Ep #115 – Building a 150 unit multifamily portfolio in 2 years with full time jobs, Matt Wood and Mike O’Connor.

• How to succeed in multifamily real estate while working a full time job.
• Purchasing a 100-unit building for $2.8 million with no money out of pocket.
• Why you should develop a team. How to find a team.
• What types of people you should include in your team.
• How to find good deals on FMLS.
• Why you should build relationships.
• What Class of property is easy to manage?
• Why you should not make a big mistake on your first deal.
• What does economically vacant mean?
• Remember, real estate is a people business!
• Why relationships/meetups are important.

Why the show is called “Lifetime Cashflow”. Book Recommendation: The Four Hour Work Week by Tim Ferriss Book Recommendation: Tools of Titans by Tim Ferriss Connect with me on Facebook at: Rod Khleif Text ROD to 41411 or visit RodKhleif.com for a FREE copy of my book, “How to Create Lifetime Cash Flow Through Multifamily Properties.”

You can learn more about our guests, Mike O’Connor and Matt Wood at:

http://www.foundationsrealtygroup.com/

Do you want to learn more about Multifamily Real Estate Investing? Work with Rod in the Lifetime CashFlow Academy's Multifamily Course & Coaching Program

Work with Rod

Full Transcript Below:

Ep #115 – Building a 150 unit multifamily portfolio in 2 years with full time job [Michael O’Connor and Matt Wood]

Welcome. This is the Lifetime Cash Flow Through Real Estate Investing Podcast. This is where you’ll learn strategies to help you achieve lifetime financial freedom through real estate investment. Your host, Rod Khleif, has owned over 2,000 homes and apartments. And he brings experts in all aspects of real estate investment and management on to the show. Now, here’s your host, Rod Khleif.

 

Rod Khleif:              Hey, I wanna tell you that we have partnership opportunities. We’re actively buying small apartment buildings and mobile home parks right now, and I’m always looking for people to partner with me. So if you have an interest in potentially partnering together on a deal with me shoot an email to partner@lifetimecashflowacademy.com.

 

We’re kicking butt, we’ve got a lot of things happening, so if you have an interest in potentially partnering with me on some deals, and looking over my shoulder and learning, as we do them together, send me an email. It is an auto-responder email and almost immediately you’ll get an email back from us that has a link to our calendar. You can just click on that link, and set up a call with us to discover partnering with us on a deal.

 

Now, either myself or my partner Robert will get on the phone and get into some more detail about these partnership opportunities. That email again is partner@lifetimecashflowacademy.com.

 

Rod Khleif:              Welcome to another edition of How to Build Lifetime Cash Flow. I’m Rod Khleif and I am thrilled you’re here. I know you’re gonna enjoy the two gentlemen we’re interviewing today. Their names are Mike O’Connor and Matt Wood, and they’re talking to us from beautiful ‘Hotlanta’.

 

They have a very interesting story that I know is gonna inspire a lot of you guys because what they accomplished, they accomplished with full-time jobs. So for those of you that have asked me the question, numerous times, can I do this if I have a full-time job? Here’s the proof. Guys I’m thrilled you’re on the show.

 

Mike O’Connor:      Appreciate it. We’re happy to be here.

 

Matt Wood:             Thanks for having us.

 

Rod Khleif:              Absolutely. I’m gonna let you guys introduce yourselves, and your stories in any format, in any way that you like, one at a time or both of you. Just tell my listeners who you are, and why real estate, and how you got started, and take us through some progression.

 

Matt Wood:             Awesome. Mike and I both met each other in college, and ended up working at the same consulting firm out of college. I’m still there, that’s my full time day job. Mike’s moved on to different firms.

 

While we were at our consulting jobs, a few years out of college, we both realized that we were looking at rental properties kind of separately, and it just came up in conversation. We said, “Well, what the heck, let’s both look together.”

 

So within about a three-month timeframe, we went from that conversation to buying a small single-family rental house and we got that least up.

 

Rod Khleif:              When was this? What year was this?

 

Matt Wood:             Sure. This was December of 2013.

 

Michael O’Connor:       Yep.

 

Rod Khleif:              Okay.

 

Matt Wood:             We closed on that first house and once we stabilized that and got a tenant in place, we said, “Well, let’s do a couple more.” We thought we would look at duplexes or triplexes or quadplexes. We reached out to a mutual connection who’s had experience in the field, and asked if he had any deals in mind.

 

He said, “Yeah, I’ve got a 32-unit complex.” We kind of laughed it off and said, “Well, that’d be fun in a few years maybe.” And then we thought about it, and I said, “You know what, maybe we could try this.”

