246. REAL DEAL: Private Money and 1031 Exchange Mastery

Summary

Real Estate Investing School Podcast Episode 246: REAL DEAL: Private Money and 1031 Exchange Mastery

Release Date: March 20, 2025
Host: Brody Fawcett
Guest: Luke Hoffman

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Introduction

In Episode 246 of the Real Estate Investing School Podcast, host Brody Fawcett welcomes real estate investor Luke Hoffman to delve into an advanced 20-unit real estate deal. This episode, titled "REAL DEAL: Private Money and 1031 Exchange Mastery," offers listeners valuable insights into finding, funding, and successfully managing a multifamily property. Luke shares his journey from missing an initial opportunity to mastering creative financing strategies, making this episode a must-listen for aspiring real estate investors.

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Overview of the Featured Real Estate Deal

Luke Hoffman introduces the centerpiece of the discussion—a 20-unit mixed-use building located on Main Street in Dubuque, Iowa. The property comprises 16 residential apartments and four commercial storefronts, situated strategically on the fringes of the town's growth area.

Luke Hoffman [03:04]: "It's a mixed use type space in our town... It was built in the 1800s or 1890s, something like that. So it's an old, old brick building, three stories."

This investment marked a significant shift for Luke, who had previously focused on single-family homes and smaller multifamily units. Purchasing a property priced over a million dollars represented a substantial leap, both financially and mentally.

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Strategies for Finding and Securing the Deal

The journey to acquiring the property began when the listing first appeared on the MLS. Although Luke initially missed the opportunity, the property fell out of contract, prompting him to act swiftly upon its return.

Luke Hoffman [04:32]: "I saw it like 7am I called my Realtor and was like, dude, we gotta jump on this. We gotta get in there like this morning, not this afternoon."

Key strategies highlighted include:

1. Pre-Underwriting Deals: Luke had already underwritten the property, allowing him to act quickly when the opportunity resurfaced.

2. Speed and Readiness: Being prepared with numbers and having a clear offer ready to go enabled Luke to secure the deal efficiently.

3. Setting Ambitious Goals: Inspired by a mastermind event, Luke set a specific goal to acquire a 20-40 unit building within a few months, which focused his search and actions.

Brody Fawcett [07:30]: "You shift your mindset. If you set a certain goal, you're more likely to achieve something beyond that same thing."

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Funding the Deal: Private Money and 1031 Exchange

Securing the necessary funds was one of the most challenging aspects of the deal. Luke employed a combination of private money, a reverse 1031 exchange, and personal home equity to finance the purchase.

1. Private Money Loans:

   • Amount Raised: Approximately $50,000 from a few investors.
   • Terms: Four-month loan with simple interest.

   Luke Hoffman [10:14]: "I used a bunch of different strategies... I found a couple of people that were essentially watching what I was doing in our marketplace, raised some money there, that was about 50 grand."

2. Reverse 1031 Exchange:

   • Strategy: Instead of the standard forward 1031 exchange, Luke executed a reverse 1031 exchange, allowing him to purchase the new property before selling the old one.
   • Equity Unlocked: $80,000 from the equity of an existing property.

   Luke Hoffman [11:36]: "We used a reverse 1031. So we actually buy the new property first and then back into the sale of the other one."

3. Personal Home Equity:

   • Additional Funds: Leveraged $38,000 in equity from his personal home through a second loan.

   Luke Hoffman [12:00]: "Between private money, a reverse 1031, a little bit of my own money, and then leveraging my own house to the hilt to make it happen."

This multifaceted approach allowed Luke to gather the approximately $230,000 needed to close the deal, despite initially having only $30,000 in available funds.

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Overcoming Challenges and Risk Management

The acquisition and management of the property were not without challenges. Luke shares his experiences of stress, near cancellation, and strategic problem-solving to ensure the deal's success.

1. Emotional Strain:

   • Stress and Doubts: Luke faced significant anxiety, contemplating backing out multiple times.
   • Support System: Conversations with fellow real estate professionals helped him stay committed.

   Luke Hoffman [15:11]: "I was very, very nervous. I almost backed out multiple times, but I'm glad I did."

2. Property Management:

   • Renovations and Rent Increases: Addressed vacancies by renovating units and systematically raising rents.
   • Utility Management: Invested $25,000 to split water meters and recaptured utility expenses, adding an additional $1,200 monthly.

   Luke Hoffman [17:28]: "We spent like 25 thousand to split it into 21 meters... we were able to push all that utility expense right on the tenant."

3. Financial Resilience:

   • ROI Achieved: Within two years, Luke recuperated his investment, and the property's value appreciated significantly.
   • Reappraisal: The property was reappraised at $1.485 million, reflecting substantial equity growth.

