Real Estate Investing School Podcast — Episode 150

"REAL DEAL: What It Takes To Do a Million Dollar Deal with Luke Hoffman"

Date: April 18, 2024
Host: Brody Fawcett
Guest: Luke Hoffman

Episode Overview

This “Real Deal” episode dives deep into the anatomy of a major real estate investment: a 20-unit mixed-use building in Dubuque, Iowa, purchased for $1.14 million by seasoned investor Luke Hoffman. The discussion uncovers what it really takes to find, fund, and “force”—or creatively execute—a million-dollar investment deal, highlighting both the financial intricacies and the mindset shifts required to make the leap from small properties to larger investing. Luke and Brody talk candidly about the risks, fears, and strategies involved, providing actionable insights and inspiration for investors aiming to scale up.

Key Discussion Points and Insights

1. Luke’s Background and Lifestyle

• Luke shares the lifestyle benefits of real estate investing, such as recent world travels with his family:
  • “We chartered a sailboat [in Thailand]... jump in the water, sleep under the stars on top of the boat. I mean, it was pretty cool.” (02:22, Luke)

2. The Deal Overview ([03:04])

• Property: 20 units (16 residential apartments + 4 commercial storefronts)
• Location: Dubuque, Iowa, on the edge of Main Street’s development
• Age: Historic, built around the 1890s
• Purchase Price: $1.14 million

3. Making the Leap to Larger Deals

• Luke had historically invested in single-family and small multi-units (duplexes/fourplexes). The million-dollar building was a major stretch and required a new mindset:
  • “It was quite the leap… more of a mindset shift for us.” (03:55, Luke)
• The property’s location in an ‘up-and-coming’ area along Main Street was a key attraction.

4. Speed and Preparedness Wins Deals ([04:42], [05:33])

• The deal was snatched up the first day it hit MLS, then fell out of contract.
• Luke’s takeaway: Underwrite deals even if you’re late. Be ready to move fast if they reappear.
• Quote:
  • “Even though it went under contract, I still did some of the legwork just to see... So when it hit the market [again], I already had all my numbers.” (04:42, Luke)
  • Brody: “Sometimes it just… doesn’t get to as many people as fast. Less competition, and you’re getting in there, they know you’re serious.” (05:38, Brody)

5. Mindset: The Power of Setting Bigger Targets ([07:30])

• Luke made the commitment at a real estate mastermind to buy a 20–40 unit building within months:
  • “I had two or three things I wanted to accomplish before the end of the year. And one of them was to go under contract on a 20 to 40 unit building. So I just made that dedication in my head before I left Maui. Alright, we’re doing this.” (07:30, Luke)
• Brody’s Reflection:
  • “You find what you’re looking for…If you don’t expand your mind… you’re not really looking for too many opportunities above and beyond [your goals].” (09:07, Brody)

6. Funding the Deal: A Creative, Layered Approach ([10:14–13:40])

• Luke needed $230k for down payment but started with only $30k personally.
• Strategies Used:
  • Private Money: Raised $50k at 10% interest for 4 months from an investor new to private lending.
    • “It was a costly deal, but I just needed to get the deal done. It was my first time I raised private money.” (10:14, Luke)
  • Reverse 1031 Exchange: Sold another property after buying this one, transferring $80k in equity.
    • “You can actually… do what’s called a reverse 1031. You buy the new property first, and then you back into the sale of the other one.” (11:47, Luke)
  • Leveraging Personal Residence: The bank put a second mortgage on his home to cover the final shortfall.
    • “They… put a second on my house for a little more than they were supposed to.” (13:01, Luke)
• Total sources: private money, reverse 1031, personal funds, and leveraging his home.

7. Bank Relationships and “Forcing” the Deal ([13:40], [26:47])

• Having pre-established bank relationships was key—Luke paved the way before looking by discussing bigger deals and requirements with his banker.
  • “I had a lot of forward conversation…like, ‘Hey, I want to do a million-dollar deal, what do I need to do to get there?’” (26:47, Luke)
• The bank even bent a guideline to help him structure the deal.

8. Executing the BRRRR on a Large Scale ([15:57])

• After closing, the plan was to BRRRR (Buy, Rehab, Rent, Refinance, Repeat):
  • Renovated units as they became vacant, raised rents, and avoided clearing the building.
  • Major value-add: spent ~$25k to individually meter water, shifting utility costs to tenants (recapturing ~$1,200/mo).
    • “Inside two years, we had our money back [from that utility investment].” (17:29, Luke)
• Rehabbed units gradually to maintain cash flow, not all at once.