 

We reached out to some other investors, and did a lot of networking. Long story short, we picked up that 32-unit property, and then 100-unit, and then a 16-unit property, all within about a six or seven month timeframe back in 2015. Scaled pretty quickly with our full-time jobs.

 

Rod Khleif:              Wow. Wow. Okay, so let’s do this. Let’s go back to that 32-unit if you don’t mind. Let’s dissect that deal to start. Actually, before we do that, I wanna ask you another question. So you guys are a team, have you… and there are a lot of people listening that are thinking they have to do this on their own, or they’re worried that maybe they’re more analytical, and they’re not the greatest people person.

 

Maybe they’re the opposite. They’re great people person but they’re not great with the numbers. How do you guys mesh? What strengths do you guys bring to each other’s team? Can you speak to that for a second?

 

Mike O’Connor:      Yeah. And I do think, and I’ll preface as with having a team, whether it’s two people, four people. Getting too big is obviously challenging. But having a team is very important.

 

Matt and I are very functionally minded individuals. In a sense, that neither one of us is overly technical. But what were very good at is, Matt is more of a cautious, must make sure we look at all the facts, and let’s make sure that we don’t jump into something too quickly. And I’m the opposite. I’m jumping headfirst as quickly as I possibly can.

 

Matt Wood:             Mike shoots first and aims later.

 

Mike O’Connor:      Exactly.

 

Rod Khleif:              No, no. That’s why I asked the question because actually, just a few minutes I’ve spent talking to you guys, and watching you, I would’ve guessed that. But I wanted to just… By the way, those of you listening on the podcast, we’re actually videoing in this as well. So I can see them and this’ll go on the YouTube channel.

 

No, I sensed that and that’s why I asked the question. That’s why I framed it that way because there are a lot of people listening that are one of you. I mean, either you’re a little more analytical, you take your time, you aim, you aim again. Now, of course, that can pull yourself into the trap of aiming forever and not actually firing.

 

And then there’s me, and… I’m sorry you’re Matt?

 

Mike O’Connor:      Mike.

 

Rod Khleif:              Yeah. Mike and I are definitely the same, because I fire and then I may aim a year later.

 

[chuckles]

 

Mike O’Connor:      Exactly.

 

Rod Khleif:              By the way, so those of you listening, that is a great team for doing real estate, where you team up an analytical person and a person that loves to get out there and beat the bushes, and communicate and all that. That’s really why I wanted to go there with that. Obviously, that’s working.

 

Now, let me asked you this, since we’re on team, before we go back and dissect that deal, let’s talk about team for a minute. Who else if on your team? And how did you set up your team? When did you get started putting it together and who are the components? Or what types of people are in on the team?

 

Mike O’Connor:      Alright. So it started off, with myself and Matt, on that first small single-family home that he referenced.

 

Rod Khleif:              Right.

 

Mike O’Connor:      When we were analyzing the deal, that we’ll talk about shortly, we realize that while we had the capital to do it ourselves, we were jumping into a whole new ballgame; going to a 32-unit complex.

 

Rod Khleif:              Sure.

 

Mike O’Connor:      It would have been nice to bring not only more skill sets, but also limit our risk from a financial perspective. So at that point we reached out to one of our business partners, Aziz Khan. Who is a very active investor in the Atlanta area, had some experience in investing in single-family home, and quads.

 

Sat down with him. We met him through some social networking sites that relate to real estate. Realized that we have a lot in common. He was a very analytical mind as well, really good with the numbers, could really underwrite a deal very well.

 

When the three of us met, he suggested that we also reach out, Aziz Khan, one of our business partners who, again, he has a lot more experience. He probably… Last time I spoke to him, I think he had 60 houses last time. Now I think he’s got about 90 houses all around Atlanta; very experienced investor.

 

We all sat down, basically, over a cup of coffee one afternoon. Decided that we were a great team. We brought something good to the table, and that level of capital exposure got us to where we are comfortable with jumping into the big deals.

 

Since then, on some of the larger deals, we’ve syndicated with investors. We brought in investor money. We can talk about that later. And then on this, one for duplexes and one of our quads now, we’re venturing towards myself and Matt again.

 

But Matt and I have been kind of working together pretty seamlessly, since that single-family house. And then Aziz and Kieran are also our right arm, as far as the team

 

Rod Khleif:              Okay. They’re not just bringing money, they are actually bringing the expertise and the knowledge and all that. Okay.

 

Mike O’Connor:      We’re a very close-knit group, the four of us.

