C (2:22)

I think the agent needs to know that you're serious. Because if they're going to take that to you instead of going to one of the other investor clients they work with, they need to know that you're actually going to perform on an offer. It just goes back to what I was saying earlier about like they, they need to know that if they put this thing in front of you, you are actually going to execute on it instead of them sending it to you and you just saying no.

B (2:46)

Yeah. Dylan, I think one of the other things you mentioned that's important in terms of building that trust in the agent is you had a pretty specific buy box and as a rookie investor, what steps should they be taking and what steps would you take to actually come up with that buy box? Because I think going to an agent and saying, I'm looking for 3 bedroom, 2 bath in the zip code built between this year and this year value add X, Y, Z conveys a lot more confidence than, hey, if you find any good deals, can you send them to me? So how can a rookie who's starting out build that buy box?

C (3:18)

I think you need to figure out what you want to do. If in my case I wanted to house hack, so I was willing to take less of a return to find the property that fit for me in the area I wanted it to be in. And whatever the thing is that you want to do, whether that is a short term rental, midterm rental or a long term rental, or you want to do house hacking like I did in this case, you need to have a criteria for the type of return it needs to be and make sure it is good with the area that you're investing in. Like, you can't just say that you want a 20 cash on cash return on a long term rental because we all want that. But if you fought, if you talk to the other investors in your market, they'll give you a rough idea of what you should be expecting as far as returns in that area. And property managers can help with that too. So just narrow down what you really want to do and then build the buy box around that. And the best way to build your buy box is honestly, you should just underwrite to dozens and dozens of properties. I probably underwrote a hundred or more different properties before I actually got this one.

A (4:25)

Dylan, with this property, did you go ahead and tour the property or what were the next steps after you got this deal presented in front of you?

C (4:35)

Oh yeah, as soon as we went to the property, because it was more of a thing where My agent called me and he said, hey, there's this property that's going to list tomorrow. Do you want to see it right now? And I said, yeah, I just got off work. Let's go right now. So we went and saw the property, and I. Once he told me the price after I had toured it and seen the condition of the units. The units were in a good condition. I probably could have rented them. It just wouldn't have been what I ended up getting on the property, now that I've made it more modern on the inside and completely renovated everything. But he told me it was 250 for the triplex. And I just said, just give them full asking price, write it up tonight, I'll sign it, and then I'm good to go.

A (5:16)

So.

B (5:16)

So, Dylan, you. You offered on this property right after walking the property. There were. There was. Okay, so let. Let's pause there for a second because I think that a lot of rookies can maybe do the legwork of finding the deal, but when it comes time to actually submit the offer, and understandably, so their first time doing this, there's a lot of hesitation around actually getting that offer out. So what was it about either your preparation or the deal that made you so confident to say, hey, let's get the offer out right now in this exact moment?

C (5:45)

I think for me, it was a combination of. I had been waiting for a really long time to do a deal, and this property just hit my buy box in multiple different ways. So not only was I buying it for 250, and I was assuming at the time that the rents could do 3,000, but it was also in a really good area in town. Like, some of the other properties I had looked at were not, like, in my favorite areas. It's not that it was a bad area, but this area is, like, right downtown, within walking distance of downtown. So I knew that I had to get this one specifically.

B (6:17)

So it sounds like, Dylan, the. The preparation of. You said you analyzed, you know, 100 deals before that. You do that enough times, it starts to become super apparent to you what a good deal looks like and what a good deal doesn't look like. And what you're saying is all of those deals you had analyzed made it super clear to you in that moment that, hey, this is actually a really good deal.

C (6:35)

Exactly. And I think you're always going to feel nervous submitting offers. Like, I feel really nervous sometimes submitting offers on some of the things that we're offering to buy. But at the same time, I've done my underwriting, I understand what it could like what my expectation is. And then I also have a buffer on the expectation so that if it doesn't go exactly how I planned, it should still work roughly at the rents that it is. Now.

A (7:02)

Dylan, after you executed on this offer, what were some of the risks that you were taking by putting an offer on this first deal?

C (7:11)

Uh, so essentially spending like all of the money I had between the down payment and renovating the property. Um, yeah. And I had never done anything like that before. So not only was I buying the property and doing all the renovations, but I was doing all the renovations myself. I had never laid LVP flooring and maybe painted a house for somebody like help paint some rooms, but I had never done electrical outlets, never leveled floors or anything like that. And luckily I just had enough people step in that are around me that are in different fields in construction that were able to show me different things. And you know, YouTube is a really big help for figuring things out. If, if you're wondering how to replace like an electrical outlet, you can go on YouTube.

