Lance Edwards is the president of First Cornerstone Group and the author of How to Make Money in Small Apartments. He talks to Jason on the ways you can find great deals, why you should always have a management company, and much more on today’s show.
Key Takeaways:
[1:50] Why are small apartments so great?
[6:50] Lance explains how the market c
ap rate for the metro area can indicate if it’s going to be a good cash flow market or not.
[10:45] How do you find a good management company?
[15:20] Lance explains how you can find a good list of potential sellers.
[18:25] Lance offers three price options for sellers.
[25:30] – For Jason’s listeners, Lance is giving his book away for free.
Mentioned In This Episode:
http://www.irem.org/
loopnet.com
corelogic.com
prospectnow.com
freeapartmentsbook.com
Tweetables:
“You’re not going to find cash flowing properties in California. It’s a different investment model.”
“If there’s any secret to seller financing is this, ask. You just gotta ask.”
“You gotta understand at the heart why they’re interested in selling.”
Transcript
Jason Hartman:
It’s my pleasure to welcome Lance Edwards to the show. He is the president of First Cornerstone Group and the author How to Make Money in Small Apartments. How to finally early the money you deserve in real estate investing. Lance, welcome, how are you doing?
Lance Edwards:
Hey Jason. Great pleasure to be here. Thank you so much for having me today.
Jason:
Yeah, it’s good to have you. So, I’ve always been fascinated with the small apartment market. I’ve done a few small apartment deals myself, one very large deal, lots of single family home deals over the years; more than I care to even count, to tell you the truth in the single family world. Why small apartments? Why is that your thing? What’s so good about it?
Lance:
Well, that’s a great question and there’s a lot of reasons for that, Jason. I actually started my real estate career back in 2002 in small apartments. My very first deal I bought was a fourplex and I never looked back. I got started that way because my first mentor said kind of something similar what you just said, Jason, he said, you know Lance, I made a lot of money doing houses, but I came to realize to meet my financial goals I needed to shift to multiple families. Multiple families provided bigger numbers in a shorter time period.
So, I came out looking to get started in small apartments. I keep small apartments to people either brand new or already doing houses for the advantages of there’s lot of them, you get bigger paydays, whether you’re flipping these properties or buying them. There’s less competition, because a lot of people just qualify themselves thinking they can’t do apartments, which every body is qualified to do apartments.
You can do it nation wide. You can make offers sight unseen. We ten offers a day on properties across the country, site unseen, because it’s all based upon the numbers. So, lots of different reasons and I’m kind of the preacher for how some people get started here or add it to your business. It’s a great place to start.
Jason:
So, define small apartments. What does that mean?
Lance:
Yeah, small apartments. This is the Lance Edwards definition. It’s two-30 unites. So, it’ll include duplexes, triplexes, and fourplexes, which are strictly speaking to residential part of real estate, but it also includes five doors and up, about 30 doors, which is commercial and that’s our definition. I think it’s, for small apartments, great place to start.
Jason:
Yeah, what markets? Just everywhere in the US or, you know, any particular geographies you like better than other?
Lance:
There’s two answers to the question. You can do it nationwide, there’s no limitation, because we don’t even need to look at these properties to make offers on them, because they are the realm of commercial, it’s all about the numbers, the net operating income, and the cap rate that we calculate, which is all simple math for anyone who is hearing these terms for the first time, very, very simple math. So, we can make offers across the country and we do.
Now, in picking particular markets, if you’re going to buy and hold apartments for cash flow, there’s certain sectors you got to focus on. For example, forget about LA getting cash flowing properties or San Francisco, but most other parts of the country with exclusions of parts of California, North East, you can find cash flowing property. Beyond that, we want market that have a population of at least 50,000, minimum, just so there’s some liquidity to that market.
Jason:
Wow. That’s small. So, you’re talking cities of – like, we like to say, you know, cities of at least 250,000, ideally more, but that’s a small markets, yeah.
Lance:
What we’re really looking for, I mean, combing it all up, what we’re really looking for is markets that have good economies, because good economies means job growth and job growth means rental demand, which is, you know, of course good for apartments, so if you can pick your sweet spot, it’s large markets where there is very strong economies.