9. The Numbers: Before and After ([17:51])

• Appraisal After 1 Year: $1.485 million
• Rehab Cost: ~$200k (funded by selling another property and plowing cash flow back into the building)
• Original Mortgage: $6,200/mo at 3.5% (20-year amortization, 5-year balloon) ([18:47])
• Re-fi: Added a $200k second loan at 7.25%; total debt service rose to $8,700/mo
• Gross Rents:
  • At purchase: ~$9,500/mo
  • After repositioning: $17,000–$18,000/mo ([20:47])
• Cash Flow:
  • Now: ~$5,000/mo free cash flow (20% reserves included)
  • “Actual true free cash flow is right around five grand a month.” (20:01, Luke)
• Equity: Estimated current value $1.8 million (only ~$100k of personal cash left in the deal)
  • “A hundred grand into almost $2 million property is pretty sweet.” (21:50, Luke)

10. Tax Strategy Wins ([24:02])

• First cost segregation study on this building saved $50k in taxes in one year.
  • “It was like 170 grand we were able to write back off our income. That was like $50k in tax burden that it wiped away…” (24:02, Luke)

11. Overcoming Doubts and “Fear Decisions” ([15:57], [25:38])

• Luke admits to almost backing out multiple times and describes nights spent agonizing over the risk.
  • “I was very, very nervous. Like, I almost backed out multiple times, but I’m glad I did.” (15:57, Luke)
• Brody on the difference between being “scared” vs. “stupid”:
  • “You didn’t make the decision stupid, you made it scared. There’s a difference in stupid decisions and scared decisions…” (25:38, Brody)

12. Scaling Up: From “Stretch” to New Comfort Zone ([26:04], [26:09])

• After the building, Luke bought a self-storage complex—showing how “big” deals get less intimidating with experience.
  • “Now doing a million dollar deal in my market… it’s not as scary anymore. Like now it’s like $5 million or $10 million, I’m like, ooh, I don’t know, let’s pump the brakes for a second.” (26:04, Luke)

13. Advice: Building Relationships with Local Banks ([27:39])

• Personal, regional banks are essential for getting started; nationwide lenders are less helpful for creative, growth investors.
  • “Somebody you can sit down in their office. I mean, I can text my banker any time of the day and he’ll reply... that personal relationship really [matters].” (27:39, Luke)
  • “Their neck is on the line just as much as yours is… The bank’s job is to see where it falls apart… you can merge all that information.” (29:12, Brody)

Notable Quotes & Memorable Moments

• “I was like, you got the money right? And I’m like, ‘Oh yeah, yeah…we’ll figure this out.’” (10:34, Luke)
• “As soon as you start looking for something, you see it. I just wasn’t looking for it before that point.” (08:05, Luke)
• “All in all, I look at it…I probably have somewhere between 75 and 100 grand of real cash still in the deal today. But…I estimated the value this morning probably at $1.8 million.” (21:15, Luke)
• “In four years, we made a million bucks off one building.” (23:27, Luke)
• “Sometimes those people, they want to help you…just ask, ‘What’s the roadmap to get there?’ And then do it. Do the work.” (27:24, Luke)
• Brody on mindset: “You find what you’re looking for…If you don’t expand your mind… you’re not really looking for too many opportunities above and beyond [your goals].” (09:07, Brody)
• On relationships: “The script kind of flips…it’s like, hold on a second, the bank wants to do the deal too.” (28:32, Brody)

Key Timestamps

• [03:04] Deal Introduction: Overview of property and market context
• [04:42] How Luke Got the Deal: Speed and underwriting before it was available
• [07:30] Mindset Shift: Mastermind and setting bigger goals
• [10:14] Funding the Purchase: Private and creative finance strategies
• [13:40] Bank Relationship & Final Financing Solution
• [15:57] The BRRRR Process: How the reposition played out, metering investment
• [17:51] Results: Re-appraisal, rents, cash flow after 1 year
• [24:02] Tax Strategy: Cost segregation and tax windfall
• [25:38] Emotional Side: Almost backing out, making decisions “scared”
• [26:47]/[27:39] Forging Bank Relationships: The importance of small local banks

Final Thoughts & Where to Find Luke

Luke emphasizes that large deals are possible with deliberate mindset shifts, creative financing, and strong bank relationships. His story illustrates how breaking comfort zones yields both risk and immense upside—and how a supportive community and good advisors can make or break your success.

Connect with Luke:
Instagram: @lukehoffman42

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