   Luke Hoffman [18:02]: "It appraised at 1.485 million."

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Results and Outcomes of the Deal

The successful implementation of private financing and a reverse 1031 exchange yielded impressive financial returns:

• Initial Cash Flow: Increased from approximately $100 per month to nearly $5,000 in free cash flow.
• Property Valuation: Grew from $1.14 million at purchase to an estimated $1.8 million within a year.
• Equity and ROI: Accumulated between $75,000 to $100,000 in real cash within the deal, with expectations to surpass $1 million in equity over four years.

Brody Fawcett [23:27]: "In four years, we made a million bucks off one building. I mean, the power of real estate."

Additionally, Luke discussed the benefits of cost segregation studies, which significantly reduced his tax burden by $170,000, further enhancing the deal's profitability.

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Insights and Advice for Listeners

Throughout the episode, both Brody and Luke offer actionable advice for real estate investors aiming to replicate similar successes:

1. Cultivate Strong Banking Relationships:

   • Engage in forward conversations with your bank about your investment goals.
   • Seek personalized support from local banks where relationships can be nurtured.

   Luke Hoffman [26:47]: "Having those people... it's like they're on the same team to go and get this thing done and create these win-win scenarios."

2. Set Ambitious Goals:

   • Attending masterminds or similar events can inspire larger investment targets.
   • Expanding your mindset opens doors to greater opportunities.

3. Leverage Creative Financing:

   • Utilize private money and 1031 exchanges to manage large investments without substantial upfront capital.
   • Be prepared to explore unconventional financing methods to secure deals.

4. Embrace Risk Thoughtfully:

   • Differentiate between smart risks and decisions made out of fear.
   • Learn from each deal to build strength and confidence in larger investments.

5. Continuous Learning and Networking:

   • Surround yourself with individuals who think bigger and support your growth.
   • Consume diverse content and engage with experienced investors to elevate your own strategies.

Brody Fawcett [27:24]: "Having those people... they're going to always try to help you figure out how to make the deal."

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Conclusion

Episode 246 of the Real Estate Investing School Podcast provides a comprehensive look into a successful multifamily investment, highlighting the importance of strategic planning, creative financing, and strong professional relationships. Luke Hoffman's journey from contemplating a 20-unit deal to realizing substantial financial gains underscores the potential of real estate investment when approached with diligence and innovative strategies.

Listeners are encouraged to connect with Luke Hoffman on Instagram @lukehoffman42 for more insights and updates on his real estate ventures.

Brody Fawcett [30:13]: "This is fun. This is what's fun about real estate."

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Key Takeaways:

• Preparation and Readiness: Having your numbers ready allows for swift action on promising deals.
• Creative Financing: Combining private money with strategies like reverse 1031 exchanges can bridge funding gaps.
• Mindset Shift: Setting higher goals can transform your investment trajectory.
• Strong Relationships: Building rapport with local banks and financial institutions is crucial for accessing larger capital.
• Continuous Improvement: Learning from each deal fosters growth and confidence in handling bigger investments.

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Thank you for tuning into the Real Estate Investing School Podcast. Stay informed and empowered on your journey to real estate success!

Transcript

[Luke Hoffman]

But the first time it came on, I missed it. It was gone like the same day and it fell out of contract. So then when it came back around, I saw it at like 7am I called my realtor and was like, dude, we gotta jump on this. Like, we gotta get in there like this morning.

[Brody Fawcett]

What's up, everybody? Welcome back to the Real Estate Investing School podcast. This is your host, Brody Fawcett. And today is a Real Deal episode that we have. We're gonna dive into one real estate deal, go through the ins and outs of it, what it took to find the deal, fund the deal and ultimately force it, meaning getting creative and making it happen. And as you guys know, you're listening because you want to learn, you want to get educated so you can go and replicate something similar. And this is how it's done. You have to learn from people that you're wanting to trade places with. And the best way to not make the mistakes is to learn what other people have done and have not done and learn from that and then go and implement those strategies. So today is going to be extra exciting. It's going to be more of an advanced deal, I want to say, just because it's, it's not your typical one unit, two unit, three unit type deal, but it's a 20 unit deal that I'm excited to get into with one of my good, good buddies, Luke Hoffman. So Luke, thanks for being here, man.

[Luke Hoffman]

Yeah, I appreciate it. Excited?

[Brody Fawcett]

Yeah, dude, excited. Excited to have you here because, yeah, I just love, love what you're doing. Love like your family life. You just got back from. How many months were you traveling?

[Luke Hoffman]

Three months internationally.

[Brody Fawcett]

With three kids or four kids?

