Key Takeaways:

6:25 – His original plan was to raise 300k in investor money, but he found a great propriety and raised $1.3 million instead. Joe had to take a big mental leap in making that purchase.

9:27 – With this multimillion dollar deal, Joe arranged that the master lease payment be equal to the mortgage payment, so he could be smarter with how he paid it off.

13:50 – With Joe’s marketing background, he mapped out all of the networks he was apart of and found people who would want to invest.

19:20 – Half of Joe’s investors had never invested in real estate before.

22:50 – How did Joe get the seller’s trust? He explains in this segment.

28:45 – Being successful in real estate requires creativity, leverage, and relationships. Help others get what they want before they help you.

Tweetables
“If you get one person from a network on board, then that person will talk to others and other people will be interested.”
“I started speaking to investors before we had a contract cuz it was my first deal and I wanted to be sure I could pull through”
“Always give before you ask for anything from someone else.” 

Mentioned In This Episode:

www.jasonhartman.com

www.joefairless.com

Transcript:

Jason Hartman:

Welcome to the Commercial Investing show. This is your host Jason Hartman where we discuss the relentless pursuit of ROI. Yes, that’s right, Return on Investment and Return on Inflation. We have a changing future with monetary policy and fiscal policy the way it is and we need to prepare for it as investors by structuring our transactions differently and we’ll talk about that on this episode and on future episodes, of course. So, we will be back with a fantastic interview for you and the guest today in just less than 60 seconds. Stay tuned.

Announcer:

What’s great about the shows you’ll find on JasonHartman.com is that if you want to learn how to finance your next big real estate deal, there’s a show for that. If you want to learn more about food storage and the best way to keep those onions from smelling up everything else, there’s a show for that. If you honestly want to know more about business ethics, there’s a show for that and if you just want to get away from it all and need to know something about world travel, there’s even a show for that. Yep, there’s a show for just about anything only from JasonHartman.com or type in Jason Hartman in the iTunes store.

Jason:

Hey, it’s my pleasure to welcome Joe Fairless to the show. He is an investor who has an amazing story about how he moved from 4 single homes to doing his first big apartment deal, which was 168 units and I think you’ll be very anxious to hear this. He’s also got some other deals going, which is very exciting as well. He’s coming to us from New York City today. Hey Joe, welcome, how are you?

Joe Fairless:

Hi Jason, I’m doing well. Thanks for having me.

Jason:

It’s good to have you on the show. By the way, you do a great job on your show, which is about the best real estate advice ever. Let’s hear your story, I mean, it’s really a pretty amazing story because you just took a literally, quite literally, Joe, a leap. You didn’t do what most people do, which is sort of the iterative approach where you have a few single family homes and then you have a couple dozen and then your first apartment deal, you know, you took a pretty big jump, right?

Joe:

Yeah, yeah, it’s how I approach things. I found that I might not do take the typical path that, you know, that others have done. My whole approach with anything really and I’ll get specific in a second, but with anything, is to find out who’s successfully done what I’ve done, model after their success, have people along the way who are advising me who have successful done it and are successfully doing what I want to do, then simply follow that same path and get the same results or similar results.

My background was in advertising, working in an advertising agency in New York City. I was the youngest Vice President of a New York City ad agency, I was 29 years old and I climbed the ladder. The only other place for me to go was president and I didn’t want to do that. It wasn’t fulfilling anymore. While I was in advertising, I invested in single family homes and I had 4 homes in Dallas Fort Worth. I’m from Fort Worth, Texas. I was born in Flint, Michigan, from Fort Worth, and now living in New York City, so kind of did a little triangle there.

Jason:

Yeah, there is quite a mix. *Laughter*.

Joe:

Yeah, very, very much so. Big ol’ mix. So, I was in advertising and I wasn’t feeling what I was doing any more. Wasn’t growing, wasn’t learning, and I saw an opportunity to learn commercial real estate, specifically multi-family. I reached out to some people who were successfully doing it. Learned from them and then I decided to leave my job. When I left my job, I realized that, and I knew this before I left, but one of the disadvantages/secret advantage was that I couldn’t get a proof for a mortgage, so that necessitated me to bring in investors and raise money for my first deal. So, that’s how I made the transition from advertising to single-family to then looking at a large multi-family.