Jason:
Yeah, okay, so large markets, strong economies are the sweet spot and a large market over 500,000 over a million, type thing?
Lance:
Yeah it’s over 500,000.
Jason:
In population. And some of the population numbers by the way, listeners, I want to say is a little deceiving, because you can have cities that are contiguous to each other and if you just look at that city even though right next door is another city, it’s just a drive. Maybe three blocks, you know.
Lance:
Which may be where the hiring centers are.
Jason:
So, it doesn’t always say the whole thing. It’s more of the metro area, really, but yeah, you gotta avoid places that are expensive. You know, the cash flow never works. I mean, I can’t believe the kind of numbers people are willing to accept in places like the socialist republic of California.
Lance:
In California, the people, people are investing in California, just take LA, people are investing in California not so much for income, they’re investing for land value and so, that drives your prices up.
Jason:
That’s a speculator’s game.
Lance:
Yeah, it’s more speculation. So, you’re not going to find cash flowing properties in California. It’s a different investment model, but that’s why I say most other parts of the country even, you know, here in my home town in Houston, great cash flowing properties. Dallas, great cash flow, even in Florida right now, which I’m really bullish on, great cash flowing properties that was kind of unheard before the recession. So, you gotta find, it has to do with something called the market cap rate, but depending on those market cap rates is a specifier whether you’re going to have cash flow or not on these apartments buildings.
Jason:
When you say market cap rate are you talking about a market cap rate for a metro area or for a specific property? Which?
Lance:
Market cap rate per metro area.
Jason:
Oh, okay, tell us about that a little bit.
Lance:
Well, let’s say you can go to Los Angeles, or let’s take Houston, Texas today has a market cap rate on class c apartments of 8-8.5%, which means the property would produce an 8.5% return if you paid all cash. Well, we’re not going to pay all cash, we’re going to borrow money to buy these buildings, but the cost of money is 4.5%. Well, if you can borrow money at 4.5% to invest in something that pays 8.5% all day long! That’s why there’s cash flow. The property return has a greater return than the cost of money, but if you go to Los Angeles where the same apartment would have the same cap rate, or the same metro area, the market cap rate of 4.5%..
Jason:
Or 4%.
Lance:
Or 4% and the cost of money is 4.5%. Well, you can burrow the money, but the investment doesn’t produce enough income to pay for the cost of the money and so you end up with negative cash flow.
Jason:
I want to ask you about a bunch of things here, but one comes up right now, Lance, is the concept of – one of the criticisms of small apartments is you don’t have an economy of scale, you know, it’s sort of, typically in the industry that people say, you gotta have 75 units to have on site management and that’s one thing to start to hone when you got a good manager on site. Of course, it doesn’t mean they will for sure, but they have the chance. So, with the small apartments, how do you do the management? I mean, management is such a critical component obviously.
Lance:
All it is and that matter fact, here’s the rule, never, never, never self-manage on these small apartment buildings. If you start self-managing, you will burn out. You will leave. So, that means we hire management companies and the keyword here is companies. We’re not hiring a guy who does property management on the side. No, we’re hiring management companies who sole exclusive focus is managing multifamily buildings and we’re looking for a company that manages several hundred doors on behalf of multiple clients, because we want to tap into their economy of scale.
For example, you know, if I own a sixplex, I can’t afford to have an on site maintenance person, but my management will have on staff, you know, a certified AC tech, a guy that can do electrical, another one can do light plumbing, another one can do the rehab. So, when my six unit building, my small six unit building needs work, my management company dispatches one of their guys on staff and I get access to them on their management, but I get him at their cost. So, I’m saving money, because they have economy of scale.
Another way I tap into their economy of scale when it comes to buying power. If they manage several hundred doors, they have buying power. They can get discounts for carpet and paint and stuff that needs to run a building and they provide me those materials for my building at, again, their cost, so I’m saving money while having it professionally managed and tapping into their economy of scale.
Jason:
Yeah, okay, do you put a clause in your management contracts that they’re not allowed to mark up costs of these maintenance and repair items.
Lance:
Oh, absolutely. Yeah. I get it at cost. That’s the part the interview process we go in in our pre-screening selection process.
