. Like start to get into the habit, then pick up the book and go deeper. Like what other accounts could I set up? What are the percentages that should go to these accounts? Like how do I know if I have a healthy business or not? A lot of the questions I answer in the book as well too. And it's like that book, I don't make a ton of money off the book. I'm not trying to sell a million copies. I'm trying to get you a good system where if you're like, I'm just living deal to deal at this point and just I thought income solved everything and it's not and it never has for me, then like just get a simple system in place. But that would be like one action step they could take is if you're listening to this, open one account, transfer 1%, get into the habit of not spending everything you make. Ryan Goldfarb (46:00.062) of just being a profitable business, starting to build margin in. And if you're like, I can only do 1% at this time because we've been spending so much, how about next quarter? Can you do 3% next quarter? Do 5, 7, 10, 12, 15. Like that way you could start scaling up your profitability as well too, just because once you have a grasp on it. This has been awesome, David. Thank you so much. How can people get in touch with you to learn more about the Fractal CFO business, about the book, about your podcast? What's the best way for people to reach you? One stop shop is simplecfo.com. Trying to make it very easy. So simplecfo.com. You can find the podcast there, the link to the book. And if you want to book a call, it's right there. No obligation. If we're not the right fit, we'll make sure we pin you to a good real estate investing bookkeeper or CPA or something like just to make sure that you have that piece buttoned up. So that's where you could go, simplecfo.com. Awesome. Awesome, that's great. David, thank you so much for being on the podcast. We really enjoyed having you and we'll check back in. Hopefully, we were on your podcast. Maybe we can do a follow-up episode in like a year or something. Yeah, yeah, that sounds good. Great, and thank you all for listening to the Brick by Brick podcast. John, I'm here, John with Ryan. If you'd like to contact us, the best way to contact me is through email. It's johnjohn at libertyhudson.com. And I'm Ryan, R-Y-A-N. Ryan Goldfarb (47:18.306) We really love talking with our listeners, so if you can like us or follow us on whatever platform you listen to us on, that would help us a tremendous amount. Feel free to ask us any questions or comments for future episodes, and we'll be back next week with a new episode. Thank you guys so much.  

BREAKING NEWS: John and Ryan talk about something other than real estate! This week, John and Ryan plan a hypothetical 72-hour trip to Atlantic City. Where will they eat? Where will they drink? How will they pass the time?  Tune in as the hosts discuss each of their preferred itineraries, including a visit to a newly reopened restaurant, indoor activities, outdoor activities, and more.  What would your ideal 72-hour trip to Atlantic City look like?   [00:00:02] 72-Hour Non-Real Estate Itinerary for Atlantic City [00:03:24] Exploring Limited Dining Options in Atlantic City [00:06:23] Planning a Day in Atlantic City [00:09:29] Recommended itinerary for a trip to Atlantic City [00:12:35] Ideal itinerary for a day in Atlantic City [00:15:56] Day and Night Plans in Atlantic City [00:19:05] Exploring Atlantic City and New York City [00:22:00] My Ideal Summer Day in Atlantic City [00:25:25] Weekend Plans in Atlantic City [00:28:37] Ideal Activities for a Day in Atlantic City [00:31:40] Dining options in Atlantic City [00:34:26] Redefining Atlantic City Beyond the Casinos [00:37:23] Exploring Food and Culture in the City [00:40:24] Things to do in Atlantic City [00:43:14] Summer Activities in Atlantic City and Beyond [00:46:21] Things to do and eat in Atlantic City [00:49:09] Lack of diverse dining and family activities in Atlantic City [00:52:04] The Need for More Amenities in Atlantic City [00:54:58] Creating a Vibrant Commercial Corridor [00:58:00] The Future of Atlantic City's Amenities [01:00:55] Updates on 'Brick by Brick' Podcast

This week, John and Ryan introduce their largest project to date -- a 48-unit condo building in Atlantic City called La Renaissance. The duo details the challenges they face in every phase of the project, from pre-closing obstacles to mechanical systems and everything in between.   [00:00:02] Renovations of Atlantic City Condo Building [00:03:49] The Deterioration of a Timeshare Building in Atlantic City [00:07:34] The Complexities of Buying Big Buildings [00:11:20] Acquiring Title for a Challenged Building [00:14:22] Purchasing Property Without Inspection: Renovation Challenges [00:18:18] Challenges of Renovating a Tall Building [00:21:44] Renovating a commercial building with complex systems [00:25:18] Navigating Complex Building Systems [00:28:50] The Cost and Condition of Elevators [00:31:52] Renovation Progress Updates [00:35:18] Renovating a Large Building for Short Term Rentals [00:38:28] Designing a Unique Hotel Experience [00:41:42] Challenges of Renovating Large Building [00:45:19] Determining Cost Basis for Building Renovation [00:48:45] Leveraging contractor bidding for better pricing [00:52:11] Considerations for Occupying a Building [00:55:34] Challenges in Construction Project [00:59:00] Water Penetration Issues in Atlantic City Building [01:02:00] Handling Stress and Excitement in a Project [01:05:04] Year in Review and Building Updates

Hosts Ryan Goldfarb and John Errico are back to discuss the benefits of creating their own direct booking website for their short-term rental properties in Atlantic City. Tired of relying solely on third-party platforms like Airbnb, they aim to increase their control over their business and provide a better guest experience. Through their discussions, they cover topics such as RevPAR, pricing strategies, marketing initiatives, the importance of a domain name, and collecting email addresses.   [00:00:02] Direct booking website for Atlantic City rentals [00:04:06] Improving RevPAR through Direct Booking Platform [00:07:17] The Power of Direct Bookings [00:10:31] Benefits of Focusing on One Geographic Area [00:14:01] Measuring Vacation Rental Marketing Success [00:17:08] Benefits of Dual Property Management/Ownership Model [00:20:25] Pricing Strategies in Vacation Rental Industry [00:23:51] Pricing and value issues on Airbnb [00:27:13] Maintaining Quality for Airbnb Rentals [00:31:14] Benefits of Using Guesty Channel Manager [00:34:39] Benefits of a Suitable Domain Name for SEO [00:38:03] Marketing approach for vacation rental properties [00:41:30] Email Collection Strategies and StayFi System [00:44:39] Maximizing Existing Resources for Atlantic City Rentals [00:47:36] Importance of Quick Decision Making [00:50:39] Special Offer and Call for Guest Suggestions [00:53:44] Podcast hosts encourage social media engagement   [00:03:49] By taking control of the distribution, we have an opportunity to do things like increase ultimately increase our RevPAR, which is the primary metric by which we gauge the revenue or monitor revenue of argument properties [00:05:41] This is an opportunity for us to really showcase our properties, the quality of them, showcase the experience and attention to detail and focus on hospitality that we've been building out over the last few years Having additional levers to pull from a promotional standpoint, including videos and more information, is hugely valuable and something that Airbnb doesn't like to show [00:13:11] An advantage for us is that we can offer a discount to our Airbnb pricing and still ultimately make more money

What could we do if we couldn't buy any more real estate? In our long awaited return to the airwaves, we debate a life-altering hypothetical. Would we even want to live in such a world? [00:06:37] Maximizing Distribution and Advertising for Direct Bookings (AtlanticCityVacationRentals.com) [00:10:21] Optimize Space [00:13:39] Stimulate Off-Peak Demand [00:17:25] Planning Unique Experiences for Workers and Special Events [00:28:02] Budgeting and Cost Controls [00:31:19] Grow PM Company [00:38:14] Maximizing Side Businesses [00:47:57] Using Occupancy and Pricing to Maximize Profit [00:50:55] Debt and Debt Management

In this episode, John and Ryan discuss the hidden gem that is Atlantic City with former Mayor of Belmar and CRDA Executive Director, Matt Doherty. They dive in the impact of casinos in AC, real estate opportunities, and why it is high time to invest in Atlantic City today. 00:00 Intro 05:35 Role of Government in Private Investment 07:43 The Hard Truth of Redevelopment 12:51 Flip Side of Rooming Houses 14:00 Real Estate Opportunities in Atlantic City 18:37 Why Did it Take Long for AC to Flourish? 23:58 Why Invest in AC Now? 32:14 Matt's Time in CRDA 33:58 The Domino Effect of Improvement 36:21 Are Casinos PRO Atlantic City? 39:37 Transportation Issues To & From AC 44:46 Diversifying Neighbourhood Amenities 47:40 How Involved Are Casinos in City Development? 49:51 What's Next for Matt Doherty? Podcast Channels:

John and Ryan re-visit the existential challenge: balancing working "IN" their business vs. "ON" their business. While they have a long way to go, they've made substantial progress in the 28 months since they last discussed this. Catch up and listen to Part I from 2019 here: https://tinyurl.com/bdexzcmm 00:00 Intro 01:46 The Genesis of Our Partnership 04:32 Working Evolution 05:34 2019 vs. 2022 Business Scale 13:53 Personnel = Business Growth 36:39 Advantages of Hiring Virtual Assistants 42:21 Tech Upgrade = Business Growth 46:14 People Management 51:40 The Small Business Paradox 54:18 Leadership Aspect in Business 57:50 Outro Podcast Channels:

John and Ryan discuss the short-term rental market drivers and discuss their approaching to evaluating new markets for investing in short-term rentals. 00:00 Intro 01:57 Asset and Location Based Demands 09:09 STR Regulations, Logistics, & Qualitative Factors 16:11 Understanding Demand Drivers 23:54 Consumer Tastes 26:05 Seasonal Market 31:33 Macroeconomical Concerns 35:15 Our Portfolio's Baseline Demand 38:09 Analyzing Asset Price 42:48 4 Variables to Consider for Investors 46:24 STR Secret Sauce: Personnel 49:27 Operating Concerns 53:14 Our Approach to Entering a New Market 57:10 Outro Podcast Channels:

Welcome back to the Brick x Brick podcast. Today we have a special guest, Stefan Tsvetkov. Stefan is the founder of RealtyQuant, a firm that focuses on approaching real estate investments with a data-driven strategy to minimize the inefficiencies in the U.S. multifamily market. Stefan started his career as a financial engineer and after a successful career in finance, Stephan ventured on his own path of innovation t start RealtyQuant. Throughout the episode, Stefan shares his wisdom on utilizing the power of data to improve the returns of real estate investments. Connect with Stefan: Website: realtyquant.com LinkedIn: linkedin.com/in/stefantsvetkov

A year after Airbnb's IPO, it's fair to say STRs as an asset class are here to stay.  But, where are we in the life cycle of this emerging asset class? And what does the future hold? Tune in as we dive into the trends we expect to shape the future of hospitality.

The year 2021 is drawing to a close, and it is time to ring in the new one. In this episode of the Brick x Brick podcast, we discuss some of the previous projects we have worked on, repairs and renovations we have undertaken, and revenue we generated during the year via different sources. Furthermore, in this episode, we discuss the philosophy and strategy behind those initiatives, the problems they encountered and conquered, the takeaways and lessons learned from past experiences, and so on.  Honestly, we feel that the year 2021 is excellent. Our returns are good, which gives us reason to be positive for the following year. We briefly evaluate and analyze some of our last undertakings across the previous year throughout the podcast. In simpler words, this episode serves as a recap of the year 2021.

As you've probably heard from our previous episodes, Ryan and John are not only investors but also the owners of a property management company as well as a construction company. In this episode of the Brick x Brick podcast, Ryan and John talk about some of their upcoming projects. Throughout the episode, they dive into how they plan to manage the volume of construction projects coming up, the philosophy and approach to projects, challenges, concerns and learnings from their previous experiences. 

In early November, the real estate marketplace Zillow announced that it will be exiting their iBuyes business.  In today's episode of the Brick x Brick podcast, we reflect on the business practices of Zillow that led to this event, what it means for the real estate industry, and what consumers should know about Zillow's exit from iBuying.

As a real estate investor, you've certainly been the beneficiary of compounded returns. On the flip side, you may have also paid the price of compounded mistakes. In this episode, we'll walk you through our costly experience with paying a steep price for repeated delays and mistakes. We aim to learn from this and to avoid making this mistake again, because we've already paid the price. Now, you can, too -- without paying the same price we did! Included in the discussion is an in-depth walkthrough of the timeline for our New Hampshire Ave. project, which we brought online over the summer.

Think STRs are all sunshine and rainbows? Think again! Hospitality is a people-pleasing business. Expectations are high. When our guests spend a pretty penny on a trip lasting only a few nights, even what seems like a minor inconvenience can cause a major interruption to one's trip. And though we strive to exceed expectations, we don't always succeed. Enter: Complaints. errr... constructive feedback? We've received a lot of this over the years. Sometimes, warranted. Other times, without merit.  Here are some common -- and some not so common -- complaints we've received over the years, and a few methods to address them.

Perhaps no topic in the world of short-term rentals is less understood than regulation. So, we're here to settle this once and for all: Are short-term rentals illegal? Spoiler Alert: It depends! This week, John and Ryan will walk through the elements of most short-term rental regulations to help you understand for yourself if STRs are a viable path for your jurisdiction. We will explore varying regulatory regimes in New Jersey, specifically in Atlantic City, to illustrate the differences in how different municipalities regulate short-term rentals. Disclaimer: To best understand STR regulations in your jurisdiction, consult with an attorney who can guide you accordingly.

Want to dive into the realm of real estate and get started on investing in short-term rental property?  In today's episode, Ryan Goldfarb and John Errico will walkthrough four of their notable projects in Atlantic City  - their venture on acquiring these properties and turning them into revenue-generating assets. They will also discuss some challenges they've faced along the way and matter-of-fact practices they've used, which aspiring real estate enthusiasts and even seasoned property investors can learn from.  If you're seeking some ballpark figures to understand the reality of STR investing, this is the episode for you. Ryan and John will also walk you through expenses and other important factors to consider and expectations to start in on the STR industry.

We're back again this week with a special guest Nick Intrieri, the man responsible for introducing us to the world of real estate in Atlantic City. Tune in to know more about how he got started investing in real estate in Atlantic City.   Nick and his brother now operate a portfolio of short-term rentals in town and are parlaying their efforts into a new venture: a new, state-of-the-art mini golf facility on the Atlantic City Boardwalk (which just received land use approval the day before this release!).   Nick is as strong an advocate for Atlantic City as you will find, and we're excited to share his vision with you.

Listen to Gabe for 30 seconds, and you'll realize he's the real deal. Gabe DaSilva is best known as a developer and flipper in Union County, New Jersey, where his company, the DaSilva Group, has completed dozens of high-end flips and new builds. Fundamentally, though, Gabe is an entrepreneur and a hustler. His relentless pursuit of perfection shines through in his work, and his systems-focused mindset provides a framework off which all entrepreneurs (and real estate investors) should evaluate their business. Connect with Gabe on the platform of your choice: www.gabedasilva.com YouTube Instagram

In the endless sea of investment opportunities, how do you, as an investor, arrive at your investing strategy? In today's episode, we sit down with veteran real estate investor Jonathan Greene to discuss his investing journey. Along the way, we learn about his home runs on his live-in filps (some intentional, others unintentional). More importantly, we uncover why he will say "no" to a deal, and why this is a critical concept for both new and experienced investors to grasp. Jonathan Greene is the Founder of Streamlined Properties (his flipping business) and Streamlined Properties On-Market, Brokered by eXp Realty. He is active on BiggerPockets, and he can be reached via email at jonathan@trustgreene.com.

"You're investing where? Atlantic City?!" "Yes!" we reply emphatically. "And here's why..." Beaches, restaurants, nightlife, casinos, a 4-mile long Boardwalk, a university, access to NYC and Philly, a robust tourism district, the Orange Loop, unmet demand, a Qualified Opportunity Zone, and... a reputation. Both good and bad. Today, in just an hour, we attempt to distill over a century of Atlantic City's history into a cohesive investment thesis. We are bullish on Atlantic City, and this is why... We're not the only ones, either. Check out some of Atlantic City's recent press below: Atlantic City Housing Market Heats Up as Investors Look Beyond Casinos (WSJ - Paywall) In Atlantic City, Developers Envision Attractions Beyond the Boardwalk (NJMonthly) Developer wants to give Atlantic City downtown new identity (TheDailyJournal) Orange Loop developers say best is yet to come in Atlantic City neighborhood (Press of AC - Paywall) Cranes fly in shipping containers for new Atlantic City downtown development (NJ.com)

Opportunity Zones - what are they? This relative newcomer to the real estate investment landscape offers favorable tax treatment of capital gains while catalyzing investment in underserved areas. OZs are spread across the country, including certain areas close to where you may already be considering an investment. From capital gains deferrals to adjusted basis, the benefits to Opportunity Zone investments can be substantial when properly utilized. Often compared to 1031 exchanges, we'll dive into a brief comparison of the two on today's episode. References: Opportunity Zone Map (from HUD): https://opportunityzones.hud.gov/resources/map Opportunity Zone FAQ (from the IRS): https://www.irs.gov/credits-deductions/opportunity-zones-frequently-asked-questions

Real estate investors often chase one thing: profits. But, long-term, is your sole barometer of success financial?  We would argue NO! We are chasing growth -- whether it's financial, professional, or personal. With that in mind, let's see how our top 3 investments shake out...

Ryan and John are once again joined by Josh Eitington and Donato Settanni of DXE Properties for a part two on their conversation about multifamily real estate investing. In this episode, the group dives deeper into the logistics of purchasing large assets from out-of-state and what it takes to bring a deal to fruition -- even during a pandemic. One such deal is a 104-unit apartment complex in Augusta, GA, which was acquired in April 2020 and is slated for a significant turnaround. DXE Properties focuses on value-add opportunities throughout the southeastern United States. Today, we peel back the curtain for a look into the firm's early days and to gain an understanding of what drives Josh and Donato. To learn more about DXE Properties, connect with them directly on their website: https://www.dxeproperties.com/

"Honey, I'm quitting my job and starting a business investing in real estate with Josh!"   "Go to sleep. We'll chat in the morning."   And, with that, DXE Properties was born. Josh Eitingon and Donato Settanni left behind their cushy gigs to pursue their dreams as full-time real estate investors. A few [long] years later, they have hundreds of doors to their names and are adding more by the day. DXE Properties focuses on value-add opportunities throughout the southeastern United States. Today, we peel back the curtain for a look into the firm's early days and to gain an understanding of what drives Josh and Donato.   To learn more about DXE Properties, connect with them directly on their website: https://www.dxeproperties.com/

We are back with another new guest: Brandon Liebeskind of Liebeskind Insurance (https://liebeskindinsurance.com/). In the first half of a back-to-back with Brandon, we discuss the basics -- and nuances -- of Property Insurance. Tune in to understand: How carriers evaluate your insurance risk What considerations you should give to your coverage The types of exclusions your policy may carry How much coverage to obtain The origins of flood coverage How to read and evaluate your policies Thanks again to Brandon for lending his expertise!

We're back at it again with Victor Liu of Clear Skies Title Agency! In this episode, we'll take a break from the nuts and bolts of real estate investing with a discussion on entrepreneurship. How does a data search company turn into a thriving title agency with 27 employees? We'll follow Victor's journey as an entrepreneur to learn how he managed to build a career (and a few businesses) without ever holding down a full-time job as an employee. You'll get to peak behind the curtain to understand how a title agency is structured as a business, and what the future may hold for the industry at large.

BREAKING NEWS: We'd like to introduce to you the first ever guest on the Brick x Brick Podcast -- Victor Liu from Clear Skies Title Agency in Cranford, NJ! After a brief introduction to Victor, we dive into the history of title insurance and an inside look into how the industry functions. Topics include: the difference between a "deed" and "title" how the title insurance industry aids in helping to keep title insurance affordable what happens in the event of a title claim do people purchase real estate without title insurance? how do title searches work? who handles real estate closings in NJ? Trivia: Can you guess which prominent historical figure is credited with laying the groundwork for the concept of title insurance?

What is real estate law? What is property ownership? What is a purchase contract? And why does it matter?! This is the first in a series of real estate law focused episodes. Our aim is to answer questions you face as a real estate investor and to provide some of the legal context behind these topics. Real estate law is confusing, and understanding the lengthy history of property law sheds some light on why. What topics have you encountered pertaining to property law or contract law that impacted your real estate investing? *Our content should not be construed as legal advice. We always advise you to retain your own legal counsel. We hope that our discussion helps to better inform you for those conversations.*

In the spirit of Thanksgiving, we are thankful for the ups and downs of entrepreneurship (and of life). This week, John and Ryan channel their inner BuzzFeed with the "Top 3" successes and failures as entrepreneurs and real estate investors. Care to share yours? Let us know on Facebook, Instagram, or via email (john@libertyhudson.com and ryan@libertyhudson.com).

Mistakes: We all make 'em. For some of us, they're the reason we even exist. For us, they present an opportunity to learn. Our team uses Slack for communication, and we've established a habit of logging our mistakes in our #mistakes channel. While it's great to log them, the goal is to learn from them. In this episode, we'll go through our first month (August 2019) worth of mistakes, and we'll explore how we can do better next time!

"Do-it-yourself," they say. "You will save money!" "Leave it to the professionals," they say. "You'll avoid mistakes, and ultimately save time and money!" John and Ryan are back to debate the age old question: Which came first, the chicken or the egg? Oops, we mean: Should I do-it-myself, or hire it out to the pros? Spoiler alert: There's a use case for both, but choose wisely!

Do you have a job, or are you a business owner? John and Ryan are back to discuss the ongoing challenge of building a business amidst the chaos of running one. How do we balance growth while ensuring that the business continues to fire on all cylinders? This topic we'll be discussed at length in the future. Consider this Part One. (Fun Fact: This is the first BxB episode recorded on location! Can you tell?)

Ben and John are back with tales from Building Departments! The duo shares war stories from an assortment of jurisdictions, including a few obscure encounters. Learn from their experiences and share your own with us on Instagram @brickxbrick_podcast!

After a long hiatus: We're back! Well, at least John and Ben are back... Today's topic: Education! Is college a viable path to breaking into real estate? Ben talks through his experience in NYU Shack's Undergraduate Real Estate Program. (Not to be confused with Shaq's real estate program, which is coming soon to a university near you. Fun fact: Shaquille O'Neal is an active real estate investor!) For those with a keen eye, you'll notice some changes to our logos and branding. Lots of new things coming at you soon... Stay tuned! As always, we'd love any feedback.  

In this follow-up episode to Real Estate Debt Financing 101, the team discusses various ways to sort through your options when it comes to sourcing debt. (Transcript below.) Ben Shelley: [00:00:00] Welcome back to the Brick x Brick Podcast. Today's episode is part two on the topic of debt financing. If you haven't heard Part 1 I encourage you to listen back. Part two is focused on discussing different strategies for the types of financing we reviewed in the first episode. Enjoy.   John Errico: [00:00:28] So we have all the terms down and depending on how we edit this that could have taken five or thirty five minutes 45 minutes and we've only listed terms. It's important the definition section of contracts very long. So what I think we would be great to talk about is if you're an investor or homeowner and you want to actually buy an investment property or your own house to live in. How or what should I. Why would it make sense to get a different type of loan product or a different type of loan. And there are pros and cons and whatever we can just walk through some sort of common use cases that we do as property investors so I would say one major caveat is how these loan products are underwritten so how they're analyzed varies depending on the product and depending on the type of home that you want to get in general very high level. If you're going to get what we've been talking well maybe even before delve into that let's just dealing it out even further the different types of loans are going to be talking about. So we're talking about step one would be a conventional loan. So a conventional loan in the parlance of real estate would be let's say a residential conventional loan. So we're talking about a 30 year fixed mortgage that you put down a certain downpayment depending on the type of property you're buying. We can contrast that with say a government backed insured loan like an FHA loan which is different from a conventional loan in that it might determine there might be limitations on the type of property you can buy with it. There might be advantages to using it based on down payment. There might be different interest rates et cetera et cetera.   Ryan Goldfarb: [00:02:03] Just just real quick. John distinguish between these two well but conventional in the common marketplace refers to Fannie Freddie back loans which our government is somewhat government affiliates. Right. But FHA is kind of its own beast. So those are kind of separated out.   John Errico: [00:02:24] Great point. There are loans that you might get that appear to be conventional loans but are not necessarily backed by Fannie or Freddie. So those could be portfolio lenders that are banks that are lending money but are not necessarily complying or reselling their mortgages on a secondary market so don't necessarily have to comply with some of those some of the laws that a conventional mortgage would have to comply with. There's the hard money side which is essentially a type of private loan. It could be given by a bank or an individual or a quasi bank or something which generally also has different terms and a different purpose and a different rationale for obtaining it. So very high level we're talking about conventional loans. We're talking about FHA loans we're talking about portfolio lenders I don't want to classify commercial and virtual lenders before lenders hard money and then we could talk very end about private lenders a hard money lenders are kind of like private lenders but whatever.   Ryan Goldfarb: [00:03:22] And then on a real institutional side you also may have life companies insurance insurance companies. They do a fair amount of lending as well. And also CMBS lenders which are very much active or inactive depending on the state of the market.   John Errico: [00:03:39] So if you were to buy a property say you want to buy an investment property you could buy cash or you could attempt to get financing on it. So why don't we just say I'm a new investor. I want to buy a flip. What would I do.   Ryan Goldfarb: [00:03:53] You can start either from the beginning or from the end. So if you're starting to the beginning you're just thinking about what kinds of loans are available to me maybe Who do I know what have I used in the past. You know it's you're limited by what's in front of you I guess if you think about it from the end and you think about what your end goal is with that property. Then I think that's probably a more efficient way and arriving at the best option for you. So if you're looking at it from the end and working backwards you might say OK this is a flip and then you may ask yourself what kind of liberty is it is this. Am I buying a piece of raw land that I'm going to develop. Am I buying the house next door to me that just needs a fresh coat of paint. But I've known the owner for years and they just want to sell it. Am I buying a property that is bank owned has been vacant for five years and needs a renovation. That question is important because each one of those strategies is going to have a different timeline. So if you're buying the house next door that just needs a fresh coat of paint you could conceivably be ready to sell that in a month or three months or four months if you're buying. A vacant foreclosure. It might be more like six months or nine months. And by the time the new buyer gets into the home it it might be nine or 12 months. And then for a new construction project depending on where you live it could be 18 months. It could be two years it could be even longer than that. So if you're looking at one of these longer time horizons it would certainly not behoove you to explore hard money options for example that generally have a duration of twelve months.   John Errico: [00:05:33] Well it's actually interesting sort of analytical question because part of the type of loan that you might get is driven by the asset that like to Ryan's point like what you're doing with the actual thing that you're buying. And part of it is just driven by can you actually obtain it for that property. So there might be a loan like I would say it would be amazing to get say conventional financing for every flip that we would do. But assuming that we could also get you know renovation costs baked in. But that's just not obtainable for these types of projects.   Ryan Goldfarb: [00:06:03] The other the other question is what what will you or the quote unquote borrowing entity qualify for. So when one issue that I've run into in the past over the past few years is that I'm. Somewhat newly self-employed and generally most conventional lenders require two years of tax returns with quote unquote self-employed status in order to qualify for a loan for any one of their loans. No matter how good the deal is. So as much as I would have loved to take advantage of that in the past that just hasn't been an option for me. Though it may have been for Ben or for anyone else who could have qualified it.   John Errico: [00:06:42] Yeah maybe. So let's look at it this way. Let's look at two different common investment hypotheticals that an investor might face and talk about how the different options that we might take advantage of to finance them. So we could look at say a very run of the mill a fix and flip on buying a distressed property that has a lot of damage but it has a lot of value. When I sell it and I want to sell between six and nine months from now if I were to look at that we could automatically eliminate a couple of different types of financing for their property just because it's probably the case that a bank will not lend money for that property under a conventional loan or possibly an FHA type of loan. Maybe there's a caveat. If you're living there but.   Ryan Goldfarb: [00:07:31] And that that limitation may also be driven by the fact that if it's that good of a deal you're probably going to have to close it quickly which would be maybe in 30 days. And I would say it's generally not a good assumption to assume that your lender can close your conventional loan or FHA loan or even commercial loan that would otherwise that this property would otherwise qualify for within that time frame.   John Errico: [00:07:55] Right. So that teases out another important thing which is that just in order to buy the property. So if I'm if I'm buying a a flip. There are several reasons why I might not either want to be able to use conventional financing to do that. One reason Ryan mentioned is that banks generally when you are getting a conventional or an FHA type of mortgage require time to closing it and will often look at your personal assets as a means to underwrite or analyze whether or not they should give you this loan. That is contrasted significantly with the hard money loan or a private loan in which case banks will though be aware of your private finances will not use that as the basis necessarily to give you a loan and also are created. When I say banks it just mean lenders not necessarily a bank. These loan products is what is their standardized products are usually created to accommodate this type of activity. So they'll close within 10 days 15 days maybe three or four days if you have a relationship with a hard money lender in return for a different loan terms.   John Errico: [00:08:58] So a conventional loan would be say as we talked about before a 30 year fully amortizing loan where you put down maybe anywhere from three and a half to 25 percent down a hard money loan will be oftentimes an interest only loan that might be between six and 18 months will require probably some amount of downpayment maybe between 10 and 20 percent down possibly inclusive of renovation costs and we'll have an interest rate that's more like 9 10 11 or even higher percentage however will be able to get loans upfront with points of front points upfront meaning that you essentially are paying a percentage of the entire loan amount as a fee to the lender to initiate the loan.   John Errico: [00:09:40] However you can usually they usually will not care about so much your personal finances. So some of the things we talked about about debt to income are not so much considered with many hard money lenders again this isn't a standardized industry but may many hard money lenders don't care about that per say they do or may care about how much you anticipate selling the house for how much they believe you could sell the house for as it means to underwrite their product and they will close within a very short amount of time relative to conventional or FHA lenders.   Ben Shelley: [00:10:09] And it's probably worth noting that these specific areas of investment there are institutions and individuals who are specifically targeting these different types of investors and investments. So right there's a whole marketplace of hard money lending that you can go to if you're not qualified and that's a great point. If either the situation. Thank you. If either the situation doesn't allow for it because of either your finances et cetera or because for example you have a short closing timeline that you need.   Ryan Goldfarb: [00:10:37] And if I wasn't gonna knock my microphone over I would have gotten up and given you a physical pat on the back.   Ryan Goldfarb: [00:10:41] So yeah. That's a great point.   Ryan Goldfarb: [00:10:43] And it also highlights the importance of having the right contacts within your network because our hard money lenders for example make it far easier for us to say yeah we will really buy this in 10 days at this number. If you're willing to accept that and oftentimes you're dealing with a distressed seller for any number of reasons. That's the ultimate selling point for them because it's more important for them to get their money in 10 days than to wait 45 days and get an extra 15 percent.   John Errico: [00:11:12] So the reason why when you see fixed and flips usually the to the extent that they're purchased with debt and sometimes the purchase with cash. But the reason why they're often purchased with debt would be a because a conventional finance conventional bank can't fund the loan can't essentially underwrite and go through the process and the amount of time that is required for you to buy it be because the person buying it you may not have the the credit or the debt to income ratio or other assets that a conventional lender might require and C would be the bank itself might just not want to make this type of loan. They might not be interested in making a loan or a property that maybe has substantial damage or whatever you might have issues with the appraisal essentially.   Ryan Goldfarb: [00:11:58] One thing to keep in mind with these hard money loans is that they will generally lend a percentage based on what the appraised value is minus renovations or After renovations rather. So in order to qualify for one of these loans they're essentially screening the deal for you and saying OK your numbers are like there's enough of a delta in there there's enough margin for us to expect that this makes sense for you as a flip to the point where at the end of this project you will be able to pay us back. Based on the value that you've created through this renovation. So to understand the numbers a little bit. A lender's requirements might be that they will lend no more than 75 percent of the appraised value which might be in this case let's say it's two hundred thousand dollar appraised value after repairs. That means the market value of this property. When you're done with your renovation is two hundred thousand dollars. If you're buying this property and let's say it's reasonable to assume that you can do this with fifty thousand dollars in renovations. So if you back into kind of your maximum offer price on this property you're going to arrive at one hundred thousand dollars. The way to arrive at that is saying 75 percent of the two hundred thousand dollar market value is one hundred fifty thousand dollars. I know that I have to put 50 thousand dollars into the project to get it to that point so I can offer no more than 150 minus the 50 which is a hundred thousand dollars. So based on those numbers you'll see that there's a margin and there are fifty thousand dollars and at first glance you'll say wow I'm gonna make fifty thousand dollars on this project. But as we've discussed in the past that is certainly not the case embedded in that fifty thousand dollars is both your profit margin and all of your additional expenses. So that's your holding costs for the six months that you have to hold onto the property before it's done or nine months or whatever it may may end up being your mortgage payments your taxes your insurance it's your closing costs on the back end your closing costs on the front end the lender is generally not going to take those into account but there are those in class when you require it and then when you sell a grant programs commissions transfer taxetc.   Ben Shelley: [00:14:17] Partners for disposition or foreclose you got legal fees legal costs relation fees rise also processing fees title and insurance again substantial.   Ryan Goldfarb: [00:14:28] So you know based on those numbers you might at first glance I think your margins 50 grand. But the reality is it's probably closer to like 20 which depending on your circumstances and your arrangement might be might be a good deal you might be a realtor too and that's your that's your way to continue building a pipeline and to feed the beast so to speak.   John Errico: [00:14:50] But I think that's so yeah to Harken it back to the terms that we discussed before. If you're talking about a hard money load in this context your I don't know in what order we did the terms but your loan length is generally going to be I would say very commonly twelve months but could be between six months and 24 months.   Ryan Goldfarb: [00:15:07] And it could be and it could be 12 months with a three month extension not shorter term multiple of those for a price.   John Errico: [00:15:13] Your your interest rate or your EPR is going to be probably in the high single or low double digits.   John Errico: [00:15:21] So you're looking at I don't know 8 percent 9 percent at the very low end up to 15 20 percent at the very very high end. Is this a before you might have to pay points upfront which are a percentage of the total loan amount as a fee to begin the process which some people I think don't consider as a cost but can be very significant. So even one or two points can be thousands and thousands of dollars that you have to pay either as wrapped into the loan or upfront.   Ryan Goldfarb: [00:15:49] In addition to maybe a legal lender legal review fee title insurance like your personal closing costs and then on top of that lender Title Insurance lender legal and maybe an appraisal or inspection amount.   Ben Shelley: [00:16:04] And worth noting that you're paying interest on the totality of what is being loaned. So that's that's both the principal and sometimes.   John Errico: [00:16:10] Yeah. So you're paying interest on debt depending on your arranged with the hard money lender you could be paying interest on the amount that you're actually obtained. Or you could be paying interest on the amount that you actually anticipated needing. So the difference is that you might say buy a house that costs one hundred thousand dollars and you loan one hundred thousand dollars but you know that it is cost fifty thousand dollars renovated so you actually want to get a hundred and fifty thousand dollars if you put say 10 percent down of that total amount you might be lending either one hundred thirty five. So yeah you're lending a hundred thirty five. But to actually buy the property you only need a hundred thousand dollars so you might be paying interest either on the amount that you lent the amount that you needed to purchase the property which could be a hundred thousand dollars or the amount that you need to purchase and renovate the property which could be hundred thirty five thousand dollars.   John Errico: [00:16:59] You might have actually received thirty five thousand dollars until one two three six months into the project.   Ben Shelley: [00:17:04] Would you say it's more common for hard money lenders to incorporate renovation costs as part of what you're paying your interest as in not what you need in the moment but what you ask for what you're approved for use in totality.   Ryan Goldfarb: [00:17:16] Usually it's done based on the loan amount less commonly it's done based on the amount that you draw. But that's obviously advantageous especially if you have a significant renovation budget. Right.   Ryan Goldfarb: [00:17:26] As we're learning on a few projects so yeah. So why don't we. Why do we move to the buy and hold.   John Errico: [00:17:31] Read universe which is has different considerations other perhaps might have similar strategies depending on the project. So if I buy a 2-family home and I want to buy it for cash flow I would say your options for buying a 2-family home are probably a bit broader than your options for buying a fix and flip. So you could consider hard money.   Ryan Goldfarb: [00:17:52] You could consider conventional lending you could consider FHA lending the one the one caveat I would add is that it's also going to depend on the condition.   John Errico: [00:18:01] Yeah so the way that I I guess I could maybe conceive of buying a home a multifamily home as like a hierarchy. There's kind of an order of preference and maybe my order of preference might be different from your order of preference but I would say if I had the option to do it I would probably say buy home with FHA financing as the number one option. If it's possible because I'd be able to put very little down and own a home essentially. So with an FHA loan on a multifamily home said 2-family I could put down three and a half percent of the purchase price. Pay some additional fees for FHA appraisals or whatever might be and then move into the home with only putting down very little the disadvantages to that would be it could take a very long time for that loan to close and if the property requires repairs I might not be able to I might not be able to obtain an FHA loan. There is an FHA 203k loan but I might not be able to obtain a straight FHA loan. I also would have to live in the property which is maybe the biggest catch you had. FHA loans are generally available only to primary resident owners owner occupants and for many reasons a sell ever home might not find that as an attractive offer because they know that it will take a very long time to close the property and one additional caveat is that I need to make sure that I have sufficient credit and income and debts to qualify for the loan. So we're talking here in the world of it's essentially a loan product created for you as a primary homeowner to live at home. But you could use it for investment purposes and I've bought homes with an FHA loan. The living in it. But in my mind thinking I'm going to use this as a as a real estate investment long term. I guess the second thing in my my hierarchy would be to buy a home with conventional financing so conventional. Well I don't know if that's thing.   Ryan Goldfarb: [00:19:54] Well I actually would look at it a little bit differently. Yes and different hierarchies. Yeah I mean in a perfect world for sure I would love to be able to buy an investment property that hits my investment criteria while putting three and a half percent down even if I to live there for six months or a year whatever the requirement is.   Ben Shelley: [00:20:14] But I think most people do you think most people don't qualify them for that FHA more so than let's say your average conventional life.   John Errico: [00:20:21] It's the property that the underwriting for a person is probably more lenient but the underwriting for property is more difficult to read.   Ryan Goldfarb: [00:20:31] But what I would say is I would rather a better investment even if I had to use a more onerous financing strategy than to buy a lesser quality investment and only do it because I have the ability to obtain an FHA mortgage through it or for that property. That's that's not to say that you can't make a good investment. Either way I think there are certain properties that lend themselves extremely well to doing to obtaining or acquiring through FHA financing. But I'd rather if I can buy a 2-family if I'm looking at two 2-family right next door to each other one of them needs to sell superfast and maybe needs a little bit of work but they're offering it at two hundred grand if you can close it close on it in 14 days or you can buy the one next door for two ninety that's ready to go and the sellers in less of a rush but they know they're asking a little bit of a premium and so they're more receptive to an owner occupant buying it with FHA financing. Depending on how much work it needs and whatever my personal financial situation is at the time I may prefer to buy the one next door and forego the opportunity to use FHA financing because the deal itself maybe you make more it makes more sense for my investing thesis.   John Errico: [00:21:44] Yeah. So I think I mean it's kind of a difficult even general topics to discuss because it's so dependent on the particular asset.   Ben Shelley: [00:21:54] I would like to look at it through your guide size.   Ryan Goldfarb: [00:21:57] I think that's the most well I look at I look at all of these finance financing options as just another tool in the tool belt and there are different projects that are going to that are going to make a lot more sense for different financing strategies.   Ben Shelley: [00:22:09] Well say something you just said Ryan too is is interesting to note which is that from a buy side perspective to keep in mind that also the way you finance your property can have an effect on how the deal proceeds because certain sellers will be more in climbing. Naturally you're more inclined to take a cash offeretc. And as you go down and put less down it becomes more tenuous for that seller to proceed with with your offer. Yeah.   Ben Shelley: [00:22:32] Yeah. So I would say I've just SEO my own life as an example. I have I've purchased several properties or purchased a property with an FHA loan. That was the very first property that I bought. I lived in it as a multifamily proper 2-family property and it was a great success because I was able to live in one unit and rent the other unit ultimately move to the basement rent out both units essentially all the other investment properties that I purchased for buying whole purposes I've bought with I don't use that word commercial loan because I may be a little confusing but I've bought from banks that are portfolio lenders so like nonconforming non not conventional loans but that have terms that are comparable to conventional loan to conforming loans. To explain the reason why I've done that it might be important to tease out the difference between a conventional lender and a portfolio lender. A portfolio lender is generally going to be in this world of real estate finance like a local bank or your credit union or a savings bank or something like that that is interested in getting your business for whatever reason but is not either eligible or interested in reselling that loan. They want to continue servicing the loan for the life of the loan and they have enough liquidity and other advantages to continue servicing the loan for however long you have it. So the advantage with going a bank like that is that they could offer interest rates in terms that are very similar to conventional loans. They can offer a 30 year fixed loan at say whatever the prevailing rate is like 5 percent for 4.5 percent. However their standards as to your credit or your debt to income or whatever aren't governed by essentially federal regulations but by their own perception of your credit worthiness. So in my case in New Jersey I've been lending I've been buying homes in an LLC quite frequently and I don't usually want to transfer the home after I buy it. So for various reasons you may not want to buy a home in your own name and transfer it into an LLC with with a mortgage one being because the due on sale clause if your mortgage could be triggered and another being that your name is on the property records anyways you're sort of defeating the purpose. But having said all that if you want to get a in New Jersey if you want to purchase a property in the name of an LLC you are generally not going to be able to get a conventional lender to do that you're going to have to find a portfolio lender. So I've used portfolio lenders to do that but have offered me terms that are identical to a conventional conforming lender. So those are like I said before a 30 year fixed prevailing rate usually there's an underwriting process about my personal credit so they do look at my credit score and my whatever but if my credit score is above or below a certain number they may or may not disqualify me as it would in the world of conventional financing if my debt to income is a certain thing. It may or may not disqualify me depending on the banks discretion.   Ryan Goldfarb: [00:25:24] In that world, it's generally more asset based than then borrower based so that's they may have certain thresholds that you need to eclipse with respect to credit score or net worth or debt to income. But so long as you are above that threshold it's it's generally driven by whether or not the property itself is a good investment amidst that criteria.   John Errico: [00:25:42] And then there is leeway so that these banks will have they might have they certainly have their own standards but if you don't meet those standards you might be able to negotiate some some means to make the loan happen even if you don't meet the standards as opposed to a conventional lender where if you don't meet the standards you just tell me the standards because they the standards are set by federal regulations. So if you don't meet the standards that can't resell the loan and they're just not going to they're just not gonna accept it. So it would sometimes it could sometimes make sense to produce a property a multifamily property with hard money. In fact we're doing that right now. And the reasons why it would make sense to do that or what Ryan mentioned a few minutes ago which is that a you need to buy the property in a very short amount of time because it's such a great deal and or b the property is in such a bad condition that you can't possibly get lending from any other institution or whatever and or see you yourself don't have the personal financial you know credit debt to income whatever might be to qualify for a conventional loan or whatever other type of loan product you're looking for.   John Errico: [00:26:46] So in that case you're almost treating it like a a fix and flip it cept the flip part the cell part is going to be you refinancing that property into a conventional or otherwise more typical loan product.   Ryan Goldfarb: [00:26:58] Yeah another. This is actually just reminding me of a strategy that I haven't really employed in the past but that is an interesting thought experiment for the purposes of buying property. There are obviously advantages to you as a buyer for utilizing different financing strategies. And there are advantages for the seller as to why they might have a preference for one or the other. I think we've done this in the past but I don't know if it's ever been successful. I know of people who just like to make offers with multiple options embedded in the offer. So they'll say if you if you want a 21 day closing here's our number. If you're willing to go to extend this out 60 days will we're willing to pay an extra six thousand dollars or something like that. And that's generally just a way of quantifying the difference between the two different financing strategies how much it's going to cost you either upfront or over the duration of that. Something else we hadn't really touched on that is maybe a little bit more common in lower cost markets but there's something called delayed financing which is generally generally entails acquiring the property with cash and then obtaining financing after closing. So you buy the property for one hundred thousand dollars because you have the cash sitting around and then you approach a lender to refinance out as soon as you close. There are certain a lot of banks have limitations against it because they don't. They might have quote unquote seasoning requirements but there are some lenders who will do something like that they may just they just may have a little bit more restrictive terms they might not go as high leverage or they'll no limit you to a percentage of cost. You'll see you'll be limited your leverage will be determined on a loan to cost basis rather than on a loan to value basis. So if you paid one hundred thousand dollars for the property even if the bank praises it at two hundred thousand dollars they might still only lend you 70 percent loan to cost which is seventy thousand dollars instead of 70 percent loan to value which is a hundred forty thousand dollars.   Ben Shelley: [00:28:57] Yeah I mean I think as John always alludes to both in person and on on the show there are so many creative ways to finance your deals. And so I think you know one of the things obviously the theme of this episode is to look at all your bevy of options and identify what's the best strategy for you. But I mean for example I guess you could probably approach your seller to do like a seller financing and say you want one half million dollars let me pay five hundred thousand dollars in cash and you take a million dollar note and we'll set up some sort of amortization structure for sure you know for a year. You know the rest of your retirement. I think that's particularly good for sellers who are a little bit older.   Ryan Goldfarb: [00:29:31] And it's also often used as a bridge that you might say hey I I know this property is going to need a little bit of work and might take nine months to do it instead of going and getting bridge financing and then ultimately refinancing into a more permanent loan. You may just say hey seller will you take will you offer this seller financing. Give me two years or whatever knowing that you're going to probably refinance around the year one mark.   John Errico: [00:29:53] Yeah. And it brings up a good point which we can touch on very very briefly at the end which is the world of truly private financing which I would say hard money is a subset of or a type of. But as Ben alluded to a seller financing if you're if you're talking about somebody maybe even a friend of yours who wants to invest in real estate you can structure a lot of times people ask me like well you know how do I do it or like how do I get money from my friends or whoever to buy property. And there's no really satisfactory answer because you can structure financing and debt in this way in every way. We've talked about this before a little bit with very high level like financing for deals. But in terms of the interest rates are all the definitions we talked about earlier. All of those things are totally up in the air and there's it's unsatisfying to hear this but there really is no market for these things. It's really what you and the person that you're investing with want to offer. So you can you can ask. So you're investor you can ask your investor friends what are the sort of deals that you give your friends. But I've done that before and I've been amazed slash appalled at the types of deals that other people have have struck with people in the investment world and it's very common for a smaller properties that to be the case. Nobody knows what the market is. There's no commonly understood market interest rate for private money deal at all. I mean there's a hard money interest rate but that may or may not have relevance towards what you know your best friend is going to lend you to buy your property. So that's a whole other topic. I think they were getting into.   Ryan Goldfarb: [00:31:24] But to to that point the reason why a lot of these requirements and restrictions are in place for these institutional lenders or for these bigger banks or for Fannie Freddie at large is because they don't have any way of understanding you or understanding the deal without looking into these metrics and all of this is a way of. It's all it's all a means of risk mitigation. So if they can say on average if we only lend to people with a 720 credit score with a DTI below 47 percent. And we don't lend more than 70 percent on the purchase price generally across the board. These will be pretty safe lending opportunities. But your friend may look and say Hey John I know exactly what you've been doing for the last five years I've seen every property that you've bought. I know you as a person maybe we've done business in another capacity before your bank might want six like your bank might be offering you 6 percent but your friend they have a ton of money. He may want some real estate exposure and he may say I'll do it for five and I'll go a little higher on the leverage or whatever and it's ultimately it's an opportunity to create a win win situation when you truly understand everyone's needs. Because these banks have very different needs than what your investor friend may have and you have a very different need than the vast majority of investors who these loans are otherwise targeted towards.   John Errico: [00:32:44] Yeah it's a great point and I think it gets to to sort of a problem with the industry that we've talked about quite frequently and why now. I think with in particular the past like five to 10 years there's been a lot more institutional ish private lenders out there. So I think that for a long time hard money lenders were almost like seen as a like a subclass of human like they're just like the like loan shark you know like kind of sell your soul to get a property.   John Errico: [00:33:13] And now we're seeing hard money lenders that are venture backed that have billions of dollars in valuation that are advertised to me every time I watch a video on YouTube.   Ryan Goldfarb: [00:33:22] You know that sort of thing because they're listening and because John watches a lot of the noise I wonder gosh it's scary actually.   John Errico: [00:33:31] But so because of what Ryan indicated about the status of the market of conventional lenders reselling their loans and the regulatory environment that frankly has has come up post the last financial crisis the housing market crash there really are sometimes gaps in the market for investors that can only be filled by private financing either by like your buddy or by some of these companies that are coming up that offer private financing although look like big companies now. So there's a market opportunity in my opinion or in many people's opinion to offer different loan products that may be not in the world of conventional financing that we've been talking about in this episode.   Ryan Goldfarb: [00:34:13] For sure. I have a few other things that came to mind while we were discussing that I just want to highlight real quick.   Ryan Goldfarb: [00:34:19] Maybe as an annex or as an appendix footnote well known as a footnote it came in right at the right I was just a buyer of close it's a place yes right.   Ryan Goldfarb: [00:34:29] Right. The first is seasoning. John discusses a little bit before and I think I mentioned it too but there are one thing you may run into when you're looking to execute on a BRRRR strategy is that certain lenders will have seasoning requirements so they won't loan on something until you've owned it for a certain period of time and it's quote unquote seasoned. So that might be six months or nine months and they really just don't want to get too ahead of themselves with constantly you know having someone who's constantly recycling loans and it's another just another means of protection for these lenders.   John Errico: [00:35:04] And also your seasoning in the context of money that you're using for a down payment which is another.   John Errico: [00:35:09] Sometimes people say there's a seasoning requirement for cash used to close in a loan so that prefigured a slight point but is an important one. Usually with a conventional or even FHA loan or any loan that's not a private loan they're usually limitations on where you get the downpayment money for and it usually can't be lent. So again usually there's a seasoning requirement for money in your bank account. So if you just got a check for fifty thousand dollars in your bank account it either has to be because you transfer it from another bank account or maybe got a gift but it can't be because you got a loan from your friend in general right.   Ryan Goldfarb: [00:35:42] And you can't just throw some salt and pepper on there to season it.   Ben Shelley: [00:35:45] Oh no. Nice was just about we get it.   John Errico: [00:35:49] That's so many laughs. It's crazy just crazy. I was an editor. Actually the whole room I mean I was worried about the structural integrity of the building standing ovations. Crazy. Well I stood. Moving on. There was a body. It's just a. I was in here. It was in silence.   Ryan Goldfarb: [00:36:04] The next thing is interest rate risk. This is I think only really applicable to commercial loans. I've never heard of this in a in a residential mortgage context. But if you're looking at commercial financing and you're obtaining an adjustable rate loan or a floating rate loan you may see that your lender requires some form of interest rate protection which can be in the form of an interest rate swap or an interest rate cap. The mechanics of each of these are a little bit different but they functionally serve the same purpose. It's to it's to offer you some type of protection against a crazy spike in interest rates and it keeps your interest rate payments. Those still variable a little bit more predictable so they generally they they wouldn't exceed a third a certain threshold up or down predictably variable rate. Next one was John also mentioned this with his some of his rental properties but it's not uncommon for investors to run into the issue where their lender will not loan to an LLC. It's just best to vet this upfront and to ask and I think this is actually a good lesson across the board but if you have any concerns about any one of the points that we've discussed today just ask your lender because it's a lot easier to figure out a way around it. At the very beginning they may just put you in a different product entirely but it's a very it's a lot easier to deal with it at the beginning than to try to deal with an issue when it comes up two months down the road or 45 days down the road when you're already in underwriting or when you've gotten your commitment and then you're looking to close.   John Errico: [00:37:45] And it reminds me of one other issue that I've run into which is that you might actually be disqualified from getting a loan at all because you have too many loans just in general.   John Errico: [00:37:54] So there is there is a Fannie Freddie guideline where you can only have X number of loans that's it doesn't matter what your debt to income ratio is.   Ryan Goldfarb: [00:38:01] About anywhere between like four in 10 per person.   John Errico: [00:38:04] Right. And again with a portfolio lender you might not have the limitation in with a private lender you probably won't have the limitation either.   Ryan Goldfarb: [00:38:12] There are also sometimes you may you may see some escrow requirements for things like taxes or insurance on larger properties you may also have escrow requirements for replacement reserves. It's usually something that can be negotiated but sometimes there's a hard stop on these things.   John Errico: [00:38:29] That's another thing. There are definitely in the world of again like Fannie and Freddie compliant loans. You will often find reserve requirements for certain types of loan requirements and you'll have to keep reserves for your other property SEO and eight other properties the bank might say. OK. We need to have 15 thousand dollars per property in a liquid account which can be a lot.   Ryan Goldfarb: [00:38:50] And that's actually that could be what's called a covenant a loan covenant which is actually the last point that I had written down but a loan covenant is an obligation that you agree to maintain throughout the life of the loan as a as a condition of that loan and a failure under your covenants may trigger it may trigger some type of action that could be default. It could be some kind of renegotiation you may have a covenant that says your group this is more relevant for commercial property but you may have covenant to maintain a certain level of occupancy through for the property and if not you may have to pay the loan down a little bit or they may hold back some kind of retainer or some money in escrow. It can be any number of things and when you're in the money on the commercial lending side that's when you'll see covenants that are a little bit more unique and tailored to that specific deal and the specific risk profile of that deal.   John Errico: [00:39:49] And in the residential world you could argue that you have a covenant for primary resident type properties that you have to intend to live in the property for a certain amount of time.   Ryan Goldfarb: [00:39:57] Yes. I just got lawyered up legally.   Ben Shelley: [00:40:00] Well more than in any episode I think we have ever created. I would very much recommend listeners. Go back to the beginning of this episode with pen and paper in hand take notes make sure you fully understand these concepts. If you don't look them up or feel free to reach out to us on our socials and I appreciate you listening. Guys thanks so much for your time and expertise as always. For the folks listening at home make sure you subscribe to us wherever you get your podcasts. You can find us on the brick by brick. That's brick X brick Facebook and Instagram. Thanks so much for listening.  