 

Rod Khleif:              Okay. Alright. Now, what about other components? Do you have brokers involved? Well, you guys are agents, right?

 

Mike O’Connor:      Correct.

 

Rod Khleif:              So you guys actually have your licenses, and I know that you’re actively selling, helping investors buy properties in the Atlanta area.

 

Mike O’Connor:      Correct.

 

Rod Khleif:              Correct me if I’m wrong, you’re also property managing as well?

 

Matt Wood:             Yeah. We’ve just started kind of venturing into that space.

 

Rod Khleif:              Okay.

 

Matt Wood:             But to your point, we are all licensed and two of the deals that we have we found off-market, but others we found on market. And that’s been an asset to have access to the FMLS listing service. As soon as they pop up, we can show the properties ourselves. That just kinda gives us a little bit of an advantage in that space.

 

Mike O’Connor:      Yeah.

 

Rod Khleif:              Sure. Sure. Awesome.

 

Mike O’Connor:      And people say that there’s no good deals, we found on the FMLS. That’s not true.

 

Rod Khleif:              Right.

 

Mike O’Connor:      You just have to be quick and creative when you find them. So you see something, you have to know your areas, you have to jump quick with reasonable terms.

 

Rod Khleif:              Sure. Sure. No, that’s absolutely true. I will tell you, the flip side is it’s not a bad idea to check the ones that have been listed a long time as well, and really dig in.

 

Mike O’Connor:      Absolutely.

 

Rod Khleif:              We found some great deals that way. People overlook things and they don’t carefully analyze the income potential or they overlook really high expense ratios. We found deals that way as well.

 

Mike O’Connor:      Exactly.

 

Rod Khleif:              But that’s absolutely an advantage, certainly, to have total access to your local MLS system. So you have any other types of people on your team? Do you have a real estate attorney? Do you have a great accountant? I mean, what other the components? Just for my listeners to get an idea who they need to get.

 

Mike O’Connor:      Yes. We have a laundry list. I mean, we’ve recently, as we’ve grown, we’ve brought on a really good accountant at Jones & Kolb. They’re located in Atlanta. Really real estate focused with how they go about doing the business.

 

The list goes on. We’ve got a great property management team that we work with. We are getting into property management ourselves.

 

Rod Khleif:              Right.

 

Mike O’Connor:      But we don’t self-manage our properties. And we can talk about that later, if it fits into the conversation.

 

Rod Khleif:              No, definitely wanna talk about that as well. Okay.

 

Mike O’Connor:      Yeah. They’ve been a huge asset in helping us scale…

 

Rod Khleif:              Okay.

 

Mike O’Connor:      We’ve actually gone through a couple of different property management companies until we found a good one. We’ve got great relationships with appliance contractors, electricians, plumbers.

 

[00:10:01]

 

Rod Khleif:              Okay.

 

Mike O’Connor:      It’s critically important, in our opinion, to have good go-to guys, we know that we can rely on at the drop of a hat because with contractors, as you all know; they come and go with the wind.

 

Rod Khleif:              Sure.

 

Matt Wood:             I was gonna say to Mike’s point, one of the things we learned pretty quickly is we could have gone from that one single-family house to another, and another, and another, but we would not have accumulated 150 units nearly as quickly because once we found the right property management company, and some of those other kinda system automation type aspects of our business, it became much easier to just add another multi-family, and another multi-family.

 

Rod Khleif:              Sure. Sure. No, I get it. I will tell you, me personally; I’m a huge proponent of self-management. Anybody listening to my show would know that. But I will tell you the caveat is, if you’re in massive acquisition mode and you don’t have the infrastructure…

 

See, I’ve had the infrastructure myself for 30 years. I’ve got a full-time property manager; have forever, and broker and all that. But if you don’t, it’ll slow you down. And so, that is a good point but it sounds to me like you guys are coming full circle now.

 

You’re starting your own property management division. I assume that ultimately, you’re gonna manage your own stuff. I mean that would only make sense.

 

Mike O’Connor:      You know, eventually, one day, we might. So what we’ve gotten into now is…

 

Rod Khleif:              Oh, wow. Okay.

 

Mike O’Connor:      The assets that we operate in are C plus to B, I would say, as far as range. We’ve got one quadplex under contract now that we’re hoping to kinda make into an A class property, in Historic College Park, which is an area in Atlanta that’s really growing, that historically, has been ignored.

 

What we’re focusing on is that kind of A plus bulkhead condo rental. To kind of get our feet wet into this property management.

 

Rod Khleif:              Oh, in the property management business. Okay. You’re gonna go for the easy management. You’re gonna go for the easy management.