Jason:
Do you find you’re able to attract good management companies for these small apartments, because, you know, there are management companies that are more the institutional kind of brand that manage the larger apartment complexes. Of course, you have on site management as well or maybe a blend of the two or something and then there are managers that manager single family homes. Where’s the distinction in this type of manager if there is one or is it the same and how do you find them? Are there certain key terms you search for?
Lance:
They are different. There’s an institutional. I mean, even depending upon the different classes of apartments. We’re dealing generally in B and C buildings, which means low to moderate income buildings and so we’re looking for, again, a company that has scale and, you know, you will find them in the apartment sector. You know, I had a few houses over my career and frankly I had a hard time finding anybody that would manage the houses, but you find them managing apartments.
How do you find them? The best way I teach people to do it, there’s websites you can go to, but the best way is get referrals from the local brokers and agents in that market and you can find them on the websites that have apartments for sale. Contact those agents and say, listen, I’m looking for a good management company who can manage a ten unit apartment building in town. Who can you refer me to? Because referral is much stronger than just blindly going to the website, which you can do, but I start with referrals and then from there it’s a selection and screening process, make sure they meet our criteria.
Jason:
So, if an investor is new and I want to talk about acquisition, of course, that’s really the first part of this, but we got off on the management thing for a moment, but if an investor is new in a market, say they just bought a 25 unit building and they need a manager, how are they going to find one if they don’t have a network in that market? You know, maybe the person they bought it from has a management company, probably they weren’t happy with them otherwise they wouldn’t be selling the unit or maybe it’s a mom and pop guy. A guy who swing his own hammer and managed the building himself. There’s lots of those out there. You know, what are they searching for online? Apartment manager or, you know, any thoughts on that?
Lance:
Well, yeah, you can Google management company, multifamily management company. There’s websites you can go to. One of them is IREM.org. You can find them there. They are actually a categorized by different categories. Another way is joining local apartment association and get referrals from the apartment association.
Jason:
Yeah, great resource by the way. We did a whole show about apartment associations. They’re great. Okay, let’s talk about more importantly, acquisition. How do you find deals? Are you looking in the MLS? are you looking on loopnet? You doing mailings? The famous yellow post card with black print.
Lance:
We do all the above. There’s three areas that we teach and I actually talk about in the book is websites and that includes, that’s lots of different websites and you mentioned two of them here, Jason. There’s loopnet.com and your MLS, your multiple listing service, they think of that as primary housing, which it is, but you can find apartments up to 50 units for sale on MLS. So, websites is a source. Speaking with brokers and/or retailers is another source who have properties for sale and sometimes they have properties not on the website. They’re pocket listening. And then the third source is letters and postcards and direct mail. We kill it with post cards, we have really fabulous responses with our post cards in particular markets, but those are the three areas we are always using to trade our gill flow.
Jason:
So, do you recommend that at an individual investor listening to this just start mailing to apartment buildings? I mean, the key is having the right list, right? Having a good list first?
Lance:
Well, you gotta have a list of, yes, you need to have a list of apartment owners. We just, we send to the list and let the post card do the work and deal with the ones who call us back and so I would even say you don’t need to get too fancy on the list, just get a list of apartments owners. Now, it’s gotta be small apartment owners. You gotta be able to sort that out of the list and mail to them, but I would say the first place for someone to start is, I mean, the fastest way is go to websites and start looking on there.
You can make offers on websites and then you can talk to the agents who are listing those properties on the websites to see if they have other properties. We make, here a secret to websites, not all deals are created equal. So, you have to know how to sort through the trash from the treasure on the websites, but that’s the only trick to it. We make offers, we’re making ten offers a day coming from those free sources I just told you.
Jason:
Absolutely, absolutely. So, any tips on what you say in your post cards? Where you get a good list? I mean, do you go to the data companies like corelogic.com and so forth, is that how you get your list or where do you buy them?
Lance:
Yeah, let me get everyone on the inside tip if, a lot of lists, you can get from the county of appraisal district. So, for example, I’m in Houston, Texas of Harris County and now, they have a website, but if I go to the website, they don’t allow me to download the database, but if I call them up, about $10 they will mail me the database. The entire database for Harris County and they’ll sell it to you in excel format.