Time to talk about leverage! In part one of this two part series, the BxB team discusses the essentials of real estate lending, including industry terminology: LTV, DCR, DTI, NOI, and more! We also talk pricing, terms, and additional variables to ensure that you match the right loan with the right project.   (Transcript below.)   Ben Shelley: [00:00:00] Welcome back to the Brick x Brick Podcast. Today's episode is part one of a two part topic on debt financing. Part one is focused on terminology surrounding the financing process. Enjoy.   Ben Shelley: [00:00:21] Welcome back to the Brick x Brick Podcast. I'm Ben and I'm here with John and Ryan. And for today's episode we're going to talk about debt financing. Now if you've been a avid listener of the show which I'm sure many of if not all of you are you know that we've already done a sort of overview episode about real estate financing more broadly today. We want to hone in a little bit more specifically on the debt side. And why we want to do that is so that you both the everyday intermediate and expert investor have a sense of the landscape and know where to go and what to look for when you're negotiating and talking with lenders. And so some of the types of financing in lenders you may be dealing with are conventional lenders portfolio lenders FHA lenders hard money privateetc. So our experts are going to take you through it. Nobody knows it better than John and Ryan and so I'm going to start by throwing it over toMr. Wells Fargo himself. Ryan Goldfarb where do we want to start this?   John Errico: [00:01:13] Ryan quote Wells Fargo quote Goldfarb.   Ryan Goldfarb: [00:01:17] Together Wells Goldfarb so far has really come. It's one of my friend's jokes. I want to try to get him right here. I think it's Neal. Okay.   John Errico: [00:01:26] And about 50 years when you acquire Wells Fargo you can.   Ben Shelley: [00:01:30] You don't want that kind of publicity.   John Errico: [00:01:32] So just over set big goals and then try to achieve. And that's you know that's just put it out to the world see what's gonna happen.   Ryan Goldfarb: [00:01:38] Interesting too. It's interesting to think about where these banks will be in 50 years from now.   Ryan Goldfarb: [00:01:42] Any who because.   John Errico: [00:01:44] They keep loaning money to us. I mean they might say.   Ryan Goldfarb: [00:01:48] Well we in Ben's eyes are the experts on this.   Ben Shelley: [00:01:51] Now of course my only goal is really to convey every episode that you guys are experts at fill in the blank topic of that episode should I cut that.   Ben Shelley: [00:02:00] I don't know.   John Errico: [00:02:00] Well we're always there's like the point 0 0 0 1 percent of the Earth's population that we listen is like these guys go to the bank for 40 years. Well they set it on the by podcast. It must be true.   Ryan Goldfarb: [00:02:12] Well sir I worked at one for three years.   John Errico: [00:02:14] I want to make sure that we accommodate that person. What incentive do that person who's like five people enter.   Ben Shelley: [00:02:20] We are way off the rails.   Ben Shelley: [00:02:21] We didn't even get started yet more sidetracked.   Ryan Goldfarb: [00:02:24] Anyway. Taking us back to square one.   Ryan Goldfarb: [00:02:26] The way that I've been thinking about this is in the context of buying let's say a car. There's so many different places where you can start and there are so many things to think about. You'll walk into a dealership and they'll start throwing all these terms out at you both pertaining to the car itself and to the different ways that you can obtain the car. You can buy it outright. You can lease it and you can finance it. And in a lot of ways I think there are parallels to buying property. You can buy it outright. You can buy it with financing.   Ryan Goldfarb: [00:03:00] You can lease iti.e. rent it as as many of us do for our own purposes.   John Errico: [00:03:05] Steal it buy adverse possessing defective squatters.   Ryan Goldfarb: [00:03:10] That be an interesting episode that is going to anyway.   Ryan Goldfarb: [00:03:14] So that's kind of how I think about this high level. There are I guess to start any number of ways that you can buy it. As I alluded to before it can be through all equity or in the case of you know just buying a property for 100 percent cash or the more common way to do it would be to put down some money in the form of a downpayment and then obtain a loan for the remainder.   Ryan Goldfarb: [00:03:44] That loan is what is classified as debt.   John Errico: [00:03:47] And usually just to clarify that the loan is secured by a lean on the property. So that's what classifies this type of financing from me. You could also get other types of debt I suppose that aren't secured by leans like you can get a personal line of credit or something like that that's secured by your personal credit. But these are all secured by the actual asset. So that distinguishes there's a category of thing. Right.   Ryan Goldfarb: [00:04:12] So under that umbrella of debt some of the options are conventional financing which is what most people think of when they're going to buy a home. It's you go to the bank and your banker says we can get you into this new house for 20 percent down while we're on your credit. It's oftentimes the loans are guaranteed by Fannie Mae or Freddie Mac and they fall into this bucket that allows them to be offered to you at pretty attractive rates. And so that's that's generally more applicable to the owner occupant class of purchasing which is what you would use to buy a primary residence on the investment side. There are also a litany of other options including commercial portfolio lenders hard money loans private lenders each of which have many similarities but also some key differences that are important to be aware of before you dive in and pursue any one of these paths. John, am I missing anything here.   John Errico: [00:05:12] Well I think we'll get into it. But part of the the skill of being a real estate investor is knowing when and how to use these different financing options. So oftentimes with the home you'll you might buy a home with a certain type of financing or no financing and then obtain financing for that home at a later time or you might start with one type of financing change or a different type of finance in Exeter et cetera it be known as a refined refinance right. And depending on your goals of the property and the type of the property that may be very advantageous or not so we can run through some examples. I mean just very high level of you if you're familiar with reading say BiggerPockets or that community of thing you've probably heard of the Byrd strategy which is buying renovating renting refinancing and then repeating and refinancing is sort of the key word or what we're talking about which is normally in a BR technique you might start with could be conventional finance and could be FHA financing whatever and then you got to refinance that into a conventional loan and take money out of it. So even like very beginner like house hacking type strategies you're going to have to know knowledge about financing and how it works.   Ryan Goldfarb: [00:06:23] Then I guess before we get too deep into the weeds here it's probably good to start with some definitions or with understanding some of the key components of what these different loans will offer. The first one is leverage. That's often referred to as the loan to value or in some cases loan to cost. So if you're buying something for two hundred thousand dollars and your lender is offering a loan product with an 80 percent loan to value that means that the lender so long as they support that two hundred thousand dollar value via an appraisal or some other type of internal valuation they're willing to loan up to one hundred sixty thousand dollars on that property for that purchase. Which means that you as the owner investor whatever you want to call yourself. Need to bring the remaining forty thousand dollars to the table plus allocations for all the closing costs that you that you will incur. Plus any holding costs that you will have for any period of time thereafter up until you are fully stabilized with your rental property and have tenants in place who are going to cover those holding costs. So.   Ryan Goldfarb: [00:07:38] Leverage. Most commonly I think the most common benchmark that you'll see is generally 75 to 80 percent loan to value for investment property. The more risky an investment can be generally the lower loan to value that a lender will offer out because it's true.   John Errico: [00:07:58] That's that's a victory for the world of residential loans properties for commercial loans.   John Errico: [00:08:03] You can get a lot lower or higher whatever you want to call it requirements so you might be a little like 70 percent loan to value 65 so a lot of other things that graduate.   Ryan Goldfarb: [00:08:11] As you get into as you get into say commercial property like a strip mall or a standalone office building or something akin to that you may find lenders that are a little bit more averse to lending and high leverage because the secondary market for that kind of mortgage is a little bit different. There aren't as many means to securitize and sell off that paper which means that the lender themselves often has to hold on to the loan for the lifetime of that loan whereas when you're buying a residential mortgage through Wells Fargo or through ABC lendingCorp. in your town that is a well known mortgage broker. They're originating alone but within a few months that loan will get bought by an investor generally as part of a pool and that investor will be the one who's essentially clipping the coupons and earning the interest on that.   John Errico: [00:09:06] Yeah. So the banks are like recycling cash. That's how these big originators are able to do so much volume because they're not at any given time loaning out like a hundred million dollars of cash they're loaning out X amount they're selling it to an investor or securitizing it or whatever and then they're recycling that money that they got back to re lend it out to more people. So right. So it may be worth noting sorry to cut you off right but that for primary resident if you're living in the home that's generally the most leverage that you can obtain. Actually no. I mean I could fathom exactly why.   Ryan Goldfarb: [00:09:41] Well I think I'll do that but I don't think it's necessarily a business play. I think the reason for it is because the so if you if you think about the existence of Fannie Mae Freddie Mac FHA FHA I think about it. FHA is is a government agency Fannie and Freddie are quasi government institutions so they are effectively the Federal Housing Administration right authority administration authority for monetary Administration FHA and Fannie and Freddie meanwhile are technically private entities but they are kind of under the oversight. Yeah they're under the oversight of the of the federal government. And the reason that those institutions are in place are for a few different purposes. One of which is to make homeownership more accessible to the everyday American. We've actually discussed this in the past. The idea of through and through government trying to catalyze good behavior or sound behavior in this case buying a home is probably better than spending that same money on a car or a or an asset that is under any circumstances going to depreciate. Home at least has a high chance of retaining its value and potential even increasing value.   John Errico: [00:10:59] So if you're living in the home as your primary residence you can get loan products that are as low as even zero percent down or maybe even pay you closing costs. But for most people it's more like three and a half percent down 5 percent down or conceivably possible depending on your credit in the home at Exeter cetera.   Ryan Goldfarb: [00:11:14] But then the other reason why these institutions exist is to promote liquidity in the marketplace. And that's mostly for the health and longevity of of the real estate markets. Anyway getting back to leverage. So as John alluded to they're actually somewhat products out there. I believe the conventional ninety seven still exists store something in that realm and then there's an FHA loan product as well that can provide access to or access to a mortgage with as little as three or three and a half percent down.   John Errico: [00:11:49] Is there evidence of a loan at zero percent interest rates on other things.   Ryan Goldfarb: [00:11:53] And then there are also some sometimes in addition to these attractive loan products there may be some down payment assistance programs and through different grant programs or other subsidies.   John Errico: [00:12:04] So you get anywhere between over 100 percent loan to value ratio to 60 percent 50 percent depending on the type of building asset that you're buying your personal creditetc. so that we'll get into that. Right.   Ryan Goldfarb: [00:12:15] And then another offshoot of the leverage question is that is the fact that some loans allow for the ability to borrow renovation proceeds. So there is still some calculus in there pertaining to to leverage limits. They generally won't let you borrow something in excess of what the property is going to be worth. At the conclusion of renovations I think two or three K may actually have an exception for that but generally any kind of investor focused loan will not. So if you're buying something for a hundred thousand dollars and plan to put twenty five thousand dollars into it you may be able to finance both a portion of the purchase and a portion of the renovation so long as your value upon renovation or upon completion is in excess of the value might be a minimum of one hundred fifty thousand and might be a minimum of 175 or 200 but depending on the loan program that will be that would generally be considered loan to appraised value or as stabilized LTV.   John Errico: [00:13:17] It can be enumerated so that you can wrap multiple loan products into one loan depending on the banks. You can get like a construction loan construction to purchase Russian to permanent something all sorts of things.   Ben Shelley: [00:13:28] To what extent do you have influence when you're talking with I know we'll get more into the process of of what is the give and take between you and a lender when you're offered terms. Can you play a part in the process of determining that after renovation value for example. Is that purely on the banks assessment or are you able to have some say in what you think that is and where you think the fairest terms are. Well.   Ryan Goldfarb: [00:13:52] If you're talking about just with respect to what the appraised value is on the back end that's generally gonna be driven by some kind of internal valuation by the bank or more than likely driven by an appraisal which is supposed to be done by an independent third party. So you may be able to make the case that based on something you know or some kind of substantive experience that you have that you know this property is gonna be worth six hundred thousand dollars when it's done because you just renovated and sold the one next door which is identical and you got six hundred thousand dollars for it. Generally on the residential side it's gonna be driven by mostly by comps sales comps that is on the commercial side. On the investment side it's generally gonna be driven by the what's called the income cap approach which is it's a valuation methodology driven by capitalizing the NOI on a property. So you go through an income and expense pro forma something out arrive at an NOI and then apply a cap rate to that NY to arrive at a value. That's something that we've gone into and a little bit more detail in in prior episodes but high level that's that's how it is.   John Errico: [00:15:02] Cap rate is usually from the market with market cap rate red is for that area.   Ryan Goldfarb: [00:15:08] Right. For that area for that asset class.   John Errico: [00:15:10] Appraisers I mean it's a whole nother different episode.   Ryan Goldfarb: [00:15:15] We can I guess move next to the loan term. So that's always going to be a big factor in weighing different investment options or loan options. The standard again in the in the residential space nowadays at least is the 30 year fixed rate loan. 30 years is advantageous to the borrower because it spreads out the principal payments over a longer period of time which means that your monthly payment is able to be kept within reason and it ultimately gives you more buying power.   John Errico: [00:15:51] So 30 years amortized and fully and so that the passive barely fully advertising loan correct advertising would mean in this case that you're not paying only the interest on the money that you lend you're paying back the principal interest for all time.   Ryan Goldfarb: [00:16:03] And that's and that's governed by an amateur nation's schedule which if you look into is is quite unfavorable to borrowers.   John Errico: [00:16:10] So you're paying mostly interest at the beginning of your loan. You're paying mostly principal at the very end of your loan.   Ryan Goldfarb: [00:16:15] Even though your payment might be the same. Twenty five hundred dollars a month for the duration of the loan. So the loan term again 30 years is common in the residential space but when you get into the commercial space it's more common to see maybe a five seven or 10 year loan. Oftentimes there's variable pricing within that. So you might have a certain period of a fixed rate loan and then it adjusts after the fifth year every year until the end of the term so you might have five years of the fixed rate loan and then after starting year 6 you will have a new rate that maybe cannot increase more than a certain amount but that will generally be pegged to the prime rate or live or perhaps the Treasury although that's a little bit more common on fixed rate loans. The loan term is is important to keep in mind as an investor for a variety of reasons but probably the most important of which is you don't want to be caught. If you're looking at. If you're looking at a five year loan and a 20 year loan and you decide to go with the five year loan because the interest rate is significantly lower it's important to bear in mind that there's risk associated with that if you're buying. If you bought in two thousand four and you put five year financing on your property and your price and your loan came due at the end of your five you were. Your loan is coming due at a time when property values were at maybe not an all time low but we're at a low for a significant period of time preceding that.   Ryan Goldfarb: [00:17:47] So you are going to be the reason we saw so many foreclosures during that time in part was because people who were in that situation and we're seeing their loans reset or we're seeing a pending maturity they couldn't purchase or they couldn't sell at a number that would allow them to pay off their loan and they couldn't refinance based on current values at a number that would make it. That would make it feasible for them to hold onto the property.   Ryan Goldfarb: [00:18:14] So that kind of fed this vicious cycle of increasing supply which further suppressed property values and just kept the spiral moving downward.   John Errico: [00:18:25] If in the short term if you're flipping for example and you have a non amortizing loan like an interest only loan you might have the term the length of time of that loan is gonna be very important because that sort of determines the amount of time that you have to sell or refinance out the property to give a six month hard money loan that gives you essentially six months is other property which is not a very long time versus a year versus 18 months. And those are usually interest only as we were talking about before they're not fully amortizing so you're only paying the interest you haven't paid the principal and at the end of the loan terms you need to pay back the entire loan in one go.   Ryan Goldfarb: [00:18:59] On the flip side of this there are also investors who use this on the more conservative side of things but they will really take a long term view view towards this and they'll say look my retirement goal is in 15 years and all I'm really looking for this property to do is to serve as a source of income for me during retirement. So they might buy a property knowing that they're going to be putting 15 year financing on the property and they might amortize that loan only over 15 years. So they're paying back a lot more principal during those 15 years than if they had spread that out over 30 years so their monthly payments are going to be higher and their cash flow is going to be lower because of that. But their goal is to have this source of income for retirement so they'll have in theory a fully paid off property at the end of year 15 no mortgage which will mean more more cash flow down the road at the expense of cashflow in those first 15 years.   Ben Shelley: [00:19:56] Good point.   Ryan Goldfarb: [00:19:57] John alluded this before but the flipside of this is when you're talking about. No pun intended flips. When you're looking at a much shorter time horizon and this is another area where investors can get a little ahead of themselves and they'll think that they can complete a flip in six months. No problem but they underestimate the scope of the work. They underestimate the obstacles with zoning or the building department. They get screwed over by a contractor and they get left with a project that's going to take them a much longer to finish than just 12 months. But I think in the hard money space it's very common to see twelve months as a typical loan term and what that loan term means is that at the end of it you were loan is due and if you can't pay off that loan then you are in default and that's that's not a road you want to go down.   Ben Shelley: [00:20:46] That's bad that's bad in the words of bench expert opinion.   Ben Shelley: [00:20:50] But I think it's probably fair to point out from a hard money perspective too that it's it can be a good option for people who may not either qualify for two reasons either.   Ben Shelley: [00:21:00] If you're looking to flip in a short term period or for investors who might not initially qualify for conventional loans for whatever reason as almost like a bridge to that conventional loan via refi we'll get into those strategies right.   John Errico: [00:21:12] Yeah well I guess I should go. Just leave particulars.   Ryan Goldfarb: [00:21:18] What other one other subset of the of the term is that you can have a different amortization period than what your loan term is going to sound very confusing. And it took me quite a while to grasp fully but you may have a 10 year loan that is due at the conclusion of 10 years and you may have an amortizing loan but it may not fully amortize over that 10 years. So you may pay off that loan as if it's a 30 year loan in which case you after 10 years you've maybe paid off 20 or 20 or so percent of the principal. But at the end of that 10 years your loan term and maybe up so your you may either have to sell or refinance or pay it off in cash if you are so inclined. The reason that this is done is because it gives lenders a little bit of cushion. And frankly borrowers as well but it gives lenders a little bit of cushion and lessens the risk on their side of things. Because if you're doing a 10 year loan as a lender if you offer it as interest only that's super risky because your borrower is not paying anything down and if they're buying it at the height of the market when they go to refinance there's a high likelihood that the valuation that they arrived at on day one will not be the same at the end of year 10 in which case they may be it's it's more likely that they will be unable to refinance the property. That's that's what we would call refinance risk. So to allay that concern to an extent they will build in some amortization into the loan schedule so that 10 year loan might amortize over 30 years which means that the principal payments are going to be embedded in every monthly payment. So it's a little bit more expensive for the borrower on a monthly basis but it's far less expensive than it would have been had that 10 year loan be fully been fully amortizing and if you if you just kind of play around with a mortgage calculator. I mean I do this all the time. If you go into Google this is what I do in my free time ladies and gentlemen if you go into Google and just type in mortgage calculator Google has a built in mortgage calculator right there and you can kind of play around with some of these things so you can see a million dollar loan at 5 percent on a 10 year term versus a 30 year term. That assumes that these loans are loans are fully amortizing so you can kind of get a sense of how that impacts the monthly payments.   Ben Shelley: [00:23:47] I mean I think it's a lot of fun when we do a lot of something that we talked about at the beginning which is interest only hard money cash purchases and refinance now we're going to talk about it later on and refinance to conventional mortgages but to to to Ryan's point I think one of the most the things that gets my blood going is playing around with the numbers in such a way to see just how much we're reducing our interest. You like playing around with those numbers. I love playing around with those numbers. Talk dirty to me. When we refinance right the whole purpose is to make your debt less expensive in essence. And sometimes that means along getting your amortization periodetc.   Ryan Goldfarb: [00:24:24] That's great.   Ben Shelley: [00:24:26] Like I didn't really I don't care at all. I'm sure you know I'm just trying to do my part. I'm sorry that I'm sorry. And we value you here. That's very clear. And the interest in the interest   Ryan Goldfarb: [00:24:43] of time. I just want to highlight some quick definitions so that we can get a little bit more into the strategy of things. But it will be useful for the details of the later conversation. So amortization we discussed on DSC RR is the debt service coverage ratio. You may also see it abbreviated as DCR and the formula for that is NOI divided by annual debt service payments. The sum of those effectively what it is showing you is the cushion between your net operating income and your debt service obligations.   Ryan Goldfarb: [00:25:18] So it's the lender's way of saying okay they're paying us ten thousand dollars a month on their mortgage. That's one hundred twenty thousand dollars a year they're projected NOI is one hundred fifty thousand dollars. So the form the math is one fifty over hundred twenty thousand which I believe is a one twenty five DCR one point to five which is oftentimes is an arbitrary threshold.   Ben Shelley: [00:25:42] I know at least federally backed financing I got rent high.   John Errico: [00:25:45] I don't know. Yeah.   Ryan Goldfarb: [00:25:48] So there's been a little duel that we'll discuss that a little later but one twenty five is a pretty common benchmark in this maze. All right. So beyond the DSCR we have the mortgage constant or debt yield. I think this is actually more of an internal metric that banks use. But the formula for this is pretty simple. It is the NOI divided by the loan amount. So for if a bank's a 10 million dollar loan on a property with eight hundred thousand dollars I know I.   Ryan Goldfarb: [00:26:15] That's a debt yield of an 8 which is another way of saying it's another way of gauging the bank's return. If they had to take over this property next we have interest rate. That's pretty straightforward though it can get a little bit more complex when you get into some some more unique deal structures.   John Errico: [00:26:36] You talk about interest rate versus EPR.   Ryan Goldfarb: [00:26:39] Yes. Would you like to do that?   Ryan Goldfarb: [00:26:42] Well no I would not like to talk about interest rate versus you. I don't I don't either. I don't know all the technical.   John Errico: [00:26:49] I mean APR is just like your interest rate. So an APR is inclusive of like additional fees or other things that might be wrapped into the loan. So you might have an interest rate of you might be quoted an interest rate of say 5 percent but then you're effectively paying five point to 5 percent because of various fees and other things that are that are wrapped into it so like it doesn't like a credit card. So you see like a credit card APR it's sort of like the effective rate that you're paying even though the your set interest rate might be below that.   Ryan Goldfarb: [00:27:20] Thank you John.   Ben Shelley: [00:27:22] Notice Ryan's different reaction when John speaks. Then when I speak out how should we feel sorry for Ben. Is trending on Twitter right now.   John Errico: [00:27:31] Anything we hear like the voice of God kind of man. You know a deep sonorous mass where he wears a voice whereas George I need Joe. Thirty two years of life pulsing over my veins.   Ryan Goldfarb: [00:27:42] All I want is for this episode to consist   Ryan Goldfarb: [00:27:45] of more than just a few definitions. All right so under the umbrella of interest rates we have a few different benchmarks that are used to determine when interest rates are some different ones that you'll hear our library which is the London Interbank Offering Rate. I believe the Treasury rate which is based off of the Federal Reserve or the Treasury Department's current yield on bonds and that's over different timeframes you have a you might have you'll have a five year treasury a seven year treasury and a 10 year Treasury and there's a yield curve that's a pricing curve that is generally accepted in that space and so you'll see a little bit of a difference between the 5 7 and 10 year pricing as a result of that. And then there's the prime rate which is I think it's actually pretty murky or unclear as to what the actual science is behind the prime rate. I don't know if John has any more.   John Errico: [00:28:36] I don't know if you're into that but it's a good question. I do know that the primates are only 1 2 3 5 7 13.   Ryan Goldfarb: [00:28:44] Yes prime no jokes ladies undergraduate Rob it's like a dad Joe our graduate. Thank you.   Ryan Goldfarb: [00:28:53] Well that's like a very specific type of bad joke that's a dad joke for a dad who's a math teacher I know.   John Errico: [00:28:58] I'm neither of those. It's unbelievable. Thank you so much. You're welcome.   Ryan Goldfarb: [00:29:02] But prime rates I believe are published publicly but I believe they're determined based on like a survey of banks and their current.   John Errico: [00:29:13] Yeah I think that's great thing it's maybe a survey of the Fed Reserve Bank. Something like something like it's a it's a it's like small sample size of banks and it's a it's it's a said obtainable number but I don't know how it's obtained.   Ryan Goldfarb: [00:29:27] But the primary it's actually important because a lot of a lot of loans are priced off of primes. You're your pricing might be prime plus 1 which would mean 1 percentage point over what the prime prime rate is of primes 5 your price that your interest rate is going to be 6. That's also adjustable rate mortgages are commonly priced as a in relation to prime.   Ryan Goldfarb: [00:29:49] Other things that you will see when shopping around are prepayment penalties which can take the form of defeasance or yield maintenance.   Ryan Goldfarb: [00:30:00] Sometimes they're in a step down pattern after a certain period of time but essentially it's just the the banks way of protecting their downside because they don't want to spend three months underwriting a loan for five million dollars and have you come back day two and just pay it back with any. Yes Ben we have a question.   Ben Shelley: [00:30:21] Yes I do. Thank you.   Ben Shelley: [00:30:22] Just curious actually so I know obviously for for hard money generally there is either no or very minimal prepayment penalties given the term but is it a direct one for one. Generally speaking that the quote unquote shorter your term the shorter the prepayment penalty will be or what is your experience.   Ryan Goldfarb: [00:30:40] I'm just curious. I don't necessarily think that's the case. I believe unconventional financing conventional loans for a home. I don't know if there's any prepayment penalty built in   Ryan Goldfarb: [00:30:50] whatsoever. I've never seen it before. I think I do. I think lending you might burn some goodwill with your lender. But I don't think there's any monetary. But again the lender is probably selling your letter. They really don't care. I think there is a minimum amount of time that they have to hold. I could be wrong but made so in order for them to articulate your views.   Ryan Goldfarb: [00:31:04] I mean maybe the 30 60 days like that but so the answer I would say is no on.   John Errico: [00:31:12] And your question is this is this episode to turn into the roast of Ben Shelley.   Ryan Goldfarb: [00:31:19] That's like the like you really really like the chocolate factory. Like you get nothing. You are awarded no points and then God have mercy on your Exactly.   John Errico: [00:31:28] Yeah.   Ryan Goldfarb: [00:31:29] So sometimes I'm like a hard money loan you may see that the lender wants like a guarantee of three months worth of interest payments. Other times you might see a loan prepayment penalty of like 1 percent of the loan amount. So it varies loan term amortization. We talked about that. Interest only has been alluded to before. It's pretty simple it's a loan on which there is no amortization and you're paying only interest. So it's a lot easier to calculate the rate on that if you have a hundred thousand other loan and your interest rate is 12 percent. That's twelve thousand dollars a year or 1000 dollars a month. That's your interest. That's your mortgage payment. That's all you pay on a monthly basis outside of your holding costs interest only loans are only really comment on investment property I've never really seen them offered on at least conventionally on owner occupied either.   John Errico: [00:32:21] It's either for hard money flips or for like commercial or he locks are like what he likes are often interest only but that can be advantageous because they may obviously allow you to have a lower monthly payment than men if you are paying decades as well shall we say.   John Errico: [00:32:38] Juice somebody returns you you have to buy and hold property if you really wanted to cash flow and you have an interest only loan.   Ryan Goldfarb: [00:32:45] If you're and if you're working with a more sophisticated lender or a lender who is willing to get a little bit creative oftentimes one way that you'll see these structured is that you'll have an interest only period so you might have six months 12 months two years of interest only payments and then it goes to an amortizing schedule and that's all.   Ben Shelley: [00:33:05] Now that's fun to underwrite.   Ryan Goldfarb: [00:33:06] Yeah that's generally done for the purposes of giving the owner time to get their operations up to par. So if you have a big repositioning or if you have a development occurring it's a way to say like OK we understand that your cash flow is gonna be tight for the first six months or twelve months or two years but we understand that there's upside in that and we'll work with you to to create something that's gonna work for you. The one last thing that we can touch on are that we should just highlight now as the DTI or debt to income that's a common metric for conventional financing because that's underwritten on an individual level versus against the property. So your debt to income is it's the ratio of your debt to income.   John Errico: [00:33:50] It's important to consider that the debt to income ratio and that's thrown around a lot particularly in the residential world too could be inclusive or exclusive of the debt that you're about to assume. So oftentimes the minimums are inclusive of the debt. So if you're buying a home your debt to income ratio has to be a certain number including the debt you're about to assume which is often quite substantial. So just as a very high level overview and we should talk also about what underwriting is. I know that that might be very obvious but we've just used the word underwriting many times. Underwriting is essentially like the call analyzing like you're just like running the numbers and seeing like do the numbers make sense. So a lot of people in the finance world say I'm going to underwrite a deal it sounds very fancy but just means that I'm going to take like three numbers together and see what they are.   Ryan Goldfarb: [00:34:35] So my first title was underwriting analyst and it took me a while to understand what that even like what that even meant analyzing I think is redundant.   Ben Shelley: [00:34:45] I think it is fair to say that in previous episodes we've alluded to a very basic form of underwriting this idea of underwriting or analyzing for the common investor or rental properties. I was an underwriting analyst for a mortgage debt lender.   Ben Shelley: [00:35:00] You were an underwriting analyst for a mortgage debt lender.   John Errico: [00:35:03] Do you ever underwrite the La Brea Tar Pits which is the tar tar pits.   Ben Shelley: [00:35:08] This is so over my head at this point I just don't even know that's not involved in it.   John Errico: [00:35:12] It doesn't matter because you can't. I just made a very common joke. I didn't I mean it's like no complexity.   Ryan Goldfarb: [00:35:18] No. I made a unique joke.   Ryan Goldfarb: [00:35:19] It just wasn't that funny.   John Errico: [00:35:21] Laughing very hard it was. Cut it out actually. We're moving further and further away.   Ryan Goldfarb: [00:35:26] Nobody laughed harder at Ryan's joke that Ryan himself.   Ben Shelley: [00:35:30] Point being that if you listen to some of our previous episodes you hear some of also the assumptions that we draw from our quote unquote analysis and underwriting cash on cash, IRR, etc. That's all part of this and I definitely recommend listening to previous episodes to make sure you have a firm sense of the concepts. For the folks listening at home make sure you subscribe to us wherever you get your podcasts. You can find us on the brick by brick. That's Brick X Brick. Facebook and Instagram. Thanks so much for listening.  

The BxB team discuss various pieces of technology that they use in their real estate and construction businesses to help with everything from communication to document storage to project management and invoicing.   (Transcript below.)   Ep 14 - Leveraging Technology as a Real Estate Entrepreneur.mp3   Ben Shelley: [00:00:07] Welcome back to the Brick x Brick Podcast.   Ben Shelley: [00:00:09] I'm Ben and I'm here with John and Ryan for today's episode we're going to talk about technology something we're all familiar with but specifically related to how you can utilize modern technology to efficiently run your business or operation. I think there's a lot of tools and apps that people may or may not have heard of who think why would that be helpful for me. Or maybe they recognize that they could utilize these tools in certain ways but simply haven't tried them yet. So we thought it might be helpful to talk about some of this technology more broadly and then specifically some of the things that we utilize which we think really helped push our business forward. So where do we want to start guys I mean we can really talk about any of the I mean I'm a slacker. To be honest I am a big slacker which really sounds bad but is actually very good.   Ryan Goldfarb: [00:00:56] Well for starters I think it's relevant to say that our utilization of technology is ever changing since we've started working together over the about eight nine months ago. I think we've at this point probably employed like five six seven eight different platforms some of which have stuck. They've withstood the test of time and they are still a relevant part of our practice today. Others we experimented with and found that they either didn't work for their intended use or we found a better solution for that same problem. I think as a general theme one one thing that I like to consider here is that the best system that you never use is not as valuable as the OK system that you already are in the habit of working with. And this is particularly true for things that are repetitive in nature things that require constant updating. And so I guess for our purposes and for our context this is particularly relevant in the communication space in the document management space in the project or task management space. John you wanna maybe give a little high level overview of of what we use and why we use it.   John Errico: [00:02:17] Yeah I think this is another general framing point. Like all technology is some of the technology that we use I would describe as being very important or maybe even essential. But at the same time it's all for us it's more of a it's a productivity saver. It's also I think a way to save processes and make things repeatable which is important to the business. But like nuts and bolts I would say we we use the Google suite of products to do a lot of stuff. We have all of our central documents for. So what we do is we have a construction company. We have a management component. I do legal work in relation to real estate stuff and then we have the private equity fund which is a lot of legal work and documents and we also have our own private real estate holdings and acquisitions which we do sort of all the time. We have a lot of different components to that. We use a Google Drive calendar emailG.M. for everything like step one. And I think a lot of organizations do similar things with that. We use we've started to use it has become I think an essential component of our workflow Tello Tello is a task management system I guess you could call it. We use it. I think you can do a lot more powerful advanced things for it but we basically use it as a repository for things to do. So. We employ in conjunction with our use of technology very high level project product management type systems that I used to employ when I was in my technology startup days. So again very high level what we try to do is have a weekly meeting which actually is today for us where we talk about all the tasks that we're doing this coming week. All the tasks that we did in the prior we talked about how much time or complexity going to take et cetera et cetera but we use truckload to keep track of all that. So if there's something that comes up like a task that has to be done but as an emergency we can just put it in trailer and say like here's where it'll live. And when we have the meeting we can go back and refer to it real quick.   Ben Shelley: [00:04:25] I think it's worth highlighting that the a lot of these workflows are relevant for the team context. So if when I was operating as an individual proprietor mostly working solo a lot of these things probably would have been overkill and might have been nice to have them written down somewhere. But it's I think it pales in comparison to having three or four people working together in conjunction with one another on a recurring basis. I think it's arguably a necessity in that context. So I think a lot of these tools are kind of geared towards that context. So keep that in mind for all residents.   John Errico: [00:05:08] And like we reference this in a previous episode as well but a lot of what we're doing is we are ourselves trying to impose processes on all the tasks that we're doing and we're using technology to help those processes. So like for example we use Google Calendar for all of our calendars calendar ring needs but or on the counter we'll put things like Hey we're gonna be done with whatever rough inspection for this property by this date or we're closing on this probably by that date and that's part of our process system of like you know what. One issue which may not be obvious but is a big problem for us is that we have a lot of properties that we ourselves own. We're also doing the construction work on them and so we don't have a client that's sort of breathing down our back to say like hey are you gonna get this done. But at the same time we have to push them through because their dollars and cents consequences for it. So we're trying to impose the same processes that we would do for a third party project on our own projects just to do it.   Ben Shelley: [00:06:00] I think from a productivity standpoint when you talk about practical use right so for example John talks about I like the phrase calendar in so when we calendar in our daily weeks and schedules what have you. It stops us from having to waste any time saying I know I don't have to call John if he say Hey I'll meet you later at this property to meet with a potential construction client. I don't have to call him out of the blue to find where the address is right. I already know it's in the calendar and from trellis standpoint and maybe we could talk a little bit more about our points system but is the system we use I happen to really like because I love putting in travel and not just from a standpoint of knowing what everyone else is doing in the context of what my goals are but setting weekly goals is remarkably motivating. I know for myself just to have everything organ. Okay yes I need to do this I need to do that and you do this as priorities. And then if I have time I can do X Y and Z. So from a practical standpoint I think it's been great.   John Errico: [00:06:50] Yeah yeah. Both times I agree. Yeah. Another tool that we use that we've been using quite frequently that Ben mentioned at the beginning of the episode is slack so slack for us as a communication tool that has replaced a lot of ways email and text messaging. So they deal with slack is that there are no important pieces of communication that we need to share among each other but we don't necessarily need to want to interrupt someone in the middle of whatever they're doing with that information. So for like not absolute emergency pieces of information we put it in slack. We can look back at previous things like decisions that we've made which has become very very helpful because we have a lot of different projects in the frying pan if you will. So we've been using that. We have channels for individual projects individual homes individual business ventures whatever it might be. And that is something that we've adapted adopted I would say over the past month but it's been very immediately an essential tool for us to be more productive and to keep track of things.   Ben Shelley: [00:07:48] I think my favorite thing about slack beyond its practical helpfulness is for people. Why would people know this our office setup is the three of us all facing back to each other and I think my favorite moments are when we're actually having a conversation on slack while we're all sitting within two feet from each other because that's how productive that's how committed to the work we have at hand is.   Ryan Goldfarb: [00:08:08] But it's also worth bearing in mind that the reason for that is because if Jon is working on something that requires immense focus it doesn't distract him in the moment because Ben and I are having a conversation about something that could be could be discussed in the background over the course of the day and then isn't immediately urgent.   John Errico: [00:08:29] Right.   Ryan Goldfarb: [00:08:30] The other thing I want to highlight with slack is this speaks to the point earlier about the the perfect system that you never use is not as valuable as the system that that you use regularly. One concern we had in Slack was that we were implementing a new system and the adoption of that new system was really going to be the key to success. One thing that was nice about working within a team context was once one or two of us made a concerted effort to use that system by virtue of necessity. The other two had to do the same in order to stay on board. So adoption really wasn't as much of a concern for us as I thought it might be. And that made things a lot easier. I think if we already had another system in place where maybe we had a group me or WhatsApp group or a Facebook group or something like that where we had been previously communicating I think it would have been a little bit tougher of a transition but up until this point we were mostly just communicating between some combination of text messaging email and a little bit of back and forth on Trello itself.   Ben Shelley: [00:09:37] And I think a good thing about it too is it's helped to delineate the quote unquote most important or like high line items for us to discuss.   Ben Shelley: [00:09:45] You know I think Ryan was the one who described this when we started this but we've all adopted this which is that you know slack tends to be this is just our choice obviously but slack tends to be things that we you know maybe don't need to address right right away but are things that we can look back on and respond we have time versus making email like OK if we need a contract signed for closing or to talk about some major issue at a property and that's what email really is for and so also delineating those in terms of importance. So you know in your mind if there's a slack I'll get to it versus an email. I need to address it right away. I think that's how productivity as well and can help your team.   John Errico: [00:10:21] Yeah. I mean what a feature that I like about psych too is that it's a it's a nice repository of information that is easily searchable so oftentimes I have the problem where like I need to find something that's buried in an email or a text message so hard to find that even there's just this morning we had a subcontractor going to one of our properties and needed the lockbox code and we just had this exact problem but we communicated over slack about how to solve it. And so I was able to send him a picture of that that someone had said on slack about how to solve this problem. And if I'd try to find that I'd like a text message or an email would have taken a long time to revive Zach in a lockbox channel I hadn't even thought about that would be brilliant because I just clicked on story just getting the last I could do.   Ben Shelley: [00:11:03] Yes that's right at this.   John Errico: [00:11:06] Yeah. So yeah we use Slack for for accounting we use quick books and I think that's been OK. We switched over from an accounting service that we used in 2018 that we weren't really satisfied with but garbage would be the right term to use.   Ben Shelley: [00:11:25] Yeah.   John Errico: [00:11:25] I mean we had some problems but so quick books has been it's you know I I we have another way of doing some of our accounting that I'll touch on a little bit but quick books is a great way you know the sort of ultimate source of truth for accounting or are our transaction logs from our checking account and or other accounts credit card accounts.   John Errico: [00:11:48] So there's there's no like there's no lying or confusion when you look at the actual brass tacks the amount of money that you spend or you took in. So we use quick bucks to keep track of that. We used to call rail as a a phone system. So we have phone numbers that we're forward to each of our phones for various reasons like we have a construction phone number that photo sales phone number that fraudster phones with a construction work number that forwards to our phones I think for four acquisitions we have in the past set up you know numbers that flow to our phones.   Ryan Goldfarb: [00:12:23] Yeah a lot of that a lot of CallRail's intent is to help with tracking. So if you're running multiple campaigns let's say for acquisitions you're running an online campaign you're doing direct mail you're doing Facebook and you are bandit signs setup. If you have a different phone number allocated to each one it better allows you to track the efficacy of each different path as opposed to just saying I had 10 leads come through this month but I don't know where they came from. Going back to the Google suite. One of the most I think in a lot of instances one of the most effective solutions is often the simplest.   Ryan Goldfarb: [00:13:04] And I would say that just taking photos using the stock app in your phone taking photos is quite possibly the biggest time saver that you can have as either a construction individual a construction person or as an investor. And one thing that I think we should do a little bit more often but that we've been getting better at recently is chronicling each project through pictures and through video and then depositing those photos or those videos into a folder for that specific project. It helps for a variety of reasons it's obviously nice to have some kind of before and after photos but it's also helpful to have to have a point of reference if you're thinking about you know how many outlets you have in a room and you're going to buy you're going to buy the electrical boxes or you're looking at purchasing light fixtures and you want to know exactly how many you have rushed into rushed into a room or if you're getting into a dispute with a subcontractor who's saying you know this wasn't there before I started it and you can say Yeah I know it was there I can show you the pictures it's super helpful and there are a lot of instances where it can save you a trip to the property and when you have multiple properties and multiple projects going on or at any point in time that can be a huge time time saver.   Ben Shelley: [00:14:22] I also think coming back to the G suite at a high level look I think it's fair to also caution the convenience of it sometimes I think I know I create a lot of Google Docs and Google Sheets and we'll drop a ton of stuff in the drive and so I think oftentimes it's something that we found too is because everything the G suite incorporates so many things where you can drop the information that both Ryan and John have talked about it can become almost a black hole. So it's really one of the things I've really enjoyed about some of these other resources. It's helped to aggregate a lot of information. I used to just drop in G suite in a drive and so unless you're being really active and again another thing we've talked about about organizing your drive you just want to be really careful because you can just get in a habit of saying now it's in my it's somewhere in my g suite so. I'll always be able to find it but that becomes a very slippery slope when you actually need information on hand right away.   Ryan Goldfarb: [00:15:13] One other one other tool that we've used not to totally Segway off of that point now is Segway away. One other tool that we've used is joist. We use that for our invoicing and estimating for the construction business. It's a pretty simple tool but it allows us to kind of operate in a professional manner. It helps in some capacity it helps with tracking invoices and outstanding invoices. What the balances for any given project but I think one of the things that I've liked about it is when we're managing our own projects we can employ some of the same practices that we use on third party work which is I think just generally a good practice to have a good habit to get into. It's very easy to just kind of like lose sight of of the bigger picture when we're working on our own projects. We don't have another investor or we don't have a client to be accountable to you. But this is also something that I've taken from working with certain hard money lenders. Having them in the picture obligates you to keep a scope of work. Keep track of where you are in the projects to kind of tabulate your costs on a consistent basis for each division within the project overall. And it just kind of creates a sense of order in what can otherwise be a pretty chaotic process.   Ben Shelley: [00:16:34] Ryan I was also going to say do you want to talk about Carrot as a tool.   Ryan Goldfarb: [00:16:38] Sure. So one of the platform we use as real estate investors as investor carrot which is I think we've mentioned them in the past but they are a firm that has templates Web sites and a suite of online marketing services that are geared specifically towards real estate investors. So that's how that's one channel through which we do some of our online marketing for mostly for motivated sour weeds. So this is mostly an acquisition tool for us. There are a few others out there and a lot of these platforms are great but they there's a pretty critical element of consistent practice and oversight and management on behalf of the business like on behalf of us as investors. You can have the greatest site in the world but if you ever market it it's not going to drive any traffic.   John Errico: [00:17:30] When we use have used in the past and would again cozy for certain property manager related tasks. Cozy is a Web site where you can put a listing for a property and it will syndicate. You're listening to a couple of other Web sites but primarily I use it for the application and sort of credit score component of it. So once you set up a listing you can set up a an application for it accept applications through the Web site and then if you want to you can also collect rent through the Web site. I generally don't do that just because it's easier for me to collect rent and tenants will pay in various ways. But it's intended to be like an end to end full service property management tool and it's essentially free to you as a landlord. They charge tenants for various things like credit checks and background checks.   Ryan Goldfarb: [00:18:16] We actually used cozy for one of our tenants to collect rent and it's nice that it's nice that it all integrates together my one gripe about it is it's a little slow when it comes to processing a payment but it's not. It has improved and as we know pretty well catching a track through a bank standard process or is is not the quickest to begin with.   John Errico: [00:18:38] We've had the same problem with Joyce. Actually because Joyce can also do payment payment processing but it's something else that we've or that I've used and I think we all use probably pretty frequently is Zillow Trulia Redfin all those websites are pretty good reference point mostly because they provide a good user interface for looking at property and with the map views it's pretty intuitive as opposed to some of the.   Ryan Goldfarb: [00:19:06] A lot of like realtor websites that integrate with the MLS. Maybe you don't have the best interface or don't have the the best ability to filter in in a specific way. I also use Google Maps a ton both for obviously for navigating purposes but also the street view tool is indispensable. It's also it's also it's also a really cool tool tool to use. You can go back and scroll through the history of a given location so you can look at you can gather the street view history from 2011 or 2012 2013 whenever they first started gathering that data up through today and then a lot of areas they've gone back they've gone back and forth to and covered the same locations multiple times. So you can kind of get a sense of how things have changed that can be helpful if you're looking for a looking at a specific building and you're trying to cross-reference different different old listings or different stories that you're hearing together whether whether things were renovated.   Ben Shelley: [00:20:06] Just as a specific example of that in particular we were just looking at a property in New Haven that is packaging together a second plot of land as part of a sale.   Ben Shelley: [00:20:16] And we still don't know if legally you'd be able to build on that but by actually going back into Google Maps years in the past I was able to see that at some point or another there was a home built on   Ben Shelley: [00:20:26] that area. So it's just just a practical use of it and then of course just sort of going back and getting a sense of the wider.   John Errico: [00:20:31] And like the satellite or Google Earth satellite version too because you can see that you can try to see the bounds of the property like if there is a parking area or garage or whatever it might   Ryan Goldfarb: [00:20:41] be. I have also seen a tool I forget the name of it but there's one that can estimate the footprint of a   John Errico: [00:20:46] building. I've used that based on based on the aerial view kind of dimensions that you can draw on it and say like here's the approximate square footage if.   Ben Shelley: [00:20:54] There's a whole mess of apps to that that I should update in the next episode that I don't know offhand that that you can look up for going in property getting measurements and getting a sort of a specific layout when you're physically in a property not just sitting by another.   Ryan Goldfarb: [00:21:09] Another tool that I love and this is an online tool. It's a physical tool but the laser measure laser measuring tool (Ryan goes nowhere without it). I love those things. It's just it's really nice for approximating square footage even even if you just use it to get one one clear shot from end to end of the building just to get a general sense of the footprint.   John Errico: [00:21:30] And then multiplying that by the number of stories that are out there to return to your earlier point right about you know looking at property data through Zillow there there there are wrappers as well that we use a lot that will take city or county or state data and then repackage them in a digestible form. A lot of increasingly cities and counties and states will have online data but oftentimes it's really inconvenient to search through it or whatever. New Jersey is and is a good example of that. So something that I use I don't know if you guys will use it as NJ parcels dot com I really like that it's a wrapper around the tax records essentially.   Ryan Goldfarb: [00:22:04] For whatever reason I is the tax records which is also good.   Ben Shelley: [00:22:07] I also want to plug state info services which is Jersey specific it's like another form of NJ passes that I absolutely love is property shark which is a paid service but has similar information.   Ryan Goldfarb: [00:22:17] A lot of these systems or most of these systems are only as good as the data that they collect. So to the extent that they differ in terms of data services you'll see some variation and.   Ben Shelley: [00:22:26] I would always suggest to cross-reference.   Ben Shelley: [00:22:29] So never just rely on one source. So I know that when I'm looking at comms I take the MLS out of it first second I'll probably go through some combination of Zillow and Trulia and then also cross-reference facts on state info services and NJ parcels and aggregate that all in a summary I'm doing of a given property just because the more info you can gather on it the better. It's a great way to verify some of the things that you're seeing.   Ryan Goldfarb: [00:22:50] It's also we've mentioned a few times already but the MLS itself despite its its deficiencies it is super helpful in terms of being in terms of being a repository for a lot of data specifically historical data. So it's nice to be able to if you have a specific property that you're looking at and you have a realtor there that you work closely with at the nice to be able to pull all relevant MLS history for that property. It's also nice to be able to search if you're in an area where a lot of the housing stock is similar. It's nice to be able to search for example as granular as like a specific block and look inside and get a sense of what each and every house on that block is like. Because obviously one of the big challenges that we all face is finding relevant Thompson.   Ryan Goldfarb: [00:23:33] Oftentimes that's the closest you're going to get.   John Errico: [00:23:35] One piece of technology that or suite of technologies that we do use which is unique to us is that we've actually built some of our own technology to manage the construction process so as we as we mentioned probably a few episodes ago when one major issue that we have as a construction company is we have a lot of projects that are going on simultaneously. And you know we're paying out expenses for these projects and to the greatest extent possible we try to use built in things with things like credit cards to divide out what expenses are per projects. But at the end of the day it can be very very challenging to keep track of where our guys worked. On any given day what we bought for a project in any given day. Well we made in a project any given day like. I mean there are definitely construction companies out there that have no idea what they're making on a project like how much margin they made or whatever else which is a whole nother episode about how these construction companies price projects but. So we I built something for us essentially to input a summary of what we did every day which allows us to keep track of our workers allows us to get progress updates on the particular project we can keep pictures in there we can put expenses like receipts in there in the future we should be able to track income and what our subcontractors are doing at every project. So with even without doing the sort of quick books based accounting we can go in and very quickly see Hey how much do I spend for framing for this particular project. How many days to take me and do in every given day or the same is true for sheet rock or plumbing or whatever else might be. So that's I would say it's been very helpful for us to keep track of our our money and our labor when we're not necessarily there at every single project every single day.   Ben Shelley: [00:25:21] And I would just say first and foremost if you're interested in learning more about managing the construction process I'd refer you to managing the construction process part 1 and Part 2 earlier episodes in our repertoire.   Ben Shelley: [00:25:31] But to John's point that's exactly right I mean one of the things if you have the capabilities we're lucky to have John who is able to build these systems for us. You know obviously you're going to have we're talking about are the uses of some of these programs and technology in the context of what we do. If you can fit that into what you do that's phenomenal. But if you're also able to build certain things that are tailored to what your specific needs are and you'll find what those are as you go on through through your operations then that's phenomenal. And just as another example John built out something to help us track our accounting he's also helping all of us build out a an acquisitions platform so that we can better keep track for example of what we're looking at. Our thoughts and opinions on on projects both that we we put offers on and didn't and that again is something that's specifically tailored to us from a technology standpoint so if you have that capability obviously that that is quite ideal.   Ryan Goldfarb: [00:26:21] A few other things I'd like to plug while we're at it. I have an app on my phone called Jotnot, J-O-T-N-O-T. I think there are various competitors to it but all of them kind of serve as like a mobile scanner. So it allows you to take a Ben Shelley scan a PDA off of a document onto your phone which I've found super helpful when I don't have a true document scanner on hand. I also do have a document scanner. It's a little bit of an older piece of technology but in terms of scanning text based documents both in terms of accuracy and speed it's it's been super helpful for contracts and invoices and things like that.   Ben Shelley: [00:27:01] It's a good idea by the way to just look at the five and even think about that just going on my phone a lot of the apps I use going through air Dropbox can always be helpful in whatever business that you do I realize that's not really where we've been.   John Errico: [00:27:11] We've had a debate about Google Drive there's a repository for documents versus Dropbox.   Ben Shelley: [00:27:17] I prefer Dropbox team Dropbox only using Google Drive which is crazy. That's a majority. I think that's all my fault.   Ryan Goldfarb: [00:27:23] I also use healthy use a cloud files though it may not be the best at integrate I'm a Mac guy and everything is OS X iCloud. I use it for some document stuff.   Ben Shelley: [00:27:36] And it's worth download where we use Canva a little bit to work on our social media I mean obviously we didn't talk about this clearly because everyone is we're on Instagram and Facebook even Twitter which we use less if at all. So having anything any kind of app or technology that can help you individually or aggregate some of your other tools can be of service.   John Errico: [00:27:56] Yeah I use Hello sign for signing document just gonna say W H genius scanner for. For the scans. That's just another. Just another scanner test which integrates with Nest.   Ben Shelley: [00:28:10] It's good to have the apps of anything so if you go to Home Depot a lot. Download the Home Depot app library. Same thing. Got to go to Lowe's I don't got to go to Lowe's actually.   Ryan Goldfarb: [00:28:18] That's actually lose it but that's Mo's. I think it's low is low. Got to go to Mo's, Modell's!   Ryan Goldfarb: [00:28:31] There's also there's also actually an I think the newer iPhone OS there's a measure app which is like kind of an augmented reality measuring tool. I don't know exactly how precise it is but in theory it's cool.   Ben Shelley: [00:28:46] I also have you have you have to have the pioneer app obviously because you can't live in business without going up and.   John Errico: [00:28:51] I also like the phone feature of the phone you can make a phone call.   Ben Shelley: [00:28:55] This is crazy thing called text messaging. Wow. Coverage. Was really really diverted. Any other things that you think can help people in business moving forward.   John Errico: [00:29:05] Operationally we could touch a little bit on I don't know if we have a lot of time but the process that we use to do product management or project management which is in conjunction with cello but. Sure. So it's I mean I guess you could call it like a pond bond or lean or whatever mini terminology is to describe it but we operate on the premise that obviously all of us have discrete amounts of time and effort that we can put into work in a given week. And one big detraction from the amount of time we can spend is figuring out what to do and also having meetings about deciding what to do. So the takeaway or the observation is that what if we just had essentially one meeting once every time period we've decided a week. But you could do it every two weeks or month whatever you'd like to determine what it is that we're going to be doing in that given time period. And so that there are recurring tasks that we all do those would not be appropriate for this type of meeting because ostensibly the things that you do every day. So like if every day you do the accounting or you update the counting and that's not a task for this type of system it's just something you do every day. But the idea being that every person has a set number of points. What I'm going to call it meetup meetup units. They can do per time period SEO per week. So you might have ten points and you can call them story points you can call them complexity points. You can call them whatever. But the important thing is that these are not time. So you might say every week I have 40 hours a week to work. But the problem is that human beings are the premise that human beings are not very good at determining how long tasks will take. But it's a lot easier to determine how difficult or complex a task might be. So even a task that might take a very long time could be very simple just because it's very repetitive like and I don't know how to treat that system but a task that might be not take a lot of time like maybe filling out an application might require a lot of thought and effort because I need to pull documents from somewhere I need to think about how to answer certain questions you know whatever else it is that willpower is a renewable resource. But it's also an expendable resource. So if you expend all your willpower doing one very complex task and one day that might really ruin your productivity for the day even if it only took you an hour or two hours to do that. So the point being is that you ascribe points to yourself or to other team members and then ascribe tasks with a value of points. So if I have 15 points to do in a week and one task takes me five points to do it then that detracts from my fifteen point total I only have ten points left for the week. So that's the system that we use to delegate work to each other. And it's used in conjunction with with check ins. So every day although we haven't been good about this recently to be frank because we see each other so often but every day we'll do a meeting that's supposed to be no longer than five minutes where we all very quickly say well we did the previous day and if we need help on doing anything the next day. So that's a way for us to keep accountable to each other and also to check in and say you know hey this task I'm waiting on you know Ben to finish something. And unless you finish it I won't be able to do it so can you talk about how to finish it or how to get it going. It's not a perfect system and we're we're evolving and working on it. And I think it's most appropriate for four companies that have our very project and task oriented which can be us sometimes but other times it's not. But in any event it's been effective for us just as just as a management tool and as a way for us to scale in the future. Know Right now we only have essentially four people that work for us that some contraction guys. But at some point when we have 10 15 40 people that work for us some system like this is going to be very important both to minimize the Times of meetings and context switching and figuring out what I'm going to do. And also just as a high level management technique where say I'm overseeing people I can understand what everybody is doing without having to go into the details and minutia that every individual task.   Ryan Goldfarb: [00:32:59] This all comes back to the the theory that that which gets measured gets managed. I think for a while we weren't really managing these things or measuring these things in any.   Ryan Goldfarb: [00:33:08] In any real way. And and now that we are. While it may not be perfect I think we're constantly iterating on it and we're constantly trying to improve it and the fact that we have a processi.e. these weekly meetings is super helpful during those meetings we also generally review whether we felt we adequately allocated points to each of us and how we could have done that a little bit better.   Ryan Goldfarb: [00:33:31] And then generally the challenge that we seem to have with this is is by the nature of what we do and we're oftentimes putting out some type of fire and it becomes difficult for us to just focus exclusively on the six tasks that we were assigned for the week. So while none of those tasks may be insurmountable or unachievable when they're taken in the context of everything else that we have going on sometimes they fall by the wayside a little bit more than they should. But it's been I think a vast improvement over the essentially nonexistent system that we had in place before here.   John Errico: [00:34:09] Is it true. For me it's the difference between working for myself and working for a company that I own is in some way creating these processes because that in a large part is like the secret sauce of a lot of these companies is having repeatable processes that say I say I am working for myself well I might do everything and everything might run through me but say I'm working in a company that has a process I might be an integral part of that process but I also might be hopefully at some point in interchangeable part of that process. So if I can't do something in it I can hire someone else to do that thing and then scale in that capacity. So you know we are already in our sort of early history of the company. There are already too many tasks where it was just me and you Ryan for example we couldn't possibly do all of the things but now that we have other people working for us we can do more thing however in order to keep scaling and keep expanding we have to put in processes in place where we're able to do that effectively and without a lot of setup and thought costs to do it. So like if we can expand to a new market we're just talking about this in fact what is the process they're going to have to say go into a market that we've never been before. And once we develop that for a market a then we can apply the exact same process with market B and C and D just plugging in different people who might be local to that market and be able to do the same processes that we've already developed and consistent with that theme.   Ryan Goldfarb: [00:35:37] Another tool that we've implemented over the last three weeks maybe is we've put a little forum together and the idea was to kind of tease out some of the repetitive tasks that we each face and to first and foremost bring them into our consciousness so that we're aware of them. And then secondly to think about ways that we can either automate the process or streamline it or outsource it to somebody else. And I think you know for John just one example of this is so taking us that back the way that it works as every day in the evening it sends us each a text message with a link to a form click the link and the form asks you a few simple questions.   Ryan Goldfarb: [00:36:20] What did you do today. What of the tasks that you did today is repetitive in nature and then how can you streamline any of these repetitive tasks and I know one thing for John a consistent theme in his responses is Airbnb messaging Airbnb responses and so naturally you know it's not something that you can necessarily automate but it is something that could potentially be outsourced and I think the the idea is to get things like that into our consciousness so that you know it sparks a debate or it sparks a conversation at some point about when the time is right to bring someone onboard to handle that task.   Ben Shelley: [00:36:57] And I think just as a final note it's just worth remembering trial and error is your friend right. Trial these things I think it's worth you.   Ben Shelley: [00:37:04] I knew of a lot of these apps Slack was something I'd done before but I had never used Trello. I had never heard of Joist I've only just learned about cozy maybe for future rentals I do try as much as you can and don't be afraid or worried if you know you stop using it or if you're not enthusiastic about it do what works for you I think that's sort of the most important theme here I think we have come to this point both from a technology of our own creation and things that already exist a nice balance for how we operate but again for for the listener out there do what what's best for you and try as many possible resources as you can as you try to streamline and make your business as efficient as possible.   John Errico: [00:37:43] And I would also briefly say and realize that there are other too. If you have a problem a business problem you are not the first person to have this problem and it's more than likely that someone else is out developed a tool to fix your problem. So sometimes businesses will go and they'll like describe their problems in such unique ways that it sounds as though like the only way to solve it would be to just build your own you know roll your own product but nine times out of ten there's gonna be something else out there it's just a matter of you know I think if you're listening to this episode then that's a great start because you can learn from our experience but also just go out there and say like hey I have this problem. I guarantee someone has thought of it thought of a solution you know whatever else so much much easier to implement somebody else's solution than roller will rule your own.   Ben Shelley: [00:38:26] Gentlemen thank you for your time and expertise as always. For the folks listening at home make sure you subscribe to us wherever you get your podcast reach out to us on the Brick x Brick. That's Brick x Brick Facebook and make sure to listen to us and iTunes and Spotify. Thanks for listening.  

