Nightmare Deals | Assisted Living Facility From Hell - Episode 20

Summary

Real Talk Real Estate: Nightmare Deals | Assisted Living Facility From Hell - Episode 20

Podcast Title: The David Greene Show
Host: David Greene
Guest: Keith Folarski
Release Date: November 19, 2024

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Introduction

In Episode 20 of Real Talk Real Estate, host David Greene delves into the tumultuous experience of investing in assisted living facilities with his guest, Keith Folarski. This episode is part of David's ongoing "Nightmare Deals" series, where he explores real-life scenarios where real estate investments did not go as planned. Keith shares his firsthand account of investing in assisted living facilities, the challenges he faced, and the lessons learned to help listeners avoid similar pitfalls.

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Meet Keith Folarski

Keith Folarski, a 35-year-old civil engineer from Wisconsin, balances his demanding career at a nuclear power plant with a decade-long venture into real estate investing. Together with his wife, Keith manages 11 buildings comprising approximately 33 units under Sky Properties 2020. Despite not having equity partners, Keith has navigated numerous deals, although he's not without experience, having moved beyond the rookie stage.

Quote:
“I’ve been doing this for over 10 years. I’ve seen the ups, the downs, and everything in between.”
— Keith Folarski [01:26]

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The Assisted Living Facility Investment

Keith's foray into assisted living facilities was not a calculated pursuit but rather a serendipitous opportunity. After deciding to exit a 112-acre farm venture through a 1031 exchange, Keith was introduced to two assisted living facilities by a seasoned agent.

Quote:
“This kind of makes sense. And I love the idea because, like or not, these facilities are needed everywhere and they’re always full from what I’ve heard.”
— Keith Folarski [03:45]

Understanding Assisted Living Facilities: David Greene provides a comprehensive overview of assisted living facilities, highlighting their role in providing housing and care for the elderly or disabled. These facilities come with stringent regulations, including ADA compliance, and typically operate under a triple net lease model where operators handle taxes, insurance, and utilities, paying rent to the property owner.

Quote:
“These were duplexes when they were originally built, like side by side duplexes tore the center wall out and made one giant unit. So ADA compliance was really important.”
— Keith Folarski [05:48]

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The Deal Structure and Initial Optimism

Keith acquired both facilities simultaneously through a single purchase agreement for $920,000. The terms included a 10% down payment, a 10% seller carry, and an 80% loan-to-value (LTV) from the bank at an advantageous rate of 6.5%, significantly lower than the market rate of 8% at the time.

Quote:
“The numbers were pretty good. I didn’t have enough money to put 20% down with my farm sale.”
— Keith Folarski [08:00]

He anticipated a combined monthly cash flow of $1,600, translating to an impressive 21.3% cash-on-cash return on his $90,000 investment.

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Unforeseen Challenges: License Transfers and Management Issues

Shortly after the purchase, complications arose. One facility was already operational, while the other was in the process of obtaining a license. Keith discovered that the operators of these facilities were unethical, leading to license issues and strained relationships.

Quote:
“I thought I would make just about $1,600 a month cash flow... I was going in pretty happy.”
— Keith Folarski [10:13]

A pivotal moment occurred when the Department of Health Services (DHS) intervened, questioning the ethics of the current operators. This led Keith to apply for the license himself, transforming his role from a passive landlord to an active operator responsible for managing the facility.

Quote:
“I went from a triple net to like a big business. We bought a E350 wheelchair van because we’re responsible for all the transportation.”
— Keith Folarski [18:30]

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Financial Strain and Operational Struggles

Keith’s optimism was quickly overshadowed by financial strain. The initial cash flow projections were disrupted by late payments from the operators, escalating maintenance costs, and the additional burdens of managing an assisted living facility without prior experience.

Quote:
“Technically, month to month, yeah. So that facility number one, all of our funding comes from Medicare Medicaid and we bill out like 45 grand a month.”
— Keith Folarski [23:02]

The second facility remained vacant, resulting in significant loss of rent and exacerbating the financial pressure. Collecting rent and managing operations without reliable operators proved untenable, leading to a cumulative loss of nearly $90,000 over 12 months.

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Personal and Emotional Toll

Balancing a full-time job with the unexpected responsibilities of running an assisted living facility took a massive personal toll on Keith. The stress culminated in sleep disturbances and strained relationships, highlighting the often-overlooked emotional challenges of real estate investing.

Quote:
“I don’t know what I’m going to do because every month for like over half a year, I’m just bleeding money.”
— Keith Folarski [25:04]

David Greene empathizes, drawing parallels to his own experiences with stressful real estate deals and emphasizing the mental health risks associated with high-stakes investments.

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Turning the Tide: Stabilization Efforts

Despite the setbacks, Keith and his team, including the adept administrator Angela, worked diligently to stabilize the facilities. Facility one began to see improvement with a stable resident count and streamlined operations. However, facility two remained a work in progress, with expectations of stabilization within six months.