Jason:

Okay, so, you raised money for which deal? The single-family deal?

Joe:

No, I raised money for the multi-family. The single-family homes I bought with my own money in different ways. The first one I put 20% down of my own money, the second one I put 10% down with a homepath loan, which homepath is going away, I read recently. The third I bought all cash, I had a cash re-finance and appraised for more than what I purchased it for and essentially got all my money back out and then the fourth one I bought with a line of credit, personal line of credit, and then for the multi-family, I started looking at different properties. I thought conservatively I could raise a $100,000 and perhaps aggressively I could raise up to $300,000.

So, I was looking at around the $1 million dollar price point and I was going to grow into that deal. That’s about the mark I was looking at, which was Tulsa, Oklahoma, that’s about a 30 unit and I kept looking, kept looking, and then after about 4 months of evaluating properties, I came across this 168 unit that one of my team members showed me and that was in Cincinnati, but the challenge was that it was $6.35 million dollars and that was no-where close to the $82,000 home that I purchased before. *Laughter*.

So, there was a mental leap that I had to take. Initially presented to me that I would only need to raise about $500,000, so it wasn’t that much of a leap from what I thought I could raise, but then the deal changed and eventually I had to raise $1.3 million dollars for the deal and ended up acquiring it by raising it with investors.

Jason:

Okay, so, take us through that deal. What was the total purchase price?

Joe:

$6.35 million.

Jason:

Okay and how did you structure the financing. Give us the whole breakdown, you raised X and you financed, what’s the whole thing.

Joe:

Yep. So we got it through a master lease with option to purchase. The reason why we did a master lease is because it has a large pre-payment penalty on it. It’s called, as you know, defeasance and it was a cost prohibited to the seller or us to put new debt on it because of that large pre-payment penalty, but the seller wanted out and we wanted in, so what we did was we structured it where we gave them a down-payment of $1.3 million, agreed on this purchase price of $6.35 million, did a master lease with option to purchase for 4 years; after the 4 years is up, the defeasance penalty is going away. At that point we’ll put new debt on it or we can sell the property, whatever, we have a couple of different options.

Jason:

Okay, so with the master lease, that’s really interesting. So, you basically got around the pre-payment penalty and this is an interesting discussion because I’ve got a 125 unit apartment complex that I’m working on selling with my partners now, you know, that one’s got a big pre-payment penalty. If we do a deal on that, we’re going to pay like $400,000 pre-payment penalty or some insane amount like that, so here I’m getting an idea from you. *Laughter*.

Joe:

Yeah. *Laughter*.

Jason:

So, how did you structure the lease terms and price. That’s such a sort of a subjective..That’s pretty hard to do on a property like that, you certainly don’t have comps. *Laughter*.

Joe:

Yeah, essentially..it’s kind of like you’re evaluating as though you’re buying and the master lease payment that we make to the seller is equal to the mortgage payment. We actually pay the lender directly. We got written approval from the lender prior to entering into this agreement that they were fine with us..

Jason:

Because you were afraid that’d call and do an unsale and say you gotta pay the pre-payment penalty right then, right?

Joe:

Absolutely. We were afraid not only that, but and the loan document it states the seller of who has the loan with the lender can not enter into a master lease agreement without written approval, so if we had given the seller $1.3 million dollars, we might not have a way of getting that $1.3 million dollars back if the lender says, “Well, you entered into a false agreement.”

Jason:

So, I’m surprised that they wrote a letter and said it was okay. That’s pretty surprising, right?

Joe:
I don’t know if that’s surprising or not. I know that from the lenders perspective, they have worked with this seller before, so they want to keep his business number one and number two, there’s little increased risk to them because the person who was originally on the hook is still on the hook. The seller still personally guaranteeing  that we, my group, will pay the mortgage.

So, none of the original documents have changed, we’ve just got somebody else who is operating the property. So, then it becomes a matter of who’s operating the property, so they wanted to make sure we had a reputable and an experienced 3rd party property management in place and once they knew that we did and we got written confirmation or proof that’s who’s going to be managing the property, they were fine with it.