Broken toilets, leaky boilers, non-paying tenants, and mice infestations... Today, the BxB team discusses the glorious world of property management! The team touches on the good, the bad, and the ugly in order to prepare you for what's in store as a property manager -- whether you're self-managing or hiring it out to a property manager. Property Management is a make-or-break for any real estate investor who holds rental property, but it's not for the faint of heart.   (Transcript below.) Ben Shelley: [00:00:00] Welcome back to the Brick x Brick Podcast. I'm Ben. I'm here with John and Ryan. And today we're going to talk about property management now whether or not you were less or less see if you're involved in real estate or interested in investing in real estate. Understanding how property management works especially for rentals is a vital part of understanding the real estate business overall. So we're going to jump right into it and we're lucky for us. We have a property management expert in our midst. John Errico one of the top property managers in all of northern New Jersey.   Ben Shelley: [00:00:33] John I'd love to know. I'd be interested to know from an origin perspective. First and foremost how you got started as a property manager and I think that would be a nice way for us to get into what property management really is.   John Errico: [00:00:45] Yeah I mean I killed the previous property manager.   Ben Shelley: [00:00:48] So no I mean this is on video you know.   John Errico: [00:00:52] Yeah no. The central premise of property management when you own an investment property is that you will have to manage the property that you own in some capacity. And I think that that we talked about this in previous episodes but I think that that for a lot of investors newer investors is not necessarily obvious to them. They think that they will either you know manage it themselves or whatever but but don't we think about what goes into that. So when I bought my first investment property which was in Union City here in New Jersey I was a 2-family home very immediately. I read it out part of the house to tenants and very immediately we had you know what I would call property management concerns for me. They were also the homeowner concerns because I was living in the home as well as renting it out. But just as a basic premise whenever you buy a piece of buy and hold real estate you will have to manage it in some capacity and as you scale larger and larger that can become a bigger and bigger burden on your time or your capabilities. Before I started the construction company and did all the things that I do with Ryan that we began last year I would say that my primary job was a property manager. I manage my portfolio in Hudson County to some extent properties in South Jersey and then a little bit properties in Connecticut. And that can be a full time job. I mean you think well how often can you know X problem happen. Well I might be not very often but if you multiply that by say 15 properties then it's going to happen pretty often. So like I've as I said before in previous podcasts like the number of times I've had to fix something leaking like water is the enemy of homes and water from the outside water from your plumbing whatever it is the number of times I've had to deal with a water related issue is so many and it happens all the time and every season has its own particular annoyance like winter is heating summer is cooling and rain fall and spring or like the transition period of time so it might be too hot and might be too cold and maybe this might be that. Lots of issues.   Ryan Goldfarb: [00:02:51] Did you set out and make a conscious decision that you and some combination of you and Shannon were going to manage your properties when you guys started acquiring or did it just kind of naturally morph into that over time as you scaled up the portfolio.   John Errico: [00:03:04] No I think it morphed into that. And the reason why I like to bring up the point about new property investors not realizing the management challenges is because we were very much in that position where we bought the property and we were living in it. We're like oh it's no problem to rent it out to other people and it wasn't. But along with that came the challenges of actually operating it in the the more the farther a move that you get from properties. I think in some ways the more difficult thing can become like when you're living at the property you obviously know what the problems are and if you're observant and proactive you can solve a lot of them before they happen. But if you're not at the property you know actually during the filming the recording of one of these episodes they had a very large problem which was that one of our basements in one of our properties totally flooded like over a foot of water and destroyed the boiler and the hot water heater which was very very expensive and challenging replace in the middle of winter so people didn't have heat.   Ryan Goldfarb: [00:03:56] And being the consummate professional that you are you were unflappable on air you really.   Ben Shelley: [00:04:01] Was impressive given the context of what we were dealing with.   John Errico: [00:04:03] Oh thank you. And that means a lot. But as an example you know I think if I had been living at that house I probably would have thought ha like I wonder what that dripping sound is or I wonder why my water pressure is low or whatever. And I probably would have stopped the problem before it got to the extent where it destroyed these this equipment in the basement but because I wasn't there and because I have tenants not to denigrate them in particular but obviously they're not either gonna be as observant or know what's going on you know what happened happened. So if you have tenants or you truly don't know them at all or you inherit a property with tenants that are in place you know Ryan and I have had this issue recently that has been some of those have been some of my my least favorite or most difficult property management experiences because the tenants you didn't you never talk to them when they went to see the property you have no idea who they are there they could have any manner of problems or issues that were inherited from the previous property owner and that the property owner didn't tell you because he wanted to buy the property no wherever it might be it's now there's.   Ryan Goldfarb: [00:05:02] No ending their merit in qualifications as talent.   Ryan Goldfarb: [00:05:04] They may not have been. They may not have been up to par for you if you were managing it but that the previous owner had no issues about exactly.   John Errico: [00:05:12] Yeah. So there's there's a reason why there are. There is a class of property managers because it is a job and frankly it's oftentimes not a very well compensated job given the amount of work that sometimes goes into it. But it is a job and it's one that I fulfilled For my own properties.   Ryan Goldfarb: [00:05:29] At any point did you consider. Did you consider outsourcing it and going with a third party property manager or was it always. Once you started it was something you were going to keep it.   John Errico: [00:05:38] No I didn't really consider outsourcing it because the class of properties that I owned and that we buy are primarily single family and small multi-family properties and finding a property manager to manage those properties can be uniquely challenging mostly because the way that property managers make money is by scale. If you manage a single property and your say taking a percent 10 percent of gross rent per month that's not going to be a lot of money. I mean you're talking about two three two dollars at most in this area. So to to employ yourself full time you'd have to have a portfolio of maybe 20 or 30 different properties. And if you can do that all under one roof if you can manage a 20 unit building that's great because you have one location you have maybe one boiler, one roof, maybe a few hot water heaters things like that. So to manage a lot of small one in 2-family properties you're not going to find a great property manager. And I know from being in the business that there is so many bad operators in this business. Finding a good operator was gonna be very challenging and if I had the time and inclination to do it then I might as well do it and start a business you know doing it professionally which is what I have done.   Ben Shelley: [00:06:55] I have a ton of questions that kind of come from what you what you were just describing but I think my my first one would be so if I'm trying to let's say House hack in an area and I want to take on property management for my individual unit whether because I think it's cost effective because I think I have the time or because I can't find to your point a property manager that's worth you know anything that's willing to take just my one unit. What were the what maybe are the first things that I should be prepared for or maybe even better. What were the first things that you realized gosh I really need to have X Y and Z in place to properly manage this property.   John Errico: [00:07:31] Yeah it's a good question. You can sort of think of it as the lifecycle of a tenant if you're sacking a property you probably have a unit that's vacant. So step one would be preparing the unit for a tenant to actually live in and in that dovetails a little bit with construction as well but you know basic things like do all of the utilities function in the unit. Are there things in the unit that would disqualify it from being rented to a tenant or would maybe reduce the the market price of a unit. So that would all be things like and you can even classify this in the category of preventative maintenance. So if I have a really old say stove in the unit I might think well the stove is functional or operational but you know at any time it might break. Or am I going to get the sort of tenant that if the stove breaks is going to be a big deal or we have to go and replace the stove maybe it was easier for me before I rent the unit to replace the stove that I can marketed as equipment in the kitchen is new. So there's a whole category of things that you might consider you might consider painting it. For example if the walls are scuffed up or have holes in them which is not uncommon from previous tenants just little issues that that if you yourself are living there you might want to fix.   John Errico: [00:08:36] You should probably take care of them for the tenant and then the second step is actually finding a tenant. So that is is its own challenge and there's obviously a class of real estate agents and brokers that can do that for you either for four cost or for no cost to you as the landlord depending on where you might live. But tenant selection is its own art and skill and there are a lot of legal issues as well involved with that involving anti-discrimination and whatever else. So I mean we could delve into any of these topics more specificity but I would think of preparing the unit finding the tenant running into the tenant and then after that is what do you mean.   John Errico: [00:09:11] You know that sort of maintenance or or more management mode which is mostly reactionary. So it's if something goes wrong which is usually identified by the tenant or possibly by you you're fixing the problem like something is broken something is leaking something is whatever. And then once the tenant has gone you're resetting that process again. So you're repurposing the unit for rental you're refining new tenants successoretc. Along the way you might have things like I want to increase rent.   John Errico: [00:09:37] So how would I do that or why would I do that. Basic things like how do we determine what the rent is we've talked about that in previous episodes. But those are those are all components that go into it too.   Ryan Goldfarb: [00:09:47] And to Ben's question about preparedness once you get into the management stage and you have a tenant there as John alluded to a lot of it is reactionary and I think one thing you can do to prepare yourself for that is to make sure that you have a lot of the requisite contacts that you will ultimately need when things hit the fan. Whether that's a plumber whether that's a handy man whether that's a pest control company whether that's your SEO. No. Yeah yourself. Or just knowing the contact info of the utility company when you have an issue with the electricity or the gas or the water having all those things handy will save you a lot of headache especially if you have it centralized and something I do is just kind of keep a note on my phone of all of these. Of all this relevant information and so if anything happens whether I'm at home or on the road I have access to most of what I need and can generally handle things remotely.   Ben Shelley: [00:10:45] I would imagine that the most difficult thing oftentimes for newer property managers or owner occupiers who are managing their own properties would be during a crisis. What do I do. Who do I call at what things cost and obviously a lot of these things is trial and error right. John oftentimes talks about just doing in real estate investment. I think property management falls under that umbrella of something that you could just try to do just out of curiosity for me. It's kind of a maybe a little bit of a sidetrack but we can look at this from two perspectives right a perspective of an investor looking for a property manager and then for listeners of ours who want themselves to be property managers so just curious.   Ben Shelley: [00:11:20] Just out of curiosity for the latter. Obviously if you own a property you have your own affiliated insurance that that covers affiliated issues with that property. But if you are trying to become a property manager what do. Is there any steps you have to take with the city or the state or the municipality. Anything in particular that you can recommend John for people or I'm just curious if you have like different insurance for your property management business or something like that.   John Errico: [00:11:45] In New Jersey specifically. There are legal requirements to operate legally a property management business a lot of them are ignored in other states. I think that the the barriers are probably a little bit less so but in certain municipalities you would have to register your management of the building depending on the size of the building so larger buildings are generally more regulated. So I think in certain cities in New Jersey if you have if you're managing a building that's larger than like three units maybe five units you have to register with the state. I'm sorry with the city and the city might impose various things on you. I'm not really even sure because it's very municipality by municipality and honestly these laws are not enforced a lot.   John Errico: [00:12:26] Usually I would say you know for if you're if you have like one hundred unit building you have an onsite management team there. If you have a single family home you have not an onsite management team. So there is in the hundred unit building probably has a professional management team and they might have certifications that are not legally required but are nice in the industry like they have taken some course for some whatever it might be versus the guy managing your single family home we just could be your buddy or yourself or whatever.   John Errico: [00:12:59] So there is a spectrum in professionalism I would say and as I alluded to before the other space that we operate in is much closer to or identical with a single family small multifamily space. So that's the least professional least regulated kind of least oversight type area of property management.   Ryan Goldfarb: [00:13:16] And I would just just caveat that by saying I think this if you're looking at this from the purpose for the purposes of self-management things are getting much less prohibitive in the sense that if you're if you're living at the property I don't even know if that's considered quote unquote property management. If you are self managing it.   John Errico: [00:13:35] Yeah a lot of these laws are to the extent they even exist have exemptions. If you are an owner of the property even a partial owner of the property so then all bets are off. That's why a lot of a lot of man a lot of bigger buildings will have on site management is just a part of the owner of the company and they don't qualify under any really laws because they're part of the company that owns it.   Ryan Goldfarb: [00:13:57] And this also oftentimes applies as well for rent control and rent control exemption. I know in a lot of cities the statute may be for units that are buildings that are for units of murder they are subject to rent control but there's an exemption if it's a four unit building that's owner occupied.   Ben Shelley: [00:14:17] You see stuff like that I think sometimes in Union City where I think there would be new ordinances that are passing both on a short term versus long term rentals and then also registering apartments for rent control and what threshold you cross 2-family for three families to buy where you have to register apartments for that for new investors it's worth looking into.   John Errico: [00:14:34] It's a good point to touch on a little bit are the the overarching legal laws that don't have to do with property management per say but just the operation of renting out an apartment. So you mentioned rent control rent control is a big issue in New Jersey and it is to some extent in other other states around here. But I think New Jersey might be pretty singular in its the prevalence of rent control particularly in North Jersey. So rent control is one issue city by city we've actually been ourselves doing a research project to just document what the rent control laws are in every city which there are so many cities in New Jersey and there's so many different laws. It's very very very to many challenging too many cities are agreeing we can. That's a whole nother topic.   John Errico: [00:15:14] The consolidation of northern New Jersey. I mean it's like they're trying to they're trying to break California into five states.   Ben Shelley: [00:15:21] It's like the opposite it starts getting one of us or each of us on different city councils and we have to beat them from within.   Ryan Goldfarb: [00:15:28] In this day and age I think it's probably a daunting challenge to unify people in that capacity.   Ben Shelley: [00:15:33] Even in Jersey I feel like Jersey maybe I I doubt it. Well this is one thing or more divided than ever right. This is not a are you talking about. Are you telling me that Bob Menendez can't do the job of unifying the Great White or the great point and end as well as him in Mayor.   John Errico: [00:15:50] Big supporters.   John Errico: [00:15:50] No it's so you know rent controls an overarching issue and then in New Jersey there's there's state level right. In fact I shouldn't even move on from the municipality level because there is still municipality issues to deal with so there's rent control issues and then there's also Certificate of blank issues occupancy conformity whatever you have call it habitability. Again every city might have their own particular take on what this is. So some municipalities in New Jersey require you to register with the city every time you get a new tenant which could trigger an inspection. Some require you to do it when you sell the property some never require you to do it some required for properties of certain numbers of units and above. So that's a whole nother regime. Again the enforcement of these laws is scattershot. In some cities at best. But it is something to be aware of. Once you've dealt with the municipal level issues there in New Jersey are state level issues in New Jersey there's a state law that applies essentially to units to buildings that have three or more families and that requires its own registration its own regulatory regime and very frustratingly the state and the municipality might be on very different pages about your compliance with various laws. It's not uncommon in New Jersey for buildings to be in compliance or at least nominal compliance with the state law but not in compliance with the city law which is very frustrating because or the opposite or the opposite. I would say that I've seen it more. They have a green card but they don't have any green card is essentially the registration certificate to get from the state. If you have three or more units in a building but I've seen it very frequently where they have a green card or they've registered with the state I'd like the city has no idea what's going on.   Ryan Goldfarb: [00:17:37] I'm thinking about it more so from. You just renovated three in a building. You close that all your permits with the city through the building department and then after that you go for the green card inspection and they come up with a whole new slew of things to tackle.   John Errico: [00:17:50] Once you've already got got it occupied and you did as Ryan just suggested it can be very frustrating because you have two different regimes. They're not communicating with each other they have no incentive to communicate with each other but you're you're exposed to the burden of both of them and they both carry a monetary and real penalties if you don't comply with them. So that level of expertise you know if if if you're getting into larger buildings and you're getting into municipalities that are more heavily regulated which is like northern New Jersey I would say it's valuable to at least learn about these laws and be aware of them.   John Errico: [00:18:23] BiggerPockets is a resource talking to other investors as a resource networking as we said before in a previous episode to this podcast listen to this podcast for sure and we can go more in depth in future episodes in New Jersey specific investing which is its own its own game but in some point we're going to have an episode about short term rentals Airbnb rentals which I think is a continuation in part of this property management conversation.   John Errico: [00:18:47] That's it's a whole nother legal regime and legal issues there.   Ben Shelley: [00:18:51] So in terms of leasing I realize this may be a quick step back but is there anything you guys can advise or just give some context to. I'm actually curious because I've never seen your guys as leases and I know also Ryan for example some of your properties we should talk about this in a second. Have federally backed tenants so as a Section 8 tenants for example. And I'd be curious to know how that affects sort of the machinations of property management but just generally speaking the standard leases or is there anything in particular you guys like or look for when you are leasing out your units.   Ryan Goldfarb: [00:19:24] Well to the leasing question itself a lot of this depends on what your level of interested is in being a part of the process. So for some investors they may choose to quote unquote self manage but if they know they may be more so interested in just kind of dealing with the continuing nature of the management but they want to leave the leasing part of it to an expert so they'll bring in a realtor and that realtor will then listed on the MLS and kind of handle all the showings and in a lot of areas that burden financially may fall on the tenant in the form of in the form of paying a broker fee. So notwithstanding the rich like limiting you know not notwithstanding the fact that you're limiting the pool of tenants who may be interested in paying that biography there's not necessarily a downside to doing that if you don't want to be doing it in the first place. Having said that I think I think this the old adage holds true that nobody is going to care as much about your property as you are. So if you want to get it done right and quickly then the best bet is probably to just suck it up and do it yourself. I know I've actually heard this from a number of investors who have had a property a rental property listed with an agent for a month or two and they were getting kind of like intermittent feedback and they were getting a little bit of traffic and wasn't renting like they thought it would. And then they took matters into their own hands and listed it just threw it on craigslist facebook Zillow and through some combination of those listings they were able to get it listed at the same price within a week purely based on the fact that they were just responding to the inquiries and they were making an effort to get people into the property when they wanted to get in there. So I think a lot of this comes back to the financial incentives here because you're talking about a eighteen hundred dollar a month rental. The net fee that the net commission to a broker might be five or six hundred dollars if they don't bring the tenant. So that's not going to in most cases it's not going to get somebody out of better it's not going to get somebody to forego their showing for a five hundred thousand dollar sale property and make it make them prioritize getting tenants in there.   John Errico: [00:21:45] I want it maybe your point then can be addressed through the the lens of tenant identification which is what Ryan was alluding to like the actual lease itself. We can talk about a little bit and it's important to have a lease but I think much more important is the process of finding tenants and identifying who they are. That's it.   John Errico: [00:22:00] That's a deep topic and I want to caveat delving into it by saying that it's very important to be aware of federal fair housing laws when you're finding tenants.   John Errico: [00:22:13] So I mean it maybe is obvious if you're at all in real estate but you can't display discriminatory preferences to individuals when you are leasing properties or even selling properties based on things like race religion ethnic cultural background. I'm not entirely sure if it's federally mandated but I'd just say logically would be sexual orientation things of that nature.   John Errico: [00:22:36] So what that means is it applies to the leasing the leasing realm is that you know you can't put up an ad saying I'm only looking for a person of a certain age or gender or race or whatever. I mean realistically that does not happen anymore because people are aware of this but it means beyond that that if someone of a particular race or gender or ethnic background comes to your property to look at the property you can't disqualify them on that basis. So usually as that is the way that all filters down to finding tenants is that you need to apply objective criteria to tenants. One example is credit score. So you can you can certainly accept tenants. You can say I won't accept tenants below a certain credit score which is an objective criteria that you can apply to them. But it becomes much more. And it's not required but it becomes much more suspect when you have a tenant who comes to with a certain credit score and they might happen to be of a certain ethnic background and you reject them. That becomes more suspicious because you could say Well I reject them on the basis of their credit score of which I have no actual criteria or you could say well maybe I reject them on the basis of some other illegal or impermissible criteria. So that's a very high level overview of it.   John Errico: [00:23:52] I don't think it's a lot should have to go into the details of that in this episode but it's very very very easy to find information about fair housing laws for housing acts. There also might be state specific laws as well. But in general just don't display discriminatory preferences towards tenants. I think that that's it's 20 19 so that's probably goes without saying. But having said all that.   John Errico: [00:24:13] What I require. When I when I look for tenants one of the most important things to think about is how you're going to price the unit. So one thing I found in leasing is that you will if you your unit correctly you will find normal tenants that are appropriate for that area. If you price your unit incorrectly you will find abnormal tenants for that area. You'll probably still find tenant applicants but they will just not be normal. And one example that I have is if you price your your unit higher than market rent you will still find tenants but they will be tenants that have something wrong with them which disqualifies them for many apartments and therefore they have to pay more but will try to for whatever reason convince you that they are okay renting your apartment. So for example they might have a low credit score. They might have very low income. They would have an eviction on their record. They might have all sorts of stories special conditions that may or may not be relevant to you but are definitely going to disqualify them from the vast majority of apartments. So sometimes people will say oh you know market rent for this area is to offer dollars a month and I'm losing my apartment at 14 15 months just to see well I guarantee that you'll get somebody to come to your apartment but they're probably not going to be the class of tenants that you're going to want to rent to. So that's not that wasn't obvious to me before I started renting but just because you can try to list your apartment for more money doesn't mean that you're gonna just because you list your apartment for more money and you get interest doesn't mean that you haven't listed it for too much money.   Ryan Goldfarb: [00:25:48] So one one thing that we've talked about in a number of different contexts is the theme of understanding what your costs are. And in this case I think the way that that applies is understand that there's a cost of trying to get that maybe above market rental number because in this in this area in particular if that is a problem tenant and you need to through an eviction the cost of that eviction both in terms of lost rent and the legal costs associated with going through that eviction whatever that difference is is not going to be enough. You're not could be obtaining a significant enough premium to justify those at added expense.   Ben Shelley: [00:26:26] And it's interesting for somebody who doesn't have properties or rents to hear that perspective because you're talking about right if everybody wants try to juice the rents as much as possible but within a margin of what the market is you can have.   Ben Shelley: [00:26:39] An extremely volatile different outcome based on the quality of tenant and that poor quality of tenant to both their points. Yes and the immediate might pay a couple of months at two hundred dollars more a month than market. But then there could be all kinds of other issues which may lead to as you know for a variety of outcomes maybe eviction being being the worst case and destruction of the of the unit you have on the topic of pricing.   Ryan Goldfarb: [00:27:01] One benefit to underpricing or at least pricing something fairly is that you will get a a wider sample of applicants from which to choose. And if you're looking at this as a long term investment and your goal is going to be to obviously make things a little bit easier on yourself but also to minimize vacancy and if you have tenants in there who are paying a fair rental figure and they're qualified because you know they were the best of the crop from which you are choosing then there is going. There's some long term value to that stability as well. Yes.   John Errico: [00:27:39] For sure. Yeah. So I think step one in the tenant identification process is listing you know determining the appropriate rent for your unit and you you can listed above what you think is market rent. But the caveat is what I said before about the quality of tenants and what we just talked about. The second thing for me is I like to you know at some point in the rental process these tenants will be met by somebody who could be by you it could be by your manager it could be by a broker or whatever but that interaction is usually quite important. Not again for determining their you know characteristics that you shouldn't discriminate on but just for determining their possible quality as a tenant. For example if they come into your unit and they bring you know eight family members and you're renting a one bedroom apartment and they say oh it's just gonna be me and my husband you know that's problematic to me because I don't know why you'd be bringing you know your eight family members to look at this one bedroom unit if it's just you and your husband. The biggest thing that I like to do when I when I meet tenants is explain to them what's going on to their reaction and then very importantly is have an application process for your tenants. A lot of landlords for some reason don't really do this or their application process is maybe verbal but it's totally legal and totally appropriate in my opinion to have a written application which alone will drastically remove a significant portion of the tenants that are gonna be interested in your your property. So wherever you find the tenants and I don't know if it's worth while to go into it because it's you know it can be region specific and you could use a broker but whoever you find tenants once they come to your apartment sometimes be interested some won't be interested. Some a waste of time some will cancel on you some or whatever. But if they actually submit an application which is a written application which requires them to actually write something and usually pay a fee which is usually for a credit check or a background check. That alone will remove about 95 percent of people that are applying your apartment and many times. I'll get tenants particularly in in know certain certain areas that say I can't figure out how to fill out the application and I can understand that to an extent. If it's maybe online and they're elderly or they don't have access to a computer. But even if you then provide them with say a written application and they're unable to do it that is a disqualification because if you're unable to. If you're unable to convey to me the information that I request. For example if you can't comply with my request for a credit check or background check because you can't sign an application or logistically get it to me in the amount of time that's required you're probably not going to be a good tenant. And maybe there is an apartment for you somewhere else. But my criteria is that you need to fill out an application in some manner has to be written so that I can submit it to a credit agency and a background agency and you have to pay me a fee so that I can pay the credit and back agency to do it. Normally I use a website called Cosey which I'm a big fan of. Cozy. Also a syndicate you're listening to a certain certain websites online. I don't only use them so much for the marketing aspect of it but their application process I found is great. Their fees are very low and reasonable for tenants and the information that they give you is usually very comprehensive. So they'll give you information like the credit score which will not be just a number but will include things like credit inquiries derogatory factors in their creditetc. They include a background check for the background check.   John Errico: [00:31:26] When you say positive or negative it'll include things like. Here is an eviction which is obviously a big negative too. Here is a misdemeanor that they got eight years ago when they were a college student which is probably less of an issue. All these factors are important because you know sometimes you'll find with tenants tenants will come to you and first of all make my favorite tenants are the ones that come to you and say you know I say okay well in order to rent the apartment know there's we do a credit check and we only accept credit scores above x or whatever might be and they'll say Oh great. You know my credit is is perfect. That's fantastic. And then I run the credit score and their credit score is like five something ridiculously low. Really. Wow.   Ben Shelley: [00:32:07] Like you know that they always wonder why majors why say it. Every move they're trying to speak it into existence right.   John Errico: [00:32:12] I mean that's really concerning to me because it's it's a total obliviousness and is also lying. It's either lying to me or being so oblivious that they have no idea. And on the contrary sometimes tenants will come to me and say Hey I just want to be really a friend. I had a hard time three years ago. You know I had to declare bankruptcy because I got divorced or someone died or some you know I lost my job. Some facts like that happened and then you see their credit score and say you know the credit score is bad but everything stems from this one incident. You know it's like a two month period of time when all their credit card bills relate andetc. and that still is not necessarily good. Their credit score might be low for four for their purpose but at least they've explained it and then you can evaluate that as you might take it. You know that the same is true with background checks like sometimes people say I've never been evicted. No eviction then you go on and then it's very obvious that the reason they're looking for a new apartment is they just got evicted for the previous year. So it's stunning because you'll tell people like look I'm going to do a credit check and a background check.   John Errico: [00:33:14] I'm not even saying like everything has to be aware I've just just to let you know what I do and they look and then say Go do and then be proactive and be like they did not ask me about it but I can't tell you how great I am you do the opposite. It's like you got me. Have a nice life. I mean you'll be it's amazing I frequent it.   Ben Shelley: [00:33:31] Did you really hear that Joy. So when I graduated from high school I actually originally I worked for a property manager and it's worth noting that every property manager to an extent does some variation of the process that John just described and I know for us like we had obviously a credit check fee and a written application a background check and it's funny now hearing John I never really thought about exactly why we did I mean I just always assumed but hearing that methodology I realized oh that's why we do it. But we also asked for like a good faith deposit which you can do I guess which is was fully refundable for some reason didn't get approved in a certain amount of security which you guys can talk about more being the landlords in the room but that is that is very funny and I think one of the things about property management is you can kind of take some some some kind of role with the funny moments when they come because like I imagine it can be extremely stressful and operational stress.   Ben Shelley: [00:34:23] So oftentimes you're going to see people and things that probably you wouldn't believe especially in very specific areas in northern New Jersey.   John Errico: [00:34:30] I mean a lot of the stress can be oftentimes people just waste your time. And that's why it's it's sometimes able to have a property manager slash realtor degree adjustments. Yeah because people will I mean they there's so many times and people will say I'm so excited it's department I want to come see it right there I second there you know they never show up or they'll say I'll be there at 1:00 and you rearrange your let's go to be there at 1:00.   John Errico: [00:34:53] They're like oh you know I am running late I'll be there at 4:00.   John Errico: [00:34:57] It's like how can I be running late. I mean that's insane. Well that's funny because that's it's different.   Ben Shelley: [00:35:02] You know it's like if you are a property manager or work for property manager versus being an individual owner as well your time constraints are very different and your time value is very different. So that's that's it that was always a brutal one.   Ryan Goldfarb: [00:35:14] A lot of the a lot of the things that you put in place here a lot of things that John just alluded to there are qualifiers and then there they serve as a filter for a lot of the bad applicants that you would otherwise receive. And while they're short while I'm sure there are plenty of applicants who will just outright ignore the fact that you're saying upfront it's going to be a month and a half security deposit the rent is going to be this much the credit score qualification. Is this that you know there are plenty of people who are going to apply anyway and just think they can get around it but they're all also are a number of people who probably don't apply and who you filter out and ultimately you know that they don't waste your time because you're upfront about that stuff.   Ryan Goldfarb: [00:35:55] And I think it's super helpful to do that because it's only going to rear its ugly head at some point so it's better to you know filter out who you can still have your process to kind of verify that you're a diamonds are being fulfilled. But ultimately ultimately you're you're only hurting yourself by not having these restrictions in there and being upfront about them. So you may as well throw it out there upfront and you may as well put some thought into what your criteria actually is.   Ben Shelley: [00:36:28] Just having some sort of process to to win out. Yeah that's possible.   John Errico: [00:36:32] I'm having rules as well. Like if you don't want to have pets in your apartment that's appropriate. But you need to be upfront about that so you can you know you can't. What sometimes happens is that people will try to fool you and they'll say oh you know I'm not going to bring a dog or something and I can bring a cat. But then they actually do. You know that's a violation of your lease and that's so that that's a serious problem it's not a problem to be like Oh it's like we just forgot about it. Like that's a serious problem. The same is true with occupancy. Right. If you have a single single bedroom apartment and you say look I only want to rent it to two or fewer people or three or four people that's appropriate because it's more people can be a fire hazard or a safety hazard than somebody moves in they have six people. That's not OK. That's a serious problem. So being firm about the rules and saying like here's what I expect is we'll set the tone for the entire relationship and also will prevent you from getting into serious trouble possibly even legal trouble with if there's an insurable issue or fire or whatever might happen.   Ryan Goldfarb: [00:37:33] And having thought about that and having kind of codified this in your own way also makes it a little bit easier to enforce it down the road because if somebody comes to you and say and says Can I can my daughter and son in law move in here or can I have a dog or a cat or any other number of requests. It's a lot easier to say no I'm sorry we have a specific company management wide policy that prohibits this versus saying you know no I'm just I'm just gonna be the bad guy. I'm just gonna be the bad guy today until you know.   Ben Shelley: [00:38:09] So out of curiosity we talked about some of the thresholds of getting tenants in. And what are the kind of standards that you can outline to try to get in the most qualified tenants are paying the maximum rent you possibly can for the area. I'm curious you get a tenant in there and they don't pay rent or they're violating there as we just talked about maybe it's the animal policy or it's again just been laid on rent what have you. What are your processes and what are certain methods property managers can take to try to address these issues very common issues I want to talk about the topic from the sense of.   John Errico: [00:38:47] So there are a lot of property there are property manager that operate on both sides of the spectrum on either side of the spectrum can be can be very negative their property managers who are extremely lackadaisical and have no conception of what's happening at their unit or their apartment and literally just show up to collect a rent check that's bad for obvious reasons because you're probably not solving problems you're probably not aware of what's going on in your in your unit to your buildings to that can cause a whole host of issues the other extreme which you might think doesn't happen but I've actually seen all the time and in fact right and I have been talking about this recently our property managers or landlords that are so involved in the lives of their tenants that it's it truly becomes a problem.   John Errico: [00:39:33] You have an on both ends of the spectrum. Your behavior will set the expectation of the tenants. So if you're the sort of property manager that doesn't deal with anything then tenants will never tell you when there is a problem because they suspect that you're not going to deal with it. On the flipside if you're the property manager that is really involved in every aspect of your tenants life they will tell you everything that's wrong. Even things that are unreasonable for you to care about or fix and expect you to be involved with them. So like I know landlords that have gotten like roommate disputes with their with their tenants which are totally beyond the scope I would say of a landlord to the extent that you know if they're all in the lease or whatever like I don't care what happens as long as you pay. I don't care if you don't like your your roommate that you yourself picked you to accept a future tenant the landlords that will do things like you know if there is a slight minor issue in some totally irrelevant way to the apartment where they'll move heaven and earth to fix this very minor bizarre issue that is like maybe unfixable or this is not economically viable to fix that nobody really care about you wouldn't care about if you live there. So there is a whole range of spectrums. Maybe. You can. I mean you know people like this also.   Ryan Goldfarb: [00:40:53] Yeah I mean I certainly echo those same sentiments. I would like to point out on the larger scale side of things. This is a little bit of a tangent but it does speak to the point of as a property manager having your pulse on the property.   Ryan Goldfarb: [00:41:12] I know it's pretty common in the investment space to buy a buy a 50 unit apartment building and to prosper to approach the investment from a value add perspective with the intention of getting rents up and as we alluded to in the last episode bumpingA.I. and improving the property that way. But oftentimes one impediment to that is that you may have a certain cross-section of your tenant pool that is involved in some type of illicit behavior or that is doing something to otherwise stigmatize that building that community that block maybe. And.   Ryan Goldfarb: [00:41:55] One thing that one benefit of being a property manager who has your pulse on the property is you know who those one or two bad eggs are in the building and if you nip that issue in the bud then you may not get to the point where your building is only 50 percent occupied because nobody wants to stay there because you know that because they know that the building is a haven for drug dealers or if there's other if there's other behavior there that other that is going to deter your tenants from wanting to live somewhere. All they want is just a safe quiet secure place.   John Errico: [00:42:37] Yeah and I think part of the issue one big name the game is communication. I mean this is the case for like it whenever there's problems or conflicts. But in the property management space being responsive to tenant issues is important. Even if your response is No I won't deal with it. So I had a tenant recently that this is in fact in the same building that we had an issue with the heating and the hot water from a flood. And we had to make a small hole in her wall to fix some plumbing and for various reasons we had to leave the hole uncovered for two or three days. And you know this is like a hole maybe six inches by six inches in a corner of a room and the heating was working the water was working everything was on just that there was this hole in the room and she said well you pay for a hotel for me because of this issue and I certainly didn't ignore her. But I just said no like that's not that's not an appropriate. That's not reason well for me to do that and I don't want to be you know she had all these reasons why I shouldn't want to do it and and why I was such an inconvenience for her an ecstatic saidetc. And I said Look I don't want to be inconsiderate to your concerns and your you know maybe unique life history that makes it so that this is very inconvenient to you but from a perspective of my duties as a or to you this is not an appropriate thing for me to do so. No we can't do that. And so so you know being that being the bad guy I guess in that context is definitely a necessary thing to your original point been about like what happens when things go wrong. You know a lot of it is like communication. So hopefully you have tenants and you have relationship with tenants such that they'll tell you when things are going wrong like if they're going to be late if they're going to be late on rent they'll tell you in advance like hey I'm having a problem that still is not necessarily okay or great but at least you're informed. But if you're not communicative or your tenants aren't communicate with you. And you know that the day to collect rent comes and there's no rent that is a big problem. You know the worst tenants that I've had are ones that either don't communicate will lie or stop communicating when things go wrong. So you know we have Ryan and I have a tenant have several tenants right now and I've been a building where we inherited tenants from the previous owner and you know we're talking earlier in the episode about how that can be problematic. You know we have these tenants are our super bad. They're they're bad because the act their expectation for communication set by the previous landlord was totally off. So they don't say when things are wrong or they they will over communicate when certain irrelevant things are wrong they won't tell me about when rents do. They have all sorts of crazy assumptions. I mean I had one one tenant claim that he believed that yes her rent is generally paid in the first of the month for the month that you're in. He claimed that his belief was that rent should be paid at the end of the month for the prior month that you'd already lived in the building for. Which is just I've never heard of that.   Ben Shelley: [00:45:44] And it's like Sir how does that have to do with you having not paid rent for three months. Right. So like I feel like usually it's a microcosm of Vallejo as you try to return your initial question like when things go wrong.   John Errico: [00:45:53] Step one is communication and just understanding what's happening and certainly there are legitimate reasons why people can be late and rent that are not eviction quality with certainly there are legitimate reasons why people can be late and rent that are not eviction quality events.   John Errico: [00:46:11] Yes. But knowing what they are will prevent that from happening.   Ben Shelley: [00:46:15] Although I would imagine I think you I think anybody would agree with the sentiment that if you feel like a tenant relationship is going in that direction to probably document as much as you can or keep track of as much as you can in terms of any issues you've had with the tenant.   John Errico: [00:46:30] Tech text messaging and email have been great boons for that as opposed to verbal conversations. So a lot of times I communicate with tenants through text and that's a great medium for just keeping information right there. You know the ultimate the ultimate problem with the tenant is when they are a tenant can do a lot of things to make it such that they can't live in your unit anymore or you you won't allow them to live in your unit anymore. And obviously if you just don't like the tenant personally or whatever you you just don't think they're good tenants that probably in alone is not enough to qualify for you to remove them from their property if they're not violating their lease agreement. It might be a justification if you're not in a rent controlled or rent stabilized or whatever situation for you to not renew their lease in the future. However you know that there are overarching legal issues as I alluded to before that might cause it to happen. But generally the number one reason why people get evicted or why leases ended because of a violation with the lease which is usually non-payment of rent or habitually late payment of rent other issues could be you know they are subletting your apartment without your consent. They have other people living in the apartment without your consent. They're violating some rule that you've imposed. Like with animals with doing illegal activities in your unit maybe they're destroying your unit or inconveniencing other tenantsetc. I very rarely ever dealt with the latter but non-payment of rent is or late payment of rent is a reality. If you manage enough properties in any area affluent or poor you will find people that are gonna be late with rent or not pay rent.   Ben Shelley: [00:48:15] And so attitude of which I rent. I just want to say I edit Curia or ask out of curiosity now sort of having now gone through most of the rental process and management process for market tenants. I do want to have a quick conversation about rent control rent stabilization and in Section 8 as it pertains to units that we that we have or that you have Ryan. So maybe you guys can take us through a little bit in the same overarching context of what is the difference if there is one between managing at market and tenants and and rent control rent stabilized Section 8 tenants maybe outside of just the obvious fact that there's a certain cap on rental increases cetera.   Ryan Goldfarb: [00:48:54] Sure. Well I think it's worthwhile to take a step back and just to think about what Section 8 is and what what that really means. Yes. So the way that it generally works in the context of the two to four one to four family rentals is a quote unquote Section 8 tenant comes to the landlord with essentially a Section 8 voucher. I think it's called a half that area for housing assistance program and that voucher is generally good for a particular amount of money per month generally as there's there's a formula that's generally based on either affordability metrics for the area or a percentage of that tenants income that should be allocated to rent and then the tenant picks up one portion of the rent and the Section 8 voucher covers the rest. So in this context these Section 8 vouchers are essentially a means of the government stepping in and providing housing assistance to lower income families.   John Errico: [00:50:10] And just as a quick caveat there are a lot of programs like this section is one particular program that's operated by it's funded by the federal government although it's actually operated by municipalities.   John Errico: [00:50:22] But there are many many many programs like this for low income or disabled or other category of tenant where for whatever reason they have government assistance to rent a unit and what Section 8 is the most common one that landlords will deal with. But all of these things that I think Ryan is about to say will apply in a similar manner to a lot of these programs.   Ryan Goldfarb: [00:50:45] And sometimes you may find tenants who are using a combination of one or two or maybe three different programs. So to me the overarching theme is the same. You want you want tenants who are going to abide by the lease. You want tenants who are not going to create issues and who have realistic expectations. Whether they're market tenants or whether they are paying through some means of housing assistance the we're also going to go with this. So when it comes to section 8 or other housing programs I think you generally find within the investor community you'll generally find that investors are either really far on either end of the spectrum so they either love it love them and swear by them or they had one bad experience with it and have written off these programs entirely. I think the reality of the situation is that it's it's case by case you're going to have excellent tenants who are on some form of housing assistance and you're going to have some tenants who are quite subpar when it comes to these are on these housing assistance programs and it's on you as the landlord to screen them appropriately and to ensure that regardless of what their means of payment are that they are qualified to lease your space.   John Errico: [00:52:08] Right.   John Errico: [00:52:09] So in my experience you know government subsidized tenants first of all in general you will find a very wide array of tenants that have government subsidies some Section 8 tenants will be in Section 8 you can just parenthetically your mind for government subsidized tenants some Section 8 tenants will be fantastic and some will be terrible. And as Ryan alluded to they the the voucher which is the amount that the Section 8 tenants rent will be covered can vary a lot. It can be a hundred percent of your rent too much less than that back of the envelope sort of high level talking usually tenants that pay more money even though this sounds counterintuitive are better tenants because they have more of a financial stake in where they live. If you have a tenant who's paying truly zero because the government program of their own pays their entire rent they have really no financial incentive to do or be anything in your apartment. And although this hasn't happened to me I know people that it's happened to these tenants can just trash your apartment because they have really no financial consequences for that happening. So if they for whatever reason don't like you or having a bad day they can really cause you financial penalty without them selves being financially at risk.   Ryan Goldfarb: [00:53:37] To be fair there there are the ramifications of their behavior in that situation would be it would be that they would lose their housing assistance payment which is not insignificant.   Ben Shelley: [00:53:46] Curiosity does the does the federal assistance cover things like credit check fees and security deposit like if you're renting to one of those tenants what is the price. Is the process different in terms of the source of of funds for those initial fees or no the tenant is still on the hook for for those payments.   John Errico: [00:54:02] It depends on the program. Oftentimes as Ryan alluded to before tenants can use multiple programs. So you know I have a tenant in one of my properties that isn't actually a section 8 tenant as in she pays market rent out of her own pocket. However for her security posit she and her security adviser was paid through a program through the city of Newark that provides emergency housing relocation because her building was condemned or something like that. And so she didn't get her deposit back or she might at some point or whatever. So there is a whole variety and yes there is assistance for application fees and whatever else might be relocation fees etc etcetc.   Ryan Goldfarb: [00:54:41] Now one other downside to a lot of these programs is they are generally administered by some agency. So in this case I think there's either I don't know that's at the city level or at the county level but there is a local section 8 office that administers the program and each of these locales and those offices will conduct periodic inspections I don't know of it's a yearly or bi annually.   John Errico: [00:55:07] I don't know.   John Errico: [00:55:07] I think it I'm not entirely sure it certainly depends on the program but it happens not infrequently but just as we alluded to earlier with the state and the city having different requirements. This just adds a third layer of oversight and it's just another body that comes out and will say hey you need to paint this wall or you need to fix this door you need to do that. It's not it's not necessarily that these things are unreasonable. It's it's just that the frequency with which these things happen and the ramifications of not being in compliance whether these requirements are reasonable or not can be significant if they're not cured within a certain period of time they will stop paying the rent. And it's just it's just another source of frustration.   John Errico: [00:55:58] It's bureaucracy. And to be honest a lot of these programs are not administered particularly well. Right. And that can be very frustrating from a landlord perspective like one of the craziest things that that we've had to do what I think is we have a section 8 tenant who is very habitually late with her rent show he seems to manage to pay it but it's very late normally.   John Errico: [00:56:20] And you know her her income portion her portion of the rent is maybe like a third or something of the total rent for the unit. So most of the rent comes from the local Section 8 office. However if she is late on her rent she will be out of the program which means that we won't get section 8 income anymore. So it's a pretty perverse incentive where I'm actually incentivized if I want to get that two thirds of her rent and if I think that at some point she will actually pay I'm actually incentivized to tell the section in office she's paying her rent on time so that I get the two thirds of the rent which is ridiculous.   John Errico: [00:56:59] Right. If I say that she's out of the program boom she's out of the program you know if I say she didn't pay rent this month you know they they want to be helpful to me. Oh great. Well she's out the program. Well okay fine. But now I have to. That doesn't mean that she leaves the apartment. It just means that some sort of a victory just means that I don't get the Section 8 component anymore and so then I have to evict her which in New Jersey is a multimedia process. I have to go through everything else involved it that try to get money from her for those other months without sexy assistance. It is not going to happen.     Ben Shelley: [00:59:52] Paper. People say that I'm scared to say that on the show because that's going to catch on. I need a trademark that. So more importantly looking at the way that for example rent stabilization grows I know it was usually like mandated between 1 and 4 percent per year of whatever rent it was below a certain threshold in New York. So I'm just curious to know like in Union City for example where there are very strict rent control and stabilized rules. What the process is for a landlord there and what to expect if you're if you're managing a property that has these kinds of controls on them.   Ryan Goldfarb: [01:00:20] The benchmark that most rent control programs are based upon is CPI Consumer Price Index. Generally there is a permissible increase of maybe a set a set amount like 3 percent or so. The greater of 3 or greater or the lesser of 3 percent or CPI sometimes it's CPI plus 2 percent. And oftentimes there are other permissible increases.   John Errico: [01:05:08] So either ask someone knowledgeable or ask your lawyer to look into it or do the research yourself.   Ryan Goldfarb: [01:05:15] All this is not to say don't buy rent control buildings. It's more so to say understand what you're buying before you do. Because at the end of the day there are still some advantages while few there are some advantages to owning these types of buildings one of which is the fact that if you have if you have a tenant who's been in an apartment for 15 years paying a thousand dollars a month in a unit that would otherwise rent for two thousand dollars a month then that tenant is highly incentivized to do whatever is necessary to stay in that apartment. Whether that means prioritizing paying rent or not being a thorn in your side or a thorn in the side of the landlord or just keeping the place in general you know generally good condition. There are some advantages to that when it comes to occupancy or when it comes to stability. But you know at the end of the day the numbers are what the numbers.   John Errico: [01:06:10