Quote:
“Facility one is pretty much stabilized. We have seven residents, and we got our seven staff that can run that facility.”
— Keith Folarski [35:56]

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Lessons Learned and Advice for Investors

Keith offers invaluable advice to fellow investors considering similar ventures:

1. Maintain Adequate Cash Reserves: Ensure you have sufficient funds to weather unexpected financial strains.
2. Limit Leverage: High leverage can amplify both gains and losses. Conservative financing may offer more stability.
3. Thorough Due Diligence: Deeply understand the operational demands and regulatory landscape of assisted living facilities before investing.
4. Prepare for Active Management: Unlike passive investments, assisted living facilities require hands-on involvement and expertise.

Quote:
“I should have had more cash reserves. If you’re going to go into a new venture, especially something you don’t know, I should have had more money and probably less leverage.”
— Keith Folarski [37:55]

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Conclusion and Contact Information

The episode concludes with Keith expressing a path toward recovery and stability, despite ongoing challenges. David Greene encourages listeners to learn from Keith’s experiences and approach real estate investments with caution and preparedness.

Contact Keith Folarski:
For those interested in connecting with Keith or learning more about his journey, you can follow him on Instagram @SkyProperties2020 or reach out via Sky Properties 2020, focusing on investments in Minnesota and Wisconsin.

Final Thoughts:
David Greene wraps up the episode by acknowledging the shared struggles within the real estate community, fostering a sense of camaraderie among investors facing similar challenges.

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Notable Quotes Highlighted:

• “I’ve seen the ups, the downs, and everything in between.” — Keith Folarski [01:26]
• “This kind of makes sense... always full from what I’ve heard.” — Keith Folarski [03:45]
• “We have seven residents, and we got our seven staff that can run that facility.” — Keith Folarski [35:56]
• “I should have had more cash reserves...” — Keith Folarski [37:55]

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This episode serves as a cautionary tale for real estate investors considering assisted living facilities, emphasizing the importance of thorough research, financial preparedness, and the readiness to transition from passive investment to active management.

Transcript

[David Green]

Welcome to Real Talk Real Estate, the show where we cover how to build wealth in real estate with no fluff, no BS and no sales pitches. I'm David Green and I've been doing this for over 10 years. I've seen the ups, the downs, and everything in between. This is the show where we pull back the curtain and show it to you, too. So if you want to build wealth through real estate or you just love learning about it, you found your home. Welcome to the David Green Show, Real Talk Real Estate. We are continuing in our nightmare series of deals gone wrong. Today I'm joined by Keith Folarski, who's going to share with us how the assisted living strategy that so many people talk about to try to make cash flow where there was none is not always a guarantee that it will go well. We're going to talk about how his deal went poorly and most importantly, how you can recognize the same signs and red flags and avoid falling into that situation yourself. Keith also just woke up not too long ago. He's taking some time out of his sleep schedule to record with us. So make sure that you reach out to Keith at the end of the show and thank him for his time. How's it going, Keith?

[Keith Folarski]

Good. Pretty good. Excited to be here, drinking coffee, waking up.

[David Green]

Glad to hear it, man. Keep chugging that thing down. I'll talk a lot so you'll get plenty of opportunities to take some. I'm probably the worst interviewer in the business because I can't help but want to jump in and elaborate and add color to these great stories that we hear. So first off, let's hear a little bit about yourself. Who's Keith Filarski?

[Keith Folarski]

Yeah. So Keith Flarski is A Wisconsin native, 35 years old, got two beautiful girls under 3. My day job, I work as a civil engineer at a nuclear power plant and nights and weekends do real estate investing for about, just about a decade. Now we have 11 buildings, about 33 units. It's all me and my wife, no equity partners, done a handful of deals. Not super seasoned, but not a rookie. No.

[David Green]

You got 13 buildings. That's pretty seasoned here. And we're going to talk about assisted living facilities. So was this a thing you heard other people talk about and thought you try your hand in it? Did somebody just happen to cross your path with the deal? What got you interested in exploring this asset class?

[Keith Folarski]