Now you got every real estate listing and you can sort out from there. Many counties will give it to you for free or for a very nominal charge. If your county does not, then there are services where it’s paid services. We use one called prospectnow.com and they go to the small source, the same county database, but they will allow you to sort segment data and for a fee they’ll send you so many names per month and those two sources I refer people is either call a county or just go to prospectnow.
Jason:
Yeah, fantastic. Okay, and what do you say on your post cards? What pulls are, are you looking for just – when you sort your list, first of all, are you looking for, you know, where the owner owns it free and clear so they can do seller financing or bank financing, okay, and then what do you say to those owners?
Lance:
Well, we just send the list. We don’t, I don’t do any kind of pre- if many are going to be motivated or not, we just send them a list, let the post cards do the work and let the math come back and basically on the post card, it essentially says, if you’re interested in selling, I’m interested in buying, and it is designed to get a response, but the key part of it, the key to it is you gotta follow up with the people and, someone will call in response to my post card, but we gotta have somebody follow up with them, because we give them a 24 hour message they can listen to. So, we have people calling in 24 hours a day, but immediately we have someone follow up behind them and that’s the real key part on any kind of direct mail campaign is through the follow up behind it.
Jason:
Yeah, okay. So, definitely, you gotta have that follow up. So, what do you want to tell people about negotiating and structuring deals and we didn’t kind of answer that question on the last round, but are you really into the seller financing or either way, it doesn’t matter to you? You know, bank financing or seller financing?
Lance:
We make offers and on our office we always have three options, there are three price options, two of those options are for seller financing and the third option is for cash. So, we’re giving the seller a choice. Of course, they get a better price with seller financing and we make it a point in our offer to explain why they get more money with seller financing.
So, we give them a choice and approximately half our deals that are done either through myself or through our students using this same format of the offer letter, half of them are selling financing. Meaning, they not going to be any bank involved in the purchase, but the seller is going to take bank payments over time, monthly payments, and it removes bank qualifying. So, we give them the choice. When we get them on the phone, of course, we want to make sure we explain them the benefits of seller financing, but half of them don’t do that, so we do cash offer, but it’s a lower price.
Jason:
How do you negotiate and say you want to get the seller to take financing. You know, tips on convincing them to do that, making the deal look good to them? You know, just kind of negotiating them working that deal out and, you know, doing it from a distance, I’m going to ask you about that too, Lance, because that’s an art too, you know, when do you tie it up, when do you do due diligence, etc.
Lance:
Well, you know, negotiation. I do entire trainings on negotiation, but you gotta understand at the heart why they’re interested in selling. Are they really interested in selling? I mean, there has to be some level of motivation on their part in order for us to have interest, because if they want retail price or even a premium of a retail price, there’s really nothing there.
So, we need to understand what their motivation is for selling and then from there if we are, you know, we really want to get people to do seller financing, because it eliminates the bank, which means deals close faster. So, the benefits we point out with doing seller financing is, they’re going to make more money because they’re actually going to earn interest when we pay them, they’re going to spread their tax burden out over five years instead of having a tax hit right now when they sell the property and they, in fact, will earn what they’ve been wanting to get for apartment building, which is passive income. They’re going to receive a monthly check and they’re never going to deal with that apartment building again.
I will tell everyone, my very first deal I ever did, a fourplex that I bought, it was 100% seller finance. Lady lived in Hawaii, never met her, I did it over the phone, and I didn’t half know what I was doing. I was brand new to this business and if there’s any secret to seller financing is this, ask. You just gotta ask. This lady explained to me how she wanted to get a monthly check, that’s why she bought this building and she didn’t want to deal with the management company. She just wanted a monthly check and I said, alright, Ms. Manson, how about I send you a monthly check and you never talk to me again in your life, how would that be? And so, that was how we ended up on seller financing. She wanted passive income, I gave it to her, and she never looked at the apartment again.
Jason:
Where do you find, you know, that your best deals are. You talked about the size of the market, you talked about the structuring and so forth, but where do you like to invest the most? Do you like to do it in Houston? Are there certain cities that are kind of like your sweet spot, favorite ones or what?