Rents - PITI = Cash Flow?!?! Nonsense! John, Ben, and Ryan discuss the real costs of owning and operating rental property. Here are a few buzz words: cap rate, NOI, cash flow after debt... Don't we sound smart now? We'll de-mystify common real estate jargon to ensure you'll know what your broker is talking about when he tries to impress you by offering you "a steal at a 6-cap".   (Transcript below.) Ben Shelley: [00:00:07] Welcome back to the Brick x Brick Podcast. I'm Ben, and I'm here with John and Ryan. And today we're going to piggy back a little off last episode where we talked and identified what might be your first area of investment both to do your first real estate investment and maybe if you're starting to pick up the number of real estate investments you're doing in your surrounding area. And we want to talk about the kind of ways to identify from a numbers and metric standpoint whether or not your deal is viable for you. And it's important to recognize obviously that finding out and identifying different real estate metrics is just part one of the many parts of figuring out whether or not a real estate deal is good for you or not. But nevertheless we want to take you through it. And so Ryan When do we kick off with you.   Ryan Goldfarb: [00:00:50] Yes. So the first thing I will... I guess it's just kind of foundationally the goal of buying investment property for me is twofold. The first part is earning cash flow that is passive income over the duration of the investment.   Ryan Goldfarb: [00:01:06] And the second part of the second piece of the puzzle is the equity side which is the idea of gaining equity in that property which is something that you do both by purchasing it right but also by holding it over the long haul and by paying down the principal of the loan amount.   John Errico: [00:01:24] Yeah I think I think that that's a really good way to frame it because you could buy an investment property and make no cash flow like no rental income but it could still be a good investment because the property could for example appreciate very rapidly either because you do something to appreciate it like going to flip or just because you bought at the right time and the broader market appreciates. So I know primarily at least up until very recently I consider myself almost exclusively a buy and hold investor like a rental investor and I almost always perform or underwrite or whatever you want to call it my investments as if there were no appreciation at all. So the power of doing that is you have to be pretty disciplined to make an investment because you're thinking OK well my rents are this my expenses are this. What if I assume that the value of my property doesn't go up at all. And what if I assume that my rents don't go up at all. Am I still comfortable with the cash flow that I'm making right now that other investors will say well you know my rents will increase at 2 percent a year or 3 percent your CPI inflation whatever and my expenses are going to be fixed my mortgage is going to be fixed to my you know B minus investment right now might turn into an investment in four or five years but that's at least not the approach that I've taken personally.   John Errico: [00:02:42] I don't know if you guys feel differently but...   Ryan Goldfarb: [00:02:43] Well I think this highlights a pivotal mistake that a lot of beginning investors make. It's that they, it's that they assume that the market will continue to appreciate and they forego what would otherwise be sound investment strategy by looking towards cash flow in lieu of the expectation of appreciation down the road. And I think particularly at a time like today you see this often when we're coming off of a period of six seven eight years of market appreciation and now the hype is strong. The market the real estate market is at its peak arguably and has soundly recovered from 2008 2009. And people are back into thinking that this is going to last forever. When the reality is it's not. If you're buying it with the expectation that you're going to make your money when you sell it because it's going to continue appreciating you're going to find yourself in a bit of trouble at some point down the line. And the way to mitigate that in my view is to buy with strong cash flow and to buy something that you're confident you can hold on to in   Ryan Goldfarb: [00:03:55] perpetuity. Based on what your cash flows are.   John Errico: [00:03:57] Yeah I think like maybe the riskiest investment that I've possibly ever seen or even was. I mean I didn't consider it for my own portfolio but I was helping somebody in California it was maybe a year ago who was buying a flip or wanted to buy a flip in California and they had this spreadsheet or this deck was really well done deck it was like 15 slides like really professional and you looking at the numbers they wanted to buy for something like 400 grand and they're going to put one hundred thousand dollars into it and they thought they're going to sell it for like 850 in a year. No there isn't. You know not that bad investment but if you look at the numbers like the comps the market comps were all at like six hundred grand right now. And the underlying assumption was that because those same properties had appreciated by like 40 percent or something in the past year or two years that it was going to continue to depreciate or 40 percent it was kind of buried in the numbers like it was really obvious as you actually click through the comps were like wait all the comps are like way below what the ARV is. So this person had reached out to me I was like look I mean if you think it's really going to continue appreciate as it has already appreciated I guess it's a good investment but no. You know it's like that's that's it. That's probably the riskiest type of investment.   John Errico: [00:05:11] I think you could make.   Ryan Goldfarb: [00:05:11] Well this this I don't want to deviate too much from what I think should be the focus of this conversation which is cash flow but this highlights something that concerns me about investors in general it's the I think there's a misunderstanding between what drives quote unquote appreciation there's there's market appreciation and then there's appreciation that you forced by buying something distressed and repositioning the asset whether that's by bumping rents or by putting capital improvements into the property and the the latter I would feel pretty comfortable assuming going in because that's something that is within your control. But I don't know that I would ever make an investment purely based on in my view speculative market.   John Errico: [00:05:52] It's like for me it's micro and macro factors micro factors are your house you can affect the the value of your house by doing something nice to it improving it. But the macro factors are like the broader market and you you individually probably are not going to impact the broader market by your improving real estate that's going to be factors that you control.   Ben Shelley: [00:06:16] Well I'll say it quickly in defence of calculating and embedding appreciation in your underwriting it is part of the fundamentals. I think for those people out there they're saying well gosh should I not account for it at all then you know it's fair it's usually standard to account for let's say 2 percent revenue growth maybe 2 percent expense growth over a certain period of time. But I think what we're saying is just be cautious about and especially understand that you need a certain amount of cash on hand at the beginning and throughout the first year of your project to to survive into it. Sorry.   John Errico: [00:06:43] No I mean I think that that's fair. My point is that I wouldn't feel comfortable buying a buy and hold property if at the moment that I bought it I wasn't satisfied with the cash flow I might be happily pleased with the cash flow and two or three years assuming appreciation assuming increases in rents. But if at the moment that I bought it it was not cash flowing like I wanted it to that I wouldn't buy it even if I thought in three or four years it might.   Ryan Goldfarb: [00:07:07] And if you're trending income at 2 percent and expenses at 2 percent just as an example granted as applies more so to a commercial property and to commercial underwriting then to let's say an underwriting for a 2-family investment property but that ultimately is driving NOI which is going to be the basis for appreciation in that scenario rather than just saying oh we're buying this at a 7 cap. And I think the market's going to be at a five cap in two years. So the energizing to stay the same.   Ryan Goldfarb: [00:07:36] But I'm going to see a sizable increase in the value of the property because it's purely based on the fact that I think the market is going to tighten and people are going to be buying more gas   Ben Shelley: [00:07:46] Which is a lesson by the way to not just look at these numbers standalone because you see a lot of people and when I when I talk to people in real estate or sometimes say well or brokers will throw those numbers at you like look look at a cap rate look at the IRR look at the NOI but you know it's a bigger puzzle and you want to try to take all of these factors into account because they wouldn't say no-ey.   John Errico: [00:08:03] No I said a thing I've never heard that I make that a thing.   Ryan Goldfarb: [00:08:06] We can make that if I just don't like and I just I think that's what it is. I think I would really go out and what I believe you're going to do well about No. I mean it's you know there's just no way I could I could maybe get on board with like Noi. But no me no noise to high class I think we're every gentlemen.   Ben Shelley: [00:08:28] So I want to I wanted to move the conversation to maybe two of the main types of deals that we do. I know we want to talk about rental properties so maybe for starters. I would love to actually now that I'm talking about this out loud talk about some of our methodology for flips. But for starters when we're looking at two three and four families I think it's important for listeners to understand how we identify those those properties and whether or not they're worth taking the leap. So we talk in the last episode about identifying the geographic location. Once you've identified your property I think the first thing that there is a little bit of a misperception is specifically for newer investors is how much cash you actually need on hand when you go into a deal. You know a lot of people see an investment of $100,000 and think great I just need the ten thousand dollar downpayment for a 10 percent DP but there's there's a lot more equity required I think than a lot of people realize or understand going into a deal and we talk about that a lot. So for example if you're planning on buying a property and renovating the property over the first let's let's say four or five months there are holding costs of fixed expenses that are associated as part of that purchase and so on top of the ten thousand dollar downpayment on top of the closing costs which might include origination depending on the points affiliated with your loan or legal fees which we talk about that are associated with putting together the necessary documentation to transfer the deal and close the deal. You also have taxes and insurance payments that you're going to have to make consistently on your property before you generate even one dollar of income. And so my first recommendation once you've identified that property for listeners is understand exactly how much is the total equity required even outside the downpayment before you move forward and kick that in to what you're going to be making in your calculation moving forward on whether or not it's a good deal for you.   Ryan Goldfarb: [00:10:14] Yeah I think one mistake people make is they they say OK I have one hundred thousand dollars cash. I know that generally speaking the kind of norm in the mortgage space is to be able to put 25 percent down. Therefore I have four hundred thousand dollars in buying power because one hundred thousand dollars as a 25 percent down payment is gives you the ability to buy afforded another property as you just alluded to. The reality is is not the case. There are circumstances where your equity requirement can be limited a little bit more to just what your down payment requirement is and that's that's generally if you're buying something that's turnkey something that's already rented and something on which you'll be collecting rental income from day one but in a lot of instances particularly if you're trying to drive value you're going to be dealing with maybe getting tenants out you're going to be dealing with some vacancy you're going to need some money set aside to do some repairs or some renovations and then you're going to need to allocate a few weeks maybe a month or two to actually getting the property tenanted and to get to the point where you are quote unquote stabilized and collecting rents.   Ben Shelley: [00:11:22] That is the most common misconception I think for newer investors coming in and just understanding all the kind of cash required. I know when I've talked to people this hour you know that even from from becoming maybe even institutional investors to house hacking they just don't have a full appreciation for how much cash is required on hand for their first investment.   Ryan Goldfarb: [00:11:40] So one thing I actually wanted to point on that point out on that front is it can be it can be really sexy to look for those kinds of like quote unquote value add plays where you can buy something and buy a three family with three tenants in there who are each paying $900 a month when you know that the market rents on that unit or $1,200 a month. But if you if you don't properly account for the downtime that you're going to have with each of those units the the upside is a little less attractive. And one thing that I I oftentimes will encourage other investors to do and something that I should probably practice a little bit more often in my own on our own projects is to maybe stagger the vacancies. So if you have those three tenants in there rather than rather than going from having a fully occupied building to a fully vacant building and to have three units to renovate at the same time and three and then ultimately three vacancies to fill at the same time whenever the units come on line to stagger home and say Okay Unit 1 she really wants to get out because she's looking to move anyway. This is just a good time for her to get out. Unit 2 and 3 are a little bit more flexible. I'll keep you in it two and three there. We'll work something out where they're here for a few more months or we'll put them on like a three month lease or whatever the case may be and then we'll do those units one by one it'll make the construction a little bit more manageable because you're just doing maybe you're just doing like a cosmetic renovation and you don't need to do anything that's that pertains to the whole building you're not rerunning plumbing entirely or you're not redoing the entire electrical system. So that's one way to mitigate the burden of sinking cash in every month after month because you'll still have maybe two of the three units paying.   Ben Shelley: [00:13:26] And I think that's a particularly important point because when you're underwriting your deal oftentimes people want to just put in whatever the market rent is. And it's really important I understand that even if there is a certain amount of time it takes where you know which is hard to know. But if you even knew that you know eight months down the road nine months down the road you can stabilize at market rents. There is a period of time whether it be because of what Ryan alluded to getting entrenched tenants out or having to put up with maybe below market rents in order to to expedite this process and maybe not have it to go through something like an eviction that you're probably not going to be generating those rents from the word go even after renovation. So you know one of the things to that point I wanted to talk about was sort of the beginning of of the underwriting process and I know this is a lot of what I do for. For Ryan and John so. So I guess for a smaller deal I think one of the first things that's important to do is is try to properly. Well the first thing you want to do is look at your comps right. And we kind of talked about that in the context of finding your geographic location so going to move forward from that and talk more about your revenue particularly as it pertains to rent. I mean it's. Sorry John.   John Errico: [00:14:30] No I was just saying maybe we can frame it in the context of explaining some of the terms that real estate investors use like cap rate cash on cash. Ah I think that the cap rate is sort of a unique real estate term that people don't fully cap rate is very broadly speaking that operated net operating income divided by the value of the asset that you buy. Normally people look. So net operating income itself is a little bit of a term of art in the real estate context generally net operating income is the revenue that you're generating from rents or from whoever you use your property minus the expenses that you're generating or that your properties accruing at any given time. Normally you don't consider debt service normally you don't consider debt service in the context of calculating it. So you like your mortgage payment interest principle would not be part of the calculation. And investors talk about cap rate. Normally they say like X cap or X numbers like a six cap would be a six percent cap rate seven capital seven percent cap rate and one of the joys of using cap rates to analyze properties even if you're looking at a smaller like a 2-family or three friendly property is that you can compare properties of different asset classes almost using the same metrics. So if you have a 2-family property in say northern New Jersey and you know that's a seven cap for some reason and you have a 2-family property in New Haven and that's a nine cap well you've essentially analyzed away all the differences and all of the details and you're just looking at one number to compare it at a high level.   Ryan Goldfarb: [00:16:06] I say that the general theory behind that is first and foremost the reason that I believe at least there isn't that cap rate is exclusive of debt service which is in this context a mortgage payment.   Ryan Goldfarb: [00:16:19] The reason that cap rates are exclusive of that is is that your financing is more specific to the specific investor and to that investors strategy than to the property itself. So the cap rate is supposed to be a means of analyzing these specific property from investor to investor be and that should not be clouded by whatever your investment strategy is like something like the cash on cash return would be or even IRR or return on equity or whatever other metric you would look at.   Ben Shelley: [00:16:51] And I was only just going to give a caveat to say that while the cap rate is and is a very effective metric to compare deal by deal it's important to recognize maybe two things one especially when you're working on smaller properties oftentimes in more distressed areas. Oftentimes the cap can be inflated just because the numbers you're playing with are smaller so when you're talking about what you're netting versus the value of the property right. If that number is smaller generally speaking the number the cap rate you're going to see could be eight plus versus maybe like a four to eight and a more institutional area.   John Errico: [00:17:20] It's a good point because when you looking at smaller properties you realize that say you're looking at a 2-family property a property with two apartments. If you for example miscalculate the rent by 5 percent that will tremendously impact your bottom line or if you say well I'm assuming that it's a 2-family but one of the units you know is a lot smaller or one of the units I just can't run for five months of the year that has an enormous impact on your bottom line. But if you had a 50 family building and you had one year that you couldn't rent for five months. Well it doesn't we have a huge impact. So in another way to look at it is so you have a 2-family building and you have two boilers and one of the boilers breaks. That's a pretty significant expense that that will very severely impact your bottom line which is if you have a 50 family house 50 unit apartment and you have some history that say costs five thousand dollars which would be like the cost of a new boiler that's not going to be severely impact your bottom line. So it's it gets into a larger question about why do large hedge funds and whatever else invest in very large multifamily properties as opposed to like a 2-family property and why the management challenges of owning a portfolio of say 10 2-family properties might be different than a 20 unit property but generally speaking one idea is because the sensitivity to expenses and incomes are way different on a two year 15 year property.   Ryan Goldfarb: [00:18:46] It's also important to bear in mind that these numbers are generally based off of performance they're estimates. So on paper if someone is talking about a property buying at about buying a property at a 10 cap they're generally talking about based on their projections and those projections as John just alluded to will vary a lot more for a smaller property than a larger property. Year one you may see a 2-family if you get hit with a lot of maintenance you may effectively operate at a five cap and then year two once you're stabilized if you have no tenants move out you might be looking at an 18 cap. So it's important to understand the volatility in these numbers and to ensure that your expectations are in line with that. The other thing I want to point out is that the cap rate the cap rate itself is effectively the unlevered rate a rate of return on the asset. So if you're looking at a 10 cap what that means is if you buy a property if you buy that property for a million dollars at a 10 cap with no debt whatsoever. So you don't get a loan on the property. That means that you should if it performs at a 10 cap you should earn a 10 percent rate of return on your money. And the idea is that if you're able to get a loan on top of it to get a loan on the property the cost of that loan is going to be less than the cap rate which is going to increase your returns because you'll be buying you'll be borrowing money at let's say a rate of 5 percent interest and the property will be quote unquote earning money at a 10 percent rate. So when you look at your blended rate of return it's going to be much higher than the 10 percent cap rate that you would be seeing if you bought it all cash and two to bookend that conversation on cap to both of their points right.   Ben Shelley: [00:20:39] If you as an individual investor are looking at a smaller project and you see in a cap and you see a 7 cap it's important to again understand that there are other factors in play so for example maybe the the property with an a cap is generating more cash in the next year two years even three years. But the seven cap property might be new construction which for whatever reason is taking time to to bring in tenants or what have you who knows what the reasons are might be in better shape for the future and that's where understanding appreciation and also not looking too closely at only one metric can be really.   John Errico: [00:21:12] I mean yeah it's it's a fair point. I mean with all these metrics like cap rate cash or metric yeah you're you can make amazing returns but you could have a like a 15 cap and only be quote unquote cash flowing like two or three dollars a month. Yeah. And your because it doesn't take into account the debt. Well it also meant taking the cash the properties were 30 grand. So it's different than absolute returns.   Ryan Goldfarb: [00:21:35] But the other thing is that these I think John alluded to this earlier this is way more of an art than a science. So you can have you can have two experienced brokers or two experienced developers underwriting a similar deal or an identical deal and one could come out to a seven cap. One could have a nine cap and when you're dealing with larger numbers that's a huge variance and it could be for various reasons it could be because one of them maybe has more experience managing that asset class. One of them may see a way to increase expenses or decrease expenses or increase income but I think that's a good segue way to the next topic which is how you arrive at the NOI and ultimately how you underwrite cash flows.   John Errico: [00:22:22] Know very broadly I would say cap rate is not the only way to analyze properties. So there is cash on cash return. There's I would say monthly cash flow which is maybe not like I'm like a form of formal analysis but it just a way to look at it and there there's IRR which is basically was not relevant to not particularly useful to calculate unless you're very aware of what your exit might be and when it might be. But I mean we could talk very briefly about what those are before we go on this but I mean they all use the same inputs but they have different results for you cash and cash return is very broadly a measurement of the sort of year. I'm not actually sure at a high level the best way to describe it.   Ryan Goldfarb: [00:23:10] It's cash on cash return displays. It's the relationship between the cash flow so the amount of money that you are clearing on an annual basis and the amount of cash that you have invested in a particular property. So if you bought this the straightest way to look at this is for something that's stabilized. So you buy at a turnkey 10 family that's already rented and already stabilized and your plans upon purchasing it are to just kind of like continue operations as they are. So it's a you buy it at a 10 cap. So you put 25 percent down so you put $250,000 down obtain a mortgage for 750 with closing costs and whatever reserves you need to put in maybe you're all in at three hundred thousand dollars invested into the property and your cash flowing thirty five three thousand dollars a month. The way to calculate the cash on cash return in this context would be the three thousand dollars a month over 12 months.   Ryan Goldfarb: [00:24:20] That's thirty six thousand dollars a year divided by your three hundred thousand dollars invested in the property. It's a little over 10 percent return cash on cash which is a pretty good for.   John Errico: [00:24:34] Pretty good depending on risk adjusted for risk strategy in the area and the advantage of cash on cash returns as Ryan alluded to is that it takes into consideration debt and leverage. And so your cash and cash return can change substantially depending on it.   John Errico: [00:24:50] So one common strategy in buying whole investing that we get into would be the you know the BRRRR strategy or whatever you want to call it which would be buy renovate rent refinance and then repeat. So the idea is that you buy a property you have a fair amount of equity in the property to begin with. You spend money on renovations which is even more equity than you read it out and then you refinance refinance meaning that your property is appreciated in value because of all the work that you've done for it and maybe you got a good deal anyways and you take a bunch of equity out that will very very significantly impact your cash and cash return because all of a sudden you go from say having one hundred grand hypothetically the property to maybe having no money in the property or 10 grand in the property. You can have like you know quote unquote infinite cash and cash returns because maybe even got money back just to buy the property. So those are that and will not necessarily show up in it in a cap rate analysis and we'll maybe have negative impacts in a cash flow sense because now your basis and now you're the value of property is higher and your mortgage rates going to be higher in excess of your mortgage amount is going to be higher but it will impact in a huge way your cash and cash returns.   Ben Shelley: [00:25:57] And I think it's just important to quickly to note that the distinguishing difference here from an actual calculation standpoint for people who are underwriting their individual deals right is for example cap rate which is dividing your NOI by the value of the property versus here where you're I'd like to turn in net cash after debt because you're also accounting for your debt service divided by the total cash invested which gives gives you a different slightly different metric and a different look when you talk about sort of your blended results assumptions and returns for how you want to approach analyzing the deal.   Ryan Goldfarb: [00:26:28] Yeah. Just to add a little more color to the last example the So you buy if you buy that same property at a 10 cap and you buy it all cash the 10 cap means that you're effectively going to see a 10 percent cash on cash return as well. Whereas in this scenario with leverage the thirty six thousand dollars a year cash flow and cash flow on a three hundred thousand dollar investment yield about a twelve percent return. So the idea there is you're using leverage you're using debt to juice your cash on cash returns. To John's point before about the bird strategy the idea there is to achieve those kind of infinite returns but that also kind of highlights the deficiencies of cash on cash return as a metric because what that doesn't necessarily take into account is when you receive the cash it it doesn't. It's agnostic to the timing of cash flows. So IRR is one metric that a lot of investors like to use because that quantifies in some way whether you're receiving that refinance cash whether you're like pulling your equity back out in month one or in month 13 or in month 9 or not until the very end of the project and Year 5 or whatever it may be.   Ryan Goldfarb: [00:27:47] So that's going to be a huge driver of returns when you're looking at things from an IRR standpoint in.   John Errico: [00:27:53] IRR is the easiest metric I think to compare real estate returns with returns from other types of investments. So cap rate is pretty generally only used in the real estate context. Cash and cash return I suppose could be used in different contexts but I've never never really seen it used outside of the real estate context personally but IRR you could say well I can make x percent on my my my bond or in return from the stock market or on my Treasury bill or whatever I invest there or investing in a private equity fund or any space or invest in a private equity fund absolutely or you know I can compare it to what I would make on a property investment. So IRR the only way to calculate are truly is retrospectively after you've already disposed of the asset or received all the cash you can receive. But it is possible to prospectively guess that well I could receive this cash flow at this point and I could exit the property at this amount at this point. So when we do that type of analysis which we do for the purposes of our private equity fund we just guess and say Well I think we're going to exit the property what would it be if we exit the property in a year and two years three years whatever educated guess.   Ryan Goldfarb: [00:29:02] Of course of course. And then to turn us back in a little bit with how it applies to I think most of what we do. The kinds of rental property that are in the two to four families base frankly in my opinion it's overkill to do a real deep dive into the numbers in this way for let's say a 2-family rental because as John alluded to before there's so much variance between between what your quote unquote cap rate is going to look like between what you're IRR is going to look like and so on and so forth. When you're dealing with such a small property and you're dealing with such swings from there a vacancy or from some kind of repair and maintenance or cap ex. So. The way that I actually like to approach most of these is to kind of I guess more subjectively the way what the cash flow is against what the equity is against what the kind of quote unquote risk and effort required is for any given deal. So just to give you an example of how how that might look. We have some stuff with some property in Montclair New Jersey which is an affluent suburb with a nice downtown big community commuter population. We also have rentals in a rental property in Newark New Jersey which has a much different reputation. So. High level I might say I'm looking for. I'm looking to clear a thousand dollars a month on this on any given rental property purchase because if it's anything below that then it's a not worth my time and b I don't feel safe enough knowing that there are going to be there are going to be weeks or months or years. And I want to make sure that I have enough cushion to weather any kind of storm but that's also factored in with a lot that's also factored in with where the property is located. So if I'm in Newark let's say I know that that is not as strong of a real estate market and in a downturn values there are going to suffer. And and there's going to be you know not as much of a pool of buyers and long term. It's a different it's a different tenant profile it's a different I would say like operational burden from a management standpoint whereas something in Montclair you're dealing with a different class of tenant. You're not generally dealing with higher income earners. So in my opinion you have a greater likelihood of achieving some kind of rent growth there because you're dealing with a population that is generally seeing wage growth which is ultimately what's going to support rent growth. And then from an operational standpoint while you may be dealing with as John and I often kind of joke about you're dealing with a lot of people who don't want to be plunging a toilet or changing a lightbulb. So sometimes you have to provide a little bit more of a white glove service when it comes to management but at the end of the day you have less concerns that they're not gonna be able to pay their rent or that they're going to stiff you on the rent or that they're going to trash your place when they when they leave. So there is an economic value to that.   John Errico: [00:32:11] Yeah it brings up a larger point maybe we can get into right now which is what are the inputs to all of these forms analysis and I would say the very very top level input would be rents or rental income. That's generally the you know revenue or income side of the equation. So why do we talk a little bit about how to figure out what rents are and how to figure out vacancy rates.   Ben Shelley: [00:32:36] Yeah sure I mean I mean just very quickly but base level right once you when you're looking at an area you know it's sort of the same way that you're identifying from last episode where you're going to invest the next step would be to look at comps to try to determine what the average rents are in the area for your specific property and unit. So I think it's worth mentioning. I know this sounds simple but obviously there's a difference between renting studios first one bedrooms or two bedrooms or three bedroomsetc. and even within that context you want to know OK are you renting individual units are you renting the property out as a whole home as a single family versus multifamilyetc.   Ben Shelley: [00:33:12] And then also take into account what is the unit mix within your property. So some units I think a lot of people say oh you either rent two bedrooms or you rent three bedrooms well just as a case in point I was looking at a property the other day in New Haven and these two properties were all one one bedroom and one three bedroom. So understanding your unit mix as well as important. So once you determine through comps et cetera what your average rents are going to be for those different types of units then you want to take into account I think any other factors that might make you revenue. So for example does your unit have parking space. And if it does do you rent that out to tenants. So if you're renting out you can additionally add those types of revenue streams to at least I like to to your total revenue as it pertains to rental income because I consider that again you're probably paying a parking space by month. And then as John and Ryan alluded to you want to try to discount that rental by a certain vacancy percentage which is really just a guess to how long per unit would any given unit on a given month or any given year be vacant because as we know every day you have a unit that's vacant in his day you're losing money. So it's very very important to not just include a vacancy rate but to try to be as close and as accurate as you possibly can.   John Errico: [00:34:23] I think it's really important what you said shouldn't be glossed over it's important to include a vacancy rate because a lot of people would say oh I have a great you know that the rental demand is really high. My area and I'm always going to find a tenant that may be true but if you have a tenant leave who just doesn't wanna renew their lease. Maybe you can line up a tenant who's going to come in right after the person leaves. But more than likely you're probably gonna have to get in there paint the unit. Do something fix it up whatever you have to do so that at the absolute minimum you're gonna spend half a month maybe more likely a month just to get the unit turned around. So even in a very very high demand market you might still have a month of vacancy. Even per year. So at the very minimum I would say include a vacancy rate in some way and then adjusted upwards if you think that the rental demand is lower.   Ryan Goldfarb: [00:35:13] Other factors are at play not to get too in depth there and to kind of lose sight of the topic at hand which is understanding the income and expense but there's also a difference between physical vacancy and economic vacancy. So economic vacancy is also intended to keep and to take into account other factors like not just how much money you're losing because a unit is taken but also oftentimes it's kind of embedded. It also has like a bad debt number embedded in there which would be bad a bad debt write off from an accounting standpoint is the amount that you are foregoing because of an inability to collect. So if you're in an area where you have if you have a 20 unit building in just about any market it's going to vary depending on where you are but chances are you're going to run into tenants who are not going to pay. We're dealing with this right now and one of our properties actually with arguably multiple tenants in one of the properties we have one eviction ongoing which means obviously that tenant is not paying. We have another tenant who is I would say paying habitually late and is somewhat somewhat troubling to deal with this.   Ryan Goldfarb: [00:36:30] Well at the generals we thought we were a white glove service but that's a separate issue but this actually highlights the importance of screening your own tenant and not inheriting tenants.   John Errico: [00:36:43] To be clear we didn't choose any of these tenants.   Ryan Goldfarb: [00:36:45] They they came with the primary vote shows us the economic vacancy kind of takes takes these things into account.   Ryan Goldfarb: [00:36:53] The other thing I like to think about is what does a 4 percent vacancy mean so that in most in most contexts a four point four percent vacancy is indicative of any of an extremely strong market. But when you take when you think about it in the way that John just described 4 percent economic vacancy essentially translates to I think about two weeks of lost rent quote unquote over the course of a year. So if you think about one full month one full month of vacancy is about 8 percent of the year. So if you divide that in half that's 4 percent. So essentially what that means is if you're underwriting a 4 percent economic vacancy that means that you're expecting that on average you're gonna be seeing about two months of lost rent over the course of the year which when you think about the logistics and you think about things from a practical standpoint if you have a tenant leave I would say two weeks to have one from the time that one tenant leaves to the time that you clean the apartment that you make any repairs to the time that you lease it out to the time that that person moves in is extremely optimistic and probably a best case scenario.   John Errico: [00:38:03] And it's another you know a lot of investors rag on rent control and rent stabilized buildings which is you know a whole different time may be warranted. Yeah but one thing that you will have in a rent controlled or rent stabilized building assuming it's controlled or stabilize below market rents is that you're probably not going to have a lot of vacancies as long as you pick tenants that are going to pay rent. So just you know other a lot of things go into the rents and the vacancy rate.   Ben Shelley: [00:38:31] So I guess just just to sort of go back to you know general income an expense. Right so let's just say your total revenue including rents and any other affiliated income streams are added up to one hundred thousand dollars and you had a 10 percent vacancy so that's $10,000. So you're your net revenue from rent if you proportion that altogether is about $90,000 and then what you tend to want to do is go through your expenses. So obviously there are closing costs affiliated with purchasing the property and then there's holding as well but for the purpose of just rentals probably want to start by talking about fixed and variable expenses. So for your fixed expenses as an example you're talking about expenses that no matter what happens you know through through a lot. So what's the expression like hell and high water you're gonna have to pay these and those things include taxes insurance your mortgage payment. I tend to like to include utilities as a fixed expense because even if you are passing through a lot of those expenses to tenants you're going to have to pay some proportion of that or at least that might amount of money is owed to somebody all the time.   Ryan Goldfarb: [00:39:33] Point out that if we're looking at we're looking at deriving NY mortgage expansion B Well that is going to fix that.   Ben Shelley: [00:39:41] Yeah and I at the end I was gonna maybe make a caveat. I don't know he doesn't believe me but I promise. This is how I look when you send us you're like Deal somebody right.   Ryan Goldfarb: [00:39:51] I know that you have it in there but I know that when I when I think about it or when I think about it and it's gonna expert anyway for anyway purposes it's tricky.   John Errico: [00:39:58] One the major caveat one major thing to say is that everything that we're talking about is a yearly just people that get used all these calculations that done on a yearly basis not a monthly basis or whatever.   Ben Shelley: [00:40:07] And this is something that I that I took from from Ryan and John but oftentimes what we'll do is we'll separate the periods even refinancing aside let's just take out of the picture where we'll calculate the cost right. Equity required and just general affiliated costs up until the time that we lease up and then extrapolate out over the course of a year to see what the property looks like stabilized for one full year which may or may not be helpful for. For you guys out there but putting that aside once you calculate your fixed expenses and will take out the make sure to take out the mortgage for the NY thank you then you would look at your variable expenses these are expenses that can change year to year.   John Errico: [00:40:40] So things like just to touch it if you look we're going to talk about utilities as a fixed expense so the utilities are I think a I think a big a big one to think about. A lot of investors grossly miscalculate what the utility costs will be. And they also change depending on the nature of the property. So as an example used before he might have a property that has separate heat and hot water that is not super uncommon for smaller multifamily properties particular the northeast. So each property has their own boiler or furnace or whatever and they each have their own say hot water heater. In that case you generally as a landlord will pass the cost of heating and hot water through to the tenant because there is a separate meter and system for each tenant in a larger building or in a different building. You might have one central heating system like one boiler or one hot water heater and in that case you as the landlord will almost always pay for the cost of heat or hot water. You may be in a good great world would be able to in some way pass the costs along to the tenant but if you're looking at comps online oftentimes it's not entirely clear if the unit has heat and hot water included in the unit or the landlord pays it or whatever. Having said all that that calculus is significant also because you might even though the tenants say pay for heating hot water use the landlord is responsible for servicing the boiler and the hot water heater so you might though you might gain on the fact you don't have to pay those types of utilities every month every year for tenants that pay their own heat and hot water. You might lose because you know all the sudden you have say three or four boilers to maintain as opposed to one boiler and the costs of replacing a boiler for a four family unit and the cost of a boiler for a one family unit might be a little bit different but it's not way different. So there are pluses and minuses to having separate utilities in larger buildings particularly in the Northeast. It will almost always be the case that there will be one central heating unit and one central one high well positioned say that I love.   Ryan Goldfarb: [00:42:52] I've seen them separated pretty pretty early and even when there's one they're not separated even when they're not separated.   Ryan Goldfarb: [00:42:59] I think a lot of landlords have transition to a rub system ratio ratio utility billing system I think it's called where they essentially pass the costs through to the tenants and just kind of build them build them back in a pro-rata fashion.   Ryan Goldfarb: [00:43:16] So regardless of whether they are metered separately or not.   Ben Shelley: [00:43:19] So this is from by the way I mean we got John here unbiased top property manager probably in Hudson County. I mean I I take it it's so important. I'm glad you stopped me there because it really is important like all of these calculations matter. You know if you and like John alluded to earlier as well it's like OK let's say you pass even if you pass all your expenses. If a boiler goes down you are responsible as the landlord for that payment so you also want to allocate certain capital resources to those emerging nations.   John Errico: [00:43:46] The overarching point is just understand the utility expenses. There are also a hidden utility costs in Hudson County as you just mentioned but you have to pay sewerage costs which is not the case in other counties in New Jersey and across the country.   Ben Shelley: [00:43:58] So Mayor Stack we're totally okay with it. Really.   John Errico: [00:44:00] I promise I love it. I love it I love it at the North Hudson Sewage Authority. One of the greatest utilities on Earth. So to the bank one way to figure it out just ask.   John Errico: [00:44:11] I mean you could ask the prior owner the chances of you know for a smaller multifamily property them having great records to give you are low but conceivably or you could just ask another property investor in the area like hey need to see your utility bill for a two or three family property to be able to get.   Ryan Goldfarb: [00:44:26] You may be able to get it from the utility itself to maybe.   John Errico: [00:44:29] Yeah I don't know. I mean you could try but yeah. So when you're doing your due diligence make sure to figure out that no because even in a 2-family property say you're off by a thousand dollars for utility costs are per year. That's the law. Yeah that's going to really impact your bottom line.   Ben Shelley: [00:44:47] Yeah I mean especially where our numbers are so when you're talking about again multi-family properties. Any discrepancy even you may think it's just five hundred six hundred dollars. That makes a big difference in your bottom line and it makes a big difference in the totality of calculation you have for a lot of the metrics that we talked about which I'll I'll get into when we finish the breakdown. So just again to quickly run through it we talked about some of our fixed expenses. So just some of the variable expenses again these are expenses that would change potentially year to year as you're you're managing your property so things like admin expenses which might be fees affiliated with filing taxes or any kind of documentation you have to go back and forth that you have to pay for things like supplies things like maintenance costs something that's also really really important to try to allocate correctly probably best to be conservative when it comes to to maintenance costs and also very important which we're very familiar with a management fee right. If most people aren't. Well I would say in the multi-family sphere you see this more often especially if you are for example a house hacker. But most people are going to pay an outside company or source to manage their property. So is there a management fee. And if so what is the percentage of your gross rent that you're paying out to that manager. So it's usually I think somewhere between 5 and 8 percent. I know for a lot of the properties John that you work on you charge a percent but that depends on some sort.   John Errico: [00:45:59] I think it's probably between five and twelve percent but really it really depends on the market and the property for sure.   Ryan Goldfarb: [00:46:05] And it could be a lot lower even for say a multi hundred unit building it could be lower three to three to five and that is I say is more more of the norm but the as a practice whether you plan to self manage or not it's it's good to put a management fee in there when you're underwriting a property because whether it's because you continue to acquire and kind of grow out of self managing or because you grow tired of self managing it's highly likely that at some point you may consider hiring or outsourcing Robert property management. And if you do that you want to know that your property can support it.   John Errico: [00:46:42] Yeah. And management is a whole other sphere that we can get into at some other point. But just to touch on it very briefly beyond the numbers that we're talking about just having. Either the ability yourself to manage the property or having a good property manager is very very very important and very very valuable. And I have used third party property managers that have been great some that have been really bad and it is a large component that goes into buying a property and thinking about how to rent it out and even to our previous conversation before about location. Sometimes just having a good property manager that you can trust in an area could be a factor as to why you might want to invest there and what other side too is if you buy a say 2-family property in the middle of nowhere or someplace where you don't have an infrastructure setup it's going to be hard to find it's often to be hard to find a property manager who just going to want to manage your 2-family property. A lot of property managers are interested in managing portfolios bigger properties know whatever it might be.   John Errico: [00:47:45] So just take that into consideration if you're investing not in your own backyard where you can't actually manage it yourself.   John Errico: [00:47:50] How you like think about how could I find a good property manager how much is that going to cost how it's going to be set upetc.   Ryan Goldfarb: [00:47:56] And that property manager is also likely going to be your gateway to a good plumber or a good electrician or a good carpenter or a good pest control company and that's going to truly inform your experience probably more so than anything outside of buying the property.   John Errico: [00:48:11] Like for some properties that I manage it's really like I am essentially the owner of the property because everything you know for that property will flow through me like I might be responsible for making sure that the utilities are paid that the taxes are paid. Collecting rent to have access to the bank account everything else. So to the tenants of that property I am the landlord. I manage the property they have no idea that I don't personally own or have any equity interest in it. So think about that too. You know this property manager the sort of person that you want your tenants to deal with all the time is like the face of the property to really manage to operate the the logistics of the property.   Ben Shelley: [00:48:51] And I think again to their point it's worth first taking into your calculation just for for both conservative purposes but also for purposes of it's likely that you'll end up using a property manager if this is one of your first investments and particularly if you're going somewhere further away from you. So if you're talking about an hour drive two hour drive or even further it really is essential but also understanding that it may well may be difficult to find a property manager for an area that you're unfamiliar with that it can be essential and can also actually in the long run cost the side help increase help juice your bottom line because if they're the ones consistently handling maintenance issues collecting rent that can be a boon for your for your total rental revenue.   Ben Shelley: [00:49:31] And so the only thing left to do once you have your revenue and income and expenses is to do the calculations to get you your final assumptions so you know for us these are smaller deals so we can talk in the second but what.   John Errico: [00:49:45] Maybe one less thing on expenses not to totally gloss over it but would be I think you mentioned too that repairs and sort of highlight the same thing.   Ben Shelley: [00:49:54] I'm doing the overhead.   John Errico: [00:49:55] You guys get into the weeds so that's another thing that property investors will often miscalculate or under overestimate the way. So I'm thinking you have a great great is maybe not the right word. There is a property manager in New Haven that we've used in the past is a real character a great guy and he was trying to sell me a property a couple of years ago that he had owned for about seven or eight years and so he was walking through those properties for five family property and he said well I said to him like why do you want to sell this property.   Ben Shelley: [00:50:32] And I said I juiced it and I think we've talked about this on a previous ad before. I think so. Now to talk about it again it is very relevant here.   John Errico: [00:50:41] Well you haven't caught that episode just yet.   Ben Shelley: [00:50:44] We're listening John. Thanks.   John Errico: [00:50:47] So yeah he said he juiced it which means that he had the everything that you have in the property has an economic life a useful life. You under describe it including the property itself but aspects of the property that have defined life terms would be the roof your boiler your hot water heater maybe some of your fixtures in your bathroom. These are the things that you install and you know that at some point you gonna have to replace them. So maybe like a cheap roof might last you 10 years a hot water heater is probably not gonna last you more than 10 or 15 years. So what he meant in that context was that he put money into the property. Day one that he bought it and now seven eight nine years later all of the stuff that you put in now needs to be replaced. So all of a sudden there's gonna be a big cost to replace the roof and the hot water heater and the boiler and whatever else. The way to look at that in the context of what I was saying with with repairs and maintenance is that those expenses that you have to pay for a hot water heater whatever are not going to be born every year like in year to year three or four you're going to have to pay money to replace a hot water heater but you're going to have to pay a lot of money after Year 10. So the way to to underwrite it or to think about it is women look at that expense and then just divide that total expense by the number of years that I have. So I might put in my budget that my repairs and maintenance are twenty five hundred dollars a year. But there might be two or three years I don't pay a dollar to that or pay ten dollars and there might be one year where I pay eight thousand dollars. So over the lifespan over the three or four year period of time and I'm looking the average might be that number. But in any given year it might not be that exact number and it's important if you look at a property you know say the owner might say oh I didn't spend any money on maintenance last year. Okay great. That does mean that the cost that you should underwrite is zero dollars. It just means that maybe you know nothing bad happened that year but next year you know this year to replace a boiler for our properties cost me a boiler and hot water heater cost me seven thousand dollars. But last year I didn't have to do anything so cost me five bucks there.   Ryan Goldfarb: [00:52:45] I'd like to have a distinction between repairs and maintenance and capital expenditures. So repairs and maintenance are generally classified as maintenance of existing fixtures maintenance maintenance and overall maintenance of the property. So that might be things like going and unclogging a toilet or patching a hole in the drywall from somebody who took down a picture. Little things like that that are just more so upkeep than a true replacement. I think a lot of things that John alluded to are more so classified as capital expenditures which also as you alluded to have a pre-defined lifespan and it's just an inevitability that there's gonna be concern that those are going to have to be addressed. So when you're looking at your quote unquote repairs a maintenance number it's important to take both sides of the equation into account. And oftentimes as this this also comes back to the idea of applying context to your investment. So if you're buying something that you're maybe getting a little bit of a deal on but it's an older house it hasn't been renovated needs a little bit of love. Need some cleanup maybe hasn't been lived in for a little bit. You can. You can bet that in the first year or two you're going to find out where the leaks are you're going to find out where the warts of the property are and you're going to be spending on both repairs and maintenance and probably some capital expenditure items if you didn't pick them up immediately anyway. And on the same token you may buy something that is perfectly that is turnkey and that was renovated right. And it may be reasonable for you to assume that in year one year to year 3 your repair maintenance number is gonna be pretty low because most of those items that John alluded to earlier have already been addressed and you shouldn't need to deal with them again. Let's say that John you also know manager property that was recently renovated but was not renovated to the standard that one would expect and so despite the fact that it's renovated I think there's been a fair amount of expenditures on the repairs and maintenance side just to address some subpar renovations.   John Errico: [00:54:50] Yeah I think the way to look at it. I think we even talked about this in the previous episode is that even though there are events that happen infrequently it doesn't mean that they'll never happen. So even if you have a property that's been recently renovated everything is OK. You could still have a pipe that will leak but just the way that it is. So I I could probably count it. You know I manage quite a few properties. I can probably count less than maybe there are one or two of the properties that I manage which is like over 10 properties each of which have multiple units that has never had a pipe leak in the time that I've managed it. And doesn't matter if the pipes are new or old or whatever it is just the way that it happens. So does it happen every day. No but it does happen. So even things that are infrequent are going to happen sometimes. Doesn't matter how old how young what the status is whatever. So the only way I mean if you really really really want to control your maintenance issues is to do preventative maintenance and I would say do it yourself. Don't rely on a previous property owner to have done quote unquote preventative maintenance because as Ryan mentioned even properties that are newly renovated you have no idea the standards that the previous construct. Contractor construction person whatever used to apply to it if you want to get it done then be preventative yourself. But I would say do it yourself and make sure it's done right.   Ben Shelley: [00:56:11] Yeah I mean it was crazy not to mention the idea of cap ex capital putting aside a capital reserve you know a lot of the things that we're doing here when they're smaller deals we're looking just a year one so renovation to lease up through through a full year year and a half. But even with something as small as that to looking at something over a 10 year 10 year exit you got to have some sort of proportion put aside of your of your income put aside to address these possible concerns.   John Errico: [00:56:35] Yeah. So that's that's a great point to bring up as well that the way that I always think about properties whether I own them or manage them is that they're that there will be a pool of money and you can call it like an emergency fund or a capital reserve fund or repair fund or whatever want to call it that is usually at least equal to the deductible of the the insurance that you have in the property but oftentimes is larger. I would suggest to be larger because for various reasons you might not want to make an insurance claim or whatever it is you want to be covered insurance but long story short is that for the first year or two of the property if you're thinking about a property as like a cash flow machine I the way that I operate and what suggest operating is taking the income that you're generating from the property you're your net operating income and putting it into a separate fund or a bank account for the property and waiting until that reaches a certain amount maybe it's 1 percent of the purchase price 2 percent of the purchase price the value whatever you want to use for me and a lot of 2-family properties it's often like 10 grand or something around there and don't touch that money at all until it gets that point once it matures beyond 10 grand start making distributions to yourself or to investors or whatever might be but keep the money in there so that you know on a rainy day if you have like and like what happened to me this year I had a seven thousand dollar expense just come out of nowhere. Well I had ten thousand dollars in my account so yeah my accounts now down to three thousand dollars but I didn't have to go into a credit card saving you know whatever might be. I just had the money sitting right there and I didn't make an insurance claim for other reasons that we can get into at some other point but but it's nice to have the security so that's I think I would highly advocate it touches back to the point before about not being undercapitalized and buying a property. This is not being undercapitalized when maintaining a property going forward.   Ryan Goldfarb: [00:58:22] That's a great point. And I think if you want to understand why we don't always believe in NOI when we see one or we don't always believe the numbers that a broker or a wholesaler or another investor is showing to us me then you want to understand why we're maybe skeptical about the numbers that we see it's because if you go through each and every one of these line items there is a certa