 

Mike O’Connor:      Exactly.

 

Rod Khleif:              Okay. Good. To those of you listening, it’s much easier to manage an A property than it is to do a B or definitely a C or D property. D of course, is hugely management intensive.

 

Mike O’Connor:      Correct.

 

Rod Khleif:              Okay. I get it. So you’re gonna get your feet wet. That’s smart, actually, because you’re not gonna have the upset. I’ve managed the whole spectrum myself so I’m very, very familiar with it. Okay.

 

Matt Wood:             Yeah, one thing I was going to add is, when we were in the acquisition mode, it was one of the things where we knew that our time was best spent looking for deals and looking for money.

 

Now that we’re a little bit more stabilized with the properties, I think you’re catching us at a time where we’re strategically thinking, “Okay, do we want to takeover our entire portfolio, or do we just gonna start with A class and go from there.”

 

Rod Khleif:              Sure. No, it makes sense. Until you have a comfort level, it makes sense to have help. I’ve always found, and this is just me personally, that I’ve had to manage the management companies. For that reason, it’s like, “Why not just hire my own managers and handle it myself.”

 

Mike O’Connor:      Exactly.

 

Rod Khleif:              But that’s always been my framework. Let’s go back. Let me ask you one more question about team, do you have employees yet? Or where you at with that?

 

Mike O’Connor:      Again, we have most of our employees through our property management company itself.

 

Rod Khleif:              Okay.

 

Mike O’Connor:      We don’t have anyone that’s directly on our payroll.

 

Rod Khleif:              Right.

 

Matt Wood:             For instance, we’ve got a full time leasing manager at the 100 unit complex, a full time maintenance guy there. We’re just essentially paying their salaries through the property management company.

 

Rod Khleif:              I gotcha. Okay. Okay. Got it. Okay. Alright. So you don’t have an office somewhere or anything like that. You haven’t had to do all that yet.

 

Mike O’Connor:      No.

 

Rod Khleif:              Okay. Good.

 

Matt Wood:             No overhead like that yet.

 

Rod Khleif:              Okay. Okay. Good. Well, that’s smart.

 

Mike O’Connor:      Yeah.

 

Rod Khleif:              That’s very smart.

 

Mike O’Connor:      Yeah. Keep it lean.

 

Rod Khleif:              There’s no reason to have unnecessary overhead. And everything is becoming so virtual these days. It’s really kinda changing. I mean, look at us, we’re on Zoom, we’re able to talk, we’re able to have a video conversation.

 

Mike O’Connor:      Exactly.

 

Rod Khleif:              I’ve got another business that I’m actually thinking of making 80% virtual for that very reason.

 

Mike O’Connor:      Fantastic.

 

Rod Khleif:              People like to work at home and all that… Let’s go back to that first deal now. So you bought a house, and you went from a house to a 32-unit. Which of course is an incredible jump. How’d you find the deal… Oh you’d mentioned, you found it through a broker. Can we dissect the numbers a little bit? What was the asking price? What’d you end up buying it? And how did you finance it?

 

Matt Wood:             Yes. When we first were looking at the single-family house, we tried to network with as many people as possible. One of the connections that we made is the same one who ended up selling us the 32-unit complex.

 

He is very connected around Atlanta, and he knew the property manager at the time of the complex and was able to get this 32-unit deal for somewhere around 200 or $215,000. Just an absolute steal and that’s a whole another conversation…

 

Ron:                          Whoa, whoa, whoa, whoa… He bought a 32-unit for 200 grand?

 

Matt Wood:             Yeah, and it’s in a nice, it’s in a good neighborhood. It’s kinda tucked in a nice area but he bought it from a non-profit who had been running the property, and just wasn’t as adept at managing the property. They had owned it for years and years, and they were happy, honestly, to offload it.

 

Rod Khleif:              Oh, my god.

 

Matt Wood:             So he gets it for 200, he sold it to us for 640, which we still…

 

Rod Khleif:              Oh, my god.

 

Matt Wood:             Felt like an incredible deal.

 

Rod Khleif:              That’s a steal! That’s an absolute steal! That’s like what 20 something a door?

 

Mike O’Connor:      Yeah.

 

Rod Khleif:              Oh, my god.

 

Matt Wood:             It appraised for 1.35 about two months ago.

 

Rod Khleif:              Oh, there you go. Wow. Congratulations. That’s amazing. That’s a no-brainer, no wonder you went straight to a 32-unit.

 

Mike O’Connor:      Exactly.

 

Rod Khleif:              I mean, wow.