So I wouldn't say I pursued it as much as it kind of fell into my lap and I, I just dealt with it. So I had a, I had 112 acre farm here in Wisconsin that I did own with a few partners. And we were looking to exit that. So I had, I had some money that I was looking to place via 1031 exchange. And so I was hunting for deals literally everywhere. And this was actually an agent. I called one of the loan brokers that I work with all the time looking for connections. And he connected me with this agent over in Wisconsin. And as soon as I talked to him, I was like, this guy's a rock star. He knows everything, he knows everybody. And he said, actually I got two assisted living facilities that we pulled off the market last year because the seller wants to pivot. Would you like to take a look at them? And my gut reaction was no, I don't know anything about it. You know, it was uncomfortable. But the more I looked at the numbers, I was like, well, I should learn more. And I was, I was motivated, right, Because I didn't really want to pay unnecessarily pay taxes if I could avoid it on some of the money. So I dove into these, learning about these assisted living facilities. The numbers were looking pretty good. I'm fairly busy, right? Got a full time job and two little girls at home and a wife. And we got a few other doors to tend to. And the numbers just kept coming back and like, you should do this, you should do this. They're triple net. So we buy the facility and then there's triple net. So the operators that are in there are paying for everything, taxes, insurance. And it was kind of like set it and forget it. So where I was at in life, right, Two girls under three, full time job, the other stuff, I was like, this kind of makes sense. And I love the idea because like it or not, like these facilities are needed everywhere and they're, they're always full from what I've heard. So I was motivated to move the money. And then once I learned about the model of assisted living, I was like, you can do this. It's not rocket science.

[David Green]

So let's break down what an assisted living facility is. I'll give you my understanding of it. You can correct me if you think I missed anything.

[Keith Folarski]

Yeah.

[David Green]

Somebody buys a property that usually has a lot of bedrooms. They are rented out to people that need help with living, usually elderly, if I suppose it could be someone who's disabled that needs on site care. So you provide housing and then you're also going to provide the, for lack of a better phrase, caretakers that are going to be there. You provide the food the meals, they pay a higher rent in exchange for everything they're getting. It's usually paid for by a family member. And these properties are going to have different regulations, different rules, different oversight as far as the size of the door frames and the handicap accessibility and ingress and egress. And you're depending on the state. That could be really strict or they could be a little bit looser. You typically have an on site administrator that runs the operational side. They oversee the caretakers to make sure that you don't have any kind of abuse going on or anything negative. So on one hand you own the real estate. On the other hand there is a business that is running now. Some people are the administrators or hire an administrator to run the business and they own the property. In your case, you were going to buy the property and lease it to the people that were running the assisted living facility out of the property. They were going to pay the taxes, the insurance and the utilities and they were going to pay rent to you in addition to that, which is what we call triple net leases. I.

[Keith Folarski]

Right, yeah, that's correct. And just to kind of back up a step or two, assisted living, a really broad term. Right. So you can, it can. A senior housing can be considered assisted living. These two facilities that we're speaking to today are subsidized. Right. So they. We receive Medicare Medicaid funding and some of our residents may be elderly, but we focus on behaviors and mental disabilities and oftentimes with that the person may have a physical disability. So like you mentioned, ADA compliance, super important. And some of the hardest stuff to do, unless you buy a facility specifically built by someone else to do living. Yeah, which these weren't. These were duplexes when they were originally built, like side by side duplexes tore the center wall out and made one giant unit. So ADA compliance, like you mentioned, is really important. Yeah. So we were gonna purchase just the, just the real estate and the operators are gonna run their business out of my buildings.

[David Green]

Okay. So you are going to buy these properties and then you are going to have to rehab them to some degree to make them compliant with the American with Disabilities act and make them eligible to receive a license so that the administrator could run the care home out of your properties and they were going to rent it from you.

[Keith Folarski]

So just to be clear, they were before I bought them, at one point, both operating assisted living facilities. One of them was currently operating and the other one was in licensure. So they had previously been licensed, which gave me some confidence that they're close, if not already ADA compliant.

[David Green]

So did the former owners, were they operating them while they were out of compliance, or is it kind of like they were grandfathered in, but when ownership transferred, it triggers a new round of inspections.

[Keith Folarski]

Exactly. So they, they did pass at one point. I came to find out that they didn't after I bought them. So they like, they reinspect and resurvey all these buildings and regulations change and things tighten up, and we found a few opportunities they have to fix.

[David Green]

Okay, so let's go under the terms of how you bought. Did you buy them both at the same time?

[Keith Folarski]

Yeah.

[David Green]

Okay, and were they part of the same deal or did you buy them as separate deals?

[Keith Folarski]

We bought them on the same purchase agreement. So like I said, I sold my equity stake in a farm and I, I rolled all those funds into one purchase agreement and bought the two facilities at once. So like I said, the numbers I couldn't get around, like, the numbers were pretty good. So the purchase price was 920 and they were advertised as both as triple net, both paying renters, and one was at a 9 cap and the other one is at a 10 cap. So. And this is just the real estate side, the triple net side, nothing to do with the business. So the numbers were attractive. I didn't have enough money to put 20% down with my farm sale. So the guy that was selling was fairly motivated. And like I said, this agent, he knows everybody in that area, so he knew the seller for a while. He's bought and sold stuff for him for like a decade. So we worked with him and did 10 down, 10 seller carry and then 80 LTV from the bank.

[David Green]

Okay, that sounds pretty solid.