[Luke Hoffman]

Yeah, three kids, 6, 8 and 12. Two boys and a girl.

[Brody Fawcett]

That's amazing. Yeah, that's the, those are the perks of being a real estate investor right there, I guess.

[Luke Hoffman]

Yep, that was, that was my goal, you know, way, way back in the day. So we checked that box. It was pretty cool.

[Brody Fawcett]

That's exciting. I know, like anytime you guys have traveled or even, I think last year when you were out here, like you don't do like the five day vacation thing. It's like you gotta really immerse yourself in the culture, which, which I love. It's so fun.

[Luke Hoffman]

Yeah. I look at it like you're traveling that far. Wherever you're going, might as well stay for a couple weeks.

[Brody Fawcett]

Yeah, dude. So cool. And you guys, you guys stayed on a, stayed on a boat, I think, for, I don't know, a week or something like that.

[Luke Hoffman]

Yep. In Thailand, we chartered a sailboat, had our own crew and stuff, and stayed on the boat 24 7. They cooked, they, you know, took you all the cool spots, jump in the water, sleep under the stars on top of the boat. I mean, it was pretty cool.

[Brody Fawcett]

That's awesome, dude. Well, I bet your kids have learned a lot from that. And just experiencing that is quite the summer vacation, so. Well, dude, I'm excited just hearing a little bit about this deal. I didn't want to get too detailed in it just when we were having conversation on it, because I wanted to save it for this show where I can authentically ask these questions that I'm curious about. But give us an overview of the deal that we're jamming on today and then we'll dive into more of the details on it.

[Luke Hoffman]

Sure, yeah. So it's an MLS deal. A couple years ago we purchased it. It's 20 units. There's 16 residential apartments and then four commercial storefronts. It's right on Main street in our town, Dubuque, Iowa. It's kind of on the fringes. It's 11th and Main. So it's like the main part of our Main street goes to about 9th or 10th Street. So we're right on that edge of where the, you know, progress is moving towards, which was one of the reasons why I liked it. But yeah, I mean, it's a kind of a mixed use type space our town. There's a lot of older housing stock, so I'd have to look, but I think it was built like 1800s, 1890s, something like that. So it's an old, old brick building, three stories. Yeah, there was just a lot of like outside my box, you know, at the time when we bought it.

[Brody Fawcett]

Yeah. So at the time you were what, mostly single family houses that you'd been investing in or. Or what?

[Luke Hoffman]

Yeah, mostly single family, up to like fourplexes, a lot of duplexes. Fourplexes. We had one six unit, or, excuse me, two six units. But, you know, it was quite the leap. I mean, it was more. It was more of a mindset shift for us. I mean, our town, I can buy single families all day for under 50,000. Like that rehab to Burr. And this was my first. You know, we paid over a million bucks for it. So it was like a drastic price difference, you know, the one I'm used to. So, yeah, a lot of, you know, stress and learning the learning curve and just going for it.

[Brody Fawcett]

Yeah. Cool. Well, yeah, I want to hear about how you did that. So what Was the purchase price.

[Luke Hoffman]

It ended up being 1.14 million.

[Brody Fawcett]

Okay, 1.14. And you said it was. It was on the market, it was on the mls. Was it sitting on the MLS for a while? Did it need a lot of rehab?

[Luke Hoffman]

No. So it actually was on the MLS about a month and then it fell out of contract. So it went back on. When the first time it came on, I missed it. I didn't. I was doing stuff and I just couldn't get to it fast enough. It was gone like the same day and it fell out of contract. So then when it came back around, I saw it. I think I heard through the grapevine a little bit, but I saw it like 7am I called my Realtor and was like, dude, we gotta jump on this. Like, get in. We gotta get in there like this morning, not this afternoon. So we were just. I mean, it was speed. At the end of the day, the one thing I did when the first time it was on, I already had underwritten it, generally speaking, to at least see if I wanted to offer on it. And so even though it went under contract, I still did some of the legwork just to see and like, run through the motion, basically, and teach myself some. Some things. So when it hit the market, I already had all my numbers. I already knew, you know, assuming nothing changes on the Performa, I already know what my offer can be like. I'm ready to go.

[Brody Fawcett]

Cool. Yeah, yeah, Two nuggets right there. Just like, it's interesting. We. We obviously get to like how you force the deal, but a lot of that comes up in just conversation, right? And I think that's, that's two of the ways right there. One, like too many times something goes under contract and we're like, oh, I'm not going to put in a backup offer. Like, oh, it's. It, it's done. I'm. I'm, you know, not even to think about it, and then it falls out of contract. So I love. You said that. Like, if anything, it's practice, right? Where you've underwritten it. You got, you got the practice and you're like, oh, if this came back up or if I were to put an offer in, this is what it would be for, right? And then two, I liked how you said speed. Like that's. I've gotten a handful of homes that way, where it really is just speed, like you said the first time, like, I just happened to miss it or you probably would have, you know, got your offer in. Well, being on the other side of that being one of the first ones that gets the offer in that makes the move on it. Sometimes it just, it doesn't get to as many people as fast. And so less competition and you're getting in there, they know you're serious. Submit an offer. So that's something I think that isn't talked about. That goes a long ways.