This week, Ben, John, and Ryan explore the art of understanding new real estate markets -- including what drives appreciation, occupancy, and rent growth.   (Transcript below.)   Ep. 11 - Location, Location, Location - Deciding Where to Invest   Ben Shelley: [00:00:07] Welcome to the Brick x Brick Podcast. I'm Ben and I'm here with John and Ryan for today's episode. We're going to discuss the geographic area of choice for most investors when they're first deciding where they want to make their first real estate investment. We're going to talk about markets in submarkets timing of purchases and how to source those deals and the process itself of narrowing down your search. As an individual investor begin to decide where it is you want to allocate your capital both for your first investment for intermediary investments and for future investments. So guys let's jump right into it maybe we can talk a little bit about our own processes and how we got into the first markets we found and what drew us to those markets I think that might be a good place to start. Ryan you want to take a crack at it.   Ryan Goldfarb: [00:00:49] Sure. The way that I break down this discussion is starting at the top we're looking at things on a market level and then beneath that you begin to consider these submarket. And then beneath that you have different neighborhoods or other areas within that submarket. So when I was making my investment decisions locally or at least most recently what I was originally contemplating was which market I wanted to be in which for me was an easy decision because I was pretty limited in that I wanted to do it close to where I was geographically located. And beyond that I was looking at a variety of factors such as the entry point on the on a purchase which limited me or at least precluded me from buying in let's say an area like Manhattan. And then lastly I was looking for neighborhoods that kind of struck a balance between something that had a a little bit of a positive outlook moving forward but that wasn't so saturated it wasn't so competitive nowadays that I felt liked where I got to where I felt future opportunity or future values had kind of passed me by.   John Errico: [00:02:05] Yeah I think where to invest is a broad topic.   John Errico: [00:02:09] And the way that I got started was just I mean if you listen to the podcast before my investing story is like I just wanted to buy a place near where I was already living. So you know I was living in Manhattan and I wanted my place in the Greater York City area. So I bought a place in New Jersey which was the closest affordable place at the time to where I was living. But the factors that go into where you want to invest I think depend a little bit on your investment thesis. So maybe we can get in a little bit to that. You know I think from a very high level the easiest way to say where I want to invest is I won't invest in a place that makes me the greatest returns. But that may not exactly be the greatest returns monetarily it may not be correlated with your goals in doing real estate investing. So for example if you can make great returns in a city very very far away from where you live that might be nice but if you want to get into doing investing say full time we're going to be a real operator totally outsourcing your investments to a third party in a different city is not going to fulfill the goals that you have of being a real estate operator. I don't Ryan actually started investing not locally right your first deal was in Nashville Memphis Memphis.   Ryan Goldfarb: [00:03:25] I wish it was a outflow of appreciated walking and whether it is Memphis.   Ben Shelley: [00:03:29] It was it was a turnkey investment right.   Ryan Goldfarb: [00:03:31] And it was it was a construction on it was the single family purchased it for right around 50 grand and rented for like six seventy five a month. How did you find that. So that was that was back when I was wrapping up college my brother and I were looking for a turnkey investment to get something under our belts and we had kind of perused a few different markets outside of New York because we were a little bit more capital constrained.   John Errico: [00:03:54] And what is peruse exactly, perused, perused. How did you go about it   Ben Shelley: [00:03:59] This is why the geography map placed them in New Jersey because if you're outside of New Jersey you don't use the word Peru's center.   John Errico: [00:04:05] I mean I mean how how did you peruse I know I'm just certain at the time.   Ryan Goldfarb: [00:04:09] Well we were first and foremost looking for something or for an area where we could buy something by a single family house for under K and building it rents that were obviously able to support the investment and yield a decent return but also to know that we're not buying in what we would have considered a war zone or an area where we wouldn't have really felt comfortable owning property especially remotely. So I think at the time we were looking at Memphis I think we had briefly considered some areas of Atlanta. I think there were some I think either Dallas or Houston there were some providers over there that we had explored very briefly but ultimately Memphis was the first one that we it seemed to take all the boxes. It was also easy to get to which for us was kind of important because we figured if if our manager wasn't holding up their end of the bargain and we had to physically go there we wanted somewhere where it wasn't gonna cost us a thousand dollars to take a roundtrip flight to go for two days just to make sure that the house wasn't on fire.   Ben Shelley: [00:05:09] Yeah it's funny you guys mention both the geography and familiarity with certain areas because I know while I am not as far in my career as either of you what brought me to Ryan first and then John was the fact that I had an interest in college and was seeking in college. My first investments particularly in the Hudson County area across the water in West New York in Union City in North Bergen and the reason for that was twofold. One of them was that the market was strong there was consistent rental growth and sales growth over a certain period of time which I was tracking and was was excited about as an investor. But there is also a familiarity factor in the sense that the person and partner that I was planning on going into this business with had family and friends who had been contractors in the area for many years. And so I understood that I was going in for myself. Looking at the market and having a familiarity with how to source deals and underwrite deals but had a partner who had experience with construction and understanding how much things cost. So I think it's probably important to also think about how do you know in certain areas. I mean it's natural to want to invest I think close by. And if the numbers can work for you and what are the other mitigating factors that might bring you closer to pulling the trigger on a deal in that neighborhood or maybe making you look a little bit further away.   John Errico: [00:06:20] Well yeah I think a really high level the way that I think about geography is so a lot of times I look at an area I'm looking at it for buy and hold purposes at least that's how I've been traditionally doing it I think for flips it's a little bit different we can talk about that but for a buy and hold area I like to come up with a thesis for investing in that area and if I don't have a thesis that I feel comfortable with or if I can't think of one then that's probably a bad sign. So the greatest example for me is then the Tri-State area like the New York City suburb. So the thesis for investing in New York or in New Jersey or in Connecticut anywhere around New York City is New York City. So obviously not everybody who lives in New Jersey or Connecticut or even New York works in New York City but the reason why this region is what it is is because of New York at some point. The reason why it's going to be sustained is because of New York. So when you're betting on when you're buying real estate around New York City you're betting on you know in a sense in New York City you're saying do I think people are going to keep living in New York City traveling a working culture whatever. And for me the answer is yes. Some people might disagree about that but probably a lot of people believe that New York City is going to be a great thing. We also invest in new haven Connecticut which is a little bit of a different market tertiary market not a New York City suburb per say but the reason why invest in new haven is because of Yale. So Yale has a ton of money. It owns a bunch of property in the area and it has the second largest endowment and other university in the entire nation.   Ben Shelley: [00:07:50] Here we go.   John Errico: [00:07:51] But so investing in real estate in New Haven particularly around Yale is betting on Yale and do I think that Yale is going to be a place where people want to go that's gonna have a lot of money that's going to keep care about the city. Yes I think that's a good that's a good answer. So you can take that analysis and say well you know what's my thesis for investing in a small city in Iowa. I don't know maybe the returns look great on paper but I'm wondering why people live there.   Ben Shelley: [00:08:17] Well I think it's going to I think a good example of that is the way that that you John identified and how we as a group are identifying properties in Atlantic City because I think what people would look at as mitigating factors to keep them away from the market things like the environments obviously the fact that the city could be underwater things like a generally I guess maybe you would say some are literally underwater literally underwater figured. So so so a market that is more based on what they deliver in the summertime so vacationers and people come in for maybe weekends or natural parties obviously there's the casinos down there and you found a model the Airbnb which has generated returns well above I think what you would generally get at market rate when you're talking about traditional rentals and so when I like your description of the thesis you bring to the table because that is a perfect example of looking at an area like Atlantic City that to a traditional foot through traditional metrics may maybe you say even if you live further way I don't know about this and turns that into that somewhere that I want to try to source deals and pick things on the cheap.   John Errico: [00:09:17] You can also tease out your assumptions and your risk factors that way right. So if you say I would invest in an area and the only reason why people live in the area is because there is this one big thing like there's a big manufacturing plant or there's this big type of industry. Then your sensitivity is well if that industry or manufacturing plant or whatever closes that's it there's no other reason to live in the area. So I'm not saying that's a bad reason to invest somewhere but it's helpful to have the knowledge of saying here's what I'm sensitive to and if any of those things happen then it's gonna be bad for me. And you know Detroit has an example right. So what.   Ryan Goldfarb: [00:09:53] Or another example of that today or I mean quite timely as Long Island City and Amazon HQ2. There's a lot of hype and a lot of I think probably a lot of speculation that went on over the the last few weeks the last few months since each Q2 was announced for Long Island City and obviously the sensitivity there is a little bit different than it is in some other locations where you don't have such a diverse subset of industry but nonetheless I'm sure there is plenty of speculative work that was done in advance rather either for developments or for just people who thought Oh the rents are going to go through the roof because people who are coming in are going to have quite a bit of money.   Ben Shelley: [00:10:35] To piggyback off that real quick to the L train I think is even a greater example because that was two years in the running and people say new leases and moved businesses and sold homes.   Ben Shelley: [00:10:43] I had friends who were involved in the real estate business who were considering going in with partners and buying up homes or along that area at a discount to market. Given what everybody was anticipating so that's it's a great point.   Ryan Goldfarb: [00:10:54] Or or the Upper East Side of Manhattan where you've had the Second Avenue subway in the works for I think it's been like 30 40 years since I really like or 60 plus or two. But yes it did.   Ryan Goldfarb: [00:11:07] Finally it finally came on line over the last few years from 96 to 72.   Ben Shelley: [00:11:12] So it's getting married. So in another 80 years maybe it'll have to have more than three stops but it is amazing and it does do a lot for congestion as well and for pricing along that line. But it's funny because when I was working for a property manager actually we used to rent two homes that were literally right on Second Avenue on 83rd Street where the hub on eighty third was being built and the no and.   Ben Shelley: [00:11:35] I hate to say this I probably shouldn't put this on record but we would probably strategically not bring people during the height of working hours because it's unconscionably loud. However. At the same time people were then getting a discount to market and frankly if someone had come to us given how delayed that process was had come to my boss and offered a reasonable price maybe a little bit discounted to market. I wouldn't be shocked if she would have maybe considered something like that given the circumstance so it's all considerations to take into account and it's not just from an investing standpoint.   Ryan Goldfarb: [00:12:03] It's interesting to think about how many deals were consummated over the last 20 30 40 years with the assumption that this redevelopment was going to be a success because over the long term that Second Avenue Subway was going to be a boon to the area.   John Errico: [00:12:18] And the other thing about it is you can never truly anticipate what's going to happen in a market you know again that the HQ to example is so great because now that you two is not happening in Long Island City police the time is recording so you can reference this was going to happen with the market and that's OK. But I think it's important to at least have the knowledge of the factors that might implicated. So even if you can't control them and don't know what's going to happen it's at least a modicum of control to have knowledge of what the factors are. So for me the first step in thinking about an area to invest in is is the thesis. Can I come up with a thesis that I feel comfortable with. Is there a reason why it's going to happen. And then along to dovetail with that something that we brought up earlier for me is what is my goal in investing is my goal to maximize the amount of money that I'm investing is my goal to learn about investing is my goal to make this one of many projects to two by only this type of asset to buy different types of assets to do buy and hold stuff to flip stuff but that depends on you. My goal Getting Started in real estate was to do more real estate investing. And for me that meant it was conducive to invest near where I was because if I was investing that's the country even if I had to do a lot of that just physically getting there would be very very hard and it would take me a long time to ramp up because even if I got comfortable with an area I would have to get very very very comfortable off sourcing all of that work to a third party living in wherever it might be before I really got started whereas living in New York and investing in new jersey as I started I mean that's a 15 20 minute trip over that I can do it any time. And did many many times before I moved here.   Ryan Goldfarb: [00:13:59] There's also some calculus involved with what your risk tolerance is because the Amazon HQ2 example highlights the resiliency of the New York market where frankly that's probably not going to make much of a ding in the economic viability of of those areas. But if you're talking about an area. In if you're talking about you know a 1 manufacturing plant town in rural Pennsylvania and your investing thesis is that there are 5000 jobs in that specific area that are tied to that plant at the moment that plant shuts there are going to be very few things to pick up the slack for you. And so the risk is like it's truly a boom bust is either it's going to go well because you have that or you're going to be. There's going to be no suitors for your for your property as tenants and there will probably be very few end buyers should you decide to liquidate.   John Errico: [00:14:54] Yeah it's one of the things that annoys me but sometimes I'll encounter people who say oh man I'm making a killing investing in city I've never heard of in state that is you know among the 10 least populated states in the country and it's like well maybe I mean maybe the returns are great but why do people live there. You know like what what's going on in that. I I don't say that cynically because maybe there is some reason they just don't fully understand. But you know I bet that you could find a multifamily property in small town come a small state that's going to look great on paper but what's going to happen to that property in two five 10 years. I have no idea. I'm probably not sure that market enough nor can I come up with a thesis as to why it's going to do well so that's that's a pretty risk investment to me even if the numbers might bear out as being very conservative.   Ryan Goldfarb: [00:15:42] To what extent this is kind of shifting gears a little bit. But John look to what extent if you have vetted a particular market let's say you're talking about New Haven. To what extent do you try to validate some of your assumptions with data you get into some of the demographic data do you get into average incomes. Do you look at home prices like what what's your what's your next step.   John Errico: [00:16:03] I don't I haven't really looked at demographic data per say. What I'm most interested in would be the rents versus price of homes for a buy and hold. So that information is extremely readily available it's literally going on Zillow or anything looking at what homes are and then going on Craigslist or rent on Twitter or any of these other Web sites and seeing what the average rents are. That alone is a pretty good starting point. I think crime data is very helpful. I think crime is probably one of the prerequisites to a lot of. I mean you can have great returns on paper but if you can't walk outside your door nobody is going to know it's going to live there. There's a big distinction in my mind between what the returns could be on paper and what they actually are. A lot of areas that have bad crime you look at whatever analytical model you want to look at cap rate cash on cash return or whatever and you say oh my gosh it's so great. Even if you assume vacancy of 10 percent or whatever and then you go in and it's insane because you just can't get anybody to live there you know your vacancy is like 50 percent or 80 percent or whatever you want to say.   Ryan Goldfarb: [00:17:10] It's funny you mentioned that because I have a theory that oftentimes the best deals the best returns that you can actually realize fall at that intersection between the areas where people have these preconceptions about maybe there being too much crime or it just being undesirable for one reason or another so that you know it scares out a certain class of person. But at the same time the reality is when you investigate it there are still plenty of people who do live there and the perception of crime perhaps is overblown. And so I think that's really where you can maximize returns and that's where that kind of like artistic or subjective metric of like intuition comes into play where you actually go somewhere and you see it and you understand what the living breathing fabric of that is.   John Errico: [00:17:56] Yeah. Davies is a concrete example. So I started investing in Union City New Jersey and I think Union City and Jersey City as well very much had fit that these. So even now there's a perception in parts of Jersey City but certainly 5 10 years ago in many parts of Jersey City and Union City that the area was dangerous and unsafe and it certainly was in the 90s. But if you physically go to the area if you walk around and you talk to people you say do you like living here. You kids like living here if you ever experience bad crime you know whatever. No one says anything at all if you look at the news reports. I mean there's maybe domestic issues or maybe small property crime type stuff but not anything that would really disincentive someone to live there. But there's this widespread perception that the air is not good. And to your point. Absolutely. You can make it you can make a killing.   Ryan Goldfarb: [00:18:43] We've also talked about this in the context of comparing certain cities that have the reputation for being kind of like the worst of the worst. But even within that classification there are big differences. I think we were we were talking about with some of the cities up here where people around here may say like What are you doing buying in so-and-so town or so-and-so city. But when we go there we feel pretty comfortable during the day there's you know there's people coming to and from work. People just kind of hanging around and talking and no hostility no obvious. Signs of threats really. But there are other places where where we've been where you go and you'll be. You'll go like two or three blocks and all you see are vacant abandoned houses and just like the absence of life which is perhaps the scariest thing. And as far as that concerns and actual investment my my theory with a lot of these places up here is that while there are certain tiers of desirability at the end of the day there's a shortage of housing and people want to live where there is a safe clean quiet comfortable place to live. And if you can provide them with that even if it might not be an area where you personally would live that doesn't mean there aren't plenty of reasonable nice qualified people who will live there.   Ben Shelley: [00:20:00] And I think it's an important point too because you want to try to fight your own biases. As you look at these for an area. So I think it's very easy to fall into this sort of ideal especially if you're coming from outside of the real estate business that somebody says something about maybe Irvington or East Orange. Both places that were either invested in or doing work in and you just say Oh yeah. Why would I go there. Or what could possibly be there and then when you put your boots on the ground you learn that there's actually opportunity whether it be in construction or investment and I think that just actually just the other day I was talking to friends who were from the summit New Jersey area describing work we were doing in some of those municipalities and they were stunned. I mean they were flattered that Irvington and what are you doing there. Obviously there are different areas that have different levels of crime. What have you and all these different cities and townships. But fundamentally if you build as Ryan just alluded to safe good fundamentally sound homes there people will come especially as these towns and areas begin to get younger over time. I think you'll see generally speaking a shift in all of these different areas because at one point or another they did thrive.   John Errico: [00:21:02] Yeah I think it's a great point. So something that occurs to me is a lot of what we're talking about is very specific to the northeast and I don't want to gloss over it. There are listeners who are not from the Northeast and I think it's hard to describe exactly how block by block a lot of these neighborhoods are so kind of within that observation is to go back to Ryan's first point something that I really like to look at when I'm looking at cities or blocks or whatever it might be is the build quality of homes because a lot of these homes you know we're not buying new construction in this area. These homes were built 40 50 60 100 plus years ago and by looking at the homes you can say well this area used to be very wealthy or this area was never particularly wealthy or this you know unhealthy area now has become wealthy for some reason. So what a good example for me is East Orange East Orange is a an area New Jersey that has a I would say quite negative perception just in terms of housing and demographics and crime and whatever else you want education the educational system definitely has some problems. However the build quality of a lot of homes any storage is quite nice and there are some areas of East Orange where you look at homes that are on half an acre of land which for this area is a tremendous huge lot. And you say what is a beautiful home. I mean beautiful original woodwork that you could just never reproduce today never would reproduce today. And that gives you some sense to say well this area at one time was wealthy maybe it could be wealthy again. What are the reasons why it became on wealthy. How does that work. And truly I could walk three blocks. I mean the literal blocks in any direction from that and being a totally different area I mean a totally where I live right now where I'm physically located right now literally I could throw a stone across the river and go into an area that is totally demographically economically socially educationally different than where I'm living. That's pretty rare and should inform people that one invest in areas like this that say I need to do my homework to figure out not only that the city not the neighborhood but the block that I'm interested in investing in.   Ben Shelley: [00:23:07] Yeah I mean listen we just had that happen with also a property this is a little bit of a different area on the border of Nutley and Clifton and talking about OK on a macro level right you want to just know what's the neighborhood like. So we've talked about crime we've talked about education and we've talked about socioeconomic and cultural history of the area but also within that is OK so what is the designation SEO been in different counties means you might be designated for different public schools in different zones. So these are the kinds of obviously different costs affiliated with mainland so what have you based on the history of the area and the build of the homes in the area. So these are all things that you have to consider and I know when I'm looking at comps even in these areas and I'm used to growing up in New York City where truly I mean it's I mean just block by block it's lot by lot it's building by building the values change coming in New Jersey where a lot sizes tend to be a little bit smaller probably on aggregate than the rest of the country it's still the same way in many respects and looking at at Garfield the other day I mean I was looking near the water I think on River Drive and again in certain areas a lot by lot. I see sales of similar like properties at the same square footage with similar lot sizes going variant ranges of 100 to 150 thousand dollars. So do your due diligence on the specific area the specific building the specific lot. And John hits the nail on the head with that one.   Ryan Goldfarb: [00:24:22] And if you're going outside of outside of what you know if you're investing remotely and looking at an area where maybe you didn't grow up or maybe you don't currently live it's also important to take into account some other factors that may may be variable depending on the region. So for example in in northern New Jersey it's it's very common that when you buy a house you'll do an oil tank sweep and confirm that there is not an oil tank on the property or an underground oil underground or oftentimes there you may see them in the basement do. But of bigger concern is the. Underground variety. But if you're you know if you're investing from somewhere where that fuel source was never prevalent you would never even think to. To call someone out to do a tank sweep. Likewise if you're in New Jersey and you're looking to buy something in Florida you should. You're going to be thinking about hurricane preparedness and and whether it is like hurricane compliant. Likewise in. California you're going to be taking into account certain seismic issues and concerns. So there are a lot of nuances to different areas that you should at least know to be aware of or know to ask about.   Ryan Goldfarb: [00:25:31] If you are investing from out of town.   John Errico: [00:25:32] What you guys think about school districts because that's something that people talk to me about a lot and I have various thoughts on it. New Jersey has a lot of school districts because their municipality by municipality which in some states it's not the case. But what do you guys think about the value importance of that.   Ryan Goldfarb: [00:25:48] I mean it's huge. I think they're the way that I think about it is it is quite possibly the most important factor that a particular subset of buyers will consider when making their housing decision. But in a lot of ways I also think that the respectability or the clout of a school district is already embedded in the price of real estate in that area. So just because I'm to I'm looking at one property in one school district and another property in another school district. That are priced the same I'm not immediately going to say I'm going to buy the one in a better school district. There may be other reasons why someone would live in an area that has a less desirable school district. You may be renting to primarily. Seniors or you may be. Looking at something in a vacation community where schools just don't matter as much. So I think it's certainly it's certainly a factor. And it's one that I would weigh considerably. But it also has to be consistent with what your strategy is.   John Errico: [00:26:49] The funny thing about school districts is that it's the perception of the school district that cares right now. No there's no like definitive rating of this is the absolute number one best school district in the state or whatever. It's just your perception of it. If it's a good school district right. So vote for me because it's a perception thing. I think that school districts school districts are the best insulator of value positive or negative. If you have a bad school district and you're trying to make the area better I think that's going to be really hard because this is a far afield from real estate. But I think that it's hard to change the quality of the school district and if you're in a good school district or perceived good school district your value is going to maintain that level because for better or for worse people are going to continue to perceive that school district as being good.   Ryan Goldfarb: [00:27:36] Yeah. I have two points to make from different ends of the spectrum. On the pro side of why to invest in an area with a good school district no matter what the market is no matter what point in the economic cycle we're at. If you are a young family with kids who are entering your you know who are turning four or five six years old and looking to be are going to be going to school soon. They're going to be they're going to be interested in areas with good school districts and that is going to be more of a guiding light than whether. Whether they're buying at the best time or whether this particular properties ticks every box on their checklist. On the flip side to my point earlier about considering school districts in the context of what your investing strategy is if you look at an area like Jersey City or Hoboken years ago those were not desirable school districts whatsoever. And I think to a large extent at least based on what their property values are they're are still quite poor school districts. But what drove development in those towns was the demographic changes of getting very very young and catering to a class of people that are not necessarily concerned with school districts because they're only living there in their years prior to having kids school age children.   Ben Shelley: [00:28:55] I mean I think it's worth noting where we're Jersey City and Hoboken as good examples are concerned is that there is spill over areas though as well. So you know when you're already we're already constantly weighing all these different factors. And I think that's a perfect example of where a lesser school district isn't going to deter you from a certain neighborhood. But I think it's worth noting for new investors or even intermediate investors that when you're looking at these areas you talk about John talked about right at the beginning of this episode the resiliency of the Tri-State area and a lot of why that makes everywhere around this very appealing. And I think that if you're identifying an area just outside a city oftentimes your bias is going to take you towards thinking well look what happened to Long Island City or is happening to Long Island City look at what's happened to Jersey City and you'll extrapolate and say that's going to happen in my area. And just to be careful about that so so to look at the school districts for example if if you're looking at a spillover area in a really good city if the school district is bad now seeing some of these other areas doing your due diligence of like kind cities areas municipalities townships you might be more inclined to take the leap.   Ben Shelley: [00:29:57] And looking at an investment like that.   John Errico: [00:29:59] I want to frame this too by saying it is the case that there are areas that are not. Not only are they not getting better but they're getting worse. I mean I think we maybe look at real estate a little bit like we being the three of us with rose colored glasses because we've been investing in the longest kind of bull market that has been in a very long time fought for real estate specifically.   John Errico: [00:30:22] But there are you know not to pick on Newark but Newark is a city many parts of Newark have been economically depressed since the 60s and are still that way. And I bet you could go back to 1965 and talk to somebody like you know what it's gonna be in five 10 years the city is coming back and we're doing is do that. And you know I don't know. I don't know what's going to happen to Newark in five or 10 years certainly some areas of Newark have gotten better but I would say some mayors have stayed the same or maybe even gotten worse so it's OK to come to conclusion that look I mean statistically Connecticut people are leaving Connecticut people are I'm moving to Connecticut anymore so you could say well I mean some areas of Connecticut like I mentioned New Haven I have a thesis about. But Connecticut broadly I don't really want invest in a place where there's a net outflow of people. There's some reason why people are leaving Connecticut. And that concerns me. So it's OK to say look this is an area that isn't getting better it might be getting worse for some a thesis about why it might get worse. So I mean how do you guys feel about that.   Ryan Goldfarb: [00:31:23] Well I think this also comes back to just having a having an investment strategy and choosing a market based on what your strategy is. If your bank. Banking on appreciation I think would be quite unwise to look at a market where all of the demographic factors and shifts are trending in the wrong direction. I don't think I don't think it's wise to assume that your property value is going to skyrocket when all of you know when you're facing all of these headwinds. Having said that if you're looking at an area if you're looking for an area where your primary goal is cash flow and you're making reasonable assumptions on what your vacancy is going to be and you're not assuming 10 percent annual rent growth which would be you know pretty absurd in an area that is an appreciating and isn't trying new blood every year it's it's a matter of being consistent with what your strategy is. If you're looking at an area that's going to appreciate over the long haul you should have a thesis that is consistent with that and you should have some data to back it up.   John Errico: [00:32:22] What do you feel about investing in college towns.   Ben Shelley: [00:32:25] It's funny junkies because I was actually sent an article about this a couple of years ago even a buddy of mine who I went to the shack program with me him and his program at NYU and we had some very procedures for a notice how I pointedly do not name the school I'm just joking I love NYU love that school in Goshen New York universe I believe in careful and wide I think is the offer but I'm not really sure Bob Gates who when you go to our football team undefeated that's all that matters because we don't have a football team.   Ben Shelley: [00:32:54] So it's interesting so I got an article sent to me a couple of years ago by this this buddy of mine and his dad and they were very interested in this concept and again the theory goes well these school towns are young they're generally thriving within the nucleus of where the the school owns buildings. Generally speaking if it's a good academic institution they're going to look to eventually expand because they're all looking to bring profits up so they need to bring in more people who can pay full tuition so they'll expand outwards. And we see a little bit of that in New Haven. And and it's been maybe slow and maybe not expended as far as some people would think. But this is the question because as I now know having been introduced to the neighborhood to John within a certain radius that is true the margins still work out for. For new and intermediate investors but it hasn't come all the way I think within a margin.   Ben Shelley: [00:33:42] And when I say margin I mean the geographic margin that I think most people would have predicted giving the prestige and the academic successes that surround a school like Yale and the perception.   Ryan Goldfarb: [00:33:50] To me no matter what what your thesis is it's almost impossible to accurately predict appreciation because any appreciation that you are assuming. Okay let's say let's say your thesis is Temple University is expanding here. That's going to catalyze the area and there's going to be a lot of growth it's going to drive property values up. The other thing that can counteract that is if there are 30 other developers who have the same theory that you have and they go snatch up all developable land and they build way and act like an overall excess of supply relative to what the increase in demand will support. So just because things are happening and things are trending in the right direction in that scenario you may actually see a decrease in property values. So I think appreciation is always very difficult to predict. And I think it's foolish to make an investment solely based off of that thesis.   John Errico: [00:34:48] What do you think about. So I often have this problem. I think even recently we were talking about this and I run where you'll look at an area and you'll just run the numbers and you'll see these returns like monster returns like 10 percent cap rate ex and sometimes I look at that and it's like why don't I just buy everything in this city you know like why why am I even bothering and other places where you know I'm not getting those returns I can come up with reasons right now like as to why I wouldn't but I wonder how you guys feel about that if you've seen places   Ben Shelley: [00:35:17] like that. Well I mean I think diversification is the name of the game I think people talk about this term a lot but to me the first thought I have is Atlantic City is a perfect example. The returns that we see cash on cash the cap rates particularly for our model and our thesis in that area is quite substantial.   John Errico: [00:35:34] Of course hurricane cynic everybody's gonna start investing you like I just like your audience just like you can't right now. Just somebody has to go about it.   Ryan Goldfarb: [00:35:42] Also keep in mind that a lot of these models that we're running are predicated on an Airbnb model which is highly susceptible to regulatory risk.   Ben Shelley: [00:35:49] Do we have right give a disclaimer. Listen you go out you try your best see if you could do in line. We are trained professionals under closed or delay.   Ryan Goldfarb: [00:35:57] The reason I bring this up we in in 93 the reason I bring this up is because I actually texted John about this the   Ryan Goldfarb: [00:36:05] other day. There's I think there are rumors swirling that Newark is potentially clamping down on Airbnb. I don't if you saw the article that I sent you because. Again John what he's ignored me.   John Errico: [00:36:17] No I I didn't ignore you. In fact I've been thinking about it constantly. So that's it. I'm just getting emails.   Ben Shelley: [00:36:24] We are always thinking about them.   Ryan Goldfarb: [00:36:25] I'm not bitter not ignored means I just like you know doing it. I just I just actively didn't respond.   Ben Shelley: [00:36:31] Let me just let me just say because that was that sort of a parlays to the point that I wanted to make I hate to keep bringing up Atlantic City but the reason I do that is look what happened in 2012. Hurricane Sandy hits the entire area was ravaged and destroyed it could happen where Atlantic City or Atlantic County completely clamps down on Airbnb BS and throws the thesis out the window. So the idea is diversification you want to be invested in a number of different areas with a number of different hopefully successful theses so that if in any scenario the worst case risk factor occurs you're hedging and you're able to continue to sustain positive net cash flow throughout   John Errico: [00:37:06] your entire portfolio. Yeah I mean.   Ryan Goldfarb: [00:37:07] I mean what what other arbitration are you guys why is this I think a lot of that's I think a lot of that is predicated on underwriting to an Airbnb Airbnb context which I would argue is not necessarily as much of a real estate play as it is a quote unquote business play because the end of the day your income is going to be driven by the fact that you are effectively running a hospitality business despite what Airbnb will be lobbyists What.   Ben Shelley: [00:37:35] What do you mean by that. Because to me I understand the distinction you're making between an as a true real estate versus just generally business hospitality play but like when I look at different areas underwriting New Haven is different in underwriting Hudson County is different underwriting Bergen County and so still diversification is diversification because it's a cash flow play doesn't get an appreciation.   John Errico: [00:37:54] It's really like you. It's not. I see what you look like you could use it right or just depending on how good or bad you are at doing it. I mean to some extent strip management in general. Yeah. Much more so in Airbnb sorry.   Ryan Goldfarb: [00:38:06] Well I think what I'm but I was also getting it as I think the baseline underwriting assumption in any real estate deal should be more of a conventional strategy whether it's I would say more of a conventional strategy know if it's a 2-family house underwrite it as to stabilized apartments renting out on twelve month leases and then if you think that there's opportunity to employ a strategy like Airbnb be with one or both of those maybe that's your upside case. But I think it's a super risky investing thesis to have all of your eggs in that one basket. And I think that kind of gets back to our overall investing strategy being a little bit more diversified and not having all of our eggs in that one.   Ben Shelley: [00:38:48] It's a good point and I want to be clear that most of what we look at is not for that business model and the idea being that if it works conventionally it's probably going to work with other means.   John Errico: [00:38:56] I mean it's an interesting broader topic for me we've been talking about this a lot in the context of our private equity fund which is how to quantify risk. And I I like the idea of baking in risk in an analytical model in a numerical model in some way. But I think that's really difficult to do. Like I so we're talking about say regulatory risk with European bee or maybe we're talking about a risk involved with some industry being the only driver for people to live in a certain city. How do you quantify that. How do you say Well I think there's like a 20 percent chance of this happening or 10 percent or higher. I mean it's hard for me to do that. And so it can be hard to build a portfolio so you have you know you're trying to buy 10 homes and you want to have a risk adjusted diversified kind of portfolio. I think it's really difficult to come up with the right allocation.   Ryan Goldfarb: [00:39:47] Well I think the mitigant to that is on the portfolio level and it's on the strategy side. I don't know that even the smartest quantitative minds I think would struggle to come up with a model that accurately depicts the risk associated with that but I think the beauty of working in the space where we work where our assets are smaller and you know we're talking about maybe a portfolio of 100 different properties in 15, 10 different markets versus another fund that is working on a portfolio with a similar asset size. But that is tied to one physical property with you know one hundred and fifty units. I think the benefit to being in our shoes is that we can we can diversify risk across that portfolio and say OK to mitigate the risk like the regulatory risk of the Airbnb model we're going to only allocate 15 percent of our portfolio to properties whose cash flow is tied to that strategy. We're also going to mitigate risk. We're going to mitigate the risk of let's say Amazon HQ to influence on our on our portfolio and on our returns by only limiting exposure to 10 percent of our portfolio in Long Island Cityetc.   John Errico: [00:41:03] Yeah I'm glad that we got here. I think because even if you don't have the answers to these questions I think it's it's fair to consider them. You know I think there are a lot of investors that start out and you know the one might have like don't worry but all these things because then you'll never do anything on the other hand. I'm like Well don't you know don't invest in a place just because your buddy says it's a cool place to invest right. Like we think because it's just that our level of experience and what we do professionally with being the three of us here are more analytical about it than I think a beginning investor should be or could be. But even even knowing you even having this thought process I think it is novel for a lot of investors just getting started because they're not thinking about risk and investing theses and things like that in   Ryan Goldfarb: [00:41:53] an area. I think under Understanding risk is a difficult topic but I think there is or maybe quantifying risk is next to impossible but Understanding risk is a little bit different. And I think that is a goal that every investor should strive towards when like prior to making a significant investment decision. And what I mean by that is you may say you may be looking at something in New Haven and you may be looking at something next to another town that is heavily driven by like a smaller university. You may say oh like college towns are great as an overlying thesis but I think to understand the risk of hitching your wagon to an institution like Yale versus the University of Phoenix which is you know a quasi education a quasi educational institution.   John Errico: [00:42:45] No I totally agree.   John Errico: [00:42:46] I think the reason why I brought up investing in college towns and not to go everywhere but what I wanted to say about it was that there's a big difference in investing in a established university than a community college even if they're both might be in a college town not there's anything wrong with the community college at all but in terms of your long term idea is this place going to be around. I mean I've a pretty good idea that you know the second oldest university in the country that has the scholars now is gonna be around.   John Errico: [00:43:15] I don't know that about a school that was maybe started three years ago that has no money that is just trying to make a quick buck or something like I don't I mean it's.   Ryan Goldfarb: [00:43:23] I think it's also worth worth at least throwing out there the fact that maybe education down the road won't look like what it looks like today. So I think an institution like Yale it's prestigious enough that they will probably find a way to stay relevant and to live on. But you know if in 20 30 years down the road education may not take the same form that it does today we may I think we kind of take for granted the assumption that four year colleges are kind of the norm these days. But that wasn't always the case and it may not always be the case in the future. And it's interesting to contemplate a world in which that is not the case especially if you are especially your hitching your wagon to investing in quote unquote college town.   John Errico: [00:44:07] It's a really exciting point and I want to actually touch on one thing very related which is that there's so many things like this that are going on that that are limited perspective having invest in real estate only for a few years. Can't really observe it but one thing that always blows my mind is the influence of ride sharing Uber and Lyft that they have had on suburban America I think is is tremendous. I mean it's changed a lot. What it means to live in a suburb and still be able to go out and say drink or do whatever else that you maybe couldn't do if you had to drive and imagine what say we you know someday soon maybe we'll have autonomous vehicles what might that change for people living in a suburb or people that have to commute you know what if we have the Elon Musk you know Hyperloop dream or we can get from San Francisco to New York in an hour or something like what what how might that change.   Ben Shelley: [00:45:02] I am just so inspired right.   Ryan Goldfarb: [00:45:03] It's funny that it's funny that you brought these up because I had if we could live on Mars.   Ryan Goldfarb: [00:45:07] I got I had those same two thoughts running through my head as winter as this conversation was evolving and I don't know the extent to which either of you are familiar with like Black Swan Theory Black Swan investing.   John Errico: [00:45:19] But it's a great film. I've actually surprise surprise.   Ryan Goldfarb: [00:45:27] But the I think as human beings we are we are uniquely poor at quantifying the risk of outlier events. And there are a lot of things that in our minds are probably perceived as impossible that are really just improbable which means there are enough of these improbabilities that eventually something is going to stick and that's going to be something transformative and it's going to be something that turns on its head. All of these things that we take for granted like something like a Yale falling off the face of the earth or something like you know Washington DC ceasing to be the political capital of the United States or New York ceasing to be the most relevant city in the state here in the country.   Ben Shelley: [00:46:13] And this is kind of a diversion from where we're going because these two are inspiring me with the words of wisdom about the future. But I do want to also address to newer investors kind of like myself as well and go back to a point about not necessarily being overly cautious but but understanding sort of where you're at in terms of your equity means and in terms of the amount of research and experience you have in certain areas. Even looking beyond what the future holds because one of the things I come back to because I think about all of these potential changes that are going to occur in society and cities and suburbs etc which will affect markets and I would just encourage I think investors when you're identifying the geographic location are going to to just be real with yourself within your means and not to necessarily extrapolate beyond what the numbers and area and people who are on the ground are telling you because you may believe in a lot of these things that are coming to these areas but it's very easy to fall into the confirmation bias cycle of saying of believing a certain ARV for a flip or believing a 2-family is going to generate you know X Y Z market when really it's rent control or rent stabilized and I realize this seems like a huge diversion from from where we work. But I do want to get back to sort of this idea that when you're looking at some of these areas to be that maybe that first project isn't always saying well this this and this is going to happen so I'm going to be super aggressive and invest in you know a 5000 square foot commercial space station in for example the multi-family market might be the best idea for you as you're analyzing the geographic area that you want to invest in for the first time.   John Errico: [00:47:45] Yeah it's all for me it's a it's a risk reward sort of calculation right. I mean it goes back to one of the first things that we were talking about for me which is just to define your goals you know if your goal is to learn more than that dictates where you are going to invest if your goal is to make as much money as you can then that's a very different goal. If your goal is to make as much money as you can in a year versus in 10 years in a hundred years that's a very different goal to make your goal is just to house hack and not have to pay rent to try and get a little ancillary income on the side.   John Errico: [00:48:17] That's a different thesis that I mean and honestly if your thesis is law if you're investing horizon is long you can make some pretty fantastic investments I mean there are families in New York that have generational investing theses. So I mean they literally bought property in World War 2 that only now are they really cashing in on. And good for them. You know I mean that's you know probably in 1950 buying a very large piece of land in Times Square might have been very speculative and it probably looked like a horrible investment until you imagine you know the Giuliani administration let's be honest no it looked like a bad investment or pretty recently and and now it's it's really pay dividends.   John Errico: [00:49:04] I don't know what the return on investment might be but it's substantial it's probably not.   John Errico: [00:49:08] So you know but if your thesis is I want to do a flip and sell it in three months then you know don't invest in Manhattan but I mean there are different categories of things that you should buy.   Ben Shelley: [00:49:20] I think the word that I was looking for the phrase I was looking forward to to sort of tie in all these different points is as been as a as a newer investor or even an intermediate investor a cautiously aggressive both in actually allocating your capital in your equity and also how you analyze these deals don't be aggressively cautious though don't be aggressive. Alan let me try to figure out that pretzel in my head. Don't be aggressively coy. I like that. Yes I agree. Yeah I learned some new from these guys every day.   Ryan Goldfarb: [00:49:47] Yeah I guess the way that I would frame this in my mind is before you look at a specific deal and before you decide they're going to make an investment first understand what you are investing in you're investing in market you're investing in maybe that school system you're investing in that economy and it's not just is this property going to on paper show that it's going to be profitable there. There are a variety of inputs and there are a variety of factors that are going to contribute to whether those rents are going to stay the same over the next 20 years whether they're going to maybe increase or decrease whether your vacancy is going to increase or decrease or stay stable and and whether the appreciation on the property is going to be what you hope it will be whether it's going to be stable or whether it's whether you're going to be stuck down the line with a property that there just aren't as many buyers for it as what you were expecting.   Ben Shelley: [00:50:44] Yeah I think to that point and that's what we talked about the fact that the three of us look at things perhaps more analytically than your your most common investor which makes sense because this is what we do for a living. But I think kind of moving into the next episode. That's where I get excited about talking with our listeners and everyday investors about both from a basic intermediate and expert level. What are the best ways to analyze the numbers that you're seeing in front of you. Because like we said there are a million outside factors that affect whether or not an investment is good both forward looking backward looking and in the present. So just sort of understanding. You know we say cash on cash when we say cap rate not just what those means but how to get those numbers and whether and how that will inform your decisions. After you've decided on which geographic location you want to invest in.   John Errico: [00:51:33] Yeah. And one thing I mean as I've said in many many podcast episodes are that we have very many but something that I've said several times as I still think it's very important just to do it and get started. So what I hope people would take away from this is not that I need to be sucked into this analysis vortex of numbers and thoughts and risk and everything else but that these are important things to consider. I don't have the answers we don't have the answers to many the questions that we posed. But it's important to answer to them. However the end of the day if you want to get started just get started and do it. So that's how I got started with not any of this analysis or thought process that I've backed into it and it's been fortunate for me but I wouldn't have had been in that position been in this position if it didn't just start.   Ryan Goldfarb: [00:52:16] I would also just think about the risk that you are taking. I think a lot of the reason why this kind of analysis paralysis or the these kind of these kinds of mental models are there for quote unquote market analysis those are in large part driven by developers who are looking at building 600 units in an area and where at the margins the difference between. Two percent population growth and two and a half percent population growth are going to be the difference between whether they have enough people to live in their building or not. If you're talking about a two or three unit building in a town that's been around for hundreds of years and where there are dozens and dozens of large employers chances are the landscape is not going to change that much. So if you've got a decent deal which will discuss how to find in the next episode you can pretty safely pull the trigger knowing that the variables that are outside of your control are likely not going to move the needle too much.   Ben Shelley: [00:53:16] Guys. Thank you for your time and your expertise as always I appreciate it. For the folks listening at home make sure you subscribe to us wherever you get your podcast reach out to us on the brick by brick. That's brick X brick Facebook and make sure to listen to us on iTunes and Spotify. Thanks for listening.  

Ben, John, and Ryan peel back the curtain on the ugly side of entrepreneurship. What is it really like to be your own boss?    (Transcript below.)   Ep 10 - The Joys (and Pitfalls) of Real Estate Entrepreneurship   Ben Shelley: [00:00:06] Welcome back to the Brick x Brick Podcast. I'm Ben and I'm here with John and Ryan today and we're going to talk about being an entrepreneur. Probably a little bit more broad than some of the topics we've gone into in recent weeks. But I think that this is something that can be both really interesting for listeners and also frankly a lot of fun because we are all entrepreneurs. And not just talking about I think what it takes to be an entrepreneur because there's a lot obviously that goes into it but also sort of identifying maybe what what is it about you and what kind of personality types tend to thrive I think in in this sort of free for all culture that both has a ton of chaos but also I guess maybe the phrase is controlled chaos so I think that's kind of the life of an entrepreneur. I guess we could start maybe by talking about our own individual experiences as entrepreneurs.   John Errico: [00:00:51] Yeah I mean I have a lot a lot to say. So much good and bad so much wisdom. It's strange I don't even know if I really consider myself to be an entrepreneur per se although I think if from a distance one would look at my career and life and say that I would fit that category. I think that being an entrepreneur can mean a lot of different things. But the substantiation that it is in my life I think in our life our lives means that we are running either our own we're working for herself and or running our own businesses. And that carries with it a lot of prerequisites and a lot of personality types and traits and tolerances that I don't think are necessarily for everyone. So maybe we can jump in the air that way. I think that my personality type is maybe not even that well situated to be an entrepreneur to be totally frank.   Ben Shelley: [00:01:50] But it's funny.   Ben Shelley: [00:01:51] I was given to say knowing you I actually feel totally different and I want to hear why you speak at first. Glad you guys think that really we're here we're just here to build John our love of yourself. I'm curious why why do you think you're not well suited for it.   John Errico: [00:02:04] So I think in my experience one thing that I think you have to totally throw to the wind is your interest in doing something that is prestigious. I think being an entrepreneur has no, there is a prestige in this sort of way that you look at a startup guy and you're like oh man he's you know building the next Facebook or whatever it is and it's so cool that he's working for himself blah blah blah. But the flip side is that to do that whether it be in real estate that we operate in or in technology or whatever you have to do a lot of really crappy things and get paid no money to do it.   John Errico: [00:02:40] And if you're the sort of person that's drawn to procedures think I mean let's be I went to Yale you know let's be I know let's be honest right now I mean I was believable actually right. It's three Ivy League Degrees. Really I have two degrees from Cornell Law School I'm basking in your great I know just one arena but you know but but you've got two degrees from law school. I had two degrees from Moscow right. Doesn't everyone know I JDL. Fact Check. Yeah. And l l m l l am. Can you tell me what the differences between these two. Yes one is a doctor and one's a master's. So if you're a doctor or I'm a doctor of law I like your attend a doctor.   Ben Shelley: [00:03:15] My mom would be a shame to me that I called a doctorate the equivalent of a doctor.   John Errico: [00:03:18] I mean I bring it up only because I'm so awesome but also because.   John Errico: [00:03:23] Also because I'm obviously if you looked at that you'd say this guy really likes procedures. I mean I went to Yale because it's a prestigious school right. I mean I went to Cornell because it's a prestigious school. I mean also it's a good education but it's very helpful. So my career path before I went off to do entrepreneur or ship things was very much seeking prestige and I like that I like people looking at my resume and me personally being like wow that guys is a great you know background a great education. If you value that, don't be an entrepreneur because you're not going to receive a lot of that doesn't. Nobody cares about that in the construction world nobody's buying a house for me because I went to Yale.   Ryan Goldfarb: [00:03:59] I mean maybe I think maybe I might not buy a house because you went to Yale.   Ben Shelley: [00:04:04] Well you know it's funny.   Ben Shelley: [00:04:06] I don't want to get sidetracked before we've even got other stories in here but it reminds you something I told John recently where I was having a conversation with an old academic mentor of mine and I told them about the fact that I'm working with John and Ryan now and she comes from a very structured environment and I think it's we're gonna note on this a lot but you talk about the difference in let's say personality types of some people who enjoy prestige and structure they get up in the morning they know exactly what they're going to do they got a paycheck every two weeks and eccentric natural life is good and easy easy is the wrong word.   Ben Shelley: [00:04:37] But but good and and instructor and consistent that's the word I was having a conversation with her. And we're talking about what we were doing together and in the real estate business and oh yeah that's great that's great and then at the end she goes what schools do they go to. I said oh University of Maryland and Yale. And then she goes Oh good good.   Ben Shelley: [00:04:55] And it's really in Maryland. That's what she said after I think to think about that you talk about the different even.   Ben Shelley: [00:05:03] Not this is not disparaging by the way this person is wonderful and and successful in her own right. But it just tells you maybe a little bit of the personality differences between people who sometimes seek structure and the quote unquote traditional maybe entrepreneur archetype and that manifests in different ways.   Ryan Goldfarb: [00:05:17] Well it's funny it's funny that you touched on the topic of prestige because I think we're in a day and age now where particularly with the Silicon Valley tech stuff there is a lot of prestige associated with being a quote unquote entrepreneur.   Ryan Goldfarb: [00:05:29] And I think that's something that's feedback I get often where people think it's so cool that I do my own thing. But what they don't see is all the ugly stuff that you alluded to earlier and they don't see the the days are like the stuff that you've been dealing with on our way in here where a pipe froze and you guys have to troubleshoot it to figure out how there's going to be heat how the water is going to get out of there. I see John's more SEO check I just see his spirit just like dying right now as these things.   Ryan Goldfarb: [00:05:57] This is supposed to be the brick by brick Comedy Hour and we're where we escape real life. But but there really is a lot of crap that goes along with it. And that is both figurative and literal crap like we almost stepped in a bunch earlier the last place we were looking at and we looked at and we said that's a metaphor. We love the play. We also said you know that.   Ryan Goldfarb: [00:06:16] But there's prestige associated with the idea of being an entrepreneur entrepreneur. But the actual practice of it I think is far less desirable and as John alluded to far less far less suitable for most personality types. I agree with a lot of things you said there.   Ryan Goldfarb: [00:06:34] There's a constant there's a constant like internal dialogue of hey this is this is beneath me I don't want to be doing this while also knowing that if you don't do something it's not going to get done and there are business things to consider too like is this the best use of my time. But this game is certainly not for the faint of heart especially in the you know residential real estate construction space where things can get dirty yeah.   John Errico: [00:07:00] There is a to use an Ivy League word a fetishization if you're not careful.   Ben Shelley: [00:07:05] People are going to come away from this episode with the wrong perception of you know it's the very thing right.   Ben Shelley: [00:07:10] There were no judgments.   John Errico: [00:07:12] Yeah I I I mean before one one delves into this I think it's probably valuable to know the struggle and so maybe we can talk about that because for both Ryan and I to get to where we are right now there's been a lot of I was having a conversation with somebody recently about our private equity fund which if you don't know about it please please feel free to review other episodes in Episode 6 reach out to us on Facebook.   Ben Shelley: [00:07:41] It's a great idea so listen to us and I didn't write it at that. Tweet us at Liberty Hudson. Absolutely please.   John Errico: [00:07:49] But I was having conversation with them and they they wanted to help us do something fun raise money. Something like that and they were sort of saying like oh well if if I help you a lot you know can I have a big share of the fun. Like can I can I get you know carry. Can I get equity in this country that could do that. And my response I very rarely get offended or are upset but my response was like Dude I've spent thousands of hours of my life doing the worst stuff ever. This is the culmination of that effort and you coming out of nowhere to ask me to give you something that I've built and right also. But right at the same story to you for me to give that to you for free because you might help me.   John Errico: [00:08:36] It's insane. It's crazy to me and it's it's actually offensive to me it's actually offensive that you'd even ask because you don't know what I had to do to get there right.   Ryan Goldfarb: [00:08:45] That's how I felt. And beyond that people don't understand the costs associated with this. I think that's this is part of the glamour of the perception or this is part of the misunderstanding. Broadly speaking about real estate people think oh I mean this is a claim that both of us could make. We could say oh we we sold five million dollars worth of property last year. So people people take that to mean we pocketed five million dollars. That's certainly not the case. I mean between debt and partners and all that. The margins are quite quite thinner than they would appear. And there are as John alluded to earlier so many inputs that just get glossed over and there's so much crap that you deal with that oftentimes they're like there are deals that we've looked at in the past or deals that I think we've discussed between the two of us that you know where we're projecting maybe a a 30 thousand other profit at the end of the day when all is said when all is said and done and to an outside observer it may seem like a no brainer. But when you think about the fact that there is going to be a lot of time there's gonna be a lot of headache. There are going to be cost overruns if that 30000 turns into a ten thousand dollar profit then both on a per hour basis and in terms of opportunity cost that is just an objectively bad deal.   John Errico: [00:10:04] Absolutely. And I think underlying it too is the stress. I think even even among us we don't really talk about it too. But it's very stressful to do this stuff I mean there there are times. I mean I I love it. So it's not an existential stress. It's not like what am I doing with my life. But it's an operational stress. It's like putting out fires and emergencies and you can take a take a step back and say look I'm doing what I love and everything's gonna be okay. But in the moment you're stressed I mean you're you're great. I'm like grinding my teeth. I'm like staying awake. My mind is racing you know that I experience that a lot. And for some these projects where I might make five grand off of it 10 grand off of it for months of work and stress and sleepless nights I mean you could work at any other job and make that money without that stress.   Ben Shelley: [00:10:51] So I think there's a there's a grid and I apologize if I misquote this here but as a great Steve Jobs quote where he says when you look very closely you know all of these overnight successes actually took a lot of work right. You only see the finished product. And to John's point I mean anyone who has lived their life in any entrepreneurial fashion or has taken that leap knows kind of that reaction you had to talking to that potential private equity investor.   Ben Shelley: [00:11:17] But I think it's it's it's interesting because because you also you don't always appreciate the fact that until you scale up which for 99 percent of businesses takes a lot of work and a lot of time you're also going back to this phrase that Ryan always uses this idea on whether or not you're working on your business excuse me working on your business versus working in your business and the amount of opportunity cost it takes when you're an entrepreneur especially when you're getting started in doing all of these nitty gritty things they just need to get done that people say oh like if you're doing real estate I get best you have you have this person new business they just they don't even think about they don't understand the idea of like even if something is as seems as simple as like you know coordinating permits with as a general contractor or with general contractors or just even like scheduling an inspection.   Ben Shelley: [00:12:05] I mean this it takes work it takes time.   John Errico: [00:12:08] Or the like buying a piece of real estate and buying complex that. My gosh it's very complex very complex.   Ryan Goldfarb: [00:12:13] It's also interesting to contrast this with my previous life working in essentially corporate America and having a very I guess I would say normal stable secure job. I admittedly was not a very good employee and I certainly didn't work my tail off there but I know I did enough and I think I did some good work. But the emotional toll of that or the emotional weight that that carried was so vastly minuscule compared to what we face today and it's not just because of the nature of the work but it's it's because of the nature of being essentially on call 24 24/7 and the fact that you know the beauty of this is that we are ultimately in control of our own destiny which is great. And this is not to say that I wouldn't want it any other way but what that carries with it is this constant burden of could I be doing more. And for me that manifests in I think a similar way to John where it'll be seven o'clock and I've just eaten dinner and I want to mail it in and I know that for my own sanity and for my own health the best thing would be to turn on the TV or talk to him and talk to my girlfriend or talk to a friend and take my mind off of work. But I also know that I have this lingering lingering anxiety about all of the things that I that I need to do and need to get done and this is time when I could be accomplishing that. And that also kind of feeds feeds unto itself because if I you know if I do start doing work at that time I might not stop doing work until 10 or 11 or midnight or one and then falling asleep becomes that much harder. And then you're sitting there at 1:00 in the morning saying crap what did I do with my night. I have to be up at 7:00 to start this whole cycle all over again.   Ben Shelley: [00:14:03] Yeah I mean I think again when you talk about your guy's individual experience it also reminds me or makes me want to say also to the listeners out there that there are also a lot of different classes and a lot different ways to be more so both of your experiences while they were very different and getting to to the end game had certain parallel lines.   Ben Shelley: [00:14:20] I think it's the same.   Ben Shelley: [00:14:21] I'm much earlier in my career than than the two of these guys but I work in property management right off the bat and that was more of a structured environment and I found that even within that scope I enjoyed sort of taking the initiative and going out and trying to be on my own which is why I transition to becoming a broker and and that's I think again it's important to recognize the fact that there's all these different classes in the real estate world.   Ben Shelley: [00:14:40] If you want to be an entrepreneur right you can be a broker you can be an investor you can be just a contractor you'll be just a property manager you can be just a lender you could be just a consultant. Yes I did write these down I don't I'm not just saying these off the top of my head.   John Errico: [00:14:51] Wow he's really smart did he go to Yale to bring about an inspector.   Ben Shelley: [00:14:55] Inspector Yeah I mean what worries an appraiser a couple other things that they estimated are two men and missions here in engineering so I mean engineering consulting environments just there's just a million things that you can do and so I think that taking that leap is very difficult but it's also important to remember there's a lot of different paths.   Ryan Goldfarb: [00:15:12] And within a lot of those paths you know there are a lot of people who have a proclivity towards entrepreneurship or towards independence but maybe don't feel comfortable because of where they are in their life or where they are in their career or they don't feel comfortable taking a full on leap of faith and and becoming a true entrepreneur and you know only having that or not having anything else to fall back on. There are other opportunities that you can cultivate that allow you to achieve a similar level of independence whether it's being a consultant or being a finding yourself in a position with a particular company where you do have a fair amount of autonomy and maybe you're in charge of a group or maybe they allow you to work from home or they compensate you for business that you bring in. It doesn't have to be a black or white equation. It's not it's not you're either an entrepreneur or you're not there are plenty of things that fall in between in that are I think important to highlight for the people who may not be cut out for or interested in the extreme.   John Errico: [00:16:10] I almost disagree I don't know. I I've thought about this a fair amount and I think that I think there's something to be said of really going all in as an entrepreneur to to see that there's nothing like having no backstop as a motivator.   [00:16:24] I I agree with that. What what I'm saying is I think there are people who think most people if you ask them would say Oh yeah it would be great not to have a boss or I'm bringing in all this business for my company but I get paid the same as Joe Schmo over there who brings in nothing. And you know it doesn't work nearly as hard as I do. So what I'm saying is like there's a spectrum and there's there are other roles that you can cultivate to satisfy certain urges or a certain itch that you may have without being like I'm speaking more so to the type of person who truly does not want to be an entrepreneur but who may think they do because of one reasoni.e. I don't have a boss or I want to have some more incentive to you know perform better at my job. I   John Errico: [00:17:13] don't know. I mean it's an open question for me like our people sort of intrinsically entrepreneurs or do people become entrepreneurs or can people learn to be more of a entrepreneur or something I don't know.   Ben Shelley: [00:17:24] I don't know. Nature versus nurture.   Ryan Goldfarb: [00:17:27] I think a lot of this is this this could go in so many different reactions now but I think there is a whole conversation to be had about the systems primarily academic that are in place today and the fact that I think in a lot of ways they they reward the type of behavior that leads you to be a good corporate employee as opposed to being a kind of rebellious entrepreneur. Well   Ben Shelley: [00:17:51] I think I think another important thing which all ties into this which I've always tried to ask myself before I took any leap in direction whether that be as an entrepreneur in my professional career or in academics because I also transferred specifically to study real estate and I kind of was all in at 20 years old and I think it's it's understanding yourself. I mean what are   Ben Shelley: [00:18:10] your strengths and weaknesses. The favorite my favorite note I've ever written for the show is underneath understand yourself strengths and weaknesses as Ryan and Eric exclamation point which is Ryan and his brother and I think like you guys are both the perfect example of doing not only what you really enjoy but playing to your strengths and then you know when I see this partnership and we talked about this I think a little bit in the networking episode this idea of identifying people who fill your gaps and understanding within yourself. What am I good   Ben Shelley: [00:18:34] at. And one of my bad. And how can I help my move my business forward. And this also good comes into this idea of looking at it from a tactical standpoint understand what your short and long term goals are. I think it's really important to you to ask yourself your question. I do agree that there's a lot of sort of these a lot of these intrinsic characteristics and be an entrepreneur but nevertheless I think oftentimes those same characteristics can lead to things like carelessness over aggression you know in terms of jumping into a business and so checking yourself and understanding what do I want to achieve today in a month from now in six months from now a year from now Ryan actually pings me with this email once in a while two years from now where do you want to be. And that's an important question to ask yourself when you're thinking about taking the leap as an entrepreneur.   John Errico: [00:19:14] But it's a great point.   John Errico: [00:19:15] I think you're prefigured in this idea of self-awareness and self identity and that's something that I find is can be very challenging. I have thought of myself as a very self-aware person but recently I have been reconsidering that and thinking that I could be a lot more self-aware. Self-aware about my own skills and capabilities and also my own goals and sort of what I'm achieving at what I'm doing. I mean I had a I have coffee with people a lot in the real estate space because they want to talk about real estate and I run a meetup. In fact we had one last night that Ben was I was a big success and if you then if you're in the northern New Jersey area feel free to check it out at meetup it's Hudson County real estate investors. But notwithstanding that I talked to people a lot and I tell them my story and tell them what I'm doing right now with with Ryan and the fund and construction other stuff and a lot of times people respond and they say wow I I'm so impressed I really want to be like you I wish I could be you I wish I could do this and I don't say that to to toot my own horn bit but almost every time someone says it my response is like really? Like, I'm surprised because the way that I see my path in entrepreneurship or real estate what they're going to say is like I'm not even getting started I mean I've just begun right. So and I have so much more that I want to do. And so it's like when people say like you've done so much you've accomplished so much it's like go I guess I mean I mean it's weird when you're in your own mind and you're working in your hustling and doing stuff that I think we are doing all the time. You don't have the perspective of being like well maybe I have accomplished some things that people would would value.   Ryan Goldfarb: [00:20:54] I think we were actually talking about that the other day because there's there's plenty of stress and anxiety come that comes along with the nature of what we're doing. And one of the things we harped on is one of the things that we touched on the other day was the fact that we probably don't celebrate our wins as much as we should because there's always a fire to put out and there's always a new challenge or a new problem that we're faced with. So I think to that end I think it's it's in our nature to just look at the next task at hand and to focus on that rather than dwelling on whatever happened in the past. Both good and bad. But I think it is also important to sit back and maybe appreciate and count our blessings while we have them because there are plenty of people who would like to be in our shoes.   John Errico: [00:21:36] And yeah I think even on a personal level it's okay to say I'm good at this.   John Errico: [00:21:43] This is a this is something that I excel at that I'm better than other people and I think personally I don't do that almost at all. I don't ever sit back and I try to focus a lot on things that I'm not good at. But I very rarely sit down and say I'm actually good at this type of thing and in fact what I was doing real estate alone which was you know all of my real estate quote unquote career except for the past eight months or whatever you know six eight months when right and I started working together and Ben a little bit later I see something that you guys told me was it was really a revelation to me which was when we would SEO something that we do as we own a or primarily or exclusively Ryan runs a tax lean portfolio in East Orange and you it's kind of become our group project as well. But you know we we have to break into houses that Ryan's has foreclosed on or through his company has foreclosed on and something that I enjoy doing is physically breaking into houses.   John Errico: [00:22:43] And I didn't think anything of it because I had done that also for other contexts but I think you guys mentioned it to me or something like like you're very resourceful or like you're doing well you're uniquely good at it right and.   Ryan Goldfarb: [00:22:54] It must have been the resourcefulness class you took at Yale.   Ben Shelley: [00:22:57] And like this is the guy I'm investing with I'm going to break into my house.   John Errico: [00:23:03] You said something to me about it and it just never occurred to me. It's something that's something that I that was unique or different about me just never. And and so when you said I was like OK like that I appreciated that right. I mean that that was great.   Ryan Goldfarb: [00:23:17] We'll be sure to shower you with combat in the next few weeks. I don't say this is let me down not seeking out of it.   John Errico: [00:23:25] I'm just saying that sometimes to get self-awareness if they ask other people.   Ryan Goldfarb: [00:23:29] Yeah I think it was ironically because we actually have a SO similar to how I've been pinging Ben about his goals. I had actually ping John somewhat recently about feedback and just to kind of and didn't respond at all.   John Errico: [00:23:43] Right. Right. So. So both of these guys I have sent separate emails to about things like this you know guys and I've gotten zero. I think about that e-mail almost every day. I seriously do. I was like I should respond to that. We're giving it you that we bring it up on this podcast even though we haven't responded yet. I do think about that this morning I woke I was like I should just like to write about that because I think it's so.   Ryan Goldfarb: [00:24:08] So for context the email was essentially a instructions or a request that like John and I sit down and just kind of be honest with each other about kind of evaluating the other person. So the idea was for John to get a better sense of his strengths and weaknesses obviously like somewhat carefully worded but also honest enough for it to be effective. And likewise for him to do that to me because our intention is as we scale this thing up we want to be both focusing on our strengths working on our weaknesses but also figuring out how to allocate the resources that we do have. So if it becomes abundantly clear that John is very good at one thing that I may potentially not be as good at then that's obviously a task that is better suited to John than to me.   Ryan Goldfarb: [00:24:59] And if there's something that neither of us are good at then it's something we when I do it is something we need to seek outside help for or put on but if I don't like this I just get that it's okay.   Ben Shelley: [00:25:12] There's no resentment.   John Errico: [00:25:14] Or Michael Gomez la Michael number one now I like what we have. Who's gentlemen. That's right. Exactly right.   Ben Shelley: [00:25:20] No I appreciate this and I'll tell you it like it you know. I don't want it. I don't wanna get too emotional here. But it's one of the things you do is when when guys like John and Ryan bring you into the fold you don't want to let them down. I think also one of the things I love about being an entrepreneur generally is you are uniquely reliant on the people around you. Those people who you do work with I think because you are on one hand completely alone in the sense that you are your own security blanket. But on the other hand you are also seeking out either partnerships whether by partnership. I don't just mean like like a John Ryan partnership I also mean partnerships like professional relationships and networking relationships that can help guide your individual effort forward. I mean everything I think is worth looking in a holistic context. And it comes back again to these questions that Ryan e-mails us to is is also understanding who are the people in your life both personally and professionally by the way personally.   Ben Shelley: [00:26:09] Being something we don't talk about as much that will help drive you not only you forward professionally from a worker standpoint but also your business overall as you begin to scale up your business and think about more of your long term goals and I think maybe it's important to recognize that it is important too to address and focus on your short term goals sometimes before you can dream big.   Ryan Goldfarb: [00:26:29] Because we all dream of that and that's actually interesting when I'm sure John can opine on this too. But one thing that is very difficult to balance is these short term goals or short term needs with long term goals. I don't like to be brutally honest with you. This is a space real estate in particular that is particularly capital intensive and I don't know that I can speak for John on this front. But for for me I know that there are oftentimes where I have most cash or a lot of cash tied up in one or two deals and I may be cash poor property rich at any point in time which you know is not a necessarily bad position to be in but it might be a little less dire or it might be a little less stressful if I had some more of these like short term wins or if I had another source of income that was a little more stable and you know we're we're building these things out but it is it is a very tough dynamic to balance.   John Errico: [00:27:24] Absolutely. I mean I think right now both have been on every spectrum of finances personally financial issues and I've been lucky that my my wife has a great job has had a great job making a stable income but but I think it underlines this idea of one thing that I see a lot something that I've struggled with and I see it a ton of times and other people is that people oftentimes will not even talk about their goals like what they want to do and sometimes it's I think that there are a lot of reasons for that could be because they're embarrassed about it because I think sharing your goals is a very personal thing. It could be that they're they're scared you know kind of related to embarrassment but they're scared of not succeeding in it because if they say hey I'm going to whatever I want to make a million dollars this year whatever if I don't do that well people look at me and say you didn't make a million dollars so you know that's foolish. These are just voices in my head that I'm verbalizing let me just say that maybe maybe other people don't think this way. But another reason some that you wouldn't talk about goals is because they're afraid maybe that other people are going to steal their thunder or steal their you know whatever in the startup world tech startup world is still your idea or whatever it might be. And all those things are so destructive because talking about your goals and sharing with other people is in my experience the only way for it to happen. I mean I had a goal personally to do this private equity fund that was a personal goal that I had as far back as like two or three years ago and I never did anything really tell me anything about it. When I told Ryan that I want to do it and now we're doing it together. It's actually happening and that I mean there's there's no easier thing that I can say than just share what you're doing what you want to do.   Ryan Goldfarb: [00:29:02] Oftentimes the fear is so unfounded because nobody when you have an idea you think it's the greatest idea in the world and so naturally you think that everyone is going to want to take your idea and run with it but oftentimes that is just unfounded. There's so much operational complexity or logistic complexity to achieving that goal that if somebody hears that idea even if they think it's the greatest idea in the world the chances of them actually acting upon it anyway are virtually zero.   John Errico: [00:29:30] It's a cliché but ideas are valueless and so they're only a prerequisite right.   Ryan Goldfarb: [00:29:35] So oftentimes what you are doing is foreclosing on the opportunity to have a discussion that may ultimately be beneficial to you. And separately it's also valuable at least in my experience to talk about these things because I find that when I talk about something I feel like I have a duty to hold up my end of the bargain and I don't want to be known as somebody who just talks talks talks and doesn't act. So if I say something and I start talking to something if I start talking to people about something then I am that much more empowered and motivated to go and attack as we're doing.   Ben Shelley: [00:30:06] Yeah I mean. And I think I've heard you both say this John.   Ben Shelley: [00:30:08] I think I heard this you also say this specifically to some of the people that we've worked with which is don't be afraid of your own ambition right I understand that that as we've alluded to there is a personal aspect of this where you can be embarrassed about this but by sharing some of those goals and some both long term and short term you can get partnerships like this forming.   Ryan Goldfarb: [00:30:27] The first step for anyone is just to start doing something and it's super overwhelming when you don't know where to start but oftentimes just studying your situation studying your goals and figuring out some kind of very broad path can bring you to the first action point which will then lead to the next. The next point the next domino and everything will kind of unfold from there.   John Errico: [00:30:52] I think it's such a great point. It's such a great point. I don't know how to just do it which is a great slogan as well but it's so many times I think questions will present themselves to me it's like will this work or you know how do I do this or how do I know this.   John Errico: [00:31:10] And the answer is always just do it and then you'll figure out if it's gonna work or not and you'll figure out what you need to do. You just need to do it. Don't don't think about it. I mean you can think about it to plan it but at some point just execute and then you figure it out.   Ryan Goldfarb: [00:31:23] But understand like understand your downside or under it like be realistic about what your situation is. Don't use everything you have working against you as an excuse but understand that if you have four kids and are living paycheck to paycheck and have very few financial means understand that or understand what your downside looks like and figure out a path that takes you there with a little less risk or with a little less risk upfront maybe that means keeping your job and working on your goal in your off hours but but be aware of well.   Ben Shelley: [00:31:58] I think it's it's funny because so much of what we've talked about it talks about how some of the rewards of being an entrepreneur but how the nitty gritty can be so I don't wanna use the word depressing but it can be so tough that the pay off sometimes isn't always.   Ben Shelley: [00:32:14] Maybe you feel like it is worth the work that you put in all the time. And I know that for me personally again I thought I wanted to be an entrepreneur when I moved into the brokerage sphere. But when I knew that I really loved it as when I was actually enjoying making cold costs. I mean there were zero moments when I was making I mean literally hundreds of phone calls a week even. And I was enjoying the idea that my life my livelihood was based on the execution of the goal in front of me. And I don't know if that's we that's can be extrapolated into some kind of trait that that is that you find in other people who enjoy being entrepreneurial. But it's it's that kind of thing is is enjoying the little things maybe not accounting that's the one thing I don't enjoy doing.   Ben Shelley: [00:32:58] But but I will tell you that outside of that either do we. That's why I do it. Yeah that's shocking to hear it. I just.   Ben Shelley: [00:33:05] But just like for us analyzing deals getting looking up calms things little things like that where you think gosh that doesn't bother you argue. I think there's actually there's there's some excitement in that and there's some enjoyment in the whole process itself.   Ryan Goldfarb: [00:33:19] Well it's interesting because the example you used of cold calling is such a clear case of knowing your strengths and knowing your interests and knowing your skills because that is something that I absolutely despise and I know there are a lot of real estate investors who make a lot of money on the basis of their cold calling skills but it's just not something that I think I could do I think there's a point at which I could do it effectively but I know it's something that I would always dread. So that's just another example of knowing yourself. The other thing I would say is a lot of these tasks that seem like they'd be dreadful or that seem like they would feel like a waste of time for you to do. There are quite a bit more rewarding when you're doing them for yourself and when you're doing it for some ultimate goal.   John Errico: [00:34:10] Yeah I mean the way that I think about it is almost like a utilitarian approach which is that doing what I'm doing is is I'm very confident that the greatest use of my abilities and I can if it's not I can easily make it that I never have the experience doing this where I show up to work and I'm like You know what I'm really a great X and I just don't have a chance to express that in my job. I never basically have that feeling doing what I'm doing. And that's a great feeling because if I think of myself as like a useful implement you know like a something to be deployed in the world what better way to deploy myself than to fully be using all of my skills and time and Yale education and efforts then what I'm doing I truly believe that. So that makes me very deep down on an existential level very happy.   Ryan Goldfarb: [00:35:10] It also comes back to having an end goal and a plan because if you didn't think that the end that you were working toward was worthwhile or if Ben didn't think that he wanted to be a broker chugging through all those cold calls or plunging those toilets or making your fourth home depot run of the day would be that much more frustrating. But when you know what the end is in mind and you can just chalk this up to another step on that journey and it's a little bit more palatable right.   John Errico: [00:35:37] I think it would be I think some of the things that we have done at least that I can recall doing would be literally unbearable if you couldn't pay me enough money to do it if not for the fact that I felt that I was building something that I cared about that was important to me. So if you find yourself if you want to be an entrepreneur and you find yourself having to do things that that and you don't like it then are you know you don't have to like it in the moment but if you don't like it in the context of what you're doing. I think that's a sign that maybe what you're doing is not the right path for you.   Ben Shelley: [00:36:11] It's a great point to finish. And for everyone listening out there. Remember to reach out to us on Facebook brick by brick that's brick X brick podcast. Remember to subscribe wherever you get your podcast and listen to us on iTunes and Spotify. Thanks so much for listening.