[Keith Folarski]

Yeah. And the 9 cap and 10 cap were. Your cash flow obviously goes down as your leverage goes up on the cash on cash side. But we got pretty good terms on the seller carry and the bank side. This was 20, this is almost September 2023, when people were routinely getting loans at like 8%. And I secured one at six and a half, which I was fricking ecstatic about at the time. So it allowed me to get in high leverage, right? 90% leverage, essentially, which is higher than I wanted, but. Or higher than I like. But I love the idea of these assisted livings. Once I got to learn about them.

[David Green]

A 9 or a 10 cat, if people are unfamiliar with that means had you paid cash for these properties, they would have had a 9% return on the money you paid for them and a 10% return on the money you paid for them. But because you were leveraging them, you had a first position lien at 80% loan of value and then a second position lien the seller carry at 10% loan of value. Do you remember what you thought the cash flow would be after the debt service?

[Keith Folarski]

Yeah. So two buildings in between the two. So with the first position and the second position on both of them, I thought I would make just about 1600amonth cash flow.

[David Green]

Right.

[Keith Folarski]

Because like the triple net, they're paying for all the expenses. How we would run it is I would pay the expenses, then they would reimburse me just to ensure that.

[David Green]

Right.

[Keith Folarski]

Taxes didn't get missed and insurance didn't get missed.

[David Green]

Okay, so 1600amonth between the two of them, that comes out to 19,200 a year. And you put $90,000 down, is that right?

[Keith Folarski]

That's right.

[David Green]

So that's a 21.3% cash on cash return is what you're expecting on that 90k.

[Keith Folarski]

Right. It was pretty stellar. I was really pumped about the numbers going in. And this was. So if I expect $1,600 cash flow, like going in. We sold a farm which was not profitable. Being from the Midwest, hunting is a big thing. So we bought it mainly just to enjoy the outdoors. And I was paying something like 600, 700amonth just out. So, like going from $1,600 a month cash flow from 700 negative, I was going to be up essentially in the portfolio, like 2,300 bucks a month. So I was going in pretty happy.

[David Green]

So, so you sell the farm, that's losing money, 1031 that into this deal. So in addition to the 1600 you think you're going to make, you're actually going to be recovering the money you were losing, which puts you at 2,300. Let me, let me do some quick math here to see what you're expecting walking into this, because that's pretty important. It shows the emotional state that you are at. That's going to bump your ROI to 30.6%. So you're looking at like, man, I'm going to get my money back in three years, basically. And it's triple net. So this should be about as passive of income as you can possibly have. How did you hear about assisted living facilities in the first place?

[Keith Folarski]

Well, the first time I think I heard it, it was. I'll forget her name, but she, she spoke on Bigger Pockets podcast. And I also.

[David Green]

Isabel Guarino.

[Keith Folarski]

Yes. Yeah. So the first time I heard it, I think it was probably from Isabelle or it was from Robert Helms on.

[David Green]

On his podcast, the Real Estate Guys radio show.

[Keith Folarski]

Yeah, I've met Robert and I have a lot of faith in listening to what he says. So, like, when he brings up stuff like that, I, I know I should look at it and, you know, learn about it myself. Yeah, that's the first time I heard about it. I know, like, I had friends in high school and early college who, who were on the personal care side. So I knew it existed and I knew, like, I understood the concept of some of these people need more help than they can get at home. And there's, there's an in between between being at home and being in a hospital, essentially, there's a big need for that window there.

[David Green]

Okay, so let's talk about how it got started. There were already people in one of them. And were you going to look for an operator for the second one?

[Keith Folarski]

Like I said, the one was full of. It was triple net lease that had seven residents. It was fully staffed. It had the contracts in place. It was operating. The second facility was previously licensed in 2022. It was currently not licensed. And the operators that were on the lease were going, they were going through the licensing process, which is not a short process, and I knew that, but it was advertised by the seller and the agent that these operators were paying to essentially hold their spot. Because when you operate these facilities correctly, they can, they can make good money. And it made sense in my head that someone would pay essentially a lease while they're going through the licensing process to hold that spot so that they had the opportunity to run the business when they got licensed. That turned out to not be true.

[David Green]

So what ended up being the case?

[Keith Folarski]