[Luke Hoffman]

Yeah, for sure. And we already talked to the bank, you know, the first time around to being as a million dollar deal, like, we wanted to have those conversations up front before I even started looking. And then this one hit, hit the MLS. So we already had that road, like 80% paved with the bank of like, hey, this is coming down the pipe. It's just a matter of when it, you know, when I find one, essentially.

[Brody Fawcett]

Yeah. Yeah, cool. So. So speaking of finding it, you mentioned that, like, this one was, you know, a stretch as far as being outside of your comfort zone a little bit, you know, more, more units, higher purchase price, things like that. Were you. Before this came up, were you already, like, looking for stuff like this and kind of expanded your mindset to like, o, I want to push myself if something like this comes up, or was it more like it came up and you're like, maybe we could actually make this work?

[Luke Hoffman]

No, it was actually. So it was following one of the Maui masterminds that I went to with you. And one of my takeaways from that mastermind in September when we were there was, you know, I had two or three things that 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. And so I just made that dedication in my head, like before I left Maui. All right, we're doing this. Like we got three or four months to find one, essentially. And so cool. Yeah, I mean, I just was like on the hunt and I'm. I mean, it's like anything you, you know, somebody gets a new car, you go down the street, you see them everywhere. Like, as soon as you start looking for something, you see it. And I just wasn't looking for it before that point.

[Brody Fawcett]

Yeah, dude, so good. I actually think I remember that actually. I remember that because that was like pretty soon after we like first met. And yeah, I remember like having the conversation if you wanted to get into more, more like consult almost like consolidated instead of like a bunch of. A bunch. A bunch of single family houses, like getting more of the established apartment complex and whatnot. But I love that you said because I think that's like, boom. That's another. Just like the way that you forced it or another like, golden nugget is you. You, like, shifted your mindset. And I think so often, like, you find what you're looking for. Right. And if you don't expand your mind to. It's the same thing with setting goals. Right. If you set a certain goal, like you're honing in on that goal and most likely you're not going to achieve much above and beyond that same thing with your annual income that you want to make, you know, because you set that as a goal and that's what you consider yourself worth. Dollar per hour. So you're not really looking for too many opportunities above and beyond that. Right. So I just. I. Yeah. Such a good concept of like, the power of just thinking. Thinking bigger and differently and then you look for bigger and different opportunities.

[Luke Hoffman]

Yeah. And I mean, when I went to the mastermind, too, I was never a huge goal person. It just never really interested me before that. But I went to the Mastermind, I spent a good chunk of money to be there and be around the right people. And so I basically just made that commitment, like, well, we're setting goals. I guess I'm just going to go all in on this and see, you know, try it out. Basically, like everybody else says, it works. So let me give it a go. And I'm glad I did. I mean, made us a lot of money. And honestly, it changed my life going to that first mastermind. It changed our whole trajectory with our business.

[Brody Fawcett]

Dude, that's amazing. I love that. I love hearing that. Okay, so we know how you found the deal. I want to get into how you funded it because that's like, usually that's like one of the biggest hurdles mentally people can't get over because it's like, oh, yeah, of course I want to go get a 20 unit, but, like, the problem is, is it costs a lot more money and I can't afford that. So what kind of helped you get over that? And then ultimately, how did you find finance this deal? Because I know it wasn't just, oh, yeah, I have this cash laying around and I can just go pay cash for it.

[Luke Hoffman]

Yeah. So, I mean, this one, it starts getting pretty complicated fast. I'll try to keep it as simple as I can, but essentially I used a bunch of different strategy strategies. I didn't have any. The down payment money. I needed roughly like 230,000, give or take, to close, and I basically had about 30 grand that I was like, I can set this aside. So I, I signed the contract and my realtor's like, you got the money, right? And I'm like, oh yeah, yeah, we got, we'll figure this out. And then like telling people behind the scenes, I'm like, yeah, I have no clue how we're going to close. And I was leaving, you know, we were going to close in February. I was leaving for the winter for three months in January 1st. Essentially. So I'm like, I don't know how we're going to do this, but let's go. But we ended up. It was my first time I raised private money. So I found a couple of people that I, they were essentially watching what I was doing in our marketplace, raised some money there, that was about 50 grand. They essentially just gave me a four month loan. And right or wrong, I mean, I probably backed myself into a corner a little bit with the short timeline, but I had four months after close, you know, I borrowed it right before we closed to get that back to them. And then I was trying to figure out what else to do to raise money. And so we ended up coming to, we had a building that had some equity on that.