Lance:
Well, there are certain, for example, Houston right now, it’s saturated. Houston and Dallas, every body is interested in Texas because they economy was so strong. That’s changing. Oil prices have dropped and that’s going to change, but we go to markets which are not being saturated and we measure it by our post card response, because we’re going into a market literally all over the country for ourselves and for our clients, because we do a lot of the marketing on behalf of our clients. We have the benefit of seeing where the most responsive markets are based on the response rates for our post cards. So, we’ll go back to the markets that are most responsive. I can tell people right now, Houston, Texas is one of the least responsive markets right now, because it’s so saturated.
Jason:
Too many people looking for deals. So, you mentioned Houston, so I just gotta ask you as a side here, do you think oil prices are going to go back up? How’s that affecting the economy there? I mean, I own property in Houston. I’ve always liked that market, you know, but I’m a little bit concerned about it with the oil prices, for sure.
Lance:
Oil prices will go up again. The better question is when! Whether it’s next year or ten years from now, who can say? I have lived in Houston since 1981, I’ve seen the whole cycle, but I – this is Lance Edwards prediction, it is going to affect the economy in Houston, Texas, because they’ve already, people, there have been lay offs with the oil companies and at the same time, there was a lot of construction going on lending to before the oil prices dropped.
So, we’re going to be overbuilt here and prices have gone silly on apartment buildings to where, you know, it’s going to correct itself. I tell people as long as you follow the fundamentals, as long as you buy the property right, make sure it cash flows, you’ll be fine, but if you got caught up in the hype and overpaid for apartment buildings in the last six-12 months, you’re going to get hurt.
Bottom line, you violated the fundamentals, which is, you know, what we teach. So, my prediction on Houston. You’re going to see prices come down because they got nose bleeds and it’s going to come back and reason again, but Houston is not going to experience what we went through during the 80s because we’re a more diversified market now than we were in the 1980s when it was just devastating for us.
Jason:
Remember the famous Bill Boeings, will the last person in Houston, please turn out the lights? The last person to leave Houston, yeah. It’s not like that.
Lance:
We’re not going to see that.
Jason:
Good to hear. Good stuff. Well, Lance, are there any questions I didn’t ask you that you want to tell the listeners? Anything you want to talk about before you wrap up?
Lance:
Let’s talk about this real quick, just make this point. One of the, theirs three fundamentals myths that keep people out of this business or they qualify themselves unnecessarily because they think they have to graduate from houses to apartments. Well, no, you can start just like I did, most of my students do. They think they have to deal with tenants and toilets, no. You go to a management company.
The third one, we didn’t talk about this one, just throwing it out there, you do not need your own cash or credit to these deals. You can raise investors to help you put you in these days. You can find business partners to put you in these deals and so, I had two students, two clients who purchased six million dollars in real estate following our system and they used none of their own cash, none of their own credit. They bought it in partner.
So, anyone listens to this call, I don’t care what your financial resources is, how limited they may be, you’re qualified to do apartment buildings right now and besides buying and holding these buildings, you can wholesale them, put them under contract to purchase and then sell your contract and you earn nice checks doing that. So, this business is for anyone. No one should be disqualifying themselves from getting started in small apartments.
Jason:
Lance, give out your website or you have special offer for our listeners, right?
Lance:
I do. For anyone that’s listening here and for Jason’s generosity in having me on today, I have a best selling book, How to Make Big Money in Small Apartments, went to number one, and it’s everything we do in the business on a daily basis. You can buy it on Amazon, it’s $14.95. I will make it available to you for free and you can get my best selling book for free as well as a CD interview of myself and Ron LeGrand on anyone get started in small apartments, but you can get it all right now and go to my website, freeapartmentsbook.com
Jason:
Good stuff. Lance Edwards, final thought?
Lance:
Everyone just get out there and just do it. Don’t rule yourself out of the game. Just get started. You’re qualified right now to get started in small apartments.
Jason:
Good advice. Good advice. Thanks for joining us.
Lance:
Thank you, Jason.
Announcer:
This show is produced by the Hartman Media Company, all rights reserved. For distribution or publication rights and media interviews, please visit www.hartmanmedia.com or email media@hartmanmedia.com. Nothing on this show should be considered specific personal or professional advice. Please consult an appropriate tax, legal, real estate or business professional for individualized advice. Opinions of guests are their own and the host is acting on behalf of Platinum Properties Investor Network Inc. exclusively.