It's two buildings, right. And the one we'll call, Facility 1, they're in separate towns that are like 45 minutes apart, and the closest one's about an hour from my house. So Facility 1 is, is operated by an operator we'll call operator number two. And they were operating essentially as like a subcontractor to operator one. And that's because operator one was going to lose their license because they were going to trial over a bunch of unethical things that they did. And Department of Health Services, dhs, they don't want to work with people with bad ethics. Right? So they said to operator one, you can't operate anymore. We don't trust you. You can hold the license and have somebody run the facility for you. So that's what they did. So this operator 2 is running it and they've they ran it fairly successful for like 10 months. I could tell they weren't super ethical just by the way they would talk to me. And I could tell they were. Everything they were saying, they were like running through a screen. Like, I could tell they were, they were thinking heavily on what information I would be told. And they were always late on rent, like 10 months in a row. But we had a really aggressive late fee structure. Like after five days, it was a $500 late fee, which I thought would be motivating. Nope, didn't change the behavior. It was late every month for the whole 10 months. But I was getting 500 extra dollars so I can manage that cash flow to make that work. Fast forward 10 months. DHS, the Department of Health Services, their regional manager, he calls me and he kind of indirectly tells me that I should back up. So there's a license transfer in process from this operator one to operator two because of the unethical dealings. But operator two, all those new operators, they get vetted by DHS to make sure they're, they're ethical. They do background checks, they do financial checks, they do criminal history checks. And they didn't like what they saw in operator two. So the regional manager calls me and kind of indirectly tells me he's not going to let this transfer go through because essentially they're going to transfer from a bad operator to another bad operator. And it. He didn't explicitly tell me they're going to cancel it because I don't think he could. But I got the gist and at one point I even said, do you think it'd be a good idea for me to apply for a license? He said, yeah, I wouldn't wait until the weekend either. And this is on like Friday night. So we start working on the license transfer and DHS is motivated because if they're, if this license transfer doesn't go through, there's a facility that's full of residents, seven residents, that if the license ends, they need to temporarily re home them and then permanently re home them. So that's a huge admin burden as well as a financial burden because you can't. Some of these residents are high need. So like if you temporarily house them before you can find them permanent housing and another assisted living, that temporary housing looks like a hospital. So you're taking up hospital beds with residents. Also the. It's a new place for them, which nobody wants to live in a hospital. So I was motivated because if they boot this operator license transfer, I'm kind of sol. DHS is motivated because they got seven residents that they want to stay there. So I put in this license transfer on like a Saturday or a Sunday, and we get the thing approved in under seven days, which might not sound like much, but these are license transfers that routinely take six to nine months. And it's not like you submit it once. It's. You're working on it, like every week for six to nine months. But because we were aligned, DHS is motivated to not have their residents leave, and I'm motivated by maintaining the license. We got it done in like a week. It was pretty amazing. But what that meant is that come July of 2024, I got licensed as an operator for this first assisted living facility, which I was pumped about. But what that means is, like, you own everything now. You own the real estate and the business. So we had seven residents with pretty significant needs. We had 10 staff. You're dealing with all the contracts. And these contracts, they flow through Medicare, Medicaid to us, and there's negotiations and all that other fun stuff that comes with that. But it's. I went from a triple net to like a big business. We. I bought a E350 wheelchair van because we're responsible for all the transportation, tent. We had 10 staff, seven residents. It was a. It was a whole thing. Not passive at all. Like triple debt.

[David Green]

Yeah. So you're in this thing deep. You buy the properties. You're trying to figure out what you're expecting to be passive income. Shortly after doing this, you find out the person who is your tenant, in essence, who's paying you the rent, is losing their license. And you can't just go on Craigslist or Zillow or Facebook Marketplace and say, I need a tenant for my house. You have a very specific type of person who's going to rent this thing from you, and there's not a lot of them. So you decide the best bet is for you to get licensed yourself.

[Keith Folarski]

Yeah, exactly.

[David Green]

Now, were you just hiring your own caretakers to help these people at that point?

[Keith Folarski]

So when the license transfer went through, we. We inherited 10 staff, essentially. You had mentioned a role referred to as an administrator, and that is the biggest hire in assisted living. Like, they're the one who steer your ship, and if you put the wrong captain in there, they're going to run it right into the ground, which is what happened essentially with these operators that. That lost their license. So central Wisconsin isn't that. It's. It feels small. Right. So I was on the phone all the time calling, trying to figure out, do I get an administrator certification because it's not easy or short, and they only hold the classes, like, once or twice a year. Do I hire an administrator? What do I pay them? Right. Because I don't. I've never done this. In all those calls, I was able to find an administrator, Angela, and she's a rock star. Like, she actually was the administrator for both of these buildings that I bought back in, like, 2020, 20, 2021, 2022, when they went through their licensing trouble. But she actually got pushed out by that operator that I referred to as Operator 1 because she was raising red flags. They were doing their unethical dealings, like, they were receiving Covid money and not distributing it how they were supposed to. There was some. The charges that are public. There's some Medicare Medicaid fraudulent issues. There's some neglect, abuse claims. So she was raising all these red flags, like when the Medicare Medicaid money and the COVID money wasn't going where it was supposed to. And they. They straight up fired her. So she was trying to guide them with her compass. So I only mention that because, like, she knows both of these facilities inside and out. She worked at them for a long time. So I had this administrator essentially in my bullpen ready to plug in on day one at July 1, when we got our license issued. So we plugged them in. We plugged Angela in on July 1st, and as you can kind of expect, in a scenario like this stuff kind of hit the fan, and, like, people were quitting. People were upset because we were bringing in, like, real rules, real structure. Like, it's supposed to be run structured and assisted living, and they were just by the seat of their pants every single day. So we came in with, like, structured schedules, procedures, and we. They were bucking it right from day one. So we had. We went from 10 staff to probably to, like, five in less than a week. Some we had to fire, some quit. And then we rehired, like, two or three personal care workers and a house manager. I went through that kind of fast, but it was like the first month was just a tornado of activity again.