 

Matt Wood:             And it gave us confidence to continue because I think if our 32-unit had been a headache like some of our other deals have been, you go through ups and downs.

 

Rod Khleif:              Sure.

 

Matt Wood:             We knew how to scale this quickly but that first big deal went so well that we were able to really keep going.

 

[overlap talk]

 

Rod Khleif:              No, I just want to interject something, only because what you just said is really profound, and I do these little five-minute clips on the psychology of success, and how 80% of your success in anything is your psychology. I just recently did one on confidence and I’ve done one on moving through adversity and failure and things like that.

 

Whenever you have a success of that magnitude, it’s got gonna build your confidence. I just wanted to kind of hammer that because that’s very lucky and fortuitous for you guys to have that first deal be such a homerun.

 

That’s why for those of you listening that haven’t done a deal, and I’m probably gonna regret saying this, particularly for the ones that are too analytical, but you don’t wanna make a mistake on the first deal. Now that said, you want to do the first deal too.

 

It’s very subjective. But definitely, if you make a big mistake on the first deal, you’re done. I do wanna go back, before we’re finished with the interview, and have you tell me a couple of war stories or at least one big one ‘cause you alluded to it. And those are always very interesting.

 

Okay. You got this place for 600 and change, and how did you finance it?

 

Mike O’Connor:      Yeah, so it was interesting. We actually went to a… Well, I consider it a larger bank, BB&T.

 

Rod Khleif:              Well, that a big one.

 

Mike O’Connor:      We said, “Hey, here’s the numbers, here’s the purchase price.” It was interesting because it was about 56% occupied when we purchased it.

 

Rod Khleif:              Wow, I’m surprised BB&T would even look at it, ‘cause typically, they want to see it stabilized. For those of you listening, which typically means 80% occupied.

 

Mike O’Connor:      Right.

 

Rod Khleif:              Very interesting.

 

Mike O’Connor:      This kinda goes back to, it was a non-profit so about eight or 10 of the units, whatever that math comes out to, were being used as transitional housing for people that were going to this non-profit organization.

 

So it’s not that they were necessarily vacant, because of some sort of [overlap talk]

 

Rod Khleif:              But were they economically vacant?

 

Matt Wood:             They were.

 

Mike O’Connor:      Economically vacant.

 

Rod Khleif:              Got it.

 

Mike O’Connor:      And by the nature of the business. Once they sold the property to our friend, Eric, who we bought it from, they became vacant because that transitional housing was no longer taking place.

 

Rod Khleif:              Let me interject something for my listeners, ‘cause they may not know what economically vacant means. Guys, when you get financials on a property. When you get a rent roll on a property, you may see, “Okay, this thing’s pulling in $10,000 a month ‘cause it shows on the rent roll… Ehh!”

 

Mike O’Connor:      Yeah.

 

Rod Khleif:              No. You’ve got to look at the income and the expense statements, and maybe even drill in more than that. Because all the people on the rent roll, are likely not paying.

 

Mike O’Connor:      Exactly.

 

Rod Khleif:              Usually, not everybody is paying. And so that’s what’s called economic vacancy. In this case, they had probably a higher ratio of economic vacancy because they were helping people in the community.

 

Mike O’Connor:      Exactly.

 

Rod Khleif:              Got it. Okay.

 

Matt Wood:             One thing that gave BB&T confidence though, ‘cause to your point, you need to see a high, pretty reasonable occupancy in order for a bank to loan.

 

Rod Khleif:              Right.

 

Matt Wood:             We knew that there was a waitlist of tenants who have been calling non-stop to try to get into this property. So once those other units got renovated and turned into rent ready units, we knew it would lease out fairly quickly. And within about three months, we were at essentially 90 plus percent occupancy.

 

Rod Khleif:              And then BB&T obviously bought into that. Honestly, you must have had some decently sophisticated and, really not straight and narrow bankers that you were dealing with over at BB&T, because that is unusual. I tell you.

 

I’ve dealt with BB&T, and Bank of America, and the large Fifth Third, these larger banks. They are pretty narrow-minded so you got lucky.

 

Matt Wood:             I’ll give Mike credit though because this kinda gets to the relationship aspect of the real estate business. He knew the commercial lender at BB&T previously, and she just put her faith in him and in our team, and that was everything.

 

Mike O’Connor:      Yeah.

 

Rod Khleif:              Guys, I wanna hammer that one home. I do this, I kinda interject and interrupt and forgive me for that…

 

Mike O’Connor:      No, it’s fine.