A (7:59)

You know, we're going to take a quick break, but when we come back, we're going to go over your rehab budget and how it ballooned per unit and, and what changed your entire buy box. So let's go there right after a quick word from our show sponsor.

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A (10:04)

Okay, so, Dylan, you've got the deal. Now the real education really starts once the walls come down. So take us into the day when you're looking at this rehab and realize that your budget was way off.

C (10:19)

Yeah, it was about halfway through when I had realized that I spent all of the money that I had actually allocated to rehab a specific unit because I was doing them one at a time. I was rehabbing one and living in it, and then I was going to continue the next one and so on. I didn't have all of the flooring orders done, and I was already over the 8,000 I expected to spend on it because I assumed, oh, I. I just got to paint and I got to lay flooring. So that's going to be the cost of, you know, flooring per square foot times 900 square feet. And then the paint is going to be $500. And I didn't account for, like, rollers or redoing all the outlets or anything like that. I did account for appliances, but something I learned on this one, I way overspent on appliances compared to what I spend now when I'm buying appliances for the apartments. It's just some. I didn't know what I didn't know. But yeah, about halfway through, yeah, I. I had some of the flooring there and I was like, okay, this is not nearly enough. I have to do another flooring order because there is waste. And the fact that I've never done this before, there's a ton of waste.

A (11:25)

I can totally relate to that. When I did my first LVP job, I was yelled at multiple times for not measuring correctly or not cutting correctly right on the line. So had a lot of voice to my first couple projects.

B (11:41)

But Dylan, I think you hit on something that a lot of rookie investors will struggle with is how do you come up with a proper scope as someone who's never created a scope of work before, as someone who's never handled a rehab before. So how has your process on creating your initial rehab scope of work, like the line items you're going to hit in your rehab, how has that changed compared to that first property to what you're doing today?

C (12:07)

Well, one thing that I did on that first one is I just walked, walked through the property and very briefly because I was only there for 30 minutes for the tour and I just started adding things to a Home Depot cart just to roughly get a good idea of what I'm expecting it to be. And then I added a few thousand dollars to that. So that's how I was like at five and then I had three. You know, there we are, 8,000. That should be good. Now you can use tools like chat GPT. I, I found that's wonderful to just figure out like what's the cost of painting in this area? What's the cost of somebody laying flooring in this area? And that can give you a better approximation than I was doing on my initial rehabs. But the way I do it now is generally I'll just have my contractor walk it and he'll bid everything at once and then I'll get another bid for it and then I'll compare the bids. Generally you'd want to get three. I really like the guy I work with, so I trust him to actually do a pretty decent bid and he just does all of the work for us.

B (13:00)

Now obviously getting a, getting a GC I think is like the best absolute way to, to get confidence in your numbers. But it's also sometimes difficult. Right? Like maybe the GCs are busy and maybe they're not always able to go walk the property for you in the, the time that we need them to. And I think my best recommendation for Ricky's and Ash, you know, I'll kick this you afterwards because I'm curious what your approach is here but. And I actually picked this up from Taro Yarber and James Aaron. Both do like some version of this, but basically walk through the entire house exterior first. Just go all the way around the exterior, take a bunch of photos, then take a video of the entire exterior, then do the same thing in the interior of the room. Photos from every single corner, video walkthrough so you can capture everything. And then even if you only have 30 minutes inside the house, that's fine, because you don't need to do everything. Then when you go back home, you can take the photos, the videos, the measurements that you got, and use that to build out a more detailed scope of work While you have your comps, right, the properties you're trying to comp against. You can see their photos, their videos and what they've done and say, oh, wow, I actually didn't notice that they had, you know, whatever in the bathroom. And I wasn't. I didn't notice that when I walked initially. And you can build it out in a little more with a little bit more detail. But, Ash, I guess how does that compare to, you know, if you were walking a property and maybe in a new market, like, what would it look like for you?