[David Green]

Okay, so let's talk about the numbers of what's going on right now. Is one of the facilities running, or are both of them down at this point?

[Keith Folarski]

One of them's running.

[David Green]

All right.

[Keith Folarski]

The one that we're trying to restaff.

[David Green]

Okay, so are you actually making money on that one?

[Keith Folarski]

Technically, month to month, yeah. So that facility number one, all of our funding comes from Medicare Medicaid and we bill out like 45 grand a month.

[David Green]

Right.

[Keith Folarski]

When I take it over, we have substantial operating costs. Right. Because we got staff, these work comp. Insurance, a bunch of insurance. But the other facility is still empty.

[David Green]

Okay. So you're bleeding money on that one pretty bad. So how much are you out every month right now?

[Keith Folarski]

The holding costs on Facility 1 is about $3,000 a month. That's just holding costs. And the other one is about 3,000 as well. So it's 6,000 just in Piti? No, just PI.

[David Green]

Right. And then you got tax insurance on top of that because you don't have a tenant who's paying it. So the triple net doesn't help you if it's vacant. Right. So what would you estimate, ballpark, that you're losing right now across these two properties each month?

[Keith Folarski]

Yeah, probably five to six grand.

[David Green]

All right. And the only way you know of to get this thing turned around is you got to basically take over operations yourself. And Angela is trying to help you do that, but she's trying to right the ship that has been wrong so badly by the previous operators. And that doesn't come up when you're told about assisted living facilities. It's, oh, you're just going to find an operator and you're going to probably have an administrator and they're going to take care of all of it. You just provide the house and everything runs like clockwork. And now you're diving into this thing like this. Clockwork's an effing mess. Like, yeah, I'm, I'm a clock maker now, trying to learn how to do this thing. And you still have your day job, right?

[Keith Folarski]

Right. So I'm working full time.

[David Green]

Yeah. What's your day job again?

[Keith Folarski]

I'm a civil engineer at a nuclear power plant here.

[David Green]

So you're Homer Simpson sitting over there watching the dials. Right. Making sure that I'm just kidding. So you have a very significant job. You're a civil engineer, a nuclear power plant. You got to be locked in and focused on what you're doing. And you got this running in the background of your brain. As you're bleeding money all the time, what's your emotional state like as you're just stuck in this position?

[Keith Folarski]

Well, I think my wife could attest to some of the, the challenges. There was a few times where I, I said something along the lines of like, I don't know what I'm going to do because every month for like, you know, over half a year, I'm just bleeding money. And for lack of a better option, I was like, maybe we gotta add this center wall back in that was tore out, and we're gonna just lease this thing as a duplex. I'm gonna sell it because I'm gonna. We're gonna sink this whole ship, like, the whole portfolio, which was essentially keeping me afloat, the rest of the buildings and lines of credit. So it was stressful. It's one of. I don't use sleep aids hardly ever. And this is one of the two times in my life I've had to use melatonin to fall asleep because I couldn't sleep.

[David Green]

I relate. It's when you're in these deals where you can't get out of it. Like, some of the situations that I'm in where the city has shut me down and they want repairs made, but then they kick it off to the building department, the zoning department, the planning department, the fire department, the construction department, and none of those employees care. Right? They're just, like, they'll take weeks or months to get back to you. And then when they do, it's make this change. Then you got to go to your architect and your engineer, who take months before they get it done, and it's just turned into two years. That anxiety just sits on you like an elephant on your chest. And it does hit you at night when there's nothing to distract you. And it just. This doesn't get discussed in real estate very often. We get this fear of missing out, because you get Ms. Guarino on a podcast talking about how these are great deals, and you should hire her company to teach you how to do it or coaching program. They're not warning you this might cause a heart attack. I mean, I don't want to be too. Too dark here, but I know people that had deals that went wrong that literally jumped off of buildings. Like, they. They could not see a way to get out of this thing, and it's significantly stressful. So are you, like, sharing this with your wife? Are you admitting, like, are we. Is foreclosure something you're actually looking at? Did you reach out people that you bought them from to say, do you want this thing back?