 

Rod Khleif:              I wanna hammer home certain points. I’ve done this one before on the show, but guys, you’re listening… Relationships are so freaking important.

 

Mike O’Connor:      It’s huge.

 

Rod Khleif:              Because you’re dealing with people. You’re not dealing with BB&T. you’re dealing with this lady. This girl you know at BB&T. And that’s why I tell you, when you’re getting started, you guys alluded to going to the meet-up, your local REIA, and you found somebody there that got you this first deal.

 

Go to these meet-ups. Go talk to the banker. Take them to lunch, have coffee with them. Because it’s a people business, it’s not a business to business.

 

You guys are really hammering home a lot of points I’ve made over the last few months because this is a people business. I’m really glad you brought that up… Okay. What kind of financing did you get?

 

Mike O’Connor:      We got an 80% loan to value, which is again, absolutely unheard of.

 

Rod Khleif:              Wow.

 

Mike O’Connor:      But, again, if you look at the pro forma, the numbers we’re hitting now at100% occupancy, which we factor in about eight to 10%.

 

[00:20:03]

 

Rod Khleif:              Right.

 

Mike O’Connor:      Or I think, at this point we’re into $18,000 and put the potential collectibles a month. So 18,000 on 640, it almost seemed like a no-brainer to the banks and a no-brainer to us. It just made sense.

 

Rod Khleif:              Sure. Sure.

 

Mike O’Connor:      The cool thing about this is it was a win-win across the board.

 

Rod Khleif:              Yeah.

 

Mike O’Connor:      It was a win for us; we’re getting 32 units for 640. It was a win for our friend Eric. He was all about burn and turn at the time.

 

Rod Khleif:              Sure.

 

Mike O’Connor:      He had a bunch of investors at this service so he made a quick $400,000. He was happy.

 

Rod Khleif:              Let me stop you there for one second. Guys, that’s a $400,000 flip. Okay. So those of you that…

 

[chuckles]

 

Rod Khleif:              That’s a pretty amazing flip. That’s the biggest one I’ve ever heard actually. I’ve heard a $100,000 whole sale deals, but wow, that’s amazing.

 

Mike O’Connor:      One where everyone wins too. It’s unheard of, right?

 

Rod Khleif:              No, It’s a win, win, win, all the way down the line. If he’s happy with that, me I’d be looking back on that kicking myself because it’s worth, what you say, 1.3?

 

Mike O’Connor:      1.35.

 

Rod Khleif:              Okay. Yeah. So there you go. But great job on that one guys. Now, let’s talk about the next one, just for a minute. Because that first one, that’s an anomaly.

 

Mike O’Connor:      Yeah.

 

Rod Khleif:              Those of you thinking you’re gonna find a deal for 20,000 a door, yeah, you may but… Probably, not in Atlanta, not like that. The next one was, what’d you say? 17?

 

Mike O’Connor:      Next one was 100 units.

 

Rod Khleif:              A 100, okay. Let’s talk about that one.

 

Mike O’Connor:      Yeah. So the 32 units came in April of 2015, and we close on the 100 units on July 1st, actually, 2015.

 

Rod Khleif:              Wow.

 

Mike O’Connor:      So just a couple of months later. The same guy who sold us the 32 units, came across our desk and said, “Hey, I found a 100-unit deal down in Albany, Georgia. Which is a sub-market about three hours south of Atlanta.

 

He says, “I’m trying to raise the capital, you guys A, interested? And B, do you know where we can find some investor money. We kinda pulled our resources together and we actually found some guys who had a good bit of money that would be interested in investing into the apartment game; for the debt service that we’d be paying them, as well as some equity.

 

Rod Khleif:              Okay.

 

Mike O’Connor:      Long story short, we actually partnered with Eric, the guy who sold us this deal, to purchase this place. We found 100 units, for 2.8 million.

 

Rod Khleif:              Wow, great…

 

Mike O’Connor:      We, as a team, put…

 

Rod Khleif:              Per door price there too. Holy cow. You guys are…

 

Mike O’Connor:      And we put no money out of pocket.

 

Rod Khleif:              Okay. Tell me how you did that deal. Let’s dissect it ‘cause you said you got some people to do debt and equity. If it’s okay to share, publicly, how you structured it, would you tell us how you structured it?