[Brody Fawcett]

Like, sorry, did you just pay them just a flat, like interest rate or what?

[Luke Hoffman]

Yeah.

[Brody Fawcett]

Were there points involved with that or.

[Luke Hoffman]

No, I mean, they weren't experienced private lenders. It was their first time too. So it was just a ten straight up. So the forty grand or the fifty grand total cost me five grand in interest.

[Brody Fawcett]

Cool. Okay. Okay.

[Luke Hoffman]

Just for that form, assuming it's pretty pricey private money. But it didn't really matter. I mean, I just needed to get the deal done. It's kind of how I looked at it. It was a costly deal, but the rest of the money essentially came from a 1031. So I had a building, it was in kind of a rougher area, wasn't crazy about it anyways. And so I was like, oh, I can sell this one. I had a buyer that I'd been previously talking to, so I kind of knew I could sell it. But the whole thing with 1031s, you know, people aren't familiar with that is you typically go on a forward 1031, you sell something, the qualified intermediary holds the money until you find something else to put it in. And so there's a process there so you don't get hit with taxes, but you can actually talking to them, you can do what's called a reverse 1031. And so you actually buy the new property first and then you back into the sale of the other one. And so I'd never heard of that, but the company I was talking to was like, oh, yeah, we do this all the time. It's totally fine. So we ended up going down that route. First time for everything. I mean, I tried, like, oh, what do we have to lose? You know, that's six grand in fees to pay them to do that. And so we basically got another 80 grand of equity that we were able to roll across. So mushing it all together, we were short about 40. So my banker really wanted to help us push this through because I needed 20% down at the end of the day. And so we barely. We had like 19. Well, I guess we had essentially like 38,000 in equity in our personal home, but it needed 40. And so they essentially just kind of throw me a bone and put a second on my house for a little more than they were supposed to. And they're like, all right, you're going to pay five grand a quarter till this is paid off. Like a two year loan straight pay down. Like, they just, I mean, they helped me out, honestly.

[Brody Fawcett]

Yeah.

[Luke Hoffman]

So, I mean, between. So it was basically private money, a reverse 1031, a little bit of my own money, and then leveraging my own house to the hilt to make it happen.

[Brody Fawcett]

And you did it. Okay, cool. No, I actually, I actually like it. I like it for the right person. It's so funny. Like, it's so funny. Like you give different advice to different people, right? And I think, like, going back, like, some of my advice to myself would be to like, be a little bit more. I don't want to even use the word like risky. There's probably a better word word for it in general, but I feel like sometimes I was too conservative, which is the advice I'd give to like, the average person because they're the opposite, right? They're. They're the ones getting like the truck payments and doing all these things they shouldn't do. So the advice is usually like, hey, think twice. But like for myself and my scenario, just because I know how I work now and I know, like sometimes if my back is up against the wall in a certain way, like, it's a good thing. And I think for you, like, you're not doing anything that's not smart at this point because you probably know, like, okay, this is what potentially this property's worth. This is like, worst case scenario, I can get out of it this way, this way, this way. Like, it's not like you were just putting yourself in this bad spot. That, hey, I hope all this works out. If not, like, I'm selling my house and I'm living on the street.

[Luke Hoffman]

No. And I mean, we had. It was essentially. It was the fastest way to get to cash. I mean, we had millions in equity in our portfolio. We just to tap that. There was a lot more hoops to jump through and a lot more red tape with the bank. And so it was the easiest way to get the deal done, essentially.

[Brody Fawcett]

Cool. Yeah.

[Luke Hoffman]

It wasn't our last dollar type of thing.

[Brody Fawcett]

Totally. Yeah. I just want to point that out because I think that that's. It's important on, like, both. Both ends of the spectrum for people to, like, hey, it's okay to, like, shuffle things around. And I think, too, there's. There's a lot of millionaires out there that don't know they're millionaires because they're just sitting on a lot of equity, a lot of things. And because they don't feel like they're a millionaire, they make decisions that millionaires don't make. Right. Where it's like, oh, I can't do this because I can't afford this, or I can't afford this, when you just kind of make it. Make it happen if it's the right thing. So cool. Love that. Tell us a little bit more about what happened after that, because I know you ultimately ended up burying this property. Right?