[Keith Folarski]

Well, we had similar discussions. So there's a seller, a second position seller. Carry on this. Right? And so I expressed to the. The gentleman who was holding the second. The seller some of the challenges, and his gut reaction, of course, is that sucks. And I. So we back up, and I'm like, I don't think you understand what this means for both of us. Like, I don't have any money to pay you. So we restructured the second. Not much to his liking, but he also didn't want him back at all. And I. I did have a conversation with the. The realtor that helped structure the deal, and he kind of recognized some of this was maybe, maybe on him. And he's mature enough to know, like, when these things really go sideways, part of that could come back to a realtor not advertising the deal correctly. So maybe he understood some of that and he offered to actually resell the deals and not take a commission on it. Right. Because I was having conversations like, I don't know what the heck to do with these things, and I can't support them anymore. He's like, well, let's put them back on the market. I'll sell them, no fees, and we'll. We'll pass the burden to somebody else. But all, all this is happening while we're trying to restructure these, you know, polish these turds.

[David Green]

So, I mean, that's another area of stress because now you sort of have to. You're like eating crow as you're going back to these people. I'd probably be a little bit angry at the seller. You didn't tell me that this operator was operating a unethical organization. And if you would have, we might have structured this differently to where I wasn't in this position in the first place. Their arguments, of course, going to be, well, I didn't know. You can't really prove anything here. So now you kind of. You're vulnerable and need this person to work with you at the same time that you're mad at them and you think that they ripped you off and you don't know how much they're sharing use. That's adding stress to this. And you're trying to work a day job while you learn how to run an assisted living facility. Thank God you find Angela, who kind of knew what was going on before. That's a godsend. But let's fast forward. How did you end up stabilizing these two assets?

[Keith Folarski]

So I don't want to skip over the other facility, which isn't any easier, but. So that thing I knew was empty right when we bought it. And it was essentially the position was being held by the operator, and they were. It was advertised as paying rent, and they're going through licensure. Right. So we closed this thing in September 2023, and I don't receive any rent from September of 2023 immediately. They don't pay And I, So I get on the phone and I call them and they're like, oh, yeah, we haven't been paying for a long time. And I'm like, what? They're like, yeah, I don't, I don't. I bet we haven't paid for over six months. And so you spoke about FOMO earlier.

[David Green]

Yeah.

[Keith Folarski]

Like, if you get kicked in the teeth with phone calls like that, you're not going to have fear of missing out. Like, it. Just because my gut just dropped out of my body right when I hear, yeah, we haven't paid in like six months. And I'm just thinking like, oh, my God, Keith, what did you just do? So not only did they not pay, like their capacity to pay didn't exist because they're. I quickly learned that they're working at the other facility that I own, which is. Is a steady job, but it's not, it's not a job that can support these lease payments because the lease payments are thousands of dollars a month. So I knew right away, like, they only aren't paying. They have no capacity to pay these leases. So as soon as I heard that, I went to DHS for license, and I said, I submitted a license application for that building. It immediately got rejected because the, my tenant already had an application in, and they won't process two applications, different operators for the same facility. So it gets auto rejected. Talking with dhs, they hadn't even touched their license application in something like three months. Because every step you do, you submit a form, you gotta write a check for like 3, 400 bucks. Then you wait three months and then you fill out another form for like 300 bucks. And they can't, they can't support that. And also the person who submits the application is the only one who can pull it. So now I'm stuck in this other triangle of that operator doesn't want to pull their license because they think they can still get it, but they can't pay me. So I engage a few attorneys more money. Right. Because they're hundreds of dollars an hour to essentially motivate these tenants to transfer their license from their company name to my company name, which doesn't sound like much, but it saved like, it saves some time because you, you submit the application and then like you spoke to some of the timelines before, like, I submit these applications and then their default is they have 45 days to respond, not approve or deny, just to respond that they received it. Right. So we saved those 45 days by the transfer. But you're paying attorneys to negotiate, essentially, and write letters to these tenants. So we start this licensing process in, like, December of 2023, like three months after I buy it, and into. That's when we start the paperwork. We didn't really get rolling until, like, March of 2024 in the licensure of the second facility. So it's every single day, either myself or my administrators working with these regulators on trying to get this facility licensed. So from, like, March to, well, September 25th. We just got licensed on September 25th. It was, like, seven months of work every day by either me or my administrator. And this is. This is like, we're moving walls, we're expanding door frames, we're adding door jambs. We're. It's. It's a big effort because it's all ADA compliant. And then you got to get the correct inspectors to come out, which. They're an hour and a half away. So we just got licensed September 25th. So now I'm an owner of the real estate and an operator of two facilities, but my second one is still empty. So we're 12 months in to this deal. The second one has been empty the whole time. It's a loss of rent, essentially, of like, 60 grand in rent and triple net fees that I missed out on, and I had to carry it these 12 months.

[David Green]

Yeah. So what would you estimate over the last 12 months? How much money do you think you've lost between these two facilities?

[Keith Folarski]

The first facility, I didn't lose any rent, essentially because it was leased, but we had startup costs, and the startup costs I calculated at about 30 grand. That's facility one, and then facility two. That just. We just got licensed last week. Those startup costs are 57 currently.

[David Green]

Okay.

[Keith Folarski]

That's not counting loss of rent. That's just, like, money out to get it up and running.

[David Green]

So how much total between the two?