Jason:

Good, good. So tell us more. Take us through the rest of the deal. Did you finish all of the structuring on exactly how that worked or is there more to come?

Joe:

Yeah.

Jason:

Yeah?

Joe:

I think that’s the jist of it.

Jason:

Okay. How did you find the property?

Joe:

I found the property through a consultant I hired and he was helping me learn the business and in addition to learning the business, he is also a broker and he came across this property through one of his connections/friends and they presented it to me.

Jason:

Okay, fantastic. Okay, so what happened next?

Joe:

Well, at that point I needed to raised a whole lotta money. *Laughter*.

Jason:

How long were you able to tie the property up for in order to raise money?

Joe:

It took about 2 months, I’d say. I’d say it took 2 months. At that point I immediately drew a thermometer on a piece of paper. *Laughter*. And I put $1.3 million at the very top and started filling it up. My approach to raising money is something I kind of fell into, you know, I’ve never raised a penny before, but from my marketing and advertising background, I’ve done a lot of different campaigns that were quantifiably focused.

So, what I did was I approached it as though I had a goal for any type of marketing or advertising campaign and we had to get a certain number of downloads or certain number of sign-ups and I know that one of the specialties whenever I was in marketing, advertising is word of mouth, and I’ve written some chapters in word of mouth books. I know if you get one person from a network on board, then that person will likely talk to others and, more importantly, other people in that network will be more likely to be interested and consequently invest if it makes sense to them.

So, what I mean by that is, I created a spreadsheet and in the spreadsheet on each column I had each network that I’m a part of, so I’m on the alumni advisory board at Texas Tech. I listed that as a network. I’m on a flag football team, I’m the capital of a flag football team, I listed that as a network. *Laughter*. Advertising, Dallas, Oil, Gas, all the different industries that I’m apart of or all the different networks that I’m apart of, then my goal, after writing down the names of people I know in each of those networks, was to get just one person. Once I got just one person in each of the networks, it was a lot easier to have a conversation with the remaining members of the networks and say, “So and so is investing, I’d love to share this opportunity with you as well.”

Jason:

Okay, okay, good. So, you had to create your documents and so forth. Tell us a little bit about that, you know, how did that all work?

Joe:

The documents…my mom is a paralegal and she used to work for an attorney in Fort Worth called, his name is Ed Cox. He has his own law firm, so he was a family friend, someone who I trusted implicitly and he was the one working with me on creating you know all the necessary documents.

Jason:

So you created a private placement memorandum, how much did you raise from your first person?

Joe:

First person said that he was going to invest initially said, $250,000. I got thrown a bit of a curve ball on that about a month before we were suppose to close and that went from $250 to $125 to $50,000 and I ended up, you know, one of the lessons learned on my end. I now know I need to raise 30% more than what I think I need and be completely transparent with the people who are in that 30% category and just tell them, “Hey, you’re on deck, if something were to change, then you’d be in the deal.”

That’s a lot easier conversation to have then be caught flat footed and need to raise money from scratch like I had to in this scenario. So, the first person ended up investing $50,000, but if it weren’t for his initial commitment to me of the $250 what I thought he was going to invest, then it would have been psychologically more challenging and tactically to raise the money, because of, you know, the extreme amount of difference that I had to make up.

Jason:

So, that’s no surprise that you had those pitfalls and, you know, I’m sure everybody who has raised money has experienced the broken promises like that. So, 30% is your target. What did you do to network into the rest of the group, you know, once you got one person on board.

Joe:

What I do is, first off, I have to wholeheartedly believe in the opportunity. I have to believe that this is one heck of an opportunity for people to make money in a way that is not available in other places to them at this moment. If I wholeheartedly believe that, and I did, and I do on my next deal, then I know that it’s just a matter of telling enough people about a good opportunity and eventually you’ll have enough people wanting to participate.

So, what I did specifically is I would email out some thing saying, “Hey, I’d love to tell you about a deal I’m closing on with investors. Here’s how much I’ve raised so far. There’s only x amount remaining, would you like me to share with some more information on it and set some time to discuss?” Then if they say yes, then I will send them the presentation.