A (14:19)

Yeah, I definitely take the same advice from Tarl, the photos walking through. But I. I do. I do all the photos, things like that. But then I also do a walkthrough pen and paper, where I have a notebook. I'm writing a bedroom one. But I'm usually starting in the. You know, when you walk in the house and I go room from room. Closet needs paint, Closet needs a new rack. Like, even if I don't know what the fix is to something, I mention it, this needs to be repaired. Even if I have no idea what would actually go into that. So I make a written list, too. And then I sit down at my computer and I go through each photo and I go through my list that I actually wrote out of different things. Then I'm sending it to my contractor. My contractor walks the property and goes through it, and then usually he calls me and he says, okay, I understand this, but I think you should do this here instead. It'll be, you know, make the. The layout better. Like, one example is we did a pocket door one time for a bathroom, and it just, like, was the best decision. It would have made the bathroom seem so cramped and tiny if we would have done a regular door again in there. So he goes through and makes his recommendations, or, like, I could save money on this. And then he. And then I kind of finalize it as he's telling me, like, changes we should put into it and then send it back to him. And he comes up with the. The estimate and breaks it down. Sometimes we've done it, like, room by room as to, like, kitchen remodel 7,500. And, you know, it includes the cabinet. It's all countertops, whatever that may be. Sometimes it's a. Material and labor. A lot of the Times it's just the labor cost. And then it's up to me to, you know, do the materials based upon what I want. And that too, we do have to go over together. Like the tile I'm picking out, is it going to be more labor because of the tile design that I want, which would increase his actual bid on it. So, so we, there's a lot of little nuances like that that we have to make sure we're on the same page about too. But that's pretty much the process. And then for apartment turnovers, I don't even go to the properties at all. I just have Darrel go there and he has a whole spreadsheet that he's created that is like every material that we've ever used in an apartment turnover. And then he just picks which what he would need, how much of each, and he builds out the materials cost and then he adds in his labor to that. So for those ones, I don't even walk the property or go to them.

B (16:52)

So moral of the story, everyone needs a Darrell basically, so they can just do the do the work for you.

A (16:57)

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

B (17:27)

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

C (18:11)

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

B (18:47)

Well, that's good news. So I guess, were. Were there any issues actually either performing the rehab or managing it once the rehab was done because of their conversion.

C (18:56)

Process on this one? No. I have actually had a really good time with all of the people that live there currently. So one of the residents has lived there for a. I think it's the 13 years. And what I did was. You guys know Dion McNeely's binder strategy. I've used that on literally every property I own. If I get inherited tenants, I. I'm not opposed to keeping the people that are living in the property, because I know if there. It does end up being any issues that we can just take care of that down the line. But if it's somebody that's been there for, like, 13, 14 years, like, I can. I can trust that they're going to be fine to continue. The other people I've had move in have been people that just knew me through the community, and they. They've been great so far, too. I will say that with some of the different units, you. You can notice, like, maybe there's sound that can bleed through into a different unit. Sometimes we don't have that issue as much because all. All the people that live there are relatively quiet. Like, they're not super loud. They don't have kids running around. So it's. It's been pretty good to manage for me. But I have seen some that I do not want to buy because I know that they didn't properly insulate everything. So you have sound constantly bleeding through and tenants complaining about that. Or there's an upstairs neighbor, and they didn't. They didn't plan that out to where you're going to have the flooring dense enough to, you know, cancel out the sound and stuff like that.

A (20:22)

Tony always loves the story of an apartment I used to manage where the tenant sent me a video, and it was a video of her wall, but it was the noise. Was the tenant upstairs, upstairs slamming her toilet seat down after she went to the bathroom. And that was like, that was when I would rip my hair out and cry because I couldn't handle the tenants anymore and decided to outsource it to property management. But yeah, like that you think it may not be like a big thing, but like that to me was the worst part of property management was dealing with tenant issues between tenants. And like if you're able to prevent some of those things from happening, it can save you a lot of headaches down the road because like who wants to live next to someone that's making noise and then who wants to live next to somebody who's complaining? Like if you can, you know, and I think of that with common areas too. When you're buying small multifamily, if they're sharing a common area, are you going to have a cleaner come and clean it? Are you going to make them both responsible? Are they going to get upset because one person cleans it, one doesn't. So there's a lot of things that I've learned along the way to actually think about these people are living together. What are some of the issues that could come up with this property that I want to be proactive about and maybe prevent or possibly not purchase the property because I already know it's going to be a headache down the road.

C (21:52)

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

B (22:18)

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

C (22:33)

I should not lock people in on one year leases when I first get the property. And that's something that I Learned on the 12 Plex because on the, the triplex property that I bought, I locked the lady in that was living there currently for another 12 months just at what she was at currently. So it didn't shake anything up and instead I would Start to do those either on a month to month or, you know, maybe a six month. So I do have the opportunity to do that bump within that year because now I've gotten to the point on that one where the property taxes have chased up to where I bought it at. But I've needed to. I've needed to raise her rent and then I had to do that after I had already gotten billed for the property taxes. Luckily I did get the other two units up just because I had rehabbed those two. So those are up to market currently. But yeah.