[Luke Hoffman]

Yeah. So we. So the part of the process, too. I mean, I did the walkthroughs and stuff before I left town, but I was leaving, so we went into escrow. I walked it, did some inspections and whatnot. But then I left town for the winter, and I actually came to. Went to Arizona, but then I was in Maui right up to when we closed. We actually left Maui to fly back to close because my banker was like, I need the confidence. You're in town. Like, this is a big thing for you, so you need to be in town, so come back. So we came back for two weeks, closed, and then left again. Went. Went south. But, yeah, I mean, it was. It was terrible. Like, the whole month of January, I was sweating it. And then we got into February, I was just sweating it. I mean, I was. I remember there's hours I was on the phone with different buddies that do real estate, trying to convince them to talk me out of it, because I was. I was very, very nervous. Like, I almost backed out multiple times, but I'm glad I did. And I mean, yeah, at the end, we essentially. You know, I have people on staff that do Construction, we burst single families all day long. And so we just went into it from a burst standpoint. You know, we like anything you buy something, people want to leave for a variety of reasons. And so we had some vacancy. So we turned those, raised the rent, turned some more, raised the rent. One of the big things that we did was it had. It's like two parcels. So there was two water meters that fed the whole building. And so we spent like 25, 21 or 25 grand to split it into 21 meters. And we had to re. Pipe some of the building to make that happen. But, you know, we were able to push all that utility expense right on the tenant then at that point. So that was, you know, a couple. It was probably 1200 bucks a month that we were able to recapture.

[Brody Fawcett]

Cool.

[Luke Hoffman]

So looking at it from like an ROI standpoint, it was a no brainer. Inside two years, we had our money back. So we, yeah, we went through. We just actually finished. Well, we. We just gave notice two weeks ago to the last unit to kind of finish up the entire burr. We. We essentially burned it and we refied it about a year ago, but we had one more unit just kind of hanging out there.

[Brody Fawcett]

Okay.

[Luke Hoffman]

But yeah, so we re. We got it reappraised almost a year to the day. It was like two days from a year. We reappraised it. It appraised at 1.485 million.

[Brody Fawcett]

Cool.

[Luke Hoffman]

And with that we had. I put in, give or take, 150,000 of my own money from. I sold another property and just kind of moved some things around. And then we used all the cash flow for the first year, dumping right back in the property.

[Brody Fawcett]

Yeah.

[Luke Hoffman]

So we were about 200 grand into the rehab, essentially.

[Brody Fawcett]

Okay, cool. I want to pause there because there's. I just want to break that down a little bit. First question, when you bought it, what was your payment to the bank? And then on top of that, what was it? Was that a long term loan and then you eventually you refinance and just to a different long term loan again? Or was it something different that you did with the bank?

[Luke Hoffman]

Sure. Nope. So the way my bank works with me is. So this was, again, rates were a lot lower. So my initial loan was like $6200 a month. That was just a 20 year loan, you know, spread out as a five year balloon. The interest rate's 3.5%. So it's a pretty solid loan that way.

[Brody Fawcett]

Yeah.

[Luke Hoffman]

And then when I refi'd it, they actually let me not refi the whole loan. So I have two loans now. I just took a second. So I have 200 grand on a 20 year, three year balloon, but it's at 7.25. So, I mean, the rate's a lot higher, but it brings my total debt to like 8,700amonth in payments.

[Brody Fawcett]

Cool. Okay, awesome. And what's the cash flow now? And what was the cash flow when you first bought it?

[Luke Hoffman]

So when we first bought it was barely like a little over 100 or like 101. $102, give or take right now. So we fluctuate a little bit because we started about half the building. We do short term midterm, and so that fluctuate. Obviously we're in Iowa, so there's some seasonality there as well. But I mean, typically we're seeing like free cash flow. We look at 20% reserves. That's how we calculate it. But like, actual true free cash flow is right around like five grand a month.

[Brody Fawcett]

Cool. Sweet.

[Luke Hoffman]

Just shy of 300 a door, give or take.

[Brody Fawcett]

Yeah. Yeah. That's awesome. So cool. So when you bought it, you weren't losing money on it right out the gate, which probably made you feel better, I'm sure. And then as far as the. You would just. A tenant would move out and you'd kind of rehab that unit a little bit and then raise rent and get somebody else in there.

[Luke Hoffman]

Yeah, we didn't want to clear the building. I mean, I didn't have the capital to just, you know, clear the building and start doing all this rehab. So we just did one by one. And, you know, sometimes we'd have two oak going at a time, but it just made sense. You know, we had a lot of other rehabs, a lot of other things going on too, so I didn't want to just like abandon all the other projects.

[Brody Fawcett]

Yeah.

[Luke Hoffman]

You know, because it would just sit bacon at some point. You know, we. If we kick too many people out. So it wasn't worth it.