 

Matt Wood:             Definitely. We were a little bit cash poor after the 32-unit, and would not have been able to go into this deal without investor money. And one thing, to take a step back, on the 100-unit, what gave us confidence in that deal is that it was a really well-built property that was already sub-metered for utilities for water usage. But the owner at the time was not billing tenants for water. That was an immediate…

 

Rod Khleif:              Let me stop you there. Okay, so guys, when you find that kind of a situation, it’s a homerun, because you can bill back utilities, or have them pay them directly. I mean, that’s a fantastic situation. Those of you listening, the fastest way to increase value…

 

The only way to increase value is to improve your net operating income. You can do that one or two ways; you raise the rents or you lower the expenses. So here’s a fantastic homerun situation for lowering the expenses.

 

Mike O’Connor:      8,000 a month.

 

Rod Khleif:              How much?

 

Mike O’Connor:      8,000 a month.

 

Rod Khleif:              Wow.

 

Matt Wood:             So from day one, that was a quick value add but there’s some war stories on this property too, where we also thought we could raise rents at the same time, which ended up being, as we would renovate units, we would raise rents. But that ended up happening too quickly with the tenant base.

 

So that’s just something that we learned over time, that you’ve got to manage what you’re asking your residents to pay. Even if you’re improving the quality of their unit, you still have that to look at.

 

But back to your question about how we financed the deal. The bank loaned 80%, the investors provided a 10% of the purchase price alone, and then we seller financed the remaining 10%.

 

Rod Khleif:              Oh, that’s beautiful. Oh, that’s a fantastic example. Guys, that’s one of the beautiful things about commercial real estate, is that banks will sometimes allow the seller to finance in a second position, to lower your down payment. This is a great example. So 80% loan, so that remained, that requires 20% equity. The bank allowed the seller to carry 10%, and you brought investors in for the other 10%.

 

Mike O’Connor:      That’s exactly right. Now, we… Knowing what we know now, we would have probably diluted ourselves less. But we gave up 50% of the deal to these guys to come in with no money.

 

We do pay them back at 5% interest over the course of three years.

 

Rod Khleif:              So they’ve got a preferred return, as well as 50% of the deal for only 10% of the equity. Yeah, that’s a sweet deal for them and that’s okay. But you’re in the deal and…

 

Mike O’Connor:      And our objective is to cash out refinance. So we knew that we’d go and get for 2.8 and probably raise the value. We got a broker pinning the value on that one for somewhere in the ballpark of 3.5 or 3.6. The objective is to do a cash-out refinance. Pay down the debt service, hopefully get an 80% LTV. We don’t think that might happen again, maybe 75 or 70. And then we’re in it, for no money out-of-pocket.

 

Rod Khleif:              See that’s my model. That’s the best model you can have in my opinion. Buy these things, refinance, and give the investors money back, so you’re no longer paying a preferred return, and then you just sit and cash flow. And that’s why my show is called Lifetime Cash Flow because that…

 

Mike O’Connor:      Exactly.

 

Rod Khleif:              Your model is exactly my model, and I think, the best model. That’s my personal opinion. I’m not in the buy and sell game. I consider myself a real estate buyer, not a real estate seller. You’ve got what sounds like a great asset. Unless the area is declining, why ever sell?

 

Mike O’Connor:      Right. Exactly.

 

Rod Khleif:              Right? I mean, you with me on that? Okay.

 

Matt Wood:             Yeah.

 

Mike O’Connor:      Cash flow, in this case.

 

Rod Khleif:              That’s awesome. And you know what’s interesting, now let’s move forward a little bit. Now, you’re seeing that the market is tight, and you’re having a hard time finding these larger deals, but now you guys are spoiled. I will say that though. 20 to 28 grand a unit, I can see why you’re apprehensive.

 

I’ve got friends that are taking down 100-unit complexes, they’re paying a lot more but the numbers still make sense. But now you’re back to smaller properties. You just told me you had a quad under contract, and didn’t you say a duplex as well?

 

Mike O’Connor:      Yeah, duplex and a six-unit.

 

Rod Khleif:              Yeah. So it’s okay to go back and forth, you guys are opportunists and you’re finding smaller deals make more sense. Now, I wanna talk about that quad because you alluded to the fact that it’s in an area that’s gentrifying?

 

Mike O’Connor:      Correct.

 

Rod Khleif:              Or that you feel could gentrify?

 

Mike O’Connor:      Yeah. That’s correct. Definitely.

 

Rod Khleif:              Yeah, see… And guys, there’s really those of you that listen to me talk about those. When you can find an area like that, I can tell you, the returns can be staggering. I use an example of… There was an area in Denver, that I could have bought whole blocks for $20,000 a house that are now in the three to four, 500,000 range. Okay.

 

Mike O’Connor:      That’s crazy.

 

Rod Khleif:              So there are incredible opportunities, and so you guys have identified one of those. You found a four-plex, and what, you’re gonna massively renovate it and then get high dollar rents on it? Is that the plan?