A (23:27)

So with the, the tenants and the renting, you mentioned doing the binder strategy. Strategy to solely increase the rent or make it their decision. As Dion says, what are some other things and lessons you have learned along the way? Now that you've become a property manager and landlord, are there certain systems and processes that you've put into place?

C (23:48)

Yeah. So as far as late fees, I used to be more of a stickler on this kind of thing and just saying, hey, if you pay late, you're late. And that's that what I've started to do more because it doesn't happen often, but people have situations where they do need somebody to work with them and actually care. And that's something that I've tried to do with all of the people that do live in the properties is understand the situations. But then also whenever any issues come up, that's the number one complaint I get from residents that live at my property, that have lived at other private landlords properties is they just don't care and they don't fix stuff quickly. So a month might go by before something silly gets fixed like their stove isn't working. Like I've had to replace two of those in the past week just because the property I bought there, they're getting relatively old. But yeah, just actually care and take care of people quickly. And I feel like they've all really appreciated that. And I think that's reflective in the fact that everybody always pays rents on time. And if they're not going to, they actually will let me know ahead of time, like, hey, I'm switching jobs, so I might be a few days late. And I'll say, okay, I just went and talked to the other guy that owns the property. I got the late fees waived for that. Just pay it when you can, you know, provided that it's that day that they're telling me they can pay by.

A (25:15)

Yeah, I think, like, and not only like moving fast on the maintenance, but just communicating like, if you can't get a contractor out there right away. But you are constantly communicating as to like, thank you, I've received your maintenance request. I'm going to contact the vendor. I contacted the vendor, they said they could be there Tuesday. Does this work for you? Just a reminder, today's Tuesday. The contractor is coming in following up. The contractor didn't have the part. I am so sorry. We're doing everything that we can for him to get the part or whatever and I think that goes a long way. Instead of just you stay, submit a maintenance request. They don't hear anything and then randomly they get a call. A couple days later a contractor is coming on their way to the property to check it. The contractor leaves. They don't really know that much. The contractor doesn't communicate what's happening. So I think a lot of that like follow up and communication and like there's a lot of property management software that has like you can add notes, you can like indicate every step of the way of this maintenance request from it being submitted to completion as to what happened. And, and that's not only nice for your tenants to know what the process is and where it's at and what's happening, but also if there are any issues down the road. I just went to court, to small claims court and having these logs and logs of records of being extremely efficient with property, with maintenance on the properties, it, you know, saved me to show that I definitely was taking care of things when this tenant didn't try to pay rent. So not only just communicating with the tenants, but also for your own protection too.

B (27:01)

And Dylan, you're, you're self managing all of your units.

C (27:04)

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

B (27:16)

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

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E (29:29)

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B (31:48)

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

C (31:56)

Because less of the attention to detail was on me. If you've gone through, well, you've definitely gone through. But going through a residential transaction, everything is focused on you and your ability to pay that for that property. Now they may factor in if there's leases. 70 I think it's 75% of the gross rent for the lease with the commercial property. They're looking at the deal specifically and if it's something that they want to be part of, they look at the debt service coverage ratio of the property to make sure it's something that's going to be safe for them to give you the money for.

B (32:32)

And when you say they, Dylan, who are you referring to?

C (32:34)

The bank. So do you want me to clarify that?

B (32:37)

No, yeah. How you said it was fine, but yeah, you can continue.

C (32:40)

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

B (33:00)

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

C (33:13)

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

B (33:40)

So just quick math, right, you said you picked it up at 775. That's about 65k a unit compared to, you know, what is that, 75k a unit, maybe almost 80k a unit on the three plex. So significantly cheaper on a per unit basis. And in terms of actually getting approved, you said that it wasn't just you, but you brought in a partner. I want to drill into that a little bit because I think that's, it's an approach that a lot of rookies like the idea of like, hey, I want to take down this bigger deal, but I don't necessarily have the ability to do it by myself. Ash and I wrote a book for biggerpockets called Real Estate Partnerships. So we believe in the power of partnerships. But I think the million dollar question, Dylan, from everyone is where do I go and find this person who's going to help me buy these properties that I can't afford? So how did you find this person?