[Brody Fawcett]

Yeah.

[Luke Hoffman]

When we took it over, just give you an idea, like, the gross rents were at like 9,500 roughly. We're now pushing typically close to about 17 or 18 grand a month.

[Brody Fawcett]

Yeah. That's awesome. Good for you. And part of that, when you refinanced it, did you. How much did you cash out? Did you get your initial investment back at that point or some of it back, or did you just get a different rate on everything?

[Luke Hoffman]

Nope. So when I refi'd it, I got 200 grand back. So essentially all the money up until that point that I had put in for the rehab, I got all back, including my cash flow. And I look at it, we paid off our investors and things with some of our own money. So 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 mean, it's probably. I estimated the value this morning probably at 1.8 million. In the last year, it's changed again with our rent rates have went up a lot since the last appraisal and commercial at that point.

[Brody Fawcett]

Yeah, yeah. So cool.

[Luke Hoffman]

A hundred grand into almost $2 million property is pretty sweet.

[Brody Fawcett]

Yeah, it's so sweet, dude. And I think, like, this is the. In a nutshell, this is like the power of real estate or one of the many powers of real estate. But like, I wish this same kind of concept that you just explained. There's like a thousand variations of it, but like, that's how you become wealthy in real estate. Like, people that are listening, like, yeah, there's different methods and things that you did to kind of get to that point. But like, all of those deals are pretty much the same where if people are listing, you go back, what you did is you're into this property, you got, you know, most of your money back, but you're into almost $2 million property for, let's say, 100 grand. You know, it's about 5% right down on this property. And then on top of that, your cash flowing, you said a little over five grand a month with everything after all your expenses and whatnot. So it's like you look at your return on your. And then you have more equity than that. Right. Another whatever. Probably, you know, 750, 700k of equity probably sitting in it. Right. So not only do you have equity like that one property alone almost is making you a millionaire. Right. And then on top of that, you're into it low cash. And then on top of that, you're cash flowing a high amount that's bringing in you, bringing you in $60,000 a year of passive income, which your return on your cash at that point is really, really good. Just crazy. You stop and think about that.

[Luke Hoffman]

Yeah, I mean, I fully expect our market here still ticking up at slower rate now with rates and stuff. But, like, there's no reason in the next year and a half, two years, we shouldn't be essentially have a million dollars in equity forced on that property. And so in four years, we made a million bucks off one building. I mean, the power of real estate, like you said.

[Brody Fawcett]

Yeah. And saying plus, you just see that kind of returns. Yeah. Plus you take into account all, you know, your. Your cash flow that's adding up over the years during that time. And then on top of that, like, I'm sure you've got some tax benefits that have came from owning that.

[Luke Hoffman]

Yeah, actually that was the first building we did the cost segregation studies on too. So last year, whatever your tax year would have been. Yeah, it was like 170 grand. We were able to write, you know, back off our income. We have multiple businesses, multiple real estate holdings. I mean, that's. That was like. I think I figured at one point it was like 50 grand in tax burden that it wiped away by moving all that stuff around. So, I mean, there's just another avenue that. It saved us a ton of money.

[Brody Fawcett]

Yeah. Which is like, that's legit cash you would have spent. Which I think is another thing that kind of gets overlooked a lot of times too, when you're factoring in numbers and returns and everything that way. Yeah. Dude, this is fun. This is a fun deal. It's fun. It's what's fun about real estate. And I think that going back and I have so many two different deals that are the exact same kind of structure as far as. Oh man, this is like making me sweat a little bit. Am I sure I want to do this? Like, okay, I'm. I'm like scrapping on this for a second and getting really creative and how I'm doing this and you know, like done same stuff with T locks and different things and. And anyhow, it's just crazy. Like you go to that kind of fork in the road and what would have been different if you didn't make that decision? Because things were uncomfortable for a minute. And I think it's important to just like, you didn't make the decision stupid, you made it scared. Right. And there's a difference in stupid decisions and scared decisions and when you should and shouldn't make those. But like, look what it's turned into.

[Luke Hoffman]

Yeah. I mean, it's like, it's about muscle building too. I mean, now we did another million dollar deal last year on a storage unit facility. So like, that was a little bit scary because. Different industry, but. Or different asset class. But now I was just talking to a buddy yesterday. I'm like, like now doing a million dollar deal in my market. Like, it's still a bit. A lot of money, don't get me wrong. But like, it's not as scary anymore. I'm like, oh, it's a million dollars. Yeah, let's do it. No problem. Yeah, like, now it's like 5 million or 10 million. I'm like, ooh, I don't know. Let's. Let's pump the brakes for a second.