The Liberty Hudson team continues their discussion about the construction process. The conversation covers selecting finishes, communicating about timelines, and what to do when your construction project isn't going as planned. The team also rehashes the importance of documentation throughout the process. (Hint: Document everything!)   (Transcript below.) Ep. 9 - Managing the Construction Process (2 of 2) Ben Shelley: [00:00:07] Welcome to the Brick x Brick Podcast where we take you from the ground up on all things real estate. I'm your host Ben Shelley. We are fortunate to have Ryan and John back with us today. Last episode we discussed general contractors, managing expectations, construction pricing, permits, licenses, and much, much more. Feel free to listen back. I would actually encourage it before diving in with us today for today's conversation. I want to start by talking about how you approach the construction process depending on your individual project goals. So we talked in previous episodes about flipping properties as an example where you may be looking to simply move on from your property rather quickly to gain equity so you can continue to invest in a neighborhood versus maybe buying something to rent and hold to create ancillary income on the side for you whether or not you are a primary investor in a real estate market or a part time investor. So I want to bring our experts in and have this conversation for me who is obviously just starting in the business when I'm curious to know and we'll start specifically. So let's look at for example a flip example. How would you guys approach the construction process holistically as well as your relationship with the general contractor with such a specific scope like like flipping a home in a real estate market in mind.   Ryan Goldfarb: [00:01:18] Well when it comes to a flip the first thing that I would baseline my my project goals against is what the neighborhood will bear. So if I'm in a in entry level neighborhood where you're mostly looking at starter homes and you know in our area this may be in the three four hundred thousand our price range I'm going to have a very different set of fixtures and finishes and fixtures in mind for a property like that versus in a higher end market around here when you get into the million plus price range. There's only so much that any market will bear and it doesn't make sense to over improve when it comes to the dynamic with the contractor that is going to in part depend on their level of expertise. So if you're bringing in a builder who has a lifetime of experience in the high end space and really has a good eye for design and that's part of what he's built the foundation of his business upon then it makes sense to leverage that and to hear his opinions and to take a little bit of guidance from him. However if you're working with somebody who is really just there to kind of take direction from you then it is incumbent on you to know which direction you want to go and where you want to draw the line as far as finishes and whatnot. And that's really where knowing the comps and knowing the market is going to come into play.   Ben Shelley: [00:02:33] So maybe John what what kind of finishes and what kind of things would you look for maybe. I think most people would look at a flip and say probably not going to do luxury finishes for something like that because you're looking to turn it over rather quickly and and probably bring it up to its highest possible ARV within a certain range given your your circumstance your financial circumstances. So maybe you could tell us a little bit about what you would seek for from pricing perspective and also a quality material perspective.   John Errico: [00:02:59] I think it really depends. As Ryan alluded to before with the market and where the market is. The overarching thing for me that is most important about a flip is time either time is important in any real estate project or for a flip time is really really money because you're carrying costs. If you're using hard money or you're loaning money whatever you're carrying cost with the property can be very high. So every day or week or whatever that goes by is like actual dollar amount it is like an actual amount that you can ascribe to. So whatever it is that you do I don't think that it's probably hard to say a general statement about like you should use this type of finishes this type or whatever but whatever you do I would say be very very cognizant about the time element and even if you can get a general contractor lined up before you start or have a general contractor come in with you when you're looking at the property you give a quote give an estimate even that could save you a week that we could be a thousand dollars in a flip and that's significant money.   John Errico: [00:03:52] So my takeaway for finishes or whatever it might be for Flip is focus on the time element.   Ben Shelley: [00:03:58] Because you know the way I think about it too is and Ryan mentioned this before about you know OK if you want something like a luxury finish whether it's a flip or not you want to find people who have expertise in whatever it is that you're looking for and also as to John's point to be cognizant of your own timeline what your cost basis is and what your financing situation is like said hard money you really got to get moving on that timeline. In terms of engaging again though with the GC in the context of your project goals for a rental for example I mean you guys have had experience both as general contractors yourselves and working with general contractors in both types of properties John maybe more so with rentals Ryan maybe more so with flips to maybe talking a little bit more I'd be interested to know at least a little bit more about some of your overarching experiences working with contractors given your different and varying project goals.   John Errico: [00:04:42] I mean a lot of times for rentals that depend on the property but I've tried really hard not to over improve rentals because I rent a lot of properties in lower income areas and the phrase that I always use my wife likes uses a lot to is cheap and cheerful. So the idea is that you want to make it look appealing and nice but you don't spend a lot of money on it and you want to be considered that they're going to be tenants living there and so in most neighborhoods I mean maybe the exception of very high end neighborhoods a tenant is not going to treat your apartment in the same way that you as the owner were treated. So you're looking for durable materials. You know one question is something I always ask myself in a rental as you say. Say I decide to put quartz countertops in a kitchen as opposed to granite or as opposed to you know a non stone countertop at all. The question I have is am I going to rent this apartment for more money because I put this thing in. And oftentimes the answer is No. There certainly are scenarios where you could say yeah having a quartz countertop will give me more rent or give me a different caliber of tenant but many times nobody cares and then I got to pay more money for it. That's particularly true in lower income areas like the finishes. You want to be functional nice but nobody's going to pay you more money. Have a nice refinish in it.   Ryan Goldfarb: [00:05:51] So the other question to ask yourself is is there are there going to be any other ancillary benefits to having that specific type of finish. So there are plenty of areas where you'll go and you know you may not even be common to have a kitchen backsplash but if you have a kitchen backsplash that wall is going to consist of tile as opposed to just being painted. And when you have grease splattering from a fireplace or water splashing from the sink that's going to be going up against your what your sheet rock as opposed to going up against tile.   John Errico: [00:06:25] So when it comes time is painted right on it. That is certainly true. And then there are way gentlemen.   Ryan Goldfarb: [00:06:32] I mean there are ways around it but really what it comes out it is not really not just the cost upfront but the ongoing cost both in time in terms of money and time.   Ben Shelley: [00:06:41] Well I think it's important to know too that when we talk about less expensive doesn't necessarily always mean less functional. Right. I think there's a difference between function and quality in that generally there's a wide spectrum of functional finishes you can use at lower cost ranges.   John Errico: [00:06:55] I think the word is value and it could value value add right, it's the name of the game.   Ryan Goldfarb: [00:06:59] It's no different than looking at a piece of property and saying what is the best bang for the buck on this project on this property how do I approach it. And I think you approach every renovation question the same way.   Ben Shelley: [00:07:09] So now I'm going to take this in a little bit different direction for four people again like me who maybe have already had some of these experiences just getting into the business with general contractors which is sometimes this feeling that regardless of what stage you are in your project and regardless of what kind of project you're doing it kind of feels like a general contractor almost abandoned you a time. I think obviously these guys are oftentimes working and gals are working on multiple projects at once but I guess I want to know from you guys who are general contractors. Take us behind the scenes and tell us maybe why that is why you felt that way. I mean for me I've actually been reaching out to a GC the last two days who we've done good work with and have not necessarily heard back from an always on a time schedule but I know that he's on it. So how do you fight that as an investor and know when to push and when to hold back.   Ryan Goldfarb: [00:07:52] Well the first thing is whether they're giving you a reason for their silence. If they are just not answering your questions for the sake of ducking you because they don't have answers then that's a red flag. If they are working behind the scenes and they have told you that plans are in with the city and they're ready for inspections they are just waiting to hear back on a date. That's one thing that's that's to a large extent out of their control. But if they are just ducking you entirely then then that's a big problem.   John Errico: [00:08:21] Yeah I think maybe we can. Don't if you're going to touch on this specifically Ben but talk about the process because that has a lot to do with timing. So there's a lot that goes on behind the scenes with a construction job that isn't obvious to an owner and a lot of that involves other components besides just like guys there with materials installing them in your house. So you know one component is the permitting process. So. And even to step back from that everything as a prerequisite right so you can say like well in order for me to redo my main sewer line what does that involve. Well it involves maybe getting the materials. So OK well what materials do I need. Well then you have to go and measure to see you know how how much of whatever material that you want well to measure you might need to rip down a wall or you might do to do something else and that might involve getting a permit or maybe even getting a architectural drawing if you're going to rearrange something or do something pretty substantial so or structural so every sort of prerequisite kind of lines up and all of those things take time. So if you're starting and saying hey I need to get architectural drawings that might itself take a week because you need to schedule somebody get out there they need to look at the property they need to make an assessment then get back to actually do the drawings find that I need to go and get permits. Well that could take just filing the permits itself could take a week because I need to quarter with a subcontractor I need to do whatever I need to coordinate all sorts of crap then besides getting the permits I need to actually maybe schedule time to do the work that could be another half week week because you know the guy's busy or I can't get the materials there on time whatever whatever. So it's very easy to see how these things can spiral into a month long project even if the actual construction work takes two days.   Ben Shelley: [00:09:57] And I guess it's worth noting too that a lot of a lot of things you do right. We talked about permanent and you're exactly right. We were going right to the timing for the construction process. It's so important to keep in mind that there are other factors also outside just the people who are working for you for example getting permits from the city can be an ongoing process where you could be left in the dark and usually are left in the dark up until the point they call you to tell you the things are accepted once things are finalized and put in. And I guess another part like you said John is pulling contractors pulling permits and putting them for you. I think investors often can do that on their own but you know as someone who maybe just investing in a home for themselves oftentimes they'll leave that responsibility to the GC.   Ryan Goldfarb: [00:10:34] Also during the process scheduling takes time oftentimes a task like that. That is rather specialized it's not going to be done by your general contractor more than likely it is going to be subbed out to a plumber and oftentimes someone with that specific expertise. So not everyone is available at the drop of a hat. Sometimes it takes a week or so before a guy has an open day in his schedule and that oftentimes needs to line up with the plans or with the excavator schedule or with whatever other pieces of the puzzle are required on that day. So if you miss one day or if the plans aren't ready for that day or the city inspector has to cancel then that may push things back a week. Not necessarily because that guy's not ready but because A, B, and C don't all line up on on another day for another year.   John Errico: [00:11:22] I'll give a real life example of we're working on several projects right now mostly for our own investing that we're also doing the construction work on and a lot of it is kind of like Ready Set wait because we'll go to a building will you know the first step for our projects is we'll demo it so with then when the building and then we're kind of to figure out what we want to do with it.   John Errico: [00:11:40] So we bring in an architect or a drafter to draft the whole thing. That alone could take I think in our case has taken what two weeks for that to happen. So we wait two weeks for that to happen then during that two weeks. Basically nothing can happen because we're waiting. Our subcontractors like our plumber an electrician our HVAC person is waiting for us to get the drawings. So we just have to wait. So we get the drawings and then we have to give them to the subcontractors. They have to look at it. They ask us questions we tell them what we want. That itself is a back and forth because they have to physically go to the property to do whatever else. So we're waiting for that. Then at some point we say OK we finalize this. No need to get permits. Well now we need to get everybody to get signatures on the permits get insurance information license information get that then submitted to the city. And you know technically we're supposed to wait until the permits are granted to begin actual work. And that could be three plus weeks for it to happen. So there's a lot of delays and say we then do the work right. I'm thinking of another project that's a little bit further on we have the permits we've done the work now we're waiting to get essentially our rough inspections. We can't do anything else until we've passed our rough inspections which are sort of like the first inspections that happen in the construction process.   John Errico: [00:12:45] We have walls that are open we have new plumbing new electrical in but we're just waiting for the city to come and look at it. And if they tell us that there's something wrong we have to go back fix it and then call them again. So there's lots of start and stop start and stop processes that go on and to be clear with that.   Ryan Goldfarb: [00:13:00] It's not that we don't want to be doing work. It's not the rough inspections require the walls and everything to be open. So anything that would be a logical next step whether it's sheetrock, flooring, painting, cabinets, any of that type of finished work is literally impossible for us to tackle right now because we can't do that until we've passed rough inspections and rough inspections require that all of that stuff still be undone.   John Errico: [00:13:25] Right I mean like I would say daily test this is one of your tests and is to call one of our contractors to say hey can we get a quote Can we get the number. Can you sign the permit. Can we submit the permit. That's every day.   Ryan Goldfarb: [00:13:36] I'm rescinding our department Yeah. Or are the crawl out of the program in the city right.   John Errico: [00:13:41] So it's like it's not like we're just sitting twiddling their thumbs it's like every day we're like Let's go go go go go. But we just can't. There's just no way to do it faster without massively violating the law or creating safety liabilities.   Ben Shelley: [00:13:53] And I guess it's important to note the wall you know it's going to sound like it's just a grand defensive of General Contractors. Obviously there's good and bad in every business that this conversation about timing is vitally important to remember for these reasons that that there are actual tangible outside forces that oftentimes cause the reality that you're experiencing of either perceived delays or real delays in these projects.   John Errico: [00:14:14] I mean we're we're the most incentivized because the projects that I'm talking about right now are our own investment projects we're also the contractor on it. But these are this is our own money so we couldn't be more incentivized to get it done and even we are waiting weeks for stuff to happen and the contractors won't get paid obviously.   John Errico: [00:14:31] No of course. But I mean even if you're cynical about it we have the most incentive to do it and we can't do it any faster than we're doing it. So you as a client if you're looking at it as a contractor just because something's happened doesn't mean you're sitting there.   Ben Shelley: [00:14:43] So what do what to what extent. I understand that. It's really the contractors trust responsibility for the most part but to what extent. For me as an investor should I be involved in quote unquote passing inspection as in obviously I'm not doing the actual work I shouldn't be the expert here but is maybe there a level that that we could advise or give advice to to the everyday investor for what they should or should I know or what questions to ask about passing inspections.   Ryan Goldfarb: [00:15:05] I don't think the investor or the homeowner should be involved really at all in that capacity that is ultimately on the on the contractor and on the subcontractors but the homeowner or investors should have certain levels of expectations based upon the scope of the work if if the contractor originally relayed that something would be a potential hindrance when it came to inspection time or on the other side of the spectrum if they said that something was going to be easy breezy no problem. That should be taken into account but it's not necessarily their responsibility to ensure that the inspections are passed. It is on the contractor shoulders. Having said that they should also keep in mind that there may be decisions that you as the investor make that will make inspections more difficult she passed down the line.   Ben Shelley: [00:15:53] And I think that's extremely helpful to keep that in mind.   Ben Shelley: [00:15:56] Again in terms of the overarching context of how you approach your project what you should and shouldn't know. I have here a note that is probably not the friendliest of topics but I think it is worth visiting. Maybe to give some brevity it's something that a lot of people go through which is the idea. Even though you're hiring a general contractor you also could be in situations where you feel the need to fire maybe these outstanding circumstances that we discuss maybe there is something in city is going on or for whatever reason they're just not meeting your expectations. It doesn't have to necessarily be a how do you fire a general contractor but what do you go what is the process and how do you remediate situations which he sees that you're unhappy with how have you guys done it.   John Errico: [00:16:33] It's a complicated issue. There are a lot of moving parts. There's the financial part. There's the actual construction part. There's the legality part. There's the city permitting part. I have had to fire contractors before and the one time I did I ended up losing a fair amount of money that I'm actively trying to get back. To be frank I had a contractor who came in this is before we started our contract and company who came in and wanted to we'd hired him to renovate an entire apartment and after maybe two or three months with him doing truly nothing. I mean this is not like him calling William permits we actually had the permits already when we hired him because we had used a previous contractor that we didn't pay any money but had long story. That's irrelevant to your question but we do want to hear the oil. So we had this guy you start doing work we paid him a large deposit that we paid maybe 14, 15 grand. And he did maybe nothing. I mean I would say maybe you did two or three thousand hours of work and so he said look it's not gonna work out. No hard feelings but can we have you know twelve thousand dollars back because we valued his work at that and he said no basically. And so our financial options. So you know at that point there's a decision tree it's like well I could continue using this guy because he's like giving me my money back. But at this point it probably burned every bridge because we said going to fire you. Probably not said I know how to lose. Right. Not very incentive to help us. The second is how can I get my money back then I can touch on. We can both touch on how that might be possible in the third is how do I actually get the work done. So we ended up hiring another contractor and you know from a from a logistical point of view the problem with a lot of subcontracts is that when you bring in a new a new contractor say new plumber and the plumbers the plumbing is like 20 percent done the new plumbers and to come in and say well I didn't do the 20 percent that I need to redo it because I can't put my name behind it. That's not uncommon because oftentimes licenses are at play liabilities a play for these guys and if there's something wrong they could be held at fault because it's their name on the on the job. So the reality is that even the 3000 hours of work this guy did I had to redo and frankly more costs because I had to bring in an electrician and a plumber who just told me that all of his work was crap which I frankly don't think is correct. But there's just no other option. I just had to go with them they had to redo it so I can go more in detail about how I'm trying to get money back from capturing how you could I do want to hear this.   Ben Shelley: [00:18:48] I'd love to hear first Ryan's perspective on many said on maybe a situation where you did the same I think you mentioned in previous episodes a very bad experience with some of the very first contractors and general contractor and subcontractors you worked with. And I do think it's an important thing to know which we'll discuss in a second that there's an opportunity cost associated with trying to get your money back when this process happens that's really important I think for people to understand that even if John ends up getting his money back there is also the time waste as well as the amount of money he's spending to proceed to to try to get the money back maybe through a legal legal means.   Ryan Goldfarb: [00:19:22] So the actual formalities of changing contractors as far as I've seen are pretty simple.   Ryan Goldfarb: [00:19:27] It's pretty straightforward for the instance that I will delve into in a moment. It was as simple as filling out a change of contract form with the building department and essentially transferring the permit or to the new.   John Errico: [00:19:38] You say that that simple but it's not that it cannot be that simple because sometimes you need to have decide off of the previous contractor.   Ryan Goldfarb: [00:19:46] That's something I was worried about and it was at least in this instance I had none.   John Errico: [00:19:50] I've had the opposite experience. Yeah all right.   Ryan Goldfarb: [00:19:52] Well caveat everything I just said.   Ben Shelley: [00:19:54] This is why we're in this game. Gentlemen I think this is help. I mean this is but it's important to realize it's amazing to two guys who are extremely experienced in the business and in different sectors of business have completely diametrically opposite experiences with this process of cha- what we want a fire of changing general contractors especially in this climate with a lot of people out of work.   Ben Shelley: [00:20:12] Hashtag furlough no politics. Ryan please continue. So you wrote off the change. Yeah. So the city and there is no problem the general contractor signed off on it.   Ryan Goldfarb: [00:20:22] Right. Well the previous one did not. But the new one did and that was all that was required from the city's point of view. The issue with it for me was more so the emotional toll of doing that. I mean that I remember the time I was I think twenty five or something like that and I was working on my first big project with a contractor who was twice my age whose life's work had been general construction and I had to get him on the phone and tell him Look you're done this isn't working out. And obviously I wanted to get it done. So obviously I wanted to approach it in a delicate manner because as John alluded to earlier there are logistical ramifications of doing this in a way that can be construed as hostile and then they can make your life a little bit more difficult. So I was trying to be cognizant of that and I was trying to approach it delicately so as to smooth over the process a little bit. I remember the toll being quite strong on me like weighing on me for a while before I actually pulled the trigger because at the end of the day I was still new and I didn't really have the right set of expectations and I don't really know what the baseline should be I didn't know how a good general contractor operated. So the fact that months had gone by with virtually no work with still no permits with virtually no updates and very little communication I didn't realize that that was so out of line and so off base especially for a guy who tried to profess his professionalism. But ultimately it was the only way I was going to get that project done and obviously there were costs to doing that. I actually I think just took the route of hey whatever whatever costs I've sunk into this I'm going to chalk up to a learning experience and not take the time and not take the headache to to try to recoup.   Ryan Goldfarb: [00:22:08] Also perhaps in part because I'm not an attorney.   John Errico: [00:22:12] It's a great point though about what is standard what is the baseline expectation. A lot of a lot of times you don't know that it takes a lot of learning and knowledge and also personal fortitude and confidence to say this is not acceptable to me even if this may be the standard I don't find this acceptable.   Ryan Goldfarb: [00:22:27] And from a tactical standpoint I also had spoken individually with both the plumber and the electrician and I had not really had any issues with them to that point. So at that time I confirmed that they would be willing to remain on board without the GC and they were. So that was one thing that I did to kind of mitigate the spillover effect that John alluded to earlier about having to bring in a new electrician a new plumber. There are plenty of other issues with these guys and ultimately there's a lot of to glean from who one associates associate themselves with.   Ryan Goldfarb: [00:23:01] And these guys were obviously associated with that general contractor but.   Ben Shelley: [00:23:05] It's important to remember again that there is tangible cost there right. Those were not reasonable waiting times given the process that where you already were.   Ben Shelley: [00:23:11] I think in the process and you have holding costs to think about so obviously.   John Errico: [00:23:15] That's why I like networking and knowing people in the industry it's important because if you literally know no one else that has ever done a gut renovation project with a general contractor you have no basis to say whether something is taking a long time or not. But if you can call up your friend and say hey I'm going to take you to do your whatever it is that you did. And he says oh it took me two weeks and you're know two months then. Obviously that's unreasonable.   Ryan Goldfarb: [00:23:35] So last thing I'll say is it's also it can be dangerous to work with someone who knows just enough that they can get by with these things. Most general contractors who operate in this capacity still have some level of experience and can still saying of things to kind of keep you at bay for a little while. So it's on you to be diligent. It's on you to be a little bit proactive and to at least know what's going on as close to the source as you can whether that's you know if the contractor says permits are in or permanent applications are in we're just waiting to hear back from the city. I want to say circumvent your contractor and make him look bad but do it and call the building department and see if the permits went in the day. He said they went in or if it's been or if he said they went in January 1st and it's February 15th. Then you call the billing department and find out that they weren't submitted until January 20. Then that's a red flag.   Ben Shelley: [00:24:30] Did that happen?   Ryan Goldfarb: [00:24:31] Maybe.   John Errico: [00:24:31] Like Ryan said talk to that it's specific talk to the subcontractor. Yeah and just say like How do I what's going on. All right so John do you want to quickly talk about on the bad side what what you're doing to try to to get your money back for this process. Well it would be helpful.   Ryan Goldfarb: [00:24:45] I'll leave this to John Errico, Esq.   John Errico: [00:24:47] He figures you know as I would say to anyone. And we I think touched on this in the previous episode when you have a register with a contractor you have a contract with your contractor and the contract should specify things like what happens when if things go sour. And also it should specify things like here are conditions that would justify me letting you go. For example if you're super super super late if we have deadlines that are not met for some reason that could be a justifiable reason for letting you go and then you know in some agreements there are specific clauses that say if we terminate at this point this is how much we will get paid or not get paid with the one contractor that I had in question we had essentially drafted it where he just gets a deposit upfront and then he had subsequent paymentsetc. But we had specific dates in the contract to say if you don't you haven't done anything by this date and we can let you go. And he hadn't met. Not only did I get that dated in like two months after it. So our remedy is to say I'm going to sue you for breach of contract because we had an agreement with you and that's a legal process but that's that's what we're doing.   Ryan Goldfarb: [00:25:48] What are the chances that you recoup any or all of that.   John Errico: [00:25:52] They're low they're low but it's the principle they're low and that's the problem is because a lot of times you know particularly when you're working for people that are gonna do work for less money they might not have a lot of assets or liquidity so you could kind of go down the rabbit hole and attempt to litigate and I'm not advocating that you should or shouldn't it depends on the money and your circumstances. But you know the reality is that there is a reason why contractors are priced differently. And one of the reasons is that a higher priced contractor might have things like sufficient insurance or might have things like solvency where if something goes wrong you can actually expect that you might be able get money out of them and you can think of it almost as an insurance payment. So like I'm I'm paying more money for somebody yeah. But in return I have at least the possibility that if something goes wrong I can.   John Errico: [00:26:37] I can be OK.   Ryan Goldfarb: [00:26:38] Is the reason that you don't think you will get anything out of this because there are no assets to seize or to get payment off of. Or is it because the the legal process by which you would obtain that is too cumbersome.   John Errico: [00:26:50] It's both. I think that there are few assets that are obtainable. I think that the way that this guy is structured his business many assets will not be reachable in a normal sort of lawsuit. And I think the the flip side is that the time and effort and frankly money because even though I'm a lawyer I'm not going to show up in court to sue this guy. Frankly it's not worth my effort even that the time and effort and all that to do it is gonna be too much.   Ben Shelley: [00:27:16] So and I think what's interesting too is is that again you see all the different ways that these these scenarios can play out.   Ben Shelley: [00:27:24] And I think it's it's important to note that if you are experiencing maybe delays in timing or perceived delays communicate manage your expectations make sure to understand your both your your recourse personally per your contract as well as your future legal means of recourse if you're unhappy with with a contractor and then fundamentally you know a lot of this stuff I think you just learn as you go through through the process itself. You got to try. You got to do it before you understand you're where you need to be in the business and you need to be networking with. I want to just take us through the end here where we let's say we were at the process part of the process where we've gotten through inspection. Take us through to the end all the way up to the point where we need to pay our contractor. Ryan wanted to take us through it.   Ryan Goldfarb: [00:28:05] So after the rough inspection everything that's done will be to get you to final inspection and ultimately to get you through the punch list. So again based on your payment schedule certain payment may be due at the conclusion of final inspections. And upon receipt of the CO and payment may also be due based upon completion of the punch list and CO being Certificate of Occupancy contracting fee or depending on the depending on the municipalities we talked about.   Ben Shelley: [00:28:34] I mean we just talked about some of the legal recourse you can take but just generically speaking to the end of the project is there maybe certain things are meant in the punch list and obviously as Ryan alluded to the more specific the better.   Ben Shelley: [00:28:44] But what can you do maybe both if some of the work is done and maybe there's a dispute or maybe more importantly if you don't like some of the work how do you approach that conversation in respect maybe to payment.   John Errico: [00:28:54] You know a lot of times contractors the way that payments are scheduled is that there is a there's a larger payment at the end for completion of work and a lot of times you know there's language or there's an understanding that the completion of work is based either on the original scope or on your satisfaction with the work. So if you're not satisfied with the work there is a perception that you can go in and say hey look I don't like this can you make it hold if it gets under way having a dispute or you think the contractor says hey I've done everything that I'm supposed to do the work is of sufficient quality where you can't be complaining anymore that that gets into too could get into some dicey territory. I mean there are things that contractors can do so. So the most powerful or damaging thing a contractor can do for say non-payment is to obtain a lean against your property like a mechanic's lean and that's a legal concept but the idea is that the contractor has an interest in your property can file an interest in your property that needs to be paid off by you upon sale of the property. Hypothetically could even be foreclosed on by the contractor for non-payment. So that's sort of the most I would say powerful tool in the arsenal of a contractor and I think the exact means that that happens or maybe beyond the scope of this conversation but if you have a dispute with your contractor realize that that could be a possibility.   Ryan Goldfarb: [00:30:14] This also comes back to the importance of documentation so you'll have a much stronger case for fighting with your contractor and getting whatever it is that you want done done. If you can go back to a specific contract or a specific point in the contract or to your original scope of work and say hey we specified that we were using twelve by 24 inch porcelain tile in the kitchens and in the bathrooms that we renovated you provided 12 by twelve ceramic and all I'm asking is that you make right by what our original agreement was or something that is clearly discernable by the scope of work.   John Errico: [00:30:52] Yeah I have a specific example that we're possibly going to be dealing with. We have a project where we're running we're switching the orientation of a shower so it used to be a shower that was kind of like in the middle of a bathroom. Now it's gonna be on an external wall of the bathroom and we were a little bit concerned that by running water lines through an exterior wall the bathroom the city might give us trouble because those lines are subject to freezing because they're literally on an exterior wall of the bathroom. So in anticipation of this we texted our subcontractor a plumber and said hey is it a problem that we're running water lines in an exterior wall. And he said no it shouldn't be a problem as long as it's insulated. So if it becomes a problem if the city says hey you can't do that then what we're gonna do is say Hey remember that text that we sent you and he said it wasn't a problem. So you need to fix it. If we didn't if we didn't have that text very easily. Not that I don't trust this guy but I'm not saying very easily he could have said well we'll fix it but it's gonna be five grand whether we run the water lines. So that's the importance of having you know we are lucky because we knew that going into it. But it's really important to have those conversations and have that set up because now we can look back at the documentation. I remember the text December 18th we talked about it. OK.   Ben Shelley: [00:31:58] Well and that's why it definitely is important to her back on that on this consistent theme that we've talked about. Again managing expectations and communication and why that can be so valuable as you come to the conclusion of your construction process in whatever project you may be dealing with.   Ben Shelley: [00:32:13] Two guys to end this conversation about not only the the ending of the construction process itself but payment of your contractors. I want to ask you guys about financing options. I think it's important for people to realize that there are different options and different ways to structure your payment scale and your payment structure with your individual contractors.   Ben Shelley: [00:32:31] So guys maybe you can talk about either scenarios where you do this yourself or just options that you know about for individual investors.   Ryan Goldfarb: [00:32:37] Well the financing side of this is somewhat broad. There are a few different ways to approach it. There is financing pertaining to the investment itself. There are also specific financing options that are available to owner occupants. Like the two or three car loan program through FHA and then there's also contractor specific financing which is I would say a little less prevalent particularly in this in this space and probably won't apply to a bigger full scale renovation but there are ways to finance where there are contractors who offer financing through a variety of other platforms that would allow you to finance a specific project.   Ben Shelley: [00:33:17] Guys I really appreciate your time and expertise as always for the folks listening at home.   Ben Shelley: [00:33:21] Make sure you subscribe to us wherever you get your podcast. Reach out to us on the Brick by Brick, that's Brick x Brick Facebook and make sure to listen to us and iTunes and Spotify. Thanks again, gentlemen.  

In the debut of our new longer format, the guys discuss the construction process through the eyes of a real estate investor and landlord: What is a general contractor? What is a subcontractor? How do I interact with my GC? Where should I spend my money? Who is on my construction team? Who will be working on my project? What is everyone's responsibility? Why is my project taking so long?!?! And much more...   (Transcript below.)   Ben Shelley: [00:00:07] Welcome to the Brick x Brick Podcast where we take you from the ground up on all things real estate. I'm your host Ben Shelley. We are fortunate to have Ryan and John back with us today. The focus of this episode will be managing the construction process. While we've discussed investing in real estate at length in this podcast, today we want to focus on the backbone of every real estate investment: construction. If you're like me just getting started in your real estate career I know the construction aspect of the business can cause a lot of stress. So we're gonna take today's episode to try to address some of the most vital aspects of succeeding in the construction business. So guys I'm gonna start as basic as I can possibly get. Tell me what a general contractor is.   John Errico: [00:00:49] That's a great question. It's actually not a basic question. I think there's a big misunderstanding about what a general contractor is and what a general contractor does. In my book a general contractor is a project manager. So they're the person overseeing the entire start to finish off a construction project. They may not be actually out there personally swinging a hammer. They might not even have people that work for them directly like employees of theirs swinging a hammer but they're keeping the whole construction process in line. So they're working with subcontractors -- and we can discuss what a subcontractor is later on -- they're working with subcontractors permits licenses all the nitty gritty stuff making sure that that gets done and in an ideal world. Hypothetically you could go to a general contractor and say here's my plan here's my money get it done in this time period and they'll get it done. That's not what happens almost ever in reality. But that is generally how I would think.   Ben Shelley: [00:01:46] Maybe you're ever in reality maybe. No I don't. Ryan?   Ryan Goldfarb: [00:01:49] I think oftentimes there's another misconception is you'll be at home depot and you'll bump into somebody and start talking to them and asking them where you can find a new switch for your kitchen light and they'll tell you they're a general contractor and they can help you with whatever problems that that you have. And you think oh great this GC is gonna solve all my problems and you know I've got this whole huge project for them to tackle and now I've got my guy.   John Errico: [00:02:15] I prefer Lowe's for what it's worth.   [00:02:18] Should I start singing jingles. Actually I love Home Depot. I actually heard him say wow that's a great point. Very true sorry right.   Ryan Goldfarb: [00:02:27] Anyhow the point to distinguish there is there are general contractors in the sense that they do general construction and they are in a lot of respects handymen. And then there are the class of quote unquote general contractors in the true like capital G capital C way that John described before which is in more of the project management type role where they oversee the project at a very high level. And they're in charge of coordinating all of the moving parts particularly on a larger project. When it comes to the subcontractors and all of the different trades and the timeline and the plans and the permitting, etc.   John Errico: [00:03:09] Yeah. And a capital G capital C general contractor usually is licensed it has insurance. So a lot of the guys that you run into at Lowe's or Home Depot will not have a license or insurance or whatever else. Nor will your general handyman and we can get into to when that would be required later. But a general contractor is normally going to have a license and insurance and you can look up their license in the state registries et cetera et cetera.   Ben Shelley: [00:03:34] Of course I do think it's also important to note especially for early investors just doing their first project or some of their first few projects that that not to be in this is sort of intimated from from Ryan's point as well not to be intimidated by that G and that C in front of the name of somebody to understand that this is your project that these people work for you if you don't know ask questions make sure you know you're going to be a little self-conscious undoubtedly about what you do and don't know. I know I have been in starting with you guys and in tackling our first projects but I think that it's important to also recognize sort of what you know and what you don't know but also what your contractor knows and doesn't know and I know we have some funny stories about some of those first experiences. But before we go to those I also have this question right. You're going in you're looking around at the sort of construction landscape we're talking about running into GCs at like stores.   Ben Shelley: [00:04:22] So begs the question how do I find a general contractor?   Ryan Goldfarb: [00:04:27] The two places I would start are in your network and in your backyard. So the first I would approach anyone who you know who is active in the construction space or who has done a project of their own recently and I would ask them what the nature of the project was how they felt the project when who they used and obviously what their what their thoughts were on that contractor. The second thing I would recommend is to look around your neighborhood and find projects that are similar in nature to your own. Particularly when you're talking about a whole house renovation or something larger I would look for structures that are similar because housing stock can vary a lot and renovating an old Victorian is a very different beast from renovating a Frank Lloyd Wright inspired mid century modern house. Shout out shout out Frank Lloyd Wright. So I would I would approach the two I would I would first go down both of those rabbit holes before resorting to something like Yelp or Home Advisor or something like that where I think there's a little bit of gamesmanship going on.   Ben Shelley: [00:05:34] John?   John Errico: [00:05:35] Well if you happen to be in the northern New Jersey area I have a...   Ben Shelley: [00:05:38] You know what I was thinking about making the plot you son of. I mean really this guy I mean you know. But I love your instincts. I know I agree with Ryan.   John Errico: [00:05:51] I think I found contractors what so too. We did a episode of networking and that's it. If you go to meetup groups and networking groups for real estate investors you will invariably find contractors. And if you're one distinction that I draw I think is a there are obviously general contractors that do both these types of jobs and we are one of them. But there certainly are contractors that do more work for investors as opposed to primary home owners residents and working. If you're an investor and you want to work in that space working with a general contractor who has experience working with investors who therefore understands budgets timelines the types of finishes that you need as is important. So if you talk to a general contractor say hey what type of work do you generally do is it for homeowners for investors single family multifamily whatever.   Ben Shelley: [00:06:42] I think that's true. And I think what's interesting is from our own experiences I know having fielded just a few of these calls to date a lot of times people will say the first things they'll ask on the phone aren't necessarily can you do this work? They'll say where do you work? I think that's a really important thing so does a contract can you find a contractor that has experience in your area and that relates a little bit to what Ryan was talking about about looking in your surrounding area and then what what what are your capabilities in terms of scope.   Ben Shelley: [00:07:08] And then obviously those those methods combined can help you hopefully locate the right person for your job.   Ryan Goldfarb: [00:07:13] Another just part of the job. Another critical point particularly in this area regarding finding someone local is the fact that all these building departments are very different. Each municipality at least in New Jersey every municipality for the most part has its own building department. And so if you happen to find the one contractor or one of the few contractors who does a lot of work in your specific town particularly with a bigger project their relationships with the building department and with the inspectors and their knowledge of what cities and building departments specific requirements are will go a long way.   Ben Shelley: [00:07:51] Yeah I mean it's so funny you mention that too because from my own experience coming into these different building departments has been on almost wild I mean just the different the difference in the people who work there the different expertise the different looks not just in terms looks the building but in all honesty in the demographic because different municipalities also have varying demographics and these have this is this has cultural history too to its socio economic history to it but that's a very vital point because I think maybe the main goal of the GC just in summation is to guide you through this process so that you can build your home to code and pass inspections and you know get your certificate of occupancy. So I want to sort of pivot here once you've hired the GC. Is there a particular way you would go about addressing or talking with your general contractor maybe from the beginning as it pertains to the scope of work. What have you. Or is it more generic across the board.   John Errico: [00:08:51] Yeah. Every project is certainly unique and I mean that the types of project that you might hire a general contractor for would range from redoing a bathroom or kitchen to get renovating a house Doing an addition to house or ground up construction of a house Even so one of the most important things to know or to think about when approaching a general contractor is what exactly is the scope of what I'm doing. And if you don't have the knowledge base to to even do that that I would say think about it and search online and watch some youtube videos about it. I mean we work both mostly with investors and investors often know what they want out of a property but it's very frustrating both for the contracting side and also from I think the client side or the investor side. We're going to say for someone to say oh I want my house to look better. So what exactly what are you What do you want.   Ben Shelley: [00:09:44] I don't know John better.   John Errico: [00:09:46] It's like I want to know that no one will say that that's insane but like you know what I want to redo the kitchen and it's like I don't know.   Ryan Goldfarb: [00:09:53] Show you pictures from Houzz or from HGTV and those I just wanted to look like that.   John Errico: [00:09:57] And so it's like when you say redo do you mean make it bigger. Same size do you want different materials new materials you wanna replace the cap you know. And people have crazy in the layout.   Ryan Goldfarb: [00:10:06] I think that's right. That's something in particular that goes overlooked. That's that's a big difference between just upgrading the cosmetics with the existing footprint versus change like turning it around it's turning it on its head and essentially starting from scratch.   John Errico: [00:10:22] Oh absolutely. And they're in their big cost differences too. So you know something that happens a lot is there's a sticker shock with general contractors. So you'll say I want to redo the kitchen and then the price will be forty thousand dollars and be oh my gosh it's way more than I would spend ten thousand dollars. And the reason is because you wanted to instead of keeping the sink where it was you want to move it on to an island and you wanted to instead of moving instead of keeping the Stover was going to move it to the opposite side of the kitchen which are presuming all new plumbing and whatever else. So if if you're not knowledgeable enough to think oh well if I move the sink or if I move the stove that's gonna be a tremendously large cost then it would be helpful to either gain that knowledge or to find a general contractor that's gonna explain that to you and say look we can redo the kitchen like this it's gonna cost that we can do this it's going to cost that whatever else so some general contractors are great at that some are not great at that just depends on what you're doing.   Ben Shelley: [00:11:17] You and we are great at that. Ryan who are the best there's no one better to me.   Ryan Goldfarb: [00:11:23] The two foundational components of this are communication and expectation.   Ryan Goldfarb: [00:11:28] I think John alluded to the expectation front quite quite a bit and quite well just now. But to expound upon that the expectation really sets the precedent.   Ryan Goldfarb: [00:11:40] And that in to to a large extent is context driven. So a an investor who's buying a property that's going to be a rental property or an investor who's buying a property for the sake of flipping it is going to have a very different set of expectations than somebody who just bought a piece of land for a million dollars and is building their 3 million dollar dream dream home and he wants every single last detail to be carefully thought about carefully curated and carefully addressed.   Ben Shelley: [00:12:14] So so I don't mean to cut you off but I guess it just kind of getting into the weeds a little bit more here. What are the kinds of things that go into creating you know a quote unquote good scope of work. We talked about communication and expectation but obviously I think creating your scope of work is vital for a lot of reasons one of which being also financing because you're going to probably borrow a certain amount of money to do that construction work so maybe talking a little bit about 4 for a new investor how do I go about creating a scope of work that is appropriate for my project and how do I work with the GC in doing that.   John Errico: [00:12:44] I think ideally it's a collaborative process between the investor in the GC I think and the architect right. So there it's important to consider that there are other components to putting together a project. So in northern New Jersey I think it's true everywhere but particularly where we operate northern New Jersey. There are a lot of. There are lot of requirements that the city will impose on you to do work. And one of them oftentimes is having an architect to do architectural drawings or whatever it is that you're doing.   John Errico: [00:13:13] So sometimes a general contractor will have an architect or draft person kind of on staff or on file and you can say hey just use this person to do the drafting work. Other times it will be the expectation that you will have to go to that architect or drafts person to figure it out. So that would be step one is saying well if I want to do something pretty major I might want to go to an architect or a general contractor that I really trust and say hey here's what I want to do. What do you think I need to get in place to start with. I think it harkens back to my point before. If you don't have the knowledge base to even say here's what I conceivably want then it's gonna be. To use a specific example. I'm thinking about one we had a project where we had someone come in. Someone called us in in Jersey City. They wanted to totally renovate their rowhouse basically and they wanted to expand it make it larger. So they wanted to push out the first floor push out the second floor create a rooftop deck finish the basement this stuff and pretty immediately it became apparent that they knew a little bit about real estate and maybe a little bit about construction because they knew kind of what they wanted it to look like but had no conception of the cost of what it would be. So there or the largest or the logistics so that it's a rowhouse so there's no way to get machinery back to the rear of the property step. That's the first problem. So they wanted to expand the building by a significant amount like I don't know 20 feet or something like that and also dig out the dig at a full basement below that expansion and make their existing basement deeper. So immediately my thought was Well we can't get a backhoe here because there's no way to get stuff to the back of the property anywhere to suffocate to the front the proper base there's no access to the rear of the property from the front. So all that's what have you done with shovels by hand essentially so that that itself enormously increases the cost of everything else that he wanted to. Like rearranging every single wall in the building the rooftop deck ultra stuff. I mean we're looking at a scope that was like probably maybe it would have been cheaper to rip down the whole building industry do the whole thing to begin with. And it was pretty obvious that he had no conception of what that was I think he thought that we were going to charge like 50 grand for this work when like probably we needed to charge like three or four hundred thousand dollars it was so crazy and the other.   Ryan Goldfarb: [00:15:32] The other issue with that instance was the lack of communication and the again the the poor expectations so he anytime we kind of broached the topic and to an extent this is on us as well for not understanding that this information is as vital as it really is to avoid us wasting our time. But he was very hesitant to divulge any type of information like what is your budget. And he was doing that from I think from a negotiating standpoint I think he wanted to see where we would come in and then negotiate based off of that rather than saying oh my budgets 250000 dollars and then have us just kind of work backwards into his budget which we wouldn't have done anyway.   John Errico: [00:16:11] Yeah I don't want to go crazy tangent here but that's a great topic. Talking about budgets and pricing is that really going to go bad.   Ben Shelley: [00:16:17] Well we'll get over but we'll get there. Hold your horses so let's talk about money. He's jumping through the microphone as we speak.   Ben Shelley: [00:16:23] I was gonna say you know again I think a lot of these topics want to talk about the relationship which he sees does come back to communication expectation the emphasis there but I think maybe it's helpful for for both new and experience investors to hear this conversation at least it is for me because you begin to have an appreciation. I think it's sort of like brokers to an extent as some of the perception around brokers in the tristate area with GCs I think everyone is always on the lookout for someone trying to do one over on them. And I think it's important to realize that this kind of confusion happens on both sides that there's nervousness and and sometimes miscommunication and lack of clear expectations set on both sides of the aisle and so it is so important especially I think if you have a lower knowledge base or if you're nervous about pricing to be communicative to go out and say hey here are my expectations. Regardless of whether or not you're an investor or you're building your dream home in Livingston New Jersey. Yeah right.   John Errico: [00:17:14] I would I would super appreciate it if we could do a project and it's a big project. If the person I'm going to work for says hey look my budget is this amount. Like I mean that doesn't necessarily mean to me that I will. That will be exactly my quote to you. It just means that I have an understanding of what it is that you want to do and then if you say hey I want to my budget is 50 grand but I want to you know put another floor on my house and redo everything on the third floor doing a. Well look that's impossible. That can't be done for 50 grand. So let's talk about a way that we can work together that would be more helpful for you. More helpful for me. You know it just it's very frustrating to waste time because it waste time for us to as a contractor trying to come up with a number if it's like oh what the but we think our number is a hundred eighty five thousand dollars and then he's like well my budget 30 grand.   John Errico: [00:18:01] It's like well we just wasted a couple hours come on no because there was no.   Ben Shelley: [00:18:04] I think construction is in some ways uniquely difficult in that in that way because it is such a mystery to most people that the pricing is just that there's no.   Ryan Goldfarb: [00:18:15] There's no menu there's no mention of price which in some cases isn't necessarily true it's just not always communicated as such and so people just think that the contractor is taking advantage of them when in reality the the breakdown there is just the gap in understanding of what renovating a bathroom truly takes. So yeah I'm sorry the other. The other point I want to just circle back on is when it comes to creating a scope of work notwithstanding the obstacles that John and I just discussed are the three of us just discussed. Once you do get to the point where you are moving forward to the project and you're in the ballpark when it comes to budgeting and you're creating your ironclad scope of work the most important thing to focus on is documenting every single detail that you possibly can and that includes both high level things and as specific as how many recessed light fixtures are going in bedroom number three and potentially even what layout they're going to be or where the light switches right things like that. And this also ties into the value of having an ironclad set of drawings of architectural plans because that is going to have an electrical plan embedded in it which should specify all of these things. And if you're at that point in the process where you're where you have electrical plans then chances are you're moving forward with the project. So spend some time and look through those plans review them in gory detail and if there are some things that you're not quite certain on. Go back to the property and walk through and maybe Mark things out and try to put yourself in the space as it will be when it's finished which I understand can be tough when some people just don't think super visually but some one track that can be really helpful is just taping out the layout on the on the ground so if you have unfinished plywood flooring or something like that just take like blue masking tape and just mark out where the walls are gonna be where the doorways are gonna be where the cabinets are gonna be where the toilet's going to be you'll get a sense of like how much clearance there is between the counter and the refrigerator you'll get a sense of of where the the toilet is in relation to the vanity or the refrigerator depending I look atetc.   Ben Shelley: [00:20:37] So maybe on the theme of keeping track of everything of writing everything down documenting everything.   Ben Shelley: [00:20:42] One of the things I think that also helps with is if you're in the middle of your either renovation or tear down or reconstruction what have you and you want to change something as you're going through the process now. A lot of people have heard the term change order maybe we can talk a little bit about what that means and how that is priced in the course of construction.   John Errico: [00:21:00] Yeah I think inevitably there will be things that come up during even the most well thought out projects that are unexpected. It's kind of a joke or a lot of times people are hesitant to even begin renovation projects because it is that when I open up a wall opening up a wall I mean like when I take off the drywall over the wall and look behind it I'm just gonna discover a lot of things that need to fix. That happens to me every single time that I've ever done that. So you open up a wall and you're like oh gosh like I didn't realize that you know there was this crazy electrical issue hiding behind this wall or that everything is rotten or that there's a plumbing problem or whatever. So I mean once you do that you have the option to not fix it for certain but it's almost insane to not fix it because the effort that it takes to put up a wall and finish it is in a bathroom so you have tile on the wall. The effort to do that is going to be a lot so when the wall is open you might as well take care of it. So that's a pretty common type of change order where it's like oh we open up the wall we found that the main sewer line of your entire house is cracked that we have to replace it.   John Errico: [00:22:00] That could be five grand. The other flipside of it is you yourself as the owner might say oh well now that we've gone through the process and now that I've seen what's going on I myself want to make a change to the scope of the work. And that's totally fine to Ryan's initial point knowing that initially is way easier both for probably your pocketbook and also for the project itself but the change order is when a general contractor will say OK now that we've changed the scope of the work you do because you've deserted or because I have strongly recommended it or because there's something way unanticipated we discovered during the process we need to go back and change the scope of what we're doing. And they have a reputation for being expensive because it might be the case that that was just not originally factored in and therefore requires a lot more time maybe another permit maybe another license maybe another even subcontracting trade to come in and do something. I would say bad general contractors will sometimes use change orders as a way to make money. So they'll say Oh I didn't charge enough at the beginning or this project is taking longer than I thought. And I'm not going to make any money in it. So now I need to make a phony change order in order to put in you know a different type of sink than what you said it's gonna be three thousand dollars even though the sink itself is only a hundred hours more or something like that that happens it's happened to me it's probably happened to you Ryan. But that that would be I would say telltale sign of a bad general contractor on the scale of good to bad.   Ben Shelley: [00:23:30] And so that brings me also to this is this fundamental question which John you were jumping out of your seat earlier to talk about which is very both very broad and specific at the same time which is pricing. And Ryan what you can continue maybe the conversation a little bit about change orders and expectations of pricing there but just generally I mean standard construction right this great mystery maybe we can try to unravel this for people like me and people listening but can you talk to us a little bit about what are just some standard construction costs that you can run through that vary from project to project.   Ryan Goldfarb: [00:24:00] I'll be honest with you I hate this question. It's hard it's hard and it's loaded and it's I'm glad I'm asking you the question.   Ryan Goldfarb: [00:24:08] It's really hard to give an answer without having context and without caveat adding it like crazy. But let's say let's take a bathroom renovation as an example. On the surface if you break it down to the components of a bathroom you're looking at generally a vanity a bath or shower. And a toilet. Then you have things like flooring which is usually tile. Oftentimes you have tile on the walls as well. You have cement board as an underlayment for the flooring which sometimes is also which generally goes on top of plywood top floor as well or sometimes goes on top of high whatever as well. You have green board which is the moisture moisture resistant the sheet rock that typically is is used in a bathroom. You have certain light fixtures. You have bath accessories and then you have paint. I'm sure I'm missing some details that maybe I usually can exhaust fan of some sort.   John Errico: [00:25:14] Well you have all plumbing and all electric right.   Ryan Goldfarb: [00:25:16] So that that is I guess what you would see for the most part that's what you will see on the surface. But the reason why this is such a difficult question to answer is that doesn't get into that doesn't even really touch on all of the components that make the bathroom what it is which is the nuts and bolts of the plumbing and the electrical. So you can have the nicest toilet the nicest vanity and the nicest shower in the world. But if the plumbing behind the wall doesn't work or clogs every other time you use it then your bathroom is going to drive you absolutely crazy. And to John's point earlier while you're doing this project if you look behind the walls and you realize that you're working with like a corroded cast iron stack from 100 years ago that. Is leaking or clogged or just as has seen better days. You'd be foolish not to go in and replace it now when the vast majority of the work has already been done. So that's going to cost more but it's going to in the long run cost way less than when your stack starts to leak like crazy or doesn't flush or everything you know nothing gets through the line and backs up into your brand new bathroom and then you throw everything out and start from scratch again.   John Errico: [00:26:30] Yeah I I want to approach the topic from a different maybe a different thinking which is just to just to say everyone should understand that contractors are not necessarily good at figuring out how much things cost. They're just not. So we're not that good at it. I mean I think that we're getting better at it. I've met so many contractors that are really bad at it and there are a bunch of different ways the contractors can figure out how much stuff is supposed to cost. And I'll describe in two. The first is that a lot of contractors literally I shouldn't say a lot. Some contractors were literally pick a number out of thin air. I guarantee you this happens and had 20000 sounds right.   John Errico: [00:27:14] Absolutely. I mean like it sounds funny but I mean I don't honey until you experience. Well I don't say that is a bad thing. It's not necessarily that they're like it's super crazy wrong but they'll just say well based on my experience and based on my general thought process I just think that it's going to be about this and though there usually give you you know kind of an estimate or something that says like services and we'll have a number and then we'll just be the number that came up with. I mean this happens more often than you might think. And so people get cynical about the industry because of this doesn't mean that the number is wrong. They might have just just thought of it randomly and that actually might be actually how much they're going to charge but that does happen. The second way is that you'll have an estimator. An estimator is like its own class of person who has usually a lot of construction experience and is familiar with how a construction project will go and an estimated will say Well I think that the materials cost for this particular scope of work will be this number because it's this many square feet of flooring in this many square feet of drywall and whatever else the estimate will also say well I think it's gonna be this many man hours of work.   John Errico: [00:28:22] And I think that each laborer or each person's working is gonna be paid about this much money and we're gonna bake in a margin there and the margin is going to be that our cost. The general contractors cost and margins can vary a lot. They can be anywhere between I would say single digit percentages up to 20 percent 25 percent it depends on the work. And that is normally the compensation for the general contractor in an ideal world and assuming will say that your costs your labor costs and your materials costs are this and you will charge a 15 percent margin. And that's what I take home as the general contractor for my effort in arranging everything getting permits getting licenses project managing the whole thing for you.   John Errico: [00:29:05] That's my fee. If I'm if I'm wrong if the the materials cost or the labor costs is too high then that just cuts into my margin or it could be wrong the other way. I actually overestimated therefore I get to keep you know the difference between what I thought I was gonna pay out then you know what I actually paid out. So then the third way that contractors will estimate stuff is they'll just look at what the market is or could be for this job and just say well everybody's charging whatever five thousand dollars for a bathroom so I'm gonna charge $5,000 for for a bathroom. I don't really know how to estimate it. I didn't really pull the number out of nowhere because I at least have some sense of what people charge. But that's what I'm gonna charge for.   Ben Shelley: [00:29:43] So to what extent am I as the investor or as the person who is building the home hiring the contractor. Am I allowed to push back on the pricing. Now now now you know it's like if you're listening to this podcast right now you're saying wow that John Errico is teaching me a thing or two I need to go back to my general contractor and make sure that everything that I'm being charged is right. So where is that balance. How do you approach that process and what is sort of the right and wrong way to go about it.   Ben Shelley: [00:30:08] If you feel that a pricing is off?   Ryan Goldfarb: [00:30:10] This Is going to depend on who you're dealing with. If you're talking about the contractor who just pulls a number out of his backside and that number is fifteen thousand and he truly just made it up out of thin air you may go back to him and say hey that seems a little high and then he'll come back to you and say All right thirteen five let's make this happen. When you're dealing with somebody who really knows what they're talking about generally there's a methodology to how they came up with their number. So if they come back to you and say this bath innovation is gonna be fifteen thousand dollars and you say hey that sounds a little high can you do any better. Oftentimes they will say no my pricing is my pricing and oftentimes that is rooted in something substantive but they may say if you're budget like What's your budget this is another reason why communication and transparency and expectation are so important. Because if that person comes back and says Look I really cannot spend more than $13,500 on this bathroom renovation then that contractor can go back and say OK.   Ryan Goldfarb: [00:31:12] Well that is reasonable like where we're in the ballpark here. Let's see what we can do to break you know to to get down to your number and to shave some costs down here and there.   Ryan Goldfarb: [00:31:23] So maybe you go and you spec a little lower and tile you don't go some custom imported high end marble and you go with a more cost effective porcelain tile or you don't you don't tile all of the all of the walls from the floor to the ceiling maybe you end to 48 48 inches high or maybe you don't go with a custom shower you go with some kind of prefabricated base and you kind of like tile it in and create like a hybrid custom work that way.   John Errico: [00:31:54] Yeah materials costs are a big thing too. So sometimes contractors will mark up the cost of materials and sometimes I'll itemize them even on the estimate. So they'll say this door is whatever hundred fifty dollars and you look at it like well how could that possibly be because I could go to Home Depot and buy the same door for 90 bucks. And if you can then you could negotiate the contractor and say I will just buy these particular materials. So there's an estimate there will be something called allowances. And those are often the cost of like finished materials. So usually an estimate will if someone says hey I want to redo my bathroom. The costs will include things like drywall and plumbing material whatever but some certain higher end finishes like the tile the bathtub maybe the vanity will be included as an allowance for the contractor to to buy like a budget number. And you could say look I think that's like way too much or I just want to buy the materials or I don't want you to charge a markup on the materials costs which happens. And another thing too is that particularly in higher end stuff the margin that your contractor is charging is a known thing. It's not a secret thing. I've seen it in contracts all the time where it's negotiated. So it's like look I know we're doing a million dollar project but I don't want you to take a 12 percent margin I want to take an 11 percent margin or a 13 percent margin. And in many cases the general contractor is not really as I said at the very beginning of this episode. He's not he or she is not out there swinging the hammer. They're not necessarily the person that's out there putting in the physical labor so they're subbing out as in they're hiring someone to do a lot of the work for them like a plumber electrician maybe a finish guy maybe an HVAC guy or whatever it might be. So their costs that are might be known. So for example it might be that you know they're plumbers don't charge them 30 grand and they're going to take a margin on 30 grand and pass it along to you. You could say look I don't want you to take a 15 percent margin. I mean to reduce it. So that's another way to negotiate as to saying what is your margin like what are your actual costs.   John Errico: [00:33:51] Can I can you talk to me about it and they might want to ...   Ryan Goldfarb: [00:33:54] On on the materials front the allowances point is it is worthwhile to make. And I think in reality oftentimes it's generally broken up between a rough rough materials costs and finished materials costs. So the stuff that John alluded to before like the sheet rock or the lumber behind the wall. That stuff is considered rough materials and those are generally embedded in the scope and embedded in the contractors cost basis. But the finish stuff is often where you can see significant variance in the allowance because as I said earlier it could be a super high end marble or could be a more run of the mill ceramic or porcelain tile for instance.   [00:34:37] Oh sorry. The others too excited today.   Ryan Goldfarb: [00:34:41] The other thing is the other thing I would note about the topic of allowances and who's providing the materials. Is there a lot of contractors who point blank will not allow the homeowner to buy materials and I think there's good reason behind it. It may seem like they're just being a hard ass on the on the front end but from their perspective if it's on the homeowner to buy the materials and the homeowner doesn't know what they're doing or only has like a rough idea of what they're doing they're going to screw up at some point they're going to buy the wrong sized door or they're going to buy the wrong type of vanity or they're going to buy a wall hung vanity instead of a freestanding one and the contractor is going to say Hey well it's more time intensive and more expensive for me to install this. You already have this here where they're going to lose time on the project because you're gonna have to go return this and get a new one or I'm going to have to charge you with a charge you are in slap you with a change order. So. So there are a number of reasons why a contractor may not want you to do that and it's not. It may not just be to extract more cash out of you.   Ben Shelley: [00:35:49] And I want to put in an important side note to the pricing conversation before we finish it up because I realized we didn't talk specifically about quote unquote what subcontractors are. Just to clarify here I mean he's a football analogy the GC I guess is kind of acting like the quarterback here he's running the offense and the subcontractors sort of act like the offensive line. And for those who really know football you know you can't really have play good offense without a good offensive line and so he's sort of orchestrate he or she sees me as sort of orchestrating the people up front to try to make sure that the project is moving smoothly and that's where the. When we talk about margins and allowances and pricing more generally it is important. I mean even today we were talking with a guy I was talking earlier with a GC that we're working with but needed to call the electrician to get a different quote. So the GC was giving us you know a number for you know h vac and plumbing and the subcontractor was giving us a quote on a project that he's also GC in for for electric. So it's just it's it's I think it's a careful dance here.   John Errico: [00:36:43] Well I would say that I think the GC is more like the coach.   John Errico: [00:36:46] I would even say that the quarterback playing the game and I mean he's playing the game he's overseeing. You're right he's not the hammer. He's not touching the ball but he is very much richer and it's I'm getting this analogy right.   John Errico: [00:36:57] It's a really important point I'm glad you brought it up I really wanna talk about it. So there is there are.   John Errico: [00:37:04] I have a relative who's building a house right now and he's hired a builder to build his house. And some people out there might think oh you've hired a builder so the builder is going to come up you know call it John's building company the builder is going to come up with John's guys and John is gonna come and he's going to have his guys putting up the framing and supporting the foundation and putting up the drywall. And you as a client might say like oh wait a second. Like when I pull up to the house nothing's as John's in it that says you know Bob's like Bob's plumbing company. Like who the hell's Bob. I didn't hire Bob. The reality is that you know in my specific example my relative was building a house. His builder is two people. It's one guy and a secretary. That's the whole company. He's the general contractor. But what he is doing is subbing out all of the work to other people in how construction can get really expensive is the more people you sub about work to the more margins there are for people to collect money on. So I had a project recently where I worked with a general contractor who actually subbed out the entire thing to a different general contractor who then subbed that out to the trades trades being like electricians plumbers whatever. So you know what what a what a subcontractor is is. Those are the people that are actually doing the work. They actually have employees that are out there putting pipes together putting up drywall swinging the hammers doing that stuff. And you as the owner or the investor might not ever know exactly who these people are because you have no your interface with them is through your general contractor. You might not have any idea who's doing the plumbing or the electrical work. Even in projects that right and I've been very involved in where we've used a general contractor we haven't had any clue about who some of these people are. But if you think about it in my case before where I had a general contractor who himself hired a general contractor who then hired subs think about how much margin there is in that you know say that the say that the subcontractors said Oh look it's $10,000 for me for it for my guys to do the labor materials and I'm going to charge you twelve thousand dollars cause I need to take a 20 percent margin. Then the general contractor says well it's $12,000 to me I need to take a margin on that so I'm gonna charge 20 percent on that. And then my general contractor I'm talking about says well I need to charge 20 percent on that. So at the end of the day I'm spending you know maybe six thousand dollars more just because these guys wanted to say about all of the work to other people what we do and what very large construction companies do is they have almost everything in-house so they'll have guys that actually work for them that swing hammers that go out to the job site and actually do labor. So in our company in one of the reasons why our costs I think generally are pretty low why we're very efficient in why we started the company is because we have guys out there that go and actually do construction work they do framing finishing put up walls tile whatever it is we don't we don't sub that out. We do so about things like plumbing and electrical work and that's usually for both experience issues and for licensing and permitting issues. But it is worthwhile to ask your general contractor Look what do you do any work in house do sub it all out. It's not a bad thing if they don't do any work in house but it's important to know that that has a really significant difference on your cost basis.   Ben Shelley: [00:40:19] If you're doing work in-house versus having it and I think that's a unique question. And Ryan I want to jump to you on this it's just a unique thing to hear specifically for new investors but really everybody in the business because I think a lot of people would feel uncomfortable asking a question like that because it's almost like asking someone well do you actually do anything that I'm paying you for. But the realities are if you understand the ins and outs of the business and understand the dynamics of what a GC really does as the coach of the team sort of organizing the players then it's actually absolutely vital for you to do that and to think about it when you're negotiating margins on a job.   Ryan Goldfarb: [00:40:50] Ryan to counter John's example I think that that illustrates what can be seen as like the dark side of the construction industry where it's just essentially daisy chaining work with somebody taking a little bit of profit every step of the way. There are there are instances where that structure works quite well. There are companies that are as John alluded to earlier like a one or two man shop where all they do is construction management and they have a subcontractor or a tradesman for every specific trade that goes into the project. So everything is highly specialized and that in and of itself can create certain efficiencies. If you think about a company like ours with with employees that do a varying degree or a varying assortment of work everything from tile to sheet rock to framing these guys are quite skilled and quite capable and I think we've been on the whole quite pleased with their work. But if you compare that to a company that does exclusively hanging of drywall or exclusively tiling or exclusively foot flooring relatively speaking those companies are going to be faster and more efficient which in certain cases can create certain cost efficiencies of they're paying   Ryan Goldfarb: [00:42:13] If they're paying roughly the same amount for their for their labor and their guys are working on that one thing and they can do it in half the time then that's roughly half the cost basis on the Labor side. So even if you factor in that subcontractors margin in a vacuum and in this kind of like perfect scenario when general contracting and quote unquote construction management is done well it can create a lot of efficiencies and it can create a lot of cost savings. But the caveat is really in the logistics and scheduling because you don't have control over those.   John Errico: [00:42:46] And the caveat to me is done well because that's you know if you want to find a general contractor it's important to consider that they have their own contacts in the industry they have their own subcontractors. We just set an example we were working with the general contractor and that general contractor subbed out the flooring work even though we had. We were sort of working it our on our own but we've been working with a general contractor in the past and the general contractor said we'll do the flooring work and they indicated that the flooring guys that they had were going to come in.   John Errico: [00:43:18] You got a rock and roll so they said I'm going to get quote unquote quote unquote. They said they're in a get well like 3000 square foot twenty two thousand twenty five hundred square feet. Twenty seven square feet of flooring done in like a day and a half. They kept telling us this right. And we were like great because that's what's what I was talking about. Got Yeah we're gonna pay more for them and subcontracted out there can be margins whatever whatever but it gets done in a day and a half. Great for our guys it might take a week because it's a lot of flooring to lay and so it was determined like Friday's the day they took they're going to come in on Friday. So we're excited we're like oh my gosh these guys these guys must be amazing right. They're gonna come in they're gonna go crazy. They're bringing like 10 guys into that thing and they're with hair like you know I think they're like eight thirty because we were there for something else. We're like there's nobody here is we're here they're finally like one or two guys kind of like rolling around like eleven eleven thirty but it's kind of like okay. Like I guess you're here now so you're gonna go crazy. And like you know it took them probably what like four days or five days like the first day.   Ryan Goldfarb: [00:44:11] They I think in the entire day completed two rooms out of eight or so they came in with an attitude.   Ryan Goldfarb: [00:44:19] They were very very angry and contrite with me listening to the loudest like how dare you make them come in in 11 Joe listen to the loudest music I've ever heard.   John Errico: [00:44:31] Human beings actually listened to like for enjoyment.   Ryan Goldfarb: [00:44:34] And on top of that they say they specifically asked me to have our guys move all of the boxes of flooring volume up to the third floor. And I think put all of the boxes in their respective rooms so that they could focus on quote unquote their task of laying a living all of their garbage.   John Errico: [00:44:53] Like all of their garbage like all of the boxes all of the scraps everything like that.   Ben Shelley: [00:44:58] But I think I think the answer is because we've got we've gone from the bad side to the good side and then instinctually sort of back to the bad side because we always remember. I think those things that go wrong is that there's there's good and bad in both and there are good GCs and bad GCs and you need to do your homework as best as you possibly can to find that person who's right for you. So briefly I just want to recap what we've done so far because we've covered a lot in layman's terms I would say communication and expectation making those things clear is vitally important. That knowledge is power knowing as much as you possibly can about what you're going to be going to do for your project can only help both you and the contractor you work with and understanding and defining your scope as clearly as possible. I know that's very difficult for non investors and people without construction backgrounds but as much research as you can do for your specific area can only help you and we've gone into already pricing and we're always open to questions comments and concerns so reach out to us if you want us to revisit this topic in future episodes. But for now I want to pivot to another portion of the business still working with General Contractors which is permitting and licensing. So as we touched on this very briefly at the beginning the episode but first and foremost maybe the difference between a licensed contractor and a non licensed contractor Gents, maybe you can talk to us a little bit about what is the difference in working with these guys and gals and when is it appropriate to use one versus the other. Or is there a difference.   Ryan Goldfarb: [00:46:21] The correct answer I think is to use a licensed and insured contractor for anything you're going to do. I would say that the reality is a little bit different if you're talking about you know you have a little you had a little leak or you had like some kind of like stain on your wall in your living room and you just want to paint a little bit like a small 5 by 5 patch. You're not going to call in a license or you don't need to call in a licensed and insured general contractor to come in and paint that and do that little bit of like handyman work. That is classic handyman work and and it's over. Frankly I think it's overkill to bring in a licensed insured general contractor who's used to working on $300,000 projects to come in and attack a job like that.   John Errico: [00:47:11] Yeah it's actually it's a little bit sad that the industry is in such a way but it is expensive to get a license and it is expensive to have insurance that is commensurate with the amount of work that you're doing. So it is the case that being a licensed and insured contractor is just more expensive than hiring someone without a license or insurance. And I think that's actually a shame because I agree with Ryan that the the work the right way to do it and not so much concerned about the license but insurance is a big issue. If you're inviting somebody in your house to do work and they get hurt and they don't have insurance that's a problem. You have a problem from the perspective of a homeowner. Having said that have I had people in my houses that don't have licenses or specifically don't have insurance do work that might be considered hazardous or possible injury capability like yes I've absolutely done that because that's the reality that doesn't make sense for me to pay. As Ryan said someone with a license or insurance to do that type of work.   Ben Shelley: [00:48:09] So can you guys talk a little bit about what kind of work requires a permit. Because we're sort of I think beating around the bush and saying well you know there's certain work we just know as handyman work but a lot of people listening may not know the difference. So what might be just a few examples of just handyman work versus work that really would require a permit maybe even from a licensed contractor.   John Errico: [00:48:27] It's hard to say because it's going to depend a lot on where you are. Even so where we are in New Jersey I would think is one of the most regulatory heavy environments for this type of thing and maybe the whole country. So you know the joke in New Jersey is that like you you drive a nail into a piece of wood or screw into a wall and you need a permit and that's not entirely untrue. I mean not that literally but that type of attitude is not entirely untrue. There are some obvious things that I don't think require permits any anywhere like painting does not require a permit. Generally in this area laying flooring doesn't require permitting although I think taking up existing flooring possibly might I'm not entirely sure. Very bizarrely putting in a new roof doesn't require a permit in New Jersey and I believe that is a recent chance of recent change.   John Errico: [00:49:12] Why is that. I have no idea.   John Errico: [00:49:14] I guess the effect of lobbying their roofing lobby has either failed or succeeded depending on if it's good or bad for them. So but obvious things that require permits will be extensive renovations like a new kitchen a new bathroom almost anything that you do with plumbing that is beyond like repairing a very small leak will require a permit. Major additions extensionsetc. Again it's the general contractors job and license to no job and. Purpose To know what permits are required how to get the permits how to work with the city. That's really a lot of times the expertise that you're paying when you're going with a good general contractor beyond all the things that we said before knowing the permitting process is very opaque. Even we who do this all the time there are still things that come up regarding permitting and working with the city that are hard to anticipate and they're different cities city to cities. So that's frustrating.   Ryan Goldfarb: [00:50:09] Tight end tight end with the permitting issue is the licensing issue on a bigger jobs in particular. There are often you're often not just looking at one trade or one permit there are usually going to be multiple sub codes that are applicable there. So you may if you're doing a kitchen renovation you may be looking at the building sub code and you're also going to be subject to the electrical sub code plumbing sub code potentially fire sub code. And each of those is overseen a little bit differently and that is the reason why you need all of these different subcontractors because they will each carry their relevant licenses so a home improvement contractor which is the type of license that we have that only that only really applies to the building sub code aspect of the job the your electrician will carry an electric or will have an electrical license and we'll also have insurance that specifically covers the nature of work that the electrician electrician performs. Likewise likewise with the plumber likewise with an H contractor. Likewise.   Ryan Goldfarb: [00:51:24] Maybe not from a licensing standpoint but from an insurance standpoint with something like a roofing contractor.   Ben Shelley: [00:51:32] You know Ryan and I think it's good that you actually bring up some of these subdivided sections and requirements for building because one of the things we want to jump into when we talk about licenses and permitting is also inspections. I think one of the biggest if not the biggest job of a GC is to get you through all the way. One of the biggest responsibilities of a GC is to get you all the way through the inspection process with the various municipalities that you're building in. So maybe you guys can I mean ask this as simply as I can which is sort of a theme of this episode. You know when it comes to inspections how do I pass my inspection.   John Errico: [00:52:04] Well normally that is not something that you as the owner of a project would really have to worry about. So if you have a good general contractor they will take care of the inspections and the permitting and working with the city and whatever else. Sometimes you are aware of them occurring because payment can be tied to that. And so a lot of general contractors will say you know you owe me a deposit at this point and then you owe some more money after the rough inspections are done. So what normally will happen is that a contractor will pull permits and at some point in the process they will begin doing work. And the city will mandate that once a certain bit of work is done an inspection has to occur. Oftentimes the rough process is say a plumber has put in new plumbing but the walls haven't been closed. So all the plumbing is exposed that would be the point of time in which a rough plumbing inspection would occur analogous for electrical HVAC etc etc cetera. So you as a homeowner don't really have to worry so much about passing that or doing anything with it. If the contractor has messed up and is unable to pass the inspections. Messing up is maybe not even the right concept. It could be just the case that the contractor and the city have a disagreement about what is required but if whatever is in the inspection isn't passed it is important to generally know that it's normally not on you as the owner to care about that or to pay more about it. Some unscrupulous general contractors might say what I didn't pass inspections and now I have to do a bunch more work so they're going to pay me more money. That's usually not how most arrangements occur. Maybe it's the case that because of the additional work required the scope will change in a change order will be required because something really unexpected has happened. Based on what the city has said. But if that's a possibility I would really prefer both as a client and also as a contractor to have communicated that there will be no that originally if that was a possibility.   Ryan Goldfarb: [00:54:01] All right John hit the nail on the head with that.   Ryan Goldfarb: [00:54:05] This is going to be your ability to pass inspections and the speed with which you pass inspections is going to be determined largely by your team and that's why it's critically important to have a general contractor with experience in that municipality and who has a network of trades a plumbers electricians HVAC contractors who have the same degree of experience in that municipality because if they've done it before they can do it again and a lot of those disagreements are barriers of barriers to communication when it comes to expectations for the plumber. The sub code inspector should be avoided by their prior experiences.   Ben Shelley: [00:54:48] And that's where maybe relationships that your GC has with the city can also come into play. I think a lot of GC is like too to sort of talk up maybe what cities or what areas they have better relationships and because they feel it does and probably does make a little bit of a difference at times where inspections are concerned. And while it is somewhat of a footnote because it's not your responsibility I think both points should be well taken particularly for for newer investors that if something goes wrong it is really not on you. So in this theme of pricing be aware of that because if a contractor comes back to you and says well I need to charge you more you should be aware of of what's going on and why they're coming to you and saying that.   Ben Shelley: [00:55:23] So I want to sort of as a book here I still want to talk a little bit about some questions about finishes but first most of what we've been talking about really falls under the category of something that's called capital expenditures cap ex and obviously there are different ways that investors look at and treat their properties if you're coming in investing in flip then cap ex is probably more of a concern than repairs and maintenance which has more relevance to people who are maybe holding their property long term or currently managing their properties under their umbrella. So guys maybe we can talk a little bit about the difference here and just distinguishing them and defining the terms of again repairs and maintenance versus CapEx.   Ryan Goldfarb: [00:56:04] These are really   Ryan Goldfarb: [00:56:06] Accounting distinctions. So a capital expenditure is something that is going to go into your basis in the property. So oftentimes capital expenditure expenditures are. Akin to fixed improvements that are going to improve the capital asset or improve the asset on the books. So if you have a house and you spend fifteen thousand dollars to install a new HVAC system that wasn't previously there that would be considered a capital improvement and thus goes on the books as a capital expenditure. The repairs and maintenance classification is just as it says it is repairs and it is maintenance in nature. So if you already have that HVAC system and if you already have that HVAC system and you need to replace an air filter or you need to replace a broken component of your furnace that is generally classified as repairs and maintenance because you are repairing or maintaining an existing component of your system. So when it comes when it comes to tax time the main distinction is your repairs and maintenance are taken as an expense whereas capital expenditures or capital improvements may go onto the books a little bit differently and maybe they may go into your basis in the property which.   Ryan Goldfarb: [00:57:44] In a round about way can ultimately be taken as an expense but is generally done so in the form of depreciation and this is a whole other topic for a tax expert or for a tax expert or a CPA to come in and opine on.   Ryan Goldfarb: [00:57:59] But high level that's that's the distinction.   Ben Shelley: [00:58:02] So for for a final topic here to bookend the segment I do want to talk about the types of finishes that people look for want to ask or ask for scuse me from their general contractors. This is gonna fold in nicely I think with the pricing conversation and how to approach and the dynamic between your GC but maybe if you guys can talk from your bank of expertise about the kinds of finishes you might want for different types of projects and