[Keith Folarski]

We'll say 60 on the second one and 30 on the first one. So, like 90.

[David Green]

Yeah. You're just shy of 100 grand and all of this stress. Yeah, yeah, that's terrible.

[Keith Folarski]

And then on top of that, so the payments come. They're. They come through Medicare, Medicaid, they flow through a third party, and then they come to me. Well, on the plus side, that funding is backed by a lot of money. Right. But on the downside, it's also backed by a lot of money called the federal government, and they're slow. So the first payment took over four weeks to get to me, and we're fully staffed on that first facility. So that's two payrolls out and paid because I can't not pay my employees for four weeks before I get reimbursed. So, yeah, it's just like, I'm getting punched from every angle. And then if there's something I. I've relied on lines of credit to support projects, but this one, I relied on cash flow from the other port, other parts of the portfolio, and lines of credit. But this is 2023. Right. So some of these lines of credit are double digits. So I'm just getting pummeled.

[David Green]

Oh, yeah, of course. Like, and there's no end in sight, because you're not in control. You're waiting for the powers that be to approve these licenses and the people that have to be hired. I mean, even worse, if you didn't have Angela. And nobody tells you that this is a thing that can happen when you're in this scenario. So I realize you're still going through it. How close do you think you are as far as. How many months away before this thing. These things will be stabilized and you're not gonna be bleeding.

[Keith Folarski]

So facility one is pretty much. I'd say it's pretty much stabilized. We have seven residents, and we got our. Our seven staff that are. That are key, and they can run that facility. Angela actually bounces between the two facilities, and my house manager, Lori, bounces between the two facilities. So that one's pretty stable. It's got seven residents. We can get to eight, and then it'll be fully stabilized. So that one should be in October. We'll get that eighth resident, facility two, which we just got licensed. This. This on the 25th of this month. That. That sucker is going to take a while, because I would bet it'll probably be less than six months is all I can really say. Because the residents, they have to be a good fit, right? You can't have certain residents with other residents. It's like any house, right? It's an ecosystem, and you got to put it together intelligently so that the residents all fit together. And then there's the staffing part, right? We need six staff to run that facility because we work. We have two on days and two on nights. Full time, 24, seven, which takes about six staff to run it. So that one will be probably six months before it's stable.

[David Green]

All right, what advice do you have for people that are out there and they're hearing about different asset opportunities? Right, because what happens is cash flow dries up in single family because everybody rushes into real estate partly due to podcasts like this, they're telling everybody how to invest. Then they move into multifamily, then they move into commercial, then they move into short term rentals, then that dries up, then they go to medium term rentals. Eventually you end up with these fringe opportunities like rent by the room, assisted living facilities, mobile home parks, arbitrage like you're. We're just getting into. It's more and more and more difficult to make it happen. And so people start overextending themselves and they're getting into something that they don't understand how many moving pieces there could be. You fell into the same trap hearing about these amazing opportunities on inspirational podcasts for people that are listening to this and they've been thinking about taking a leap. What would you tell them?

[Keith Folarski]

If I had to learn, If I learned a few things, it was, I should have had more cash reserves. Right. I had some. I have less now. But I relied a lot on lines of credit, which at times when they were like 4%, I didn't really think about it. But when I'm paying like 11 on lines of credit, oh, boy, you better have your ducks in a row because that stuff is those lines of credit are expensive. So if you're going to go into a new venture, especially something that you don't know, which I knew, I knew, I didn't know assisted living, I should have had more money and probably less leverage because I went in with 90 leverage. Right, right. And I got kicked in the teeth and I'm still getting kicked. But yep, we're on our way back up.

[David Green]

Well, I'm glad to hear that. If people want to reach out, learn more about this, they want to get to know you a little better. How can they find you?

[Keith Folarski]

Yeah, my wife and I, we have a fun little Instagram Sky Properties 2020. That's probably the best way to reach out. We do all our investing in, in the Midwest, Minnesota and Wisconsin.

[David Green]

All right, thank you for that. I will follow up with you. We'll keep an eye on this nightmare that's not over. I feel like this is inception. We kind of jumped into your dream and we're like, oh, God, this nightmare is still going on. They're still bleeding money. It's 90k and counting, and there's no way out of this thing. But I will tell you, you made me feel a little bit better about the nightmare that I've been living. Personally, I'm glad to know, selfishly, I'm not the only person that is going through getting kicked in the teeth so we are suffering brothers together. All right. Thanks Keith.

[Keith Folarski]

Thank you.

[David Green]

Thanks for listening to Real Talk Real Estate. If you would like to be featured on the podcast, I'd love to have you visit davidgreen24.com Ask and submit your question there. Also, please do me a huge favor and share the show with someone that you love that you think would benefit from his message. And make sure you're subscribed to get notified for future episodes. If you want to reach out directly, you can also DM me on Instagram or social media and check out davidgreen24.com.