C (34:29)

So I had pre negotiated the deal with the seller of the property and we had gone back and forth figured out a price that they approximately okay with. Before, I was willing to go out there and start talking to other investors to see who would be willing to do it. Luckily, at the company I was working at, there's another guy that's been buying real estate for quite a while. He's been buying since 2019. I just started, you know, when I bought that triplex in 2023. So I showed him the financials and I said, is this something you'd want to be part of? Because I didn't think this guy was going to want to sell this this year. I was thinking the conversation I was having with him was maybe in two years, three years, five years, I could buy your 12 plex from you. But he was like, no, I want to sell it right now. So I, I talked to this other guy and he luckily had the money for it because he's, he's been investing for a lot longer than me and he's just let the cash stack up on the sidelines. So he was able to be a large portion of the down payment and I came in with a smaller portion of the down payment just to get the deal done. But it's been great thus far.

A (35:31)

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

C (36:10)

Commercial is going to be really good if you're trying to qualify a property on the just from an income perspective instead of just buying a property that's going to need rehab beforehand. Like, we had proof that this property was already able to cover the debt. So it was something the bank was willing to lend us the money on. Now there may be some projects where you can give the bank a estimation of what you think everything is going to be like after a few months. I've talked to them about doing deals like that, but it's just going to be significantly easier to get financing this way. And also it keeps the debt off of your personal, like your personal credit statement. So When I pull up credit karma, this debt doesn't pop up like my other mortgage does because it's under an llc. So it's, it's our company that owes the debt. I signed the personal guarantee though, personally guaranteeing the fact that me and my partner will cover this debt over time. Another key difference between commercial and residential financing is on the residential financing side you're blessed to have 30 year fixed rate debt. We just don't have that on the commercial side. There are some DSCR products that you can find. But for the most part in my situation, working with a community bank and that's who I try to work with because I like to build the relationships with the banks around us, you're going to be looking at 20 to 25 year debt and it's going to adjust after a period of five to seven years. In our case, after five years we have to go get a new interest rate with the bank. Now I'm hoping that's going to be in the fours or fives in five years and not the sixes, but we'll see.

B (37:48)

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

C (38:04)

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

B (38:22)

And when you say call them, let's, you know, let's, let's say you, you know, you called, they pick up the phone. What exactly are you saying to them? Are you saying, hey, I've got a deal, can you give me money? Or like how does that dialog actually flow?

C (38:34)

Yeah, so just calling the bank, asking them to transfer me to the commercial loan department if they have one. Some banks will just say that, oh, we don't have that because I was just going down a sheet calling the people that would potentially work with me on that and then letting them know what you have in mind for the deal beforehand since it was off market, it wasn't anything that was urgent. And then generally what they'll do, and in this case what my bank did, is they'll Send me a term sheet, which is essentially like my pre approval letter to say that they will do this deal with me. And then that's when I can finally get the offer submitted with the seller. And then we can start going through the due diligence process, which is quite a bit more expensive than if you've done a few residential deals, paying for some of those commercial things.

B (39:24)

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

C (39:34)

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

B (39:56)

And we interviewed my lender, Jeff, well on a recent episode, and in that episode, and really in a lot of episodes, we shared that different lending institutions offer different products and obviously they're all going to give you a mortgage. But like the terms of that mortgage and how much creativity and flexibility they have, it does vary, and sometimes significantly from one lending institution to the next. What Chase or Bank of America can offer is probably very different than the small community bank that Dylan went to for this deal. So just a reminder for all of our rookies to shop. And you know, Dylan said he called 30 different banks, so you gotta, gotta put in the legwork. One last question for me, Dylan, on the the 12 unit here, we talked earlier about you increasing the value. Walk rookies through what that actually means on commercial real estate, because for a traditional single family rental, the value of that home is 99.9 of the time tied to what other comparable homes in that area have sold for. So it doesn't matter how much revenue the property is generating as a rental, it's how much did you know, John Doe's house sell for next door? How is that different on the commercial side? And what specifically did you see for this property once you took over ownership?

C (41:12)

I think this is the beauty of the commercial space. And what's probably going to get people to want to go out and do a commercial deal after this is the fact that commercial properties are valued based on the income in the trading cap rates in the area. And all a cap rate is is if you bought a property for a million bucks and it was making $70,000 a year, it's a 7% cap rate. So if all properties are selling for a 7% cap rate, what if you raise the income from 70,000 to $100,000 a year? Well, it's got to get reassessed back at that 7% cap rate. So you just increase the property in value by whatever that difference is. That could be like 30, 40% in value just, just on moving the income on the property. And what that looks like for these apartment buildings that we looked at buy is we find owners that have a property, they've owned it for a really long time, they've kind of got stagnant with the rents because they've owned it for so long, they may even own this in cash. It really doesn't matter to them whether they're charging $700 a month or $800 a month for an apartment. But when we look at how that affects the value of the property on the back end, that's really where you can take advantage of that as an investor in commercial real estate, unlike the residential side, because we can go add that value to the property simply by increasing the rents that we don't have to do renovations or anything. Generally we are doing renovations to maximize how much we can get. But if you just simply increase the income on the property, you can add substantial value. And that's why I'm trying to focus most of my portfolio on commercial real estate.