The BxB crew discusses the importance of creating your real estate team and best practices for real estate networking.   (Transcript below.)   Ep. 7 - Building Your Real Estate Network - Transcript Ben Shelley: [00:00:08] Welcome to the Brick by Brick Podcast where we take you from the ground up on all things real estate. I'm your host Ben Shelley. We are fortunate to have Ryan and John back with us today. The focus of this episode is something we do in every business: networking. However, there are many different ways to network in the real estate industry and that's what we'll be discussing today. Gentlemen, let's jump right into it. John, why don't we start with you?   John Errico: [00:00:33] Yeah. So it's perhaps a prerequisite to say that Ryan and I met through real estate networking. And something that we alluded to in a previous episode which is true about real estate investing but is also true just about entrepreneurship in general is that it can be very lonely. So real estate networking offers the opportunity to both meet like minded people and also to build out your team of people that you might use to invest in real estate. So a lot of real estate investors talk about building a team and it's certainly is it is a true thing. Your team might be a great real estate agent or acquisition person like a wholesaler. They could include an attorney it could include a home inspector an appraiser a general contractor or property manager or even like a plethora of things that might be on the table. So networking is an important facet of being I think just being a happy person. If you're a real estate, full time real estate investorm entrepreneur and also in my mind an essential thing to build out a team of people to help you accomplish your, your real estate goals.   Ryan Goldfarb: [00:01:37] One thing I would add is beyond the obvious value of having say a competent real estate attorney on your team. One thing that I think goes way undervalued is networking with other real estate investors and that's valuable for a variety of reasons one of which John alluded to earlier is the loneliness factor that you may experience as a solo entrepreneur, a real estate investor. But beyond that there's also an educational advantage that you have or that you gain by networking with and speaking with other investors in the same field. Oftentimes you'll find that another investor in your market is doing a lot of similar things on the surface but tactically speaking they may be doing things very different when you get below the surface.   John Errico: [00:02:29] Yeah real estate I think has a guru problem. A lot of industries have this but real estate has this to a huge extent. These are the people that you see maybe an ad before a YouTube video or TV late night TV or hear on the radio that are coming with you know a free conference to talk to you about whatever you know how to make all your dreams come true by buying real estate with nobody down, etc. And it's not to say that all of them are scams but I would say the vast majority of them are out there to just take your money for the fees that they're going to charge for their books and their training and their courses and whatever else.   Ryan Goldfarb: [00:03:06] The most frustrating thing about that to me is not that it's a scam or not that they don't have value it's the fact that there is so much free information available out there that I just don't believe it's genuine to try to push that upon somebody who could otherwise learn the same stuff for free or by perhaps bartering something else of value to work hands on with somebody who is doing it in the field every single day.   John Errico: [00:03:36] Yeah. So one major piece of advice that I would have about networking is not to name specific names of gurus but when you see people listening to this podcast will probably just immediately have a couple in mind when I'm talking about it when you see those those are probably not the best networking opportunities because a lot of times the people that attend those conferences or events are gonna be people that maybe are just getting started in the real estate space like you. And although there's some value to networking with those want to be your soon to be investors the much more authentic and engaging connections that are gonna make you there by building your team or by finding fellow real estate investors are through specific real estate networking events that you often don't have to pay money to attend. Or maybe for a very small fee to get in the door.   Ben Shelley: [00:04:22] So maybe something that would be helpful because you know I think a lot of people abide by a maxim we've used on the show before life being a relationship business and nowhere is that more true than the real estate business. So when you're looking and you see online or you see on television come to my seminar come do this. Maybe you get solicited calls from brokers or wholesalers maybe what are some of the strategies from a networking perspective given how experience you guys are to differentiate who's worth connecting with and maybe who's worth staying away from Ryan.   Ryan Goldfarb: [00:04:50] I would be most cautious of opportunities or of events that are proposed that have a very high entry fee or that have maybe an introductory entry fee with the promise of some type of knowledge that is going to fulfill all of your wildest dreams. The fact of the matter is learning takes time and those events appeal to the people who want to take a shortcut to get to what is often a lifelong process of learning. So I would start by rather than falling prey to the people who are trying to advertise to me and trying to reach me I would try to find the people who are the gatekeepers so to speak or find people who are in my backyard and who are doing the things that I would like to be doing and see who they associate yourself with. One of most valuable aspects of networking is the fact that once you find one or two of these linchpins you'll often find that they are connected to a quality team of respective professionals in the same space as well. So a good title company often knows a really good real estate attorney who they can refer you to or another active investor or a wholesaler who whose deals they close frequently and who may be a good resource to you as a new or aspiring real estate investor.   John Errico: [00:06:16] Absolutely. So pretty much every city neighborhood county that you may be in has a local real estate investing group club whatever you want to call it. And oftentimes those groups are advertised on places like Meetup.com. So Meetup is a great place you can literally go open it up type in real estate and you'll find a ton of events. Some of them will be of the guru variety and those are often the ones that charge you know 50 dollars or dollars just to to attend and the others will be of the authentic real estate investor variety which are usually free or maybe charge a nominal fee because they had a reserve the space for the event or there's some drink or food minimum but that is just showing up is you know like 90 percent of the battle because I host a real estate meetup group in northern New Jersey and I think there are about a thousand people in the group and I hold events every month and I don't sell anything I don't charge any money for people to attend I'm not going there with any ulterior motive to get any obvious immediate personal benefit to me. But you know I'll have a thousand people in the group and say maybe 50 people RSVP to any one event and of the people that RSVP maybe 20 people will actually come. So you know I'm not saying that just because you're in the group you have to come to the events but that just gives you a sense of how many people are aspiring real estate investors or interested in networking but then don't actually take the step of Oh I'm actually going to walk out my door and go to a networking event.   Ryan Goldfarb: [00:07:41] And then beyond that I would say that the next step once you do that and once you've established some clout you've done a few deals. The natural progression I think is to find the events that aren't generally solicited to the public and that aren't available to just any aspiring investor. We've taken a little bit different of a path and my brother and I add is to the networking game. We more recently have hosted an event or two with various investors who we know and various people in the real estate space. And it's been a little bit more of the invite only variety not to say it's quote unquote exclusive but our end goal was to get as many active investors together as we possibly could. And what I've realized and I'm sure what John has realized is a lot of publicly advertised events often attract newer investors. And while that's great. And while I've benefited from those and I've certainly met some great people John included from events like that. The downside to it is once you've done a few deals you end up spending the vast majority of your time talking to people who haven't done a single deal yet and you are giving giving giving giving and oftentimes not getting much in return. And oftentimes talking to somebody who may never even take the first step and buy an investment property.   Ben Shelley: [00:09:00] So before we continue down the conversation of do's and don'ts I want to know from each of you given your accumulated experience what are short of your real estate network essentials. You're starting as an investor or you're a couple of properties in to building an investment portfolio. You've got a backpack on your network essentials that you're putting in with you as you continue to elevate or move forward in the business from a relationship standpoint.   John Errico: [00:09:24] So I would say for Ryan's point fellow investors are super important. I don't see investing in real estate as a zero sum game. So my success doesn't mean the detriment of somebody else. So if I get a deal that somebody else wanted. I often try to structure where maybe we can both get the deal but we can both partner in on it or we can both talk about it and even if I end up getting it maybe I'll learn a lot from that other person's perspective. The second thing though is I would say it's very important to get people that can. So when you think about a real estate transaction. Who are the people that you're going to have to need for a real estate transaction. So you may need an agent. Depends on the sort of transaction that you're going into or how you're getting out of it. You may need a property inspector and that's someone who after you go to contract on the property will inspect the property for flaws issues that you might want to negotiate with the seller. You likely need an attorney in some areas of the country that's less common but where we are it's very common to have an attorney represent you as a buyer or seller in a real estate transaction. The title company and that's something that an attorney can connect you with or that you can find on your own and then you'll probably need a contractor which is someone that will help you to repair the property or fix any issues that come up after you buy it.   Ryan Goldfarb: [00:10:41] The last thing I would add to that is you may need a or you will likely need a financing partner or a lender who will facilitate the mortgage or the loan that you're getting to purchase the property. And when it comes to qualifying these people there are a few things that I always like to keep in mind. The first of which is the character of that individual. So I don't think you know it's great to meet another investor. It's great to meet another attorney but if that person conducts himself in a way that is diametrically opposed to how you would like conduct yourself you're better off cutting ties now than getting too far down the line with that person and falling prey to their behavior. In addition to that I would also way I'd also put a little bit of an emphasis on the personal side. So do you like being around this person. There are plenty of people who I've worked with in the past who I worked with for reasons other than that. And oftentimes I came to regret it. I remember one example of that was a subcontractor I used on one of my first projects that individual was one of the least pleasant human beings I've ever been around. And though he was a subcontractor of mine and in this context I was his customer. He for whatever reason had this prevailing notion that it was my privilege to be employing him for this job. And every single interaction I had with him reflected that. And it just left a sour taste in my mouth and it took mental energy and it was just not the kind of person I wanted on my team. So pick up on that and address   John Errico: [00:12:23] it. Yeah. And I think it's important to consider first. I think it's a great point about the caliber of the person. For me it's about what are they willing to give to you without an immediate expectation of return. So something that I I really try to do that we both try to do is I think give give back our knowledge and experience to other people even if it doesn't obviously make financial sense for us. So if you encounter somebody at a networking event that has a lot of knowledge maybe it's a contractor or an attorney or something. It's a really bad sign if they are not really interested in talking to you except if you've engaged their services because as we started out saying in this episode knowledge of the real estate space is really readily available and you don't have to pay money for knowledge. So if you encounter people that don't want to give you free knowledge it's a really bad side.   Ryan Goldfarb: [00:13:15] Additionally while this may run counter to what your instincts may tell you I like to surround myself with people who are a little bit different than I am or who run in different circles than I do. When you ask anyone in your network for a referral they'll often say Oh hey I have a cousin who's an attorney or I have a brother in law who's a lender you should talk to them you know that that may be great. And if you have no other options that person if they're qualified can be a great asset to your team. But I've also found it quite beneficial to cultivate relationships with people who are otherwise outside my social sphere because that opens up other doors to other networks and you never know who that person may ultimately refer you to. And that's a referral that you would otherwise miss out on if you're talking to somebody who is   Ben Shelley: [00:14:01] in your network. Yeah. And I would even draw listeners to even hear I think the tone of Ryan's voice when you talked about your interaction with the first subcontractor and the bad taste that left in your mouth and it's a reminder to people that how you treat people matters obviously but also do you meet your commitments. Do you do what you say you're going to do are you willing to go maybe a little bit as John alluded to up and beyond just generally sharing knowledge and go the extra mile to form the basis of relationship again as John said. And has he appropriately noted this is not a zero sum game. And I think in the first it might have been in the introductory episode where you talked about you both talked about how it would be very easy in the context of this business and what you guys do in the residential market to sort of look at your deals on an individual basis and just see in the larger scope what's best for you. But that how that would not be effective towards achieving both your long term goals and to maintaining the strong relationship you have together there was. Was it the rising tide. What was that phrase you used to love.   Ben Shelley: [00:14:59] The rising tide lifts all ships raises all ships. Right.   Ben Shelley: [00:15:02] And if there's two things to take away from this episode it's how the real estate network and John Errico does not like gross not not one bit don't you. Don't you say good or don't you say you're a guru.   John Errico: [00:15:12] Well I to like pagers I like. I'm just joking around. I want to give a specific shout out to one networking tool in particular which is BiggerPockets and BiggerPockets is a if you're not familiar with it it's BiggerPockets dot com. We're not sponsored by them. So you not yet at least not yet. We're not sponsored by them but if you go to BiggerPockets you'll see a lot of resources that they have including podcasts and online resources. But what the most valuable thing for me are the forums the message boards and they have specific message boards for every real estate strategy you've ever thought of. For geographical regions and whatever and there are many Meetup groups there are many networking events that are either sponsored by them or that appear on their Web site that are really really valuable. And just reading and also contributing to it has been a huge part of my real estate growth. I've given I haven't been active that recently and BiggerPockets which I actually regret. But for a time I was posting very frequently and I met a lot of great people through that through that back and forth and learned a tremendous amount. That was probably my number one resource when I was getting into real estate was was BiggerPockets so using that as a networking tool I highly highly highly recommend. Now   Ben Shelley: [00:16:23] we've already kind of summarized I think the most important themes for each one of us when it comes to real estate networking. But maybe last thoughts from each of you.   Ryan Goldfarb: [00:16:32] Before we close the episode I'd like to expand on a point that John alluded to earlier which is about evaluating those who you may be interacting with and you may be welcoming into your network. I would look at that from the converse or inverse perspective. Flip it on its head if you will and think about how you come across to other people. I always strive to make myself a resource to those in my network and if I'm meeting somebody for the first time I like to think about how I may be able to help them. And while that may pay dividends to me on occasion it is certainly not my end goal and every time I put myself out there offering something of value to someone. The reason being if you put enough goodwill out there in the world generally finds its way back to you. And for me I want to be a giver I want to be somebody who provides value and I want to be somebody who people enjoy having in their lives. And I think there are both tangible and intangible benefits to that some of which are business related some of which are personal.   John Errico: [00:17:33] Can't really find that image because I was going to do the exact same thing. Truly I think it's a really important point this is true for one.   Ryan Goldfarb: [00:17:42] Why don't you try to say the same thing and then we'll both play we'll play both of our responses with a poll and we can ask the listeners who say it well.   John Errico: [00:17:51] I would phrase that exact same point is to give a lot more than you take. And that's the philosophy that I have in almost always everything and particularly in networking. So I think I would have foreclosed so many opportunities if I were another way to say as I've left so much money on the table right. I think we both have done that. There's there's so many ways that I could have made more money in the past doing real estate that I haven't but I would've foreclosed so many future opportunities. So networking is a two way street. And for me it's a lot more about what you give than what you take. So even if you've no experience whatsoever in real estate I am sure I'm certain you have experience in something where you have something to offer or some perspective or some ability to help somebody else. So even somebody who's done nothing in real estate has no experience in real estate. I could talk to and gain something from that experience I could I could get something from it and then I hopefully can   Ben Shelley: [00:18:44] give something to them as well. And one last thought that actually occurred to me from listening to both of you I think it was Ryan who mentioned you want to try to look for people who maybe fill your gaps who maybe have a separate skill sets. But I think the other important thing to look for even if and when they are different from you from a skill set perspective is to find people in business who share values and your principles. Because even though you may have different strengths and different weaknesses that mesh well with each other I think it's important to be unified in terms of not only a forward looking goal but how you want your operation to run how it should be perceived and how you treat people. Guys as always I appreciate your time and your expertise. Thanks so much for coming on.   Ben Shelley: [00:19:34] And thank you for listening to the brick by brick podcast where we take you from the ground up on all things real estate. We will continue to bring you the best and brightest the real estate world has to offer as we leave no stone unturned in helping you the everyday investor. Thanks for listening.  

The team examines the complex topic of real estate investment funds from a high-level and in the context of their real estate investment business.   (Transcript below.)   Ep. 6 - Raising a Fund for Real Estate Investment - Transcript   Ben Shelley: [00:00:07] Welcome to the Brick x Brick Podcast where we take you from the ground up on all things real estate. I'm your host Ben Shelley. We are fortunate to have Ryan and John back with us today. The focus of this episode is about raising a fund for real estate investment. As you begin to build your real estate portfolio and gain experience in the business the opportunity can arise to rapidly expand your operation by raising money from outside investors and utilizing an increased capital base to scale up your business and generate returns. For this discussion we'll take a deep dive into how real estate funds can be structured when might be a good time for you as an investor to consider raising a fund and how the increase in capital resource can help you upscale your business. Gentlemen let's jump right into it. John, why don't we start with you.   John Errico: [00:00:55] Yeah. So I think I want to take a very high level perspective on this to start with and then we can delve into some specifics. But just as a sort of perfunctory statement I think raising a fund like we're gonna be talking about is something that is not appropriate for all real estate investors and even kind of advanced or experienced real estate investors might not ever do or might not be ever interested in doing. And I'll explain why that is as we go on. But from a very very very high level perspective raising a fund is related to a previous podcast episode where we talked about real estate financing and how to get money for deals. So the way that Ryan and I generally get money for deals is on what I would describe a deal by deal basis. So we'll see a property - you can call it an asset for for this world. You'll see an asset and you say how can I raise money? Well I'm going to go to my investor friend or my partner and get money in whatever capacity and whatever structure I want to do for that specific property. If you don't want to do that for some reason so maybe because it takes a lot of time to do that or maybe because you have a lot of deal flow or maybe because you have such a large asset that it doesn't make sense to go to one individual person it may make sense for you to raise what what we are calling in this case a real estate fund. And when you do that you're entering into the world of what I would say is private equity. So a real estate fund is the way that we're using the term is a pool of money. It could be provided by a single investor. It could be provided by a bunch of investors. But normally or frequently in the real estate world or the private equity world the way that they're structured is you pool people's money together. The people who operate the fund are called the sponsors or maybe the general partners of the fund. They're paid a fee and they control all of the investments that the fund makes. So instead of going on a deal by deal basis and raising money you sort of do it all upfront. You say, "hey friend, I'm raising five million, 10 million, hundred million, a billion dollars and I'm an investor in this type of asset class in this strategy and I want you to put in money to this fund and let me manage it for you. I'm gonna do it for you." And so you might be familiar with companies like Blackstone or maybe Brookfield or maybe any sort of company that you like could jeez I wonder what they do you know kind of in the finance banking world. A lot of them are private equity companies and a lot of them raise humungous funds. A lot of times to buy real estate. So Ryan and I are in the midst of raising money for our first fund and the details of that and how it structure we can get into right now. But that's a very high level overview of kind of what the world is. Ryan, do you want to touch maybe a little bit on the why we in particular raising a fund as opposed to deal by deal?   Ryan Goldfarb: [00:03:40] Yeah. So that was a great summary of high level what a fund is. Now you may ask yourself why you would want to do that when what you've already been doing has been working with some degree of success. For us it became a matter of scale and we were at a point where we were wasting a lot of time, or maybe not wasting, but we were occupying a lot of our time with trying to line up investors on a deal by deal basis. And at the same time we felt like we were missing out on opportunities to buy other properties because we didn't want to have to go through that whole song and dance to raise maybe 50, or 100, or 150 thousand dollars because of the amount of time required to make that a reality. So the logical next step for us was to figure out something with a little bit more scale, which in this instance turned out to be this fund. So the impetus for this, or the logic here, is let's front load all of the fundraising. Let's front load all of the work so that over the duration of this fund we have discretion over the investments that we're going to make. And the moment we see something that we would like to act upon we have the resources to make it a reality. Now there are still plenty of opportunities to get creative and to borrow money or put some type of unique capital structure in place either on a deal by deal basis or by employing some leverage with the fund itself.   Ryan Goldfarb: [00:05:15] But we are no longer beholden to finding a new investor for every single deal every time something comes across our plates.   John Errico: [00:05:23] And one aspect of our decision to raise a fund as well is the idea of diversifying returns and risk so we will have deals that come through our doors that range from extremely speculative, very high risk but hopefully are usually very high return to quite conservative, quite middle of the road, but correspondingly quite modest returns relatively, and some of those deals might be appropriate for certain types of investors. Some investors want to do really high risk. Some investors wanted to conservative stuff but if you're raising money on a deal by deal basis that investor doesn't really have the luxury of saying, oh I don't. It may be awkward to say I don't invest in this, you know, low risk, low yielding deal but I would want to deploy money more aggressively. It's hard to to say like well just wait a couple of months and then I'll have another deal for you. In the fund structure we can say look we're doing all of that together, it's diversified, right. So we're buying stuff that's really high risk and we're also buying stuff that's conservative. But the blended return to an investor is hopefully a healthy return at a risk portfolio that. Almost any real estate investor in this world would be happy to accept.   Ryan Goldfarb: [00:06:38] One other benefit to this strategy or to the fund path for our investors is, you know, in comparison to let's say an equity partner who might be on a flip with us, that flip is only going to hopefully last six months, nine months, or 12 months. So it's a shorter term play and while the investor's rate of return on that investment on that single project may be quite high by the end of it, they get their cash back plus their profits but they're left with the same problem that they faced at the beginning. What do I do with this extra cash? They now have to find another deal, another quality deal, whether it's with us or somebody else, and they need to try to recreate those same returns. So the benefit to them in this scenario is they make this investment upfront, and while they may not have access to the cash for an extended period of time as depicted by the limited partnership agreement and as outlined by the fund itself, the benefit is that theoretical high rate of return is achieved on that capital from the point of inception up through the dissolution of the fund, which in this case is going to be many years down the line.   John Errico: [00:07:59] Yeah, that's true of the the fund structure that we are putting together. It might be significant to understand that there are many many many different ways to structure funds, real estate funds, even a REIT is a type of real estate fund structure, which is unique and has unique advantages and disadvantages. I mean even putting together money for a single deal you could think of it in a way as as a fund. And frankly it is subjected to the same legal requirements as even what we're doing. We're sort of talking about a fund in the very traditional private equity world of a fund. If you went to say Blackstone and said "how do you structure your funds?" they would be similar to the way that we are discussing structuring a fund. So as Ryan alluded to the fund structure is such that we raised money at the beginning usually within a small period of time and that money is essentially illiquid meaning it cannot be withdrawn from the fund, maybe your interest in the fund can be sold to another investor. But basically if you need the cash you don't have access to it until the fund sunsets. There are funds that are "evergreen funds" which are around forever but generally the most common option in what we're doing is a fund with a set time horizon so you invest money at the beginning, the fund invests that money over a - could be 4, 5, 6, 7, 8 year period of time - and in our case for doing a six year fund - invest that money over that period of time and at the end of that period of time the fund operators liquidate those assets either by selling them to potentially another fund or by selling them to buyers or refinancing out of them or doing whatever. But at that point all the money that you've raised is returned to investors and the investors will receive obviously more than the amount of money they've initially raised. And that difference is their return on their investment. And as Ryan alluded to before the if you sort of backdate the amount that they've been returned you can get a pretty healthy IRR, a pretty healthy yearly rate of return, for the amount of capital that was initially invested.   Ben Shelley: [00:09:57] So John you took us a little bit through there...   Ben Shelley: [00:10:00] The capital structure both of funds generally and specifically the fund that you and Ryan are raising now. I do want to get also into the fund raising process itself from your guys perspective, both your experience and also maybe strategies for potential investors transitioning to creating a fund, but just out of curiosity could you maybe also talk about whether it's yours or funds generally, the corporate structure. So if I'm an investor and I own real estate under multiple LLCs and I'm ready to take that next step, is there a specific way I should go about structuring my legal ownership of my already owned properties to take that next step?   John Errico: [00:10:35] Yeah, it's a great question and it's important to understand that underpinning or overpinning all of what we're discussing is a large legal apparatus and a large legal structure. Even to the extent of raising money for a specific deal which is something we discussed in a previous episode there is a legal structure that overlays that. And as Ryan was alluding to before, that's part of the time going through it because it's important to, for example, structure your purchase in an entity like an LLC. But to answer your direct question, funds are structured in a partnership model and partnership is - frankly not entirely sure of the current legal reason why it's done this way - but historically it has been done this way. You can think of it similar to an LLC. Basically there will be a pool of people that invest who are called limited partners and limited partners have certain enumerated rights and those rights might be things like the formation of the entity, the disposition of the entity, what happens if the the other partner is gone or dies. The other partner is called the general partner and the general partner will be the entity that controls the fund. The fund itself being the partnership. So if you're raising money for a fund, limited partners will be your investors, and general partners will be you or your entity and one of the great things about the fund's structure is that that general partnership can itself be its own thing. It can survive the lifespan of the fund and because that general partnership is making management fees, which are another component of the fund and making profit on the back end carry or carried interest after the fund is over, the general partnership can become quite lucrative and quite solvent and can go on to raise itself. Other funds. So when you hear these big companies, you say well how did Blackstone, for example, which is the largest, I believe, the largest private equity firm in the country, how does Blackstone operate? How does it become what it is? Well Blackstone, maybe through its subsidiaries, is a general partner in many funds and they make money by management fees and by carried interest. So if you want to build a real estate company that that sort of has a legacy that is beyond you as a person, this is one way to do it because you're not tied to individual assets, not tied to individual investments. You're really creating a business. A company that can survive and become quite large, you know, you can approach even an asset class that maybe right and I don't even know about yet commercial industrial whatever.   Ryan Goldfarb: [00:12:56] John, correct me if I'm wrong but I believe one other ancillary benefit of the limited partnership structure is that the LPs are shielded from certain liability, right?   John Errico: [00:13:05] So similar to an LLC, the LPs are shielded from personal responsibility for the debts of the the overarching fund.   John Errico: [00:13:13] One counter to that is that when raising money from partners that are purely passive whether it be for a specific house specific asset or in a fund structure there are federal securities laws and even state securities laws that are significant. So most people that raise funds consult an attorney and frankly it's a very expensive attorney to set this up. In our specific case, I'm an attorney and my wife Shannon happens to be a private equity attorney which is a humungous advantage to us because we don't have to pay a very large New York City law firm to put together this private equity fund structure. But having said that most investors who are passive must be accredited investors which is a quite large burden for structuring deals or getting investors. We can get into some of the legal complications and aspects of it, iff you're just doing a single deal essentially raising money for a single property but in a structure where you have purely passive partners generally they're going to have to be accredited investors.   Ryan Goldfarb: [00:14:14] And speaking to your point about creating a legacy and speaking to your point about why it is that we would want to start a fund, I think you hit the nail on the head when you brought up the Blackstones, the BlackRocks, the Brookfields, all of those players are behemoths. But at one point they started off in some capacity doing what we are striving to do today. And our secret sauce may not be the same secret sauce that they have. But at the end of the day, the value that these firms bring to the table is their ability to identify deals and investment opportunities and their ability to execute on those deals and investment opportunities. And while we may be playing in a different arena - we're not, you know, we're not raising a five or ten billion dollar fund, the thesis is still the same. And the underlying goal is still the same. It's to put forth a plan to execute on that plan and to make ourselves and our investment partners happy with the end result.   John Errico: [00:15:18] It's a great point in the way that I think of it as the difference between being an operator and being something else. So I actually love being an operator of real estate like I love just getting stuff done in the real estate space. However I think that the perhaps highest and best use of our skills is to one day no longer be just an operator but to be someone who sort of sits above it and controls the financing and gets money from people that we might even hire as operators. And that's what these humungous funds and companies do. So you are out there listening as an investor you know you are an operator right. You're the person, you're your boots on the ground. You're buying assets. You're doing the work. You're renting it out you're doing all that sort of stuff. The way to make the transition from being an operator to kind of the next level is the way that we found it is to be doing this fund. I think we're gonna be operators for a very long time. Because I actually love doing it but I also love the idea of building something that's bigger than just me or just on a deal by deal basis.   Ryan Goldfarb: [00:16:17] This really hits close to home because day in and day out over the past six or so months I've seen the extent to which John really loves being an operator and I often find myself trying to prod him in the other direction and taking a step back and saying you know John you're you may love doing this and this may be very helpful in the moment but there's a bigger picture here and I think to an extent we're selling ourselves short by getting bogged down by some of these tasks.   John Errico: [00:16:48] So I think it prefigured the larger conversation you can have in this podcast about what it is to mature as a real estate investor. And I think we are I myself certainly am learning and struggling even with that transition at times.   Ryan Goldfarb: [00:17:00] I think, the the way that I've thought about it over the last few months, is that we're trying to transition from being real estate investors and owner operators as you have specified before, we are transitioning towards becoming business owners who operate in the real estate space. Right. And what that entails is putting the systems in place and putting the mechanisms in place to execute on these strategies whether it's us or those who we put in positions to do so.   John Errico: [00:17:27] Right. That's a great way to put it.   Ben Shelley: [00:17:28] So when it comes to the fund itself what I'm curious to know from you guys and they think this will be a good way to to sort of wrap this conversation up is when an investor looks at any investment opportunity they're still weighing the similar risk factors when it comes to what's going to happen to my money. And so whether they're looking at a general S&P 500 or Nasdaq stock, a REIT investment, private equity real estate fund, they tend to look at similar risk factors and trying to make their decision of whether or not they should invest. So it doesn't necessarily have to be a pitch for Liberty Hudson, although it can be, but why should a individual investor invest in a real estate fund like you guys?   John Errico: [00:18:07] Well I think if you look broadly at the returns as you laid it out there are many many ways to invest money. If you look broadly at the returns that private companies generate it's outsized. It's much higher than you can get even doing I suppose doing very speculative stock trading maybe you can do some crazy things but you're investing in like an index fund or something moderately conservative investing private companies way way way a general outperforms that. As to why you would invest in a real estate fund specifically for me it comes back to faith in the asset class of real estate and what we do specifically is residential real estate. So faith in that specific asset class. I think if you look at all real estate and all of the country over the last 200 years or whatever it is has been real estate does not appreciate very well it appreciates maybe at inflation or something akin to that. However, if you look at certain pockets of real estate over certain times with certain investment theses it performs extremely well. So my pitch as to why somebody would want to invest in a private equity real estate fund would be that it's a way to diversify your portfolio in an asset class that has proven to be very high performing and that hopefully will outperform what you might be able to do were you to deploy your money elsewhere. And if you can find operators or fund managers that you trust and have demonstrated performance in the past so much the better.   Ben Shelley: [00:19:37] Ryan?   Ryan Goldfarb: [00:19:38] The way I think about it harkens back to what I was talking about before about this being a business. The two main focuses of the business are scale and efficiency and having an investment fund and having all of these funds pooled together makes the whole greater than the sum of its parts. So that scale leads to certain advantages in terms of efficiencies is in the sense that as a fund you are able to do things that as a singular investor you may not be able to do. You are providing a service to your investors and that service is returns. That service is providing an investment vehicle that would otherwise be unreachable for you as a solo investor. So if you are a wealthy professional, if you're a doctor, or a lawyer, an entrepreneur in a field other than real estate, and you have cash sitting around, more than likely the best use of your time is not to go and plunge a toilet or paint a ceiling or clean up someone's apartment after they just moved out and trashed your place. The best use of your time is what you are good at. What most fund managers and what most investment funds are good at are real estate investments - or investments in their specialized asset class. So for us we try to focus on that each and every day and we try to build a business around that core competency. And we try to open the door to others to kind of ride the coattails of that experience and that success.   Ben Shelley: [00:21:18] I know I appreciate this I know our listeners appreciate this and guys thank you for your time and your expertise as always.   Ben Shelley: [00:21:33] And thank you for listening to the Brick x Brick Podcast where we take you from the ground up on all things real estate. We will continue to bring you the best and brightest the real estate world has to offer as we leave no stone unturned in helping you the everyday investor. Thanks for listening.  

John, Ryan, and Ben explore the range of financing options available for real estate acquisitions. John and Ryan walk through a sample deal using a hard money lender.

John, Ryan, and Ben discuss deal sourcing basics and the range of options for finding deals. John and Ryan debate the merits and drawbacks of various deal sourcing techniques to find dynamite real estate deals in a competitive market.   (Transcript below.)   Ep. 4 - Sourcing Real Estate Deals - Transcript Ben Shelley: [00:00:07] Welcome to the Brick x Brick Podcast where we take you from the ground up on all things real estate. I'm your host Ben Shelley. We are fortunate to have Ryan and John back with us today. The focus of this episode is another common investor question. Where do I begin to source deals for my own real estate investments? For this discussion our focus will be on different ways you can source your deals as well as strategies on where you can start your search on your way to finding diamonds in the rough. Gentlemen let's jump right into it. John why don't we start with you.   John Errico: [00:00:39] Yeah it's a great topic and it's a great question. I think from a very high level deal sourcing for real estate investing is sort of the lifeblood of investing. And I think even as we discussed in a previous podcast the really good wholesalers which are the class of people that we'll talk about that find deals will often go on to be investors because it's such an important facet of finding deals. But very broadly so when I first started getting involved in real estate investing the most obvious place to look for deals is sort of where everyone would go to turn to for buying a house which is a real estate agent. So a real estate agent will have access to something called the MLS which is the multiple listing service. There are actually many multiple listing services in any geographic area in any given house might not be listed on all of them for that area. I think in North Jersey alone there are at least three that I'm aware of possibly more.   John Errico: [00:01:33] And so the the MLS is a database that is controlled by realtors. And when someone is selling a house and use a realtor they will put that house, the realtor will put that house on to the database the MLS and then you as a buyer either as a buyer for your own living purposes or as an investor will have access to the MLS through your realtor. You'll see all the properties that are available. So the first house that I bought was off of the MLS and I think for some real estate investors using the MLS to source deals has like a bad name because they think oh it's just very overpriced or it's you know quote unquote market price because it's on the MLS. But you know four or five years ago in northern New Jersey you know we're talking like 2013esque when the real estate market was still quite poor you could literally throw a dart on the MLS and find an amazing great deal and that's how I found my first deal which is still proudly one of the best deals I've ever found. So the MLS is something that I still consult.   John Errico: [00:02:35] I still look at it for deal sourcing and finding deals but there are more and many many many more ways to find. I'll let Ryan chime in because he's perhaps much more so than me and much more creative about finding has been much more creative.   Ryan Goldfarb: [00:02:50] Yes I'll start by saying that while I try to avoid the MLS at all costs nowadays my first few deals I did procure from the MLS. Nowadays I tend to use the MLS more so as a data source than as a source of deals. More recently I have been sourcing from a variety of other channels. One of which it has been from wholesalers as John alluded to earlier. I've also I've also found some deals through SEO which is search engine optimization that is organic. SEO is the means by which a site like Google ranks websites, ranks results based on certain keyword searches. So for SEO I have targeted specific keywords to generate what should be a targeted seller profile to drive traffic to the website to ultimately lead someone to reach out to me as a potential buyer for their distressed property. Similarly there's also what is called pay-per-click which is generally abbreviated as PPC. That's what you see. Those are the page search results that you see on platforms like Google, Bing, Facebook and those are sponsored listings that investors, business owners, what have you will essentially bid up to get their name in front of you as the search, you as the seller or the target customer. So I've I've had some degree of success sourcing deals via SEO and by pay-per-click. Those are the main. Those are the main channels online. I know other people also have leveraged social media like Instagram for deal sourcing as well though I would argue that's a little bit tougher in the real estate space than it is for let's say a consumer facing business.   John Errico: [00:04:47] So I think to clarify you actually just said that people understand what SEO and pay-per-click means in this context. Ryan actually operates a Web site that is not necessarily affiliated with doesn't say like Ryan Goldfarb on it but it's a Web site that he runs. And I think you use a company right to help you run - InvestorCarrot, right?   Ryan Goldfarb: [00:05:07] So they are one of several options in the space. They have templates for... They have templates for Web sites that are tailored specifically to real estate investors. So it comes with content packs and it comes with templates that are already specifically tailored to this use. So it's somewhat of a plug and play option though it does require some degree of refinement especially in areas where you're facing a lot of competition.   Ben Shelley: [00:05:31] So before we jump in because I think the listeners would benefit a lot from hearing some specific examples from you guys on how you've used these methods to secure net positive deals in the marketplace. But I just want to clarify just sort of separating the three things that you guys just talked about. So when you talk about purchasing or finding a deal sourcing a deal via the MLS you're really talking about using a broker and their access to the MLS to secure the deal. When you're talking about a wholesale purchase you're talking about really not needing necessarily to use a broker though there are wholesale agents in order to secure a property, usually I would say at a discount to market. And then when you talk about SEO optimization you're talking about using a Web site and keying in on sort of key search terms to allow for search engines to move your listings or your site up the ladder when people are doing generic searches to click on you and bring deals to you as the investor is that generally correct?   John Errico: [00:06:27] Yeah. And I think that you bring up an important dichotomy between agents and kind of deal originators. So there is as you mentioned there's a class of real estate agents and those people normally get deals from the MLS but they could have found deals from other places. There's also a class of wholesalers which are also functionally agents, though they are not maybe regulated as that way but they also originate deals through whatever means that we're talking about. And one of the ways that they could originate deals is by their own SEO or pay-per-click both real estate agents and wholesalers take advantage of that. So there's the sort of agency class which is brokers and wholesalers and then there's like the originating class which is as Ryan said before pay-per-click, SEO optimization than other techniques that we can that maybe Ryan can allude on to.   Ryan Goldfarb: [00:07:13] And then separately from all that there are some other ancillary means of sourcing deals just off the bat leveraging your own network. If you know people who are willing to sell or are interested in selling or if you know people who know people who are looking to sell that can be a great way to find deals. We actually had a deal come through recently that came through someone who we know who noticed that their neighbor had been cleaning out the house and presumably prepping it for sale turned out it had been in an estate somebody had passed recently they were cleaning it out and getting ready to list it and we were able to swoop in and buy it before it hit the market. In addition to that there are Sheriff auctions or sheriff's sales, property auctions. They have different terms in different states based on the means of foreclosure but that those are broadly speaking classified as foreclosure auctions. We've also dabbled in the tax lien space and we've obtained property through tax lien foreclosure more recently that's a little bit more of a niche product but nonetheless that is a that is a way to procure deals. There are also valuable relationships you can cultivate with attorneys whether they are bankruptcy attorneys or foreclosure attorneys or estate attorneys all of which can...   John Errico: [00:08:33] Divorce attorneys.   Ryan Goldfarb: [00:08:34] Divorce attorneys... [banter]... All of which can be a good gateway to real estate opportunities so you can get creative with this. I mean there are plenty of options outside of what we discussed just now. But the key is finding and sourcing deals in ways that the masses probably are not.   Ben Shelley: [00:08:57] So maybe to to sort of help this come alive for listeners particularly those who are looking to become investors and are still asking themselves the fundamental questions about how they want to go about sourcing their deals. We've just given them a lot of helpful context here. But you both said that the first deal you guys closed was through the MLS. So can you talk about in context why was it that you went in that direction first based on maybe where your the amount of capital resource you had on hand at the time. And how is your network grown from there. From a deal sourcing perspective.   John Errico: [00:09:28] Yes. So the reason why I went to the MLS initially was because I didn't know any other information at the time. And I had a real estate agent that was that I still trust and is great and was very helpful had access to the MLS and she would feed us listings and say oh this is great. At the time this is I bought my first place in 2013 2014 essentially the market. There were so many foreclosures that were working their way through the system and many of them were appearing on the MLS that as I said before it was really like you could throw a dart and you could find a great deal. The second deal that I found was actually a for sale by owner deal. So that would be kind of like a like an originating process. I ultimately went through my agent but my then girlfriend now wife were walking down the street and we saw a For Sale sign in a house and we called up the number and it turned out that they were didn't have an agent at the time but were wanted to sell it. And so I went to my realtor and said hey can we set this up and I think she ultimately probably made some nice commissions from that but I did a few more deals in the MLS as well just because again it was so easy to find stuff. The numbers made so much sense and then you know I too as Ryan alluded to before I've I've bought things from sheriff's sales which are foreclosure auctions. I we both have tried this originating tactic which is talked about extensively in places like BiggerPockets which is direct mail and cold calling and you know door to door sale I've never actually done door to door or cold calling but I've certainly tried we both have tried and have had varying success with direct mail and direct mail is essentially going to a company that will print letters for you based on your search criteria and there are a bunch of them companies that provide you with data and then we'll actually do the printing on the mailing. But it's literally finding people that meet some criteria maybe they're older maybe they don't have a mortgage or have a big balance on a mortgage or live in a different state and saying hey I want to buy your house. I'm an investor. Anyone who owns a house is probably seen these. They're also the same type of people that do bandit signs which are signs that say you know I buy your house for money or for cash and a condition called this number. So I've tried that a little bit I've actually never purchased a property from I don't know if you have room I actually bought a property from that.... From your own direct mail?   Ryan Goldfarb: [00:11:49] Yeah we have actually bought, I think, it has been just one. And we were close on a second one that deal fell apart but actually our first rental property that we still have to this day that was purchased by direct mail.   Ben Shelley: [00:12:02] Well I think it's interesting too because what you realize I think a lot of people they almost think cold calling direct mail those kinds of methods are almost old news. They think oh you know maybe it worked in a bygone age but it can't possibly work for me now and you realize when you actually do it you pick up the phone and you make those calls and you send out direct mail, yeah, may be out of a thousand calls nine hundred ninety seven people tell you to go you know what yourself but that three that one two or three deals you could get out of it could be quite substantial so Ryan I'd love to hear from you sort of your origin story how you sort of went through the deal sourcing process.   Ryan Goldfarb: [00:12:35] So similar to John I bought my first two deals off the MLS and again similar to John it was mostly because I just didn't know any better. And it was the path of least resistance. Since then I have experimented with direct mail. I've cultivated relationships with wholesalers. I've attended sheriff auctions but have not purchased through their sheriff auctions. I have received referrals through my network for people who know of potential deals that have ultimately panned out. I have chased plenty of leads that did not work out. I bought a portfolio of tax liens and a number of the liens ended up being ripe for foreclosure and there didn't seem to be a redemption coming anytime soon and that seemed like the most logical course of action to protect our own interests. So we ended up I think at this point we've gotten eight properties back through tax lien foreclosure. And the online route I've now purchased a few properties through either pay-per-click or SEO marketing. And all of these, all of these have been validated enough in my own mind that I see them as a viable path towards sourcing deals in the future. But each of them come with certain drawbacks. Each of them have certain benefits one of which I one of which Ben alluded to earlier when you're sending out direct mail or your cold calling you get plenty of rejection and you get plenty of plenty of angry rejection from people who feel like you are overstepping boundaries by reaching out to them in somewhat of an unsolicited fashion. Conversely one of the things I like about marketing online is most people are seeking you out as opposed to you seeking them out. So there tends to be a little bit better of a tone to the conversation and people tend to be a little bit more amiable towards working something out because they're a little bit more motivated and if they've gotten to you they've gotten to you on their own accord and they're a little bit more cordial.   Ben Shelley: [00:14:44] So now getting a better sense of both of your individual organic paths through various deals sourcing methods what would you guys say is the best path forward for both a beginning investor, a mid-level investor, a high end investor and do you see a difference between these different methods that you guys have talked about?   Ryan Goldfarb: [00:15:05] Well I've definitely noticed a difference in the various channels towards deal sourcing. Having said that I don't think there is a way to break it down that works best for a beginning investor, a mid-level investor, and a more sophisticated investor. I think the goal of every investor should be to source deals off market and to source the best kind of deals you can find whether that's online whether its share of auction whether it's through your network. I think that should be every investor's goal and the reason for that is not that you can't find good deals on the MLS but what I've found and maybe John feels differently about this is that the good deals on the MLS are in front of so many investors that whatever margin there was or whatever price it was listed at that made it a good deal in the first place is quickly quickly vanishes because it gets bid up by the plethora of investors whose plate it comes across. So, there's an element of time associated with all of this. If if I have to look at 10 or 20 quote unquote good deals on the MLS to actually land one then that's not the best use of my time and that's not the ideal deal sourcing channel for me. So I prefer these other methods specifically online, direct mail, networking with wholesalers who I have established a relationship with and who don't function in a manner akin to the MLS with thousands of eyes on every one of their deals. And the main reason for this is I like control and I like knowing that I'm in the driver's seat. I prefer the channels where I'm not competing with investor A, investor B, and investor C where I'm not wasting my time kicking spinning the wheels and trying to find trying to make a deal work that I may not ultimately land at the end of the day anyway.   Ben Shelley: [00:17:06] And just as an example of the way they know that you leverage your people network through the increased level of deal sourcing that you've maintained over the course of your career I know you have a wholesale broker who you work with for example who himself John alluded to this as well who himself uses SEO systems to bring in deals and oftentimes funnels that to you because he knows you're an active qualified buyer and it's just an example I think of how all this can maybe be tied together as well. John your closing thoughts.   John Errico: [00:17:32] I think Ryan brings up a great point and a major observation that I have had is when I first started with real estate investing I think I felt maybe that I was almost too good to do some of the things that are involved in finding deals. So I thought of myself as well. Once I find the deal I can do all the stuff related to the deal but I want to be the guy sending out you know emails or cold calls or direct mail whatever or I don't want to deal with wholesalers because generally the class of wholesalers frankly is humungous. It is a huge variation so there are some wholesalers that are great and there a lot of wholesalers that have no idea where they're doing that will just literally find deals on the MLS and say I'm wholesaling to you for five thousand dollars more than what you could just find on the MLS. So if you're going to be a serious real estate investor particularly in the residential sector which is what we invest in it is really important to take the time to learn how to source and find deals whether it be you go to a broker class like an agent or a wholesaler or you yourself find the sorts of deals that that class identifies like Ryan said direct mail, SEO, sheriff's sales, relationships, for sale by owner whatever it is it's very important to learn those skills because those as I said I think when the very first things we were talking about is that finding deals is the lifeblood of your investment and if you want to really succeed it's important to either control that or know how it's done.   Ben Shelley: [00:19:00] Guys I know I appreciate this. I know our listeners appreciate this and thank you for your time and your expertise as always.   Ben Shelley: [00:19:16] And thank you for listening to the Brick x Brick Podcast where we take you from the ground up on all things real estate. We will continue to bring you the best and brightest the real estate world has to offer as we leave no stone unturned in helping you the everyday investor. Thanks for listening.  