I will give them a couple of days to review that way going into the call, the majority of them have already said, “Yes, I’m interested.” and reviewed the presentation that way we’re not having a conversation from the starting line. It’s rather just speaking about some other things that they might have questions about with the deal and with that same email that I mentioned originally to them it also says, so and so is also either investing or interested in the deal, just to tie that back to the networking advice that I had.

Jason:

Good, good. Have these people had any interest in investing in a syndicated real estate deal or any experience in that before or you probably didn’t know, what were your assumptions about that?

Joe:

I’d say a majority of them had not. One of them had and the other was also simultaneously about to invest in another one, so it was a different conversation then..it wasn’t just a conversation about the deal, it was about multi-family, the benefits of investing in real estate in general, and then we got to specific deal parameters.

I’d say half of them had been investors on their own though for real estate so they knew about it and I’d say the other half hadn’t, but they had been successful in their careers, the stock market, and other investments, so they had an investor mentality, so that allowed me to cater the conversation to whatever we needed to for that particular investor.

Jason:

Alright, you tied that property up, for what, 2 months and that was on a due diligence kind of free-look period, right?

Joe:

We actually..

Jason:

And that’s when you went out and raised the money.

Joe:

It was interesting. I knew, because of the relationship and I wouldn’t recommend this, but because of the relationship that my consultant had with the broker and the broker had with the seller, because of the unique structure of the deal and because the seller, quite frankly couldn’t sell the property without this unique structure because of the million dollar pre-payment penalty, we started, I started speaking to investors before we officially had it under contract just because, you know, it was my first deal and I wanted to make sure I could actually pull through on closing on it before I put it on contract. So, I would say, we tied it up for 2 months, but I’d say, 3 months, maybe 3 1/2 months, is when ever I had the first conversation to investors about it.

Jason:

Did you have anybody else helping you raise the money? Did you hire anybody or put someone on a commission and I know there’s probably some securities laws about that, but you know, any like affiliates helping you or did you do it all yourself?

Joe:

I worked with the brokers and they put their commission into the deal to be 25% owners of it, so they put in about $350,000 plus or minus. I’m forgetting the exact amount. So, I raised the remaining amount.

Jason:

What else would you like people to know, maybe the deal itself, you know, what did you like this deal, how did you, you know, manage the deal, and how’s it going now? We talked a lot about raising money part and I wanted to do that, Joe, because so many people wonder where does the money come from. What I do want to say to the listeners is, a good deal attracts money. The hardest part is finding the good deal and, you know, getting some control of the good deal for enough time so you can raise the money.

The other part of that really is dealing with the seller. How did you develop that credibility on that side? You know, that they’d want to tie up the property. I know you didn’t tie it up right away, as you mentioned, how did they know you were going to come through and make this happen? I mean, you’re a 29 year old guy who has never raised money before and was only a single-family home investor before that.

Joe:

*Laughter*.
Jason:

I mean, how did they believe in you? You know, you had to get them to do that.

Joe:

Yeah, I think that’s the one aspect that I completely was unaware of that is critically important with multi-family and that’s credibility. I was blown away by how important credibility is as far as how many properties you’ve closed on before, how many you manage, if you bought this particular type of real estate asset. I didn’t know that was going to be so important and, fortunately, how I was able to pull up my chair at the big kid’s table is by having other people around me who had done those types of deals before. I had a consultant, I had a property management company, and I had the money. At least, I was claiming I had the money from investors and it just kind of happened and I knew it would happen.

Jason:

I mean, a lot of sellers would ask for proof of funds, that’s a reasonable question.

Joe:

Yeah and I didn’t have it. I didn’t have proof of funds and I wasn’t asked to present it. Now if I’m asked for proof of funds, I can show that and then some, because I’ve got the track record and I’ve got the people on my team and investors who have that, but previously, I didn’t have proof of funds, but you know what? If they had asked for it, I would have found away. I know I would have found the way, so that wouldn’t have been a stopping point for me.

As far as other things I’d like to mention about the deal and why I thought it was good opportunity, well, it is a classic repositioning in that the seller was wanting to develop, he was more interested in develop than management and he is an amazing developer and he wanted to get out of this management of the property. At the time, it was family managed and we saw opportunities to optimize the management and then also increase rents without doing significant improvements to the property. We just saw there was some opportunities to bring the rents up just by updating the landscaping a bit and, you know, having some better processes in place for the residents, communication, and that type of thing.