A (42:50)

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

C (43:02)

So something that I always do whenever I'm talking to sellers of a commercial property, apartment building or otherwise is I'll try to find a way to give them multiple offers. Generally the price that they start out with is substantially higher than makes sense to pay as an investment. They like. A lot of the times I, I mean I've talked to some of these people, it's just like, well, my lucky number is a million, so I want a million. And I'm like, okay, but it just doesn't make the money to support that. We can try to figure out how to make that work. But what I'll try to do is if they have a number that I can try to get close to by doing creative financing, I'll try to give them a few different types of offers. Like one might be a interest only loan for seven years and then it balloons out after that. Or I might do something where they sell or carry back 40% of the loan the bank gives us 50%, because the bank always has to have more, and they need first position on the loan to be willing to lend on it. And then we'd only need to bring 10%. If you find a home run deal, even though you're. What is that, 90% leveraged on the property, that. That could end up putting you in a situation where you turn that 10% you put down into like 30, 40, 50 or more. It just depends on how good of a deal you can negotiate.

B (44:21)

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

C (44:32)

Since I didn't have all of the money to bring to the deal, I was willing to take a smaller piece of equity in the deal. So we have a. In terms of equity, we have a table that split 80, 20. But in terms of decision making, I have 50, 50 with him. So anytime either one of us wants to make a decision on the property, we have to both okay it. And I just had him agree to that if he was willing to do the deal with me because we both need to participate in the management of the property. And just overall, like, I don't. I don't want to be put in a situation where one of us thinks we should do something on the property and they have all of the rights to just say, yes, we're doing that because I own 60% of the property. And then the person owning 40 is just stuck dealing with it.

B (45:23)

Are you. Since you're taking care of the management, are you also collecting a management fee?

C (45:28)

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

B (46:15)

Yeah, absolutely. And I think it makes sense on larger properties where that bottom line is bigger. Right. Like 12 units produces significantly more net profit than one unit. So doing it there I think makes tons of sense. But you're right, it definitely does incentivize to the PM to not just focus on top line revenue, but also like, hey, are we conserving costs? Right? Are we protecting the asset in that way? I think there's also something to be said. You, you said, hey, I just want to get this deal done. So I'm fine taking 20% ownership. Because the true value, Dylan, isn't even necessarily in the number of units or the equity, but it's a, that you're adding another property to your portfolio. So you're building your track record, which will make the next deal, I think, even easier for you. You're building a relationship with this partner who maybe you guys can go on to do more deals together. And in general, it's just making you a better investor. And I think sometimes rookies get so caught up on I want to own the whole pie, but then they end up with the pie that's so small, like it doesn't even, you know, doesn't even do anything right. So I just. Kudos to you for having a bigger picture view on the partnership.

C (47:25)

I had that conversation with him when we were first looking at doing that deal and he was like, are you, are you, are you really okay with only taking 20% of this? And I said yes, because 20% of doing a commercial deal is better than not owning a commercial deal. I would rather learn the process now with the money I have, and then we can focus on buying bigger deals. Lately later, did I structure the equity wrong? As the person that fined negotiate and negotiated the deal, probably not. I probably should have taken a piece of the deal just for doing that piece. Because what I've learned since then is that that's a really valuable skill to have and people value that. Like, I've talked to other investors. They're like, I would have probably just given you 20 equity in the deal just for the fact that you found the thing in the first place and negotiated it. But I wouldn't go back and do it any differently because this gave me the opportunity to learn commercial real estate. And I'm happy to just keep this and continue to do other deals in the future.

A (48:22)

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

C (48:49)

Yeah, of course. You can find me on YouTube under the same name. Just Dylan Pettajon. The easiest way to reach me is on Instagram if you're looking at buying properties in the Indianapolis area. I am an agent and specifically work with investors so feel free to reach out to me.

A (49:04)

Well, Dylan, thank you so much. I'm Ashley. He's Tony and this has been an episode of Real Estate Rookie packages by Expedia.

B (49:14)

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