John and Ryan discuss an upcoming renovation project in Livingston, New Jersey. The two debate potential exit strategies and play out various scenarios. (Transcript below.) Ep. 3 - The Anatomy of a Deal in North Jersey - Transcript   Ben Shelley: [00:00:07] Welcome to the Brick by Brick Podcast where we take you from the ground up on all things real estate. I'm your host Ben Shelley. We are fortunate to have back with us today the partners of Liberty Hudson Ryan Goldfarb and John Errico. The focus of today's episode is a very common investors' question. How do I determine the highest and best use for my real estate investment. For this discussion the focus will be on the residential real estate market and we defer to our experts to learn their thought process on deal analysis, exit strategy, and everything in between. Ryan, why don't we start with you.   Ryan Goldfarb: [00:00:42] Well I guess I would I would classify it as falling into two two departments so to speak. There is the financial viability and you know from a financial perspective what is the highest and best use of a property. And then there's also the zoning component. So you know anything in midtown Manhattan or any any plot of land is going to support the absolute highest density you can build on it. You know the value that we're in the middle of Manhattan. Real estate is super valuable here. So just about any play you would attempt in a place like this is going to pencil out. The main constraint that you're working within are the zoning conditions provided by the New York City building apartment or the New York City Planning Board, zoning office. I don't know what the jurisdiction falls under exactly..   John Errico: [00:01:28] Probably many multiple...   Ryan Goldfarb: [00:01:30] Seven layers deep so high level, that's how I approach it. When we're talking about things in the residential context specifically in a more suburban setting the subset of opportunities or the subset of options is going to be a little bit more cut and dry than it would be in a place like Manhattan. If you're in the middle of a residential neighborhood you're gonna be building residential. It's probably going to be a single family. The question is whether knocking that down and building new is the play or keeping the existing footprint and renovating that is the play. Or, keeping the existing footprint and then adding onto it as the play. So this is a question that John and I have faced quite frequently in the past and the more we deal with these types of projects the better idea we'll have of what the right candidate for the right solution is.   John Errico: [00:02:24] I agree I think something that I think about when approaching this topic is what if money was not an option and that's not true because money is always limiting factor as well as time. But when considering the highest and best use for property I envision it saying well what if I had a billion dollars. What would I do in this one piece of property to make the most money off of it or to to add the most value to it? And that sometimes you can come up with creative answers that you might not have anticipated before and if you really become convinced of that you might be able to find a way to to raise that amount of money. I'm thinking of for example in Atlantic City. So I've done some investing in Atlantic City and I'm very bullish on Atlantic City for different reasons but a lot of plays in Atlantic City are really ground up redevelopment plays so ripping down existing buildings and rebuilding them. And that is very, very... It takes a lot of money to do that. It takes a lot of time to do that. But hypothetically the value to doing that on a property and selling it as something brand new could be very high. I think perhaps we could get into this topic by addressing a project that we have right now which is in Livingston northern New Jersey. Ryan, maybe you can set the field and we can talk about it.   Ryan Goldfarb: [00:03:41] So we're looking at or we're under contract on a single family house in Livingston. It's a split level home which is pretty common for the area. It's on a very quiet dead end street from an intangibles perspective it ticks every box. It's in a great school district. The block itself is pretty nice. And we're looking at an entry point based on our purchase price that makes a few different plays viable. So when we were looking at this deal we were contemplating a few different, a few different options.   John Errico: [00:04:15] I think just even as a baseline statement so this is a residential area. So building something other than a single family residential home as you said to your zoning issue is just, you can't do that at all.   Ryan Goldfarb: [00:04:25] More than, like, I think the max we could do is probably two and a half three stories.   John Errico: [00:04:30] Sorry yeah. So yeah, in terms of, yeah it's gonna be a single family home. It could be multiple stores but it's not going to be more density than that. And I think I'm not sure if we even really seriously consider this but the idea of doing ground up construction is just not going to be economically viable.   Ryan Goldfarb: [00:04:44] Yeah for that, for that size lot, I don't think we'd be adding enough square footage for it to make sense. And given the state of the existing structure, there weren't any compelling structural issues that would have made that more advantegeous.   John Errico: [00:04:58] We came to this conclusion by looking at other stuff in the neighborhood essentially.   John Errico: [00:05:02] So we we saw this house. You were familiar, you're more familiar with because you grew up essentially around the block and so we saw this house. We were familiar with what stuff generally sold for more or less in the neighborhood and so we said OK well this house could sell for this if maybe possibly it had X Y Z. And we sort of had a decision tree maybe wasn't as formal as that but we had a decision tree where we thought okay if we did x we could make this amount of money. If we did y we can make that amount of money. If we did whatever whatever whatever. So maybe it will be interesting to discuss what the decisions were that we kind of went down.   Ryan Goldfarb: [00:05:41] And on the way there. Something else that is always worth bearing in mind is what's on the block. You know as nice of a town as that may be there's a ceiling on value. So if zoning would permit a 3,500 square foot or 4,000 square foot monster to be built on a block where the average house is 2,000 square feet that may not be the right place for it. So it's always worth bearing in mind that you don't want to over improve your property and you don't want to be going above and beyond what that street will support or what that area will support. So from a very fundamental level I think that that ruled out some of the more extreme options like knocking it down and building something brand new.   John Errico: [00:06:22] Yeah I think from our perspective to it just super risky to have to try to sell the most expensive property in the neighborhood, which could have been an option with what we were doing. But I think there's an adage in real estate like the cheapest property in the neighborhood will always sell. Doesn't matter what the economic macroeconomic environment is. And I think that the most expensive property will always have a hard time selling even when things are great. So we didn't go with the most expensive kind of option.   Ryan Goldfarb: [00:06:50] Yeah right. So that was that was ruled out essentially from the beginning. So the two main options that we were considering at least once we saw the place and once we saw the current condition were option A going in renovating it with a similar floor plan in mind maybe modernizing some things maybe bumping...   John Errico: [00:07:09] So this is a three bedroom as it is now ranges on renovated it's a three bedroom two and a half bathroom property with a formal family room and even in what you'd call it...   Ryan Goldfarb: [00:07:20] A family room, a rec room, a den...   John Errico: [00:07:23] A den, a kitchen, and then like a living room, dining room esque area opening up until a fairly sized backyard with an attached garage.   Ryan Goldfarb: [00:07:32] And an unfinished basement   John Errico: [00:07:34] Unfinished basement, right.   Ryan Goldfarb: [00:07:35] So option A was to essentially keep that same floor plan in mind and just renovate it, update it, modernize it. Maybe contemplate a few changes like opening up the kitchen to the rest of the living space again to go for a more contemporary modern open style feel. But for the most part the footprint would stay the same and there wouldn't be any noticeable difference outside of the aesthetics of the property. Option B that we were considering was to add an addition above the current primary living area. So it's a split level home. If you're not familiar with that... The way to think about it is rather than a colonial or a cape where you have one floor with another floor mirroring it right on top, you have kind of like a half level between between floors. So you have the ground floor. Then you go up about a half a set of stairs to the main living area and then you go up another half a set of half a flight of stairs to get to the bedroom area. So for an addition, what we were proposing was to put up half, or a third, half staircase to go up to an additional half flight above that living room/dining room/kitchen area to put on a master bedroom and master bathroom. These houses were built in the early 1960s so they were built with a little bit different of -- a little different style. The master bedroom in those style houses are not significantly larger than the other bedrooms. There's no real fancy en suite with a walk in shower, soaking tub, anything like that. No double vanities. So the only way to to achieve that is to build it or to significantly alter the current landscape of the floor plan.   John Errico: [00:09:26] Our premise was as Ryan alluded to before this is a neighborhood of primarily families that have moved there probably for the school district or suburban living. It's not, in contrast to say, it's not you know, young urban professionals that are commuting every day to New York. It's not renters. I mean there are people who commute for work but it's not necessarily in a family in a family context. It's not renters it's not lower income housing per se. Generally, I would say, higher, upper middle class type of a neighborhood. So that alone would dictate you wouldn't ever make sense to say convert it to some massive two bedroom or something where each bedroom is humungous. But that might maybe appeal to a renter and it wouldn't make sense to convert it to like a seven bedroom property or something that might make sense for maybe a lower income area where density is more important. So we are sort of constricted of operating in the three bedroom or four bedroom type of realm which is what we think from the neighborhood appeals to families. You know, two bedrooms probably not enough. Anything more than four bedrooms is probably crazy, doesn't make any sense.   Ryan Goldfarb: [00:10:36] Right. So The main goal we had in mind was to build something that is going to be appealing to the average family looking for a newly renovated house in that area. So with the current floor plan we were looking at three bedrooms, two and a half baths, which would certainly work for some. But if you think about the average family who's buying in that area, again, on average, you're likely looking at parents, two children, maybe a golden retriever, and it's safe to assume that if you're looking for a family home, you may also want space for guests, for in-laws, for parents for cousins, whomever. So with a three bedroom layout you are constricted in the sense that if you have one child or if you have like the only one that's going to work and if you have one child or two children who are sharing a room, which at that price point is probably unrealistic. So that put the idea of the addition in play because we could get that fourth bedroom.   John Errico: [00:11:34] Right... And so to use kind of actual numbers the way that we thought about it is our kind of purchase price is $400,000. That's what we're going into it for. We had thought that the after renovated value or sort of the market value after we were done would change based on how many bedrooms we had, based on how it looked. So in a three two and a half scenario which is the current default scenario I think we get maybe what...   Ryan Goldfarb: [00:12:01] Frankly it's hard to comp that out because it's a fairly unusual, most people typically want that fourth...   John Errico: [00:12:08] Which is another issue.   Ryan Goldfarb: [00:12:09] Right. Right. So whatever the scenario or whatever the number would be it is most likely a discount to what the ideal scenario would be for.   John Errico: [00:12:18] So structure. Right. Would you just call it, say, we could get $650k or something. The logic that's going through our minds and we're looking at is OK we're we're in for $400k. And of that $400k gonna put a little bit of money down and we're going to borrow the rest which we're paying interest on. So every month that we hold the property we pay interest on it. The way that we are funding it is with a hard money loan. And that's quite high interest. Not credit card interest but not traditional mortgage interest so it's maybe in the realm of like 10%. So every month that we own the property we have to pay interest on that and then we might loan more than that because we need money to renovate the property. So we're paying interest on that every month or else paying taxes, insurance, utilities, general upkeep, you know making sure the lawn is cut and whatever else you have to, you know, snow removal, which is very expensive apparently. And so, so that's that we have to do that regardless of whatever we do with the property. The variable is how much does it cost to actually renovate it or expand on it. And that price difference quite substantially if it's, we're adding a floor or we're doing an extension in some capacity versus just doing an aesthetic renovation, which as Ryan was saying before was blowing out a wall, redoing the flooring, bathroom, kitchens, and then calling it a day. So the calculus is well if I put more money in to do the extension and then I make more money am I making even more money than I would have had I not done, done any of that at all. Say I'm gonna make $50,000 after I calculate all those carrying costs and also that the sale costs I guess I should mention too are substantial so there's broker fees, attorneys fees, transfer taxes, all sorts of stuff. After all that say if I'm making $50,000 by just doing aesthetic renovation and if I were to do an addition and have to spend $150,000 more but I'd still like to make $50,000 then I would never do that because that would take me six more months to do and I would just do the easier thing which is to do do the very cheap renovation.   Ryan Goldfarb: [00:14:14] Right. And anytime you add to the scope in one way or another you're complicating things. The notion of you know keep it simple stupid certainly applies to real estate and certainly applies to flipping. If you can get away with doing a cosmetic renovation not necessarily going cheap or not necessarily skimping on the scope but rather than getting too fancy with it you can, if you can make money doing that, that is typically going to be your safest play. To John's point that calculus is is applicable and is I would argue that's the right way to look at it. Something else to bear in mind as part of that is you're not just thinking about you know if you're looking at scenario A you're talking about putting one hundred thousand dollars in renovation costs to make fifty thousand dollar gross profit versus Option B of putting two hundred thousand dollars into it to make fifty thousand dollars gross profit - the difference there is not just in your hard renovation costs. The difference is also in your soft costs which would be your holding costs, i.e. taxes, insurance, snow removal, utilities, etc. as well as your financing costs which is your interest for that time period that you are holding a project.   John Errico: [00:15:26] And the opportunity cost of your time. Time is very valuable when you're doing the sorts of things you have to spend eight months on a project versus four months in a project that's four months that I have to at least devote some amount of mental energy and physical energy to do.   Ryan Goldfarb: [00:15:39] And from a qualitative standpoint there's also risk in whether your plans are going to get approved, and whether the exact scope that you have planned from day one is going to be approved, and whether they're going to be alterations required to the existing systems in the building.   John Errico: [00:15:53] And what is the market going to look like in eight months?   John Errico: [00:15:55] I may know what it's gonna look like in two or three months but eight months is a long time.   Ryan Goldfarb: [00:15:59] Especially when you're talking about a specific time of year. So right now where we're sitting here in November and if we close on this property in the next week or so and we go with a pretty simple - I don't wanna say no frills - but if we if we don't get too complex with the renovation having this on the market in let's say six months is quite realistic and I would argue is almost an excessively conservative estimate. But nonetheless that leaves us in the spring season getting towards summer which is by most accounts the best time to be selling a property. Whereas if we try to pop the top off, pursue an addition, and potentially pursue an extension of some sort, there's a lot more volatility on the timeline side of things that may push us out passed the summer to sell the project.   John Errico: [00:16:46] To kind of like contextualize it to the actual thing that we're we're talking about are doing.   [00:16:51] We had thought well for us maybe the addition is the only way to do it because there really aren't any properties in this neighborhood that have three bedrooms two and half bathrooms and we may just really have a hard time selling it at all if we did it. Doing the addition was something that we were hesitant about doing because we worried about the building department and whatever else so we were kind of hemming and hawing about what can we do what can we do and then you actually came up with I think a great idea which is now most likely going to be the winning idea which I'll let you describe but essentially to get both right to have add a bedroom but not have to do the addition.   [00:17:27] Right. So the thought here was what does the end buyer in this town want. And in my head It's four bedrooms, minimum two and a half bathrooms, ideally three full bathrooms. And in thinking about that we had been stuck on this idea of doing the addition which would have required obviously a more exhaustive scope from a plans and permitting standpoint. It would have required additional framing. It would have required potentially addressing some structural issues with the existing building.   John Errico: [00:17:58] A ten thousand dollars steel beam apparently...   Ryan Goldfarb: [00:18:00] Not necessarily things that are of immediate concern but things that could potentially be a concern if you're talking about adding additional load to the building. Because if you think about it these buildings were spec'd out and were framed out and designed with a specific purpose in mind and that was to to function as a split level home. So if you're adding another level on top you're talking about adding additional weight to a structure that was not intended to originally support that. So there is potential that something like that can have to be addressed in the future not to mention, you know, just the hard costs of doing that actual renovation that actual additions which would be the framing, the plumbing, the electrical, HVAC, so on and so forth. So in contemplating this I was thinking you know the angle is really to get four bedrooms. Are there any other ways we could do that? Given the existing structure and giving given the existing floor plan... And I was thinking you know for for a family of four, the three bedrooms upstairs is not necessarily a concern. The bedrooms are all pretty decent size, pretty decent sizes and there are two full bathrooms up there already. And then there's also the family room downstairs. I know something that's common is to have kind of a guest suite or at least a guest room. And I thought that something like that maybe more of like a flex room was something that would be of substantial value there. So what we proposed was to build out a closet within the family room on the first floor. A closet is typically a prerequisite to being able to list a room as a "bedroom" notwithstanding a few other requirements like minimum square footage and oftentimes a window. So that got us passed the hurdle of trying to get that fourth bedroom. The next thing was thinking about it from a functional standpoint which would be you know if you have three people living on the second floor and then you have guests saying over... It's great that they have a guest room but they have to go up two flights of stairs to use the shower or to use the bathroom.   John Errico: [00:20:03] So to contextualize at the half bathroom that we have right now that the half in the two and a half is right next to the family room.   [00:20:10] Right. So the remedy to that was the half bathroom that John just mentioned, that abuts the family room. And then on the other side of that is a laundry room. So the thought is to combine the laundry room and the half bath to achieve a full bathroom on that first floor. We may be able to relocate the washer/dryer on that first floor as well but more than likely we'll move that to the basement, which, to compensate for the fact that we're adding a bedroom on that first floor and kind of getting rid of some of the utility space or the family space in that family room, we're gonna be finishing the basement as kind of a playroom, rec room for kids again with this young family in mind. And the great part about that is even though it's a basement there are some windows down there. There is some light. It doesn't feel totally basement-y. And once it's finished and has lighting in it it certainly won't. And most kids are not 6 foot 5 like John so they're not going to have an issue with the lower ceiling height.   Ben Shelley: [00:21:15] So I know we're going to have to definitely do a part one and a part two because I think I'm on the rollercoaster ride of my life right now. I think for people who know me they can't even believe I've been silent for this long but that's how good these guys are. Now we've already got a little taste of what this will be but as a book into this segment can you tell us what is your optimal exit strategy.   [00:21:35] Yeah, from a financial standpoint our goal all along is to have the largest gross profit that we can, to make the most money that we can from the sale of the property. So Ryan's solution is is so great and so elegant because we get to essentially have a four bedroom, three bathroom property which is what we were anticipating we would have if we were to make an extension, b we don't have to actually do any structural work. And structural work as Ryan was alluding to this is very expensive. So we can have an additional bedroom that is within the footprint of the property do a mostly aesthetic renovation to the property and still sort of have all the advantages that we would have if we're to spend a lot of money. So essentially our after return amount like a four bedroom, three bathroom, we could sell in the...   Ryan Goldfarb: [00:22:27] High sixes...   John Errico: [00:22:27] Sure. So we can have that sort of exit while only putting in maybe, a hundred grand in renovation costs. We'll see.   Ryan Goldfarb: [00:22:36] Give or take.   John Errico: [00:22:37] Whereas I think to do in addition we're talking more in the realm of 200 grand. Yeah probably 175 hundred.   Ryan Goldfarb: [00:22:45] I would say two hundred as a starting point. Right. And part of the reason for that is everything that goes along with doing it it's not just the hard costs.   John Errico: [00:22:52] So if it all works out we will have saved if you will one hundred thousand dollars which is a substantial amount of money on a deal of this size.   Ryan Goldfarb: [00:22:58] About a hundred thousand dollars in about six months of time.   John Errico: [00:23:01] Yeah, and a lot of effort and sweat and concern and stress and etc.   Ben Shelley: [00:23:07] Well if you took notes throughout this episode you're gonna have at least the base tools to understand and execute a proper analysis of a deal that you're doing particularly in Livingston but in wider New Jersey residential market. And I appreciate how you guys took us through all the different scenarios blowing the top off versus a general rehab and whether or not you would you just sort of cosmetic lift versus maybe some more serious work. I know I appreciate this I know the listeners appreciate it and guys thank you for your time and your expertise as always.   Ben Shelley: [00:23:46] And thank you for listening to the Brick by Brick Podcast where we take you from the ground up on all things real estate. We will continue to bring you the best and brightest the real estate world has to offer as we leave no stone unturned in helping you, the everyday investor. Thanks for listening.  

Host Ben Shelley walks through Ryan and John's journeys toward becoming full-time real estate investors. (Transcript below.) Ep. 2 - Becoming A Full Time Real Estate Investor   Ben Shelley: [00:00:07] Welcome to the Brick by Brick podcast where we take you from the ground up on all things real estate. I'm your host Ben Shelley. It is once again my honor and pleasure to be joined by Ryan Goldfarb and John Errico. The principals of Liberty Hudson, a real estate company that invests manages and constructs homes all throughout New Jersey. We're going to discuss with our experts how they both transitioned from their day jobs to becoming full-time real estate investors. A lot of people have their hands in many different pots as they begin to invest in real estate, and all of us deal with similar common questions as we navigate our own lives as investors. Can I invest in real estate while still doing my job? How much money do I need to be making as a full time investor before I can transition to real estate full-time? You both successfully made this transition and so now we defer to you for your expertise. John, how about we start with you.   John Errico: [00:01:02] Yeah, I think it's a great question. I actually think Ryan and I have a very different approaches to this and how we started. So my background was that - immediately prior to being a full-time real estate investor - I ran technology startups and I had been doing that for a few years. I bought my first place in early 2014 which was a 2-family where I lived in the basement and rented that out. And then I bought a second place about seven blocks away and did the same thing. I lived in a unit then moved to the basement, rented the whole thing out and probably in early 2016 I was up to I think four properties so I had done the same thing three times in North Jersey in Hudson County and then I owned a place in New Haven. And my startup that I'd been working on, I was getting a little bit burned out because I'd been doing that for I'd been in the startup world for four maybe five years and my sort of decision points- so I'm a lawyer by education and I had kind of long ago left the prescribed track for lawyers so anyone that has that has entered that the big law universe may know that there is a kind of you you start in big laws and associate and you work your way hopefully to partner maybe didn't has counselling if you ever get off that track you can't really get back on it it's right at a decision point where I thought wow I could I could keep doing startups which I'm burned out of doing, I could maybe go to a different grad school I get an MBA and do something in you know like a pure business role. But I didn't want to do that and work is already going to school for a very long time to get my law degree.   Ben Shelley: [00:02:36] Stacking Degrees.   John Errico: [00:02:39] Right. I could get you know a "normal job" which was I really didn't want to do because I've been working for myself for a while or I could really double down on real estate and I gave myself essentially a year to see if I could make it as a real estate investor full time. And that timing for me was a great impetus because I had to figure out Well how do I make money from from what I'm doing right now because I'm making money from rentals and that's great but it's not really enough activity for me to justify doing it full time and it's not up money for me. The opportunity costs of doing it is really high because I could make you know hypothetically a nice salary doing something you know in the traditional world. So I tried really hard to find more deals and make partners with people and investors. I ended up buying I'm not even sure the exact number but it was at least four or five more properties in that period of time getting more rental income and trying to develop alternate streams of income we can maybe go into that a little bit. But after the year was over, I was kind of in a position where you know my wildest dreams hadn't really been achieved but by kind of more more modest or realistic dreams had been achieved where I thought I'm adding value I enjoy what I'm doing I'm making up money for I can sleep well at night and go to my wife who happens to have a very very high paying job and you know be kind of respected as someone that's at least in some capacity a coequal earner to her.   Ben Shelley: [00:04:01] She'll love that plug.   John Errico: [00:04:02] Yeah, she's great. I love you so much. So this is early 2017 that I mean that I'd been doing it full time since 2016 but in 2017 I was like okay. There's no turning back. I'm going to be full time until I can't do it anymore. That's where am now.   Ben Shelley: [00:04:16] Beautiful.   Ben Shelley: [00:04:16] And, Ryan, what about you?   Ryan Goldfarb: [00:04:18] First and foremost I wanted to say that that's fascinating to hear because I've known John throughout the entirety of all of that, of that playing out, that timeline and I don't know that I knew that in such vivd detail fascinating to hear.   John Errico: [00:04:33] The sweat, the blood toil.   Ben Shelley: [00:04:35] Because I'm very curious and Ryan and we'll hear about a little bit about this in your story that what's the alternative to breaking point?   Ryan Goldfarb: [00:04:42] Critical mass   Ben Shelley: [00:04:44] The critical mass this is an inside job we can't get into this right now but what is the critical mass of money you have to be bringing in as an investor to justify taking that big leap. John alluded to that a little bit but Ryan let's hear your backstory.   Ryan Goldfarb: [00:04:56] So I graduated from college in 2013 and even prior to that.   Ryan Goldfarb: [00:05:02] I knew that I wanted to do real estate. I didn't quite know in what capacity but I think in a perfect world I always had envisioned something entrepreneurial. But I kind of fell into the traditional path that most of my peers were involved with in college and that was you know getting internships lining up jobs accepting jobs and then selling your soul to corporate America for years. So I did that. I worked in real estate finance for a few years specifically on the on the debt side in the multifamily space and a year, six or so months into it, I finally came to the conclusion that it wasn't the path for me and that long term it wasn't really what I was striving towards. So I started looking at other paths and figured know there's there's no real sense in trying to look outside of where I was presently to find something that might be incrementally better. I knew that the only thing I was really gonna make me happy was for me to chart my own course. So I started getting the wheels in motion to to try to find deals locally. I tried to get my feet wet in the North Jersey market which for a variety of reasons seemed to make sense at the time and I ultimately settled on Jersey City. I was a little back and forth between whether I wanted to flip or whether I wanted to buy rentals. Ultimately decided to flip. Bought my first one about nine months after I started looking and it turned out to be a quite an ambitious project for my first undertaking. But I learned a lot from it. It took way longer and cost way more than I expected it to. But nonetheless it was a worthwhile experience and about halfway through that project the time came when I thought that I was ready to do this full time. I wasn't happy where I was. I didn't think that it was the best use of my time and I felt like it was holding me back from being the best real estate investor that I could be. Primarily from a timing standpoint so fairly quickly I made the decision that I was gonna give my notice to leave. I left with, while I was by about halfway through my first flip. Subsequently had a few more deals lined up after that and kind of hit the ground running going full time in real estate investing.   Ben Shelley: [00:07:20] Well it's interesting because this kind of picks up on that theme from last show about being proactive taking the bull by the horns really just going Johns is just trying. I mean just doing the work and you kind of learn from there but I'm curious because we talk about becoming a full time real estate investor but that means different things to different people I know where you guys are concerned that incorporates also a little bit of property management but maybe more so the construction part of the business. So I'd be curious just to know from your guy's perspective as you transition to full time real estate investors. How did you think and treat the construction side of the business and how did you approach also incorporating that under your own umbrella. John why don't we start with you.   John Errico: [00:07:59] Yeah it's a great question. So something that that Ryan and I do is we we run a general contracting business together called Liberty Hudson construction in North Jersey and that was born I think out of possibly two maybe more primary desires. The first was that we just had a lot of projects that we were doing ourselves flips or renovations for buy and hold stuff. And we'd been using third party contractors a lot. Ryan had a contractor that he'd been using quite frequently. I had kind of like a hodgepodge of handymen and people like that and we were sort of looking at the margins that these people were making because what we've been doing in each you know for you know this point three or four years. So we're pretty familiar with materials costs and labor costs and we're just looking at the margins that people are making we thought well this is this is absurd that these contractors are making so much money on us when we really in some cases know as much as some of our, you know, general contractors these are the people running the business. The second component of it though was really for us to try to make money off of our knowledge and our experience in a way. Something that I don't think either of us really set out to learn but ended up becoming quite knowledgeable and is just the process of doing renovations in a property. So whether it be like the nuts and bolts of renovating a bathroom or a kitchen or the complexity of you know going through inspections or working with the city with different issues. I think both of us have dealt with that to a large extent probably much larger than we want to deal with in some of these properties. So for me it's I think less about the dollars although it's very nice to have money coming in and more about the ability to to add and provide value. So the ability to go to even a third party client like not a project that we're not doing and say like because of my experience and knowledge and expertise I can help you but I can add value to you and make something better for me as a really cool feeling. And then obviously being compensated for it it is is nice because it allows me to keep doing it.   Ben Shelley: [00:10:08] Well it's it's interesting. And Ryan I want to hear your opinion on this as well because when John talks about having the background the knowledge the expertise and also the ability to to sort of execute on the practical construction side of the business. I think it's a clear advantage for Liberty Hudson where you know you see other funds who they raise money and they just outsource everything and that's fine if you make smart investments you can still make money. But I think it's in many ways it's it's what sort of distinguishes Liberty Hudson the rest of the competition.   Ryan Goldfarb: [00:10:36] Yeah, for sure. I think to touch on John's point I think there are a lot of people who like to call themselves accidental landlords but I think we could coin the phrase accidental contractors as well because I think that encapsulates our journey to to this point and then to your point about that about having everything in-house. I would say the single greatest advantage of that thus far has been the knowledge that we are relying on ourselves and on ourselves alone. We're not beholden to a contractor that we have an agreement with who may or may not be holding up their end of the bargain or who at the very least may not be holding up their end of the bargain to the extent that we would like. You know typically the two biggest variables on that front are going to be timing and cost both of which are in some ways intertwined. I think having a little bit more control over that for our own projects is a huge value add. And then secondly to John's earlier point about being able to add value one way I like to approach any interaction I have with another investor or with a would be seller or anything like that is to think about how I can be of value. And I think there are a lot of investors who go out there and meet with a potential seller and they have one thing on their mind and that's to to buy their property from them and they don't take the time to listen to what their needs are into what their situation is and they're just trying to force their ideal outcome on the seller who may have a different ideal outcome in mind or who may need a little bit of guidance to get to that ideal outcome. So for us I like the fact that we can refer them out to a network of agents who we who we work with one of which is my brother. I like the fact that we can offer them construction services if need be. I like the fact that we can offer them the ability to sell their house all cash quickly and kind of be the outlet that they need for whatever situation therein. And lastly the fact that we have other connections in the industry and we know plenty of other real estate investors who may have a greater appetite for certain types of projects at any given time than we do.   John Errico: [00:12:39] Yeah I think that that's a it's an important point and it brings up something to me that I've reflected on a real estate a lot which is that I think for for better for worse most probably for worse is that a lot of people who are involved in the real estate industry particularly on the residential side and the side in which Ryan and I operate I would say are just are just not great at what they do. And I don't say that lightly because I interact with a lot of people but I'm talking from the perspective of landlords for example I've met so many very very bad landlords or property managers from the perspective of real estate brokers real estate agents I've met so many bad brokers and agents we've met so many bad construction guys, contractors there are surprisingly few people in the business I think that do it because they A enjoy it and B want to add value in the way that we're talking about and there are a lot of people that do it because they want to make money fast. And like in any business you can make money fast doing this but the longer term outcomes are going to be are not going to be good. And so you know one reason why Ryan and I found each other work together I think is because we both valued our connection even if we weren't friends or you know weren't hanging out all the time.   Ryan Goldfarb: [00:13:56] We're gazing into each other's eyes as you say.   Ben Shelley: [00:13:58] Yeah I mean I kind of feel like I'm intruding.   John Errico: [00:14:00] It's a little bit intimate actually right of it. But you know we we value to respect each other and we're helpful to each other we didn't feel like we were competitive with each other. We we didn't say like well if Ryan is successful that means I'm not successful. That kind of mentality, while maybe if Ryan and I were looking at the same deal maybe if I won that deal that means I make a little bit more money but it would have meant that I totally foreclosed on the opportunity to work with Ryan. And now years later we're partners and we've done things together already that I think would be far greater than the advantage of getting a single deal over each other night. Personally I think we both try to deal with people that way too. It's never zero sum game it's always you know - a rising tide lifts all all ships sort of mentality.   Ben Shelley: [00:14:43] Life is truly a relationship business and I'm witnessing that right here and now. So from a construction background I'd be curious to hear from both of you. What are the kinds of things as general contractors yourselves can you advise people to look out for as they're making that transition and working on their first few projects.   Ryan Goldfarb: [00:14:59] First thing I would say is I've heard this before but I don't think it rang true until I realized how it applied to me. Nobody's ever going to care about your project as much as you do and particularly if you're working with a contractor who has a viable business going you're not going to be the guy's only or gal you're not gonna be their only project. And you're going to be competing with other projects for their attention. When there's a fire to put out at another project. That contractor is going to have their attention over there and that is typically going to happen at the expense of your project. I think to John's point earlier there aren't a lot of people who run this as a business or in the way that a "business" should be run. It is often mostly reliant on one person more than on a business where things are segmented and where things are fall on different people shoulders. To that end the one way that anyone who is doing a project can add value is just to care. Just be there. Just watch. Defer to the experts where you can defer to the experts but know that you're gonna be the one who's moving the project along. And at the end of the day, the buck stops with you. And if things aren't moving at the pace that you think they should step in do something about it and grab the bull by the horns.   John Errico: [00:16:19] I would say to dovetail on Ryan's point. Something that I learned early on but I keep learning is that there's more than one way to accomplish something. And sometimes contractors and people in real estate will tell you that the way that they do it is the only way that it can be done and that ranges from things as basic as installing cabinets in a house to as as complex as an entire renovation. And we're discovering that all the time everywhere. So when when you encounter a contractor when you approach a project and somebody tells you like this is the way it is I would treat that with a lot of skepticism. And if you were inquisitive enough to try to peel back the onion and figure out the different ways that something can be accomplished you will learn a lot more and you may realize that there are other ways that you can do it more cheaply or more quickly or more efficiently or whatever might be.   Ryan Goldfarb: [00:17:13] To that end just to piggyback off that point a little bit I know this is supposed to be one final thing.   Ben Shelley: [00:17:18] I love the pinball here.   Ryan Goldfarb: [00:17:19] I think the best way to achieve that particularly if you don't know a lot about construction is to recognize the fact that you don't know a lot about construction and to rely on people who do. So if you're going into your first project meet with three electricians before you sign a bid. Meet with three plumbers. Meet with three general contractors. I guarantee you will learn something from each and every one of them. And a lot of it will be the fact that there's not one way to skin a cat. Sorry John I know you have two cats. But you'll learn something and you'll learn that there's not only one way to do it. You'll learn that there are a variety of ways and none of them -- not one single way is going to be the right way. But there may be a better way to do it for a given project given the parameters and given the constraints. And I think the only way to really figure that out is to get a variety of opinions and to talk to the experts and to figure out how they would approach it. And the last thing I'll say is you also will just get a better sense of how an electrician how a plumber how a general contractor, so on and so forth, how each of them think about and approach their craft and over the long haul that's gonna be super valuable.   Ben Shelley: [00:18:26] I know I appreciate this. I know the listeners appreciate it and guys thank you for your time and your expertise as always.   Ben Shelley: [00:18:41] Thank you for listening to the Brick by Brick podcast where we take you from the ground up on all things real estate. We will continue to bring you the best and brightest the real estate world has to offer as we leave no stone unturned in helping you, the everyday investor. Thanks for listening.  

Join Host Ben Shelley as we "meet the partners" - John Errico and Ryan Goldfarb. We'll dive into the origins of how John and Ryan wound up in the field of real estate and into the genesis of their partnership. (Transcript below.) Ep1.MeetThePartners - Transcript Ben Shelley: [00:00:07] Welcome to the Brick by Brick Podcast where we take you from the ground up on all things real estate. I'm your host Ben Shelley. Today, I'm lucky enough to be sitting with the two principals of Liberty Hudson who teamed up to create a thriving business as they invest and build homes throughout the wider New Jersey area. Liberty Hudson primarily invests in one to four family residential homes. To date, they also manage properties and build homes as general contractors themselves under Liberty Hudson Construction we now are fortunate to get to meet the principals of Liberty Hudson, Mr. Ryan Goldfarb and Mr. John Errico. Gentlemen it's a pleasure to have you both in studio today. Off the bat, it would be great to hear about some of your accumulated experiences as well as some of the reasons why you got into real estate and how you got to where you are today. So let's jump right into it. Ryan, how about we start with you.   Ryan Goldfarb: [00:00:59] Sure. So I am Ryan Goldfarb. I began my real estate investing journey several years ago I was actually as I was finishing up my undergrad career at the University of Maryland, go Terps! I started actually looking at turnkey investing opportunities out in Memphis Tennessee way back when. This was in late 2012 going into 2013. Long story short, I ended up securing my first investment out there with my brother. We went in on something together as 50/50 partners. Closed on a turnkey rental right around the time when I graduated which was April or May of 2013. Got you and I knew that was the kind of thing that was never going to make me rich never gonna leave me broke but I figured to be a good opportunity to get one under my belt. So we went through went through that experience did what I wanted to do that went under my belt. And since then I've dove into it a little bit further.   Ben Shelley: [00:01:57] So I know you said Long story short although we're here today to get the long story as best we can. Before I go to John I'm just curious. I know you talked about what the first project was but what is it about real estate in general that story. Was it since you were younger that you knew that you wanted to get into it or was it some experience maybe later as you had gotten to college.   Ryan Goldfarb: [00:02:16] It's actually something I've wanted to do since I was maybe ten, eleven years old. I was like to say it's from moment I realized I wasn't to be a professional baseball player.   Ben Shelley: [00:02:25] A true story for every Jewish male out there in the world today.   Ryan Goldfarb: [00:02:28] Exactly. I know I'm not alone in that here. So, Ryan, please continue.   Ryan Goldfarb: [00:02:34] Yeah, I actually I have a vivid memory when I was a kid going to Pier Village. I want to say that development in Long Branch, New Jersey. Ocean front, kind of luxury development. I was maybe 12 years old at the time something like that. I think was right around and it had just opened up. And I remember going there for the first time and just being in awe of this brand new development, right on the ocean in the middle of New Jersey on a place that was previously, you know, downtrodden remnant of decades and decades of neglect.   Ryan Goldfarb: [00:03:09] And I remember being fascinated by the fact that you could take something like that from a state of nothing or a state of despair and with a little planning with some resources and a little bit of time you could turn it into something that's a bustling vibrant oceanfront community. I think it's still standing today and every time I go back there I think about that same like that same feeling of awe I had when I was probably pre-teen, seeing it for the first time.   Ben Shelley: [00:03:34] This is for listeners out there.   Ben Shelley: [00:03:36] I think it's important I mean because there's a reason that everyone obviously money is a reason for a lot of people. But fundamentally I think the back end of what drives us to do what we do is a love of real estate a lot of shaping communities and opportunity you get your hands dirty with real substantive and productive work. And I appreciate you sharing this Ryan. We're going to continue that way but John I want to I want to bring you in here now. John is a real mystery to most of us. He's a brilliant individual. He's like a multilayered milkshake. He's a fifty thousand piece puzzle. He's in a Rubik's cube. We want to know who is John Errico and what makes him tick.   John Errico: [00:04:10] So I got into real estate in maybe an unusual way so I'm actually a lawyer by education and experience. I went to law school and I had no real particular interest in in real estate in college or law school. I actually worked in law for a little bit and then I left that to do technology startups. I ran a couple of startups in the real estate space, or at least a startup in the real estate space. Then a few others in related spaces and I was living in Manhattan. This is maybe four or five years ago with my then girlfriend now wife. We really wanted to we didn't want to rent anymore, and we wanted to buy our own place and started looking in areas within commuting distance of midtown Manhattan. We settled on northern New Jersey just because of the cost and the relative distance to where my wife was working at the time and bought a 2-family. It was a foreclosure so we had no no real conception of what it would be to live in a property that had been foreclosed on and had been abandoned. This is early 2014. So we we immediately moved because we were so excited but we realized that the property basically didn't have a roof. Didn't have electricity in one of the floors and didn't have a working bathroom and so very quickly we sort of were forced to learn a lot about home ownership. We learned about renovating our place and kind of all that the details that go into moving into somewhere that hasn't been lived in for a long time. We eventually started renting out the second floor which was a two family house. We started running at the second floor to tenants that went really well. We eventually moved from the first floor to the basement and started renting out the whole property to tenants and we had originally been living in Manhattan paying $3,000 a month in rent. And by living in this house living in the basement renting out the two units that were renting out we were essentially making, I think at least a grand a month above our carrying costs the property so above the mortgage and taxes and insurance.   John Errico: [00:06:14] So we had within a six month period of time like a $4,000 dollar per month income shift which was transformative. So we all of a sudden were able to start saving money start investing in other real estate we bought a second place and we've kind of been growing since then. But so the genesis was maybe four years ago that I've been doing real estate. I'd been doing real estate full time for about two years.   Ben Shelley: [00:06:37] Well what I love about that is it's it's a background of yourself but you also worked in there some of that genius that that allowed you to be successful early on in the business and there was cultural reasons why you moved out there, too, right? I know you and your wife are both bilingual. Obviously we know that northern New Jersey has a big Hispanic population there's a lot of Spanish spoken among other languages. So can you talk a little bit about that as well?   John Errico: [00:06:58] Yeah. So we where we moved from Manhattan is a city called Union City which is actually the most densely populated city in the country I believe. If you assume that New York is one city and not just Manhattan but so it's a city of I think it's about 50,000 people right on the other side of the Hudson River and it's predominantly Hispanic, Latino population so probably 95 percent of the population speaks Spanish or grew up in a Spanish speaking household. And my wife speaks Spanish basically fluently. Had lived in Spain for a year. So we were drawn to that culturally. We looked at other places in New Jersey like Jersey City and some places in Queens and the Bronx. But we liked culturally Union City a lot. The food the language the culture. So that was a humungous draw for us. And it's funny when we move to Union City, the story that I always tell is that maybe the first week that we're living in Union City we were the first people on our block that I think was not or is not of Latino descent or heritage. So we were walking outside of our house and one of our neighbors stopped us and said oh you're going the wrong way Hoboken is that way, the opposite direction.   Ben Shelley: [00:08:12] You can't live here.   John Errico: [00:08:14] Yeah no it's funny that that same neighbor I think told me like you know we all get along here we have, you know, Colombians, Hondurans, Mexicans, Ecuadorians, then Americans putting to us that is you.   Ben Shelley: [00:08:26] Well it's kind of a beautiful thing. I mean people don't realize sometimes like Union City for example, it's a hop skip and a jump from Manhattan. It's right across the river. And the dichotomy between what you find right in Manhattan and the diversity not just ethnic diversity but lingual diversity that you find right across the water Union City et cetera is quite profound. And so I guess Ryan I'm curious what got the wheels turning about working together in this field.   Ryan Goldfarb: [00:08:51] So we actually met I want to say it was about three or four years ago I think we were both fairly new at this. We had met through a real estate networking platform, BiggerPockets. I'm sure many people have heard of that. And we originally connected because we were both introductory investors. John was a little more focused on rentals. I was a little more focused on flips. But we met for lunch actually in Union City and we met on - I remember we went to a I guess it would be classified as an authentic Latin American-   John Errico: [00:09:25] Oh yeah, is that the place with the mirrors?   Ryan Goldfarb: [00:09:27] And back then you eat meat. I think...   John Errico: [00:09:29] Right.   Ben Shelley: [00:09:30] Enlighten us because there's a lot of inside there, the place with the mirrors. What is this place?   John Errico: [00:09:34] I don't know exactly. I mean it's...   Ryan Goldfarb: [00:09:37] I want to say it was on Bergenline...   John Errico: [00:09:38] Definitely on Bergenline and... Bergen line and 15 16 something like that and it's like maybe a Honduran restaurant could be I don't know.   Ryan Goldfarb: [00:09:47] I remember I got meat I got rice and I think maybe some plantains - it was good!   Ben Shelley: [00:09:53] These are important details.   Ryan Goldfarb: [00:09:53] Yeah. Leave no stone unturned. So yes that was that was I think our first encounter. And then I think we just kind of kept in touch after that I don't think we it is probably you know we maybe saw each other like six months after that.   John Errico: [00:10:08] I think we ran into each other at some meet ups. Maybe you could.   Ryan Goldfarb: [00:10:12] Did you have your meet up at that point?   John Errico: [00:10:13] Not At that time but I think maybe a year after I started doing that I think you came to you the first answer too. Yeah.   Ben Shelley: [00:10:19] So I'm curious because obviously you guys have brought me to an extent we like to joke. Ryan was very kind when we were off air. I said I work for them and he said I work with them which was very flattering very exciting to hear but I'm curious now kind of of how successful you guys have been individually over the last couple of years both in the buy rehab hold and flip range of all kinds of properties whether it be wholesale traditional foreclosure at market. What have you. I'm just curious what is sort of the this is a big question sort of the secret sauce method behind the madness for you guys when you're looking at these deals and maybe if you can bring in some of those background accumulated experiences what is the way that you look at this? John maybe we'll start with you here.   John Errico: [00:11:03] That's a great question and it's it's hard to give a really succinct answer to that. I guess I will preface my answer by saying that something that I see all the time in real estate investing among my peers and I run a Meetup group in New Jersey so people that come to my Meetup group and even in myself is this idea of analysis paralysis. So I think an obvious answer to your question is like, oh, well, I open up a spreadsheet and I run numbers and I do sort of you know underwriting kind of on my computer and that's a component of what I do. And I think we we both do. But for me if there are people listening to this that are just getting into real estate or just thinking about investing or maybe are buying their first place it's so important to just do it. You know to not get sucked into the details of you know the financial data that you won't be seeing. I mean just today I was talking to somebody about you know where we in the economic cycle or like the real estate cycle and you know maybe we're nearing the top of the cycle so maybe we should not invest at all and I don't know exactly where we are in the cycle it's really not the bottom of the cycle but if you have that mentality you're always going to find a reason not to invest. So not to not answer your question I just want to say that to begin with. How I actually invest is I you know I have primarily as Ryan alluded to mostly rentals so what I would call buy and hold property so I buy properties that are distressed or in poor condition that need renovation usually from you know not not a traditional kind of sale technique so I don't necessarily go on like the MLS and search for stuff but I might find stuff for sale by owner or maybe from foreclosure short sale anything like that. I'm familiar with a lot of the numbers in North Jersey in terms of how much stuff rents for. How much I need to pay in maintenance costs operating costs taxes insurance whatever else and I will put that into a very basic spreadsheet and look at things. Like the numbers that I care about are cap rate which we can go into at some point you know cash on cash and then just pure cash flow and by looking at all those numbers for me I can get a sense of is this an investment that I'm interested in and is not investment that I'm interested in. If it's an area I don't know I really want to go there drive around the neighborhood look at the streets north New Jersey is very block by block. Ryan knows super well in Jersey City that level of detail and I know to an extent in Union City too and other areas but yeah. So my approach is trying to find stuff that is obviously distressed using some very basic numbers putting into a spreadsheet looking at some metrics and then making a decision essentially from there.   Ben Shelley: [00:13:43] And it's funny you mentioned that and we will get into sort of the back in numbers in future episodes but I think the underlying skill here is a proactivity. This idea of jumping into the fire understanding the metrics behind what you're doing but having the confidence to take the bull by the horns. And I've seen firsthand John break into our own foreclosed properties going into through the windows and through the front doors and so I think there's a combination of understanding this from the back end and metric side and also just kind of going for it and being confident that you'll make some mistakes but the net gain will be worth it. Ryan what do you think.   Ryan Goldfarb: [00:14:19] Before I dive into my answer that reminded me of a story from a few months ago. Just real quick to give you a sense of how John operates. We were at one of our foreclosed properties trying to gain access to it for the first time and I would say we probably spent about a good hour trying to break our way into the basement. And then once we got into the basement John took a hammer and broke through the world's strongest solid core wood door. And eventually he he broke a hole through that door that was large enough for him to get through so that he could then unscrew the the studs that were holding it in place on the other side. After the fact we went back, we went through the house. Eventually exited and at the end of it we realized that the front door was wide open the whole time.   John Errico: [00:15:09] I was there this morning actually.   Ben Shelley: [00:15:11] See what that tells people is you guys are operators and that's what you do.   Ben Shelley: [00:15:14] Yeah you go in and you... I'm just imagining, picturing that in my head right now and it's too funny. But it's back to the essential question of not that that wasn't a wonderful sidetrack back to the essential question of the way you look at deals and how your accumulated experiences have affected that. What would you say?   Ryan Goldfarb: [00:15:33] So the way I look at things high level is to break it down into a few different categories. I think there are a few different ways that you can find deals and that you can make the numbers work and really drive returns. I would classify that as falling under into one of these four categories. It would be management, effective deal sourcing, financing, and construction. I think you'll find that most people who are in the real estate space particularly those who do this at scale and who do it well will tend to have some level of expertise in at least one of those areas. And I'm talking like true expertise to where you know they they've been a contractor for 30 years and really know the construction side or they're super well-connected on the financing end and have that on autopilot and they're able to get money at will and inexpensively. Or they're experts at marketing and they know how to find deals better than anyone can. Or you know they have a large management company and are able to handle that thing that stuff in-house. So, so typically it falls under that umbrella or one of those four categories within that umbrella. And one thing that I think working with John has got me to realize is how much of it is really just tenacity at least in the beginning. There is a resourcefulness that is almost a necessity. There's a the old adage that nothing's really a problem that you can throw enough money at it. But for a real estate investment you know that that may be an option but it's not always the optimal option. So you know whether it comes to, whether it's being resourceful in the sense of being able to fix things less expensively without compromising the longevity of that repair or whether it's just using a space and a little bit more creative of a way that's going to get you the highest and best return for that investment. I think those kinds of things go a long way and I think it's really hard to learn those things without being boots on the ground and without being in it.   John Errico: [00:17:27] I think that that's that's a great point. It's a super important point too about how different there's a lot of creativity in real estate investing that may not be obvious from the outside. I think when people go into it they they might have this opinion like I have to buy you know a turnkey property that will gross rents at a certain rate and that's how I'm going to do it. But pretty much every deal I think that I have done and I think the same is true for you Ryan that every deal is unique and different and the ways to make money on the deal are very unique to the deal. I mean we've had conversations where we bought something that we thought it was going to be a long term - I'm talking about myself here - I thought is gonna be a long term rental play I just have a long term tenant in there and it turned out that it was great to do Airbnb in that particular property for some reason. I think you've had properties where you thought maybe you were going to rent them out or that might have been an option then you ended up flipping them or even vice versa. Part of the, part of this skill is learning the suite of options that are available to you and I'm still learning that too about different ways to use properties and different to do deals.   Ryan Goldfarb: [00:18:32] And I think that's I think that's an evolution that you never quite reach the end of. I think that's particularly applicable around here where you have not just markets that change town by town, street by street, but you have buildings that have been here anywhere from since you know 150 years ago up through new construction and everything in between. And anything that was built in 1900, you can you can bet that at some point changes were made and even the two houses that are right next door to one another probably are a little different from each other when you look under the hood.   Ben Shelley: [00:19:06] It's interesting because I can even speak from a very short experience working with you guys that when I came aboard I looked at things in a very linear fashion and I've appreciated the diversity of ways that you look at deals. And we are running out of time here. But before we go in this introduction of the general partners of Liberty Hudson I would be interested to just hear from you guys maybe a last bit of advice or suggestion you would give to an upstart investor. Something you would say to somebody who was you 5 years 10 years ago as a way to inspire them or maybe a guide to what they should do first to make it in the business. John let's start with you.   John Errico: [00:19:40] Yeah I mean... So my point would be what I what I said before which is just to get started. Real estate investing is, I consider it, an entrepreneurial endeavor. And something that I think is very true about entrepreneurial endeavors is that they can be very lonely. Something that was great for me was discovering Ryan mentioned before a online BiggerPockets. It's actually how we met. But even beyond that just talking to people that are in real estate and do real estate is immense because I remember some very early conversations I had with people that were you know real estate brokers were on real estate finance and just asking them even really simple questions like "What is an FHA loan?" Or "how do I buy a house?" which are not obvious things I mean I didn't know that information despite going to law school, you know, I had really no conception. So I would say talk to people about it ask questions. There are great resources online and in probably your local communities friends mentors whatever you wanna call it ask talk about it and just get started. That's if I didn't... I almost was so ignorant I knew so little at the beginning that I didn't know how daunting a challenge my first house would be. But if I had a sense of that risk I never would have done it. So I'm very happy that I took the plunge.   Ben Shelley: [00:20:57] Ryan.   Ryan Goldfarb: [00:20:57] Sure. First of all thank you for putting us on the spot Ben.   Ben Shelley: [00:21:00] That's what I live for.   Ryan Goldfarb: [00:21:03] So I will go in a little bit different of a direction maybe something a little bit more tactical. I remember one thing that I think it took me a little bit of time to get passed when I was first beginning was you know I fell into the bucket of what John described before as paralysis by analysis. And I think that that is certainly not unusual for would be investors. One thing that I think helped me get passed that was to really focus on one area or two areas of a particular city in my case it was this Jersey City. And I'm not going to say that I was an expert on those after just a few months but I put forth all of my focus on those parts of town and those parts of that city specifically whereas previously I was distracted by every new town I was learning about or every new town I was exploring in North Jersey. And what I found was once I honed in on that one area on those those like two or three neighborhoods of that one town that gave me the baseline level of understanding that I needed to do every subsequent deal that I've done since then. So I don't know that that would have happened without having put forth that degree of focus at the beginning. It took some discipline especially when I just wanted more than anything to do my first deal in the area. But I think it was necessary and I think that was the catalyst for a lot of things that happened thereafter.   Ben Shelley: [00:22:27] I know I appreciate this I know the listeners appreciate it and guys thank you for your time and your expertise as always.   Ben Shelley: [00:22:42] And thank you for listening to the Brick by Brick Podcast where we take you from the ground up on all things real estate. We will continue to bring you the best and brightest the real estate world has to offer as we leave no stone unturned in helping you, the everyday investor. Thanks for listening.