[Brody Fawcett]

Yeah. Yeah, dude.

[Luke Hoffman]

So you level yourself up.

[Brody Fawcett]

You do, man. You do a hundred. A hundred percent. And that's just like everything in life too, you know, like, and that's why it's important to hang around different people who think bigger. And like, all of a sudden that the average way of thinking, because you leveled up, the average content you consume, the average deals you do, the average people you communicate with. Now that's the new norm. And it's just not scary or strange.

[Luke Hoffman]

Right, if they support you in it.

[Brody Fawcett]

Totally. Well, dude, any. Anything that we've missed on this one that you would say, like, hey, this is how I force this deal. Here's. Here's some other, like, nuggets that I would give if somebody's trying to go out and do something similar.

[Luke Hoffman]

Yeah, I think it was really comes down to, like, the banking relationship I had. You know, we've done multiple deals, but I had a lot of forward conversation. I remember there was literally a time I can see in my mind, like, sitting in his office and just talking, like, hey, I want to do a million dollar deal. What do I need to do to get there? And he outlined, like, you need to set, you know, do this in your personal life, do this, this, and this in the business. And he gave me a roadmap, and so I did it all. And then when I was ready, I'm like, hey, I did. I completed what you asked. And then he was like, all right, let's do a deal. You know, sometimes those people, they want to help you, like the bankers and different advisors, like, just ask, what's the roadmap to get there? And then do it. Do the work.

[Brody Fawcett]

Yeah. So cool, dude. I love that. And would you say, like, you would give that advice to somebody that's wanting to do bigger deals? Like go make a relationship with a local credit union or is there any. Any specific advice with that?

[Luke Hoffman]

Yeah, so I use a local bank. You know, it's probably 10 branches, give or take, in our region. But yeah, I mean, that's where my best experience has been from a banking relationship. Somebody that you can sit down their office. I mean, I can text my banker any time of the day and he'll reply, like, some of that personal relationship, really compared to like a bigger nationwide broker when you're starting, like that person's betting on you at the end of the day and their neck is on the line just as much as yours is. So they're willing to, I mean, he's underwrote many deals for me to help me and just, you know, I'm like, hey, I think this is a good deal. What do you think? And he'll look at it and be like, well, what about this, this and this? And you know, sometimes it's valid and sometimes it's not and we talk through it. But yeah, having those people, I mean your friends and stuff are, you know, your buddies that are in real estate, they're going to always try to help you figure out how to make the deal. But the bank's job is to make, see where it falls apart and so you can merge all that information and see the middle of the road, like, is it a good deal or not?

[Brody Fawcett]

Yeah, love that, dude. I love that. Yeah. I think the game changer for me was when I started realizing that like, like different banks wanted to meet with me or like wanted to like go to lunch with me or go golfing with me. And it's like, hold on a second. The script kind of flips to where it's like, oh, please, please, like give me a loan, please give me a loan. Where you realize like, hold on a second, that's what they want to do is they want to make it work because that's also how they get paid. Right? So instead of looking at it like my team versus your team, it's like, dude, we're on the same team to like go and get this thing done and create these win win scenarios. And I think just that mental shift, at least for me, like made all the difference.

[Luke Hoffman]

No, a hundred percent. I had that same same experience.

[Brody Fawcett]

I love it, dude. Well, this has been awesome. We're, we're bumping up on time. I know people are going to want to connect with you as they, as they should. What's the best place for them to do that or find you?

[Luke Hoffman]

Yeah, probably find me on Instagram lukehoffman42. That's where I don't post a ton of necessarily content but I put up a lot of stuff in my story. Just what I got going personally and work related stuff, some interesting stuff. Sometimes things I run across. I'm getting a lot of random places and houses. So it's kind of fun sometimes.

[Brody Fawcett]

Yeah, super fun. Yeah. I like the family stuff too. Well, yesterday you were, I don't know, is like homemade bread or something like that. Going on a walk with the family or something like that?

[Luke Hoffman]

Yeah, we were working on a job site and my wife, she's been making sourdough bread. So she made bread and brought it to us on the job site and, you know, warm bread and homemade apple butter and, you know, bring our employees in as, you know, extensions of our family.

[Brody Fawcett]

That's so cool, man. Well, this was fun. This is fun jamming on this deal. And we're actually at. We need to bring you back to talk about some of your other stuff because I know you have, like, an awesome vacation home you bought in Florida, and that was really cool the way you did that and the handful of just other deals and things you have going on. They'll be fun to jam on, but appreciate you. This has been awesome. I know I got a ton of value and I know listeners will also. So thanks for jumping on. All right, we'll catch you next time.

[Luke Hoffman]

Thanks.