So, you know, we had a motivated seller and we had a seller who was challenged because he couldn’t sell the traditional route and on the flip side with me and my group, we had never, since it’s a company I created from scratch, we had never managed a property and we didn’t have the track record in multi-family, so the best way for us to get in and get that track record was to go in under a master lease because we don’t have to go through the rigorous approval process of a lender.

Even though they approved us, they didn’t go through our financial like they would if we were the ones on hook for the loan. At the same time, now we’re going to get a credit for managing this properties for 4 plus years and then we’re going to build our track record and our experience and that’s going to help with the next deal.

Jason:

Yeah, okay. So, when do you think you’ll do your next deal? Well, you’re working on a deal now, but I know you can’t talk a lot about that. I want to just let you answer that question how ever you like to. Sorry if I put you in a tough spot there.

Joe:

*Laughter*. No, I’m put on the spot all the time, I an work it. *Laughter*.

Jason:

Alright, go for it.

Joe:

I’ve been working on my next deal for the last 5 months. It’s an off-market deal, so as you mentioned, I can’t say a whole lot about it. All I can say is that it is a large development multi-family development opportunity that I’m going to be doing and the reason why is because I want to continually evolve as a person and as a professional and I want to continually learn and grow and I feel like I’m getting one heck of a learning experience with the 168 unit repositioning and it’s not that I am burnt out by the repositioning, I actually really enjoy it, but I want a different type of challenge and a grounded development certainly is.

How I am able to do that because I’ve never developed before and I would need to raise a lot of money to make this deal happen is I’m partnering with an experienced developer and he’ll lead the charge on the development and I’ll, you know, work with him as more of the person who executes on the ground and I’ll learn that way. I think that’s a much better way of learning development, to actually get paid then going to school for 4 years or 6 years or whatever and paying someone to teach me rather I’m being paid to learn. You know, building my net worth and helping out investors who will be presented a good opportunity.

Jason:

Just any other tips you want to close with, Joe? Any of the thoughts you have on any part of the real estate investing world, why you like it, what you think about it? Whatever, I just wanted to leave it open for you.

Joe:

I think real estate, being successful in real estate it has 3 parts to it. One is creativity. You know, finding ..there’s any structure that you pass on the street is an opportunity. It’s just a matter of can you structure the deal, can you think of a way to structure a deal so that it makes sense for both parties and the 168 units is a prime example of creativity. The second is leverage, so really leveraging both time with having people who have been there done that help you learn the process, that has allowed me to be exponentially farther than I would be if I didn’t do that, and then also obviously leverage money with real estate. I’m a huge fan of, not over leveraging, but leveraging intelligently.

Lastly, relationships. The third part. I wholeheartedly believe that the foundation of business, not only real estate, is relationships. My number one relationship advice from a professional stand point is to always give before you ask for anything from someone. I am a proponent of always offering to give someone something before I ask them for anything and if that mentally is present in all of your professional dealings, it’s incredible how much you’ll stand out from everybody else and how fulfilling it is to help others get what they want before you get anything that you want.

Jason:

yeah, I think that’s definitely true. You know, I had Harvey McKay on the show before and he’s got all these creative book titles and, you know, my favorite one is Dig Your Well, Before You’re Thirsty.

Joe:

Yeah.

Jason:

*Laughter*. So that’s a great book title. So, that’s a good philosophy. The famous Zig Ziglar, he used to say, “You can have everything in life you want if you just help other people get what they want.” You know, that’s so true. The world is an abundant place. It’s all out there, you just gotta learn how to create enough value, you know, and put that value out there first and then it will be no problem to get it in return and get people interested in all the stuff that you’re doing. So, that’s a great philosophy, Joe, and I appreciate you sharing it with us. Give the listeners your website and tell them where you can learn more about you and your work.

Joe:

You can check me out at my podcast is called Best Real Estate Investing Advice Ever and you can see that at Joefairless.com/show.

Jason:

Good stuff, Joe Fairless thank you for joining us.

Joe:

Alright, thank you, sir.

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