 

Matt Wood:             That’s the plan and to even go back to the most recent deal that we closed on back at the end of 2015, a 16-unit complex that was in a similar kind of area that was trending upwards. They just put in new townhomes that are selling for 250 to 280,000 per door.

 

Rod Khleif:              Yeah. But you still have some tough ones in there, right? You still got some crappy-looking houses, some of the people walking down the street who’re a little shaky. But that’s perfect. Those are the areas you get the artists to come in…

 

Mike O’Connor:      Exactly.

 

Rod Khleif:              The yoga studios, the coffee shops…

 

Mike O’Connor:      Yep, that’s exactly right.

 

Rod Khleif:              Watch out, the values just go through the roof.

 

Matt Wood:             That’s what we’re hoping.

 

Rod Khleif:              So you had another one like that, huh?

 

Mike O’Connor:      Yeah.

 

Rod Khleif:              What you say was it? Six?

 

Matt Wood:             16 units, we got it for 471 because half of the property was covered in mold in the inside.

 

Mike O’Connor:      {chuckles]

 

Matt Wood:             And so we had to gut and renovate…

 

Mike O’Connor:      An MLS listing…

 

Matt Wood:             This was an on-market listing.

 

Rod Khleif:              Wow.

 

Matt Wood:             We had to gut and renovate almost every unit. And when we bought it, there were six tenants out of 16 in there, but only half of them were even paying rent. To your point about checking the rent roll is not enough.

 

Rod Khleif:              Right.

 

Matt Wood:             So this has been almost a year-plus-long flip, in a way, where we have had to turn each individual unit over time, using cash flow from other deals. Because up until this point, we still haven’t taken any money out of the business.

 

Rod Khleif:              Let me ask you this, do you consider it a seminar? I don’t call it failures. I mean was it a mistake, going into that deal?

 

Mike O’Connor:      No.

 

Rod Khleif:              Okay. Alright.

 

Mike O’Connor:      Now, so we brought it for 471, we probably put in $100,000. Let’s say our base is 570.

 

Rod Khleif:              Okay.

 

Mike O’Connor:      We just got it appraised for 1.05 million. So the property value has jumped up significantly. It’s probably our favorite property.

 

Rod Khleif:              Okay.

 

Mike O’Connor:      It’s in an area where there’s McMansions up and down the street. There’s nice townhomes being built there. It just took a long time to turn. We had a very bad property management company.

 

Rod Khleif:              Okay.

 

Mike O’Connor:      As we would even turn units, they fill it with terrible tenants that we had to then evict. Then we had to turn them again. So it was this long drawn out process where we should have been done six months ago. But because of mismanagement and we’ll take some of the blame for that…

 

Rod Khleif:              Sure.

 

Mike O’Connor:      Getting it is a new experience. It turned a lot slower but it was a great property in one of those areas that we saw was turning. It wasn’t great but it’s getting a lot better.

 

Rod Khleif:              So you’re gonna keep it.

 

Mike O’Connor:      Oh, yeah.

 

Rod Khleif:              I hope you’re gonna keep it. Yeah.

 

Mike O’Connor:      Yeah.

 

Rod Khleif:              ‘Cause you may be shocked by what it ends up appraising for, ultimately. That’s probably my biggest seminar, was selling those houses that I had in Denver… So let me ask you this, a lot of my listeners are brand new, okay? They haven’t taken the plunge yet. They may own a house or two, but they’ve not done a multi-family. What advice would you give them?

 

Mike O’Connor:      I would say, back to the earlier, balancing in that you were talking about, back to why we work so well together… Jumping in headfirst, being smart about it, I know that’s kinda saying two different things but we really did a lot of analysis on that first single-family home that we did.

 

We probably over-analyzed. But when we found one that worked, we knew that it worked, and we pulled the trigger.

 

[00:30:01]

 

Mike O’Connor:      We just made it happen. We kinda had the thought process of don’t be scared to get into something new.

 

I think it’s really important to have professional property management off the bat. Because it’s like learning with training wheels, right? You’ve got someone there to make sure you don’t fall off on the edge. You can operate within a certain parameters, but they’re not gonna let you fall into the deep end. So make sure you understand your area, know your market, have an idea of what it is that you want to do, and then jump headfirst.

 

Rod Khleif:              Yeah, that’s good.

 

Matt Wood:             To that point, I was gonna add that, after we met with enough mentors and people who had experience in this game, we developed our own spreadsheets, our own cash flow models. And I would just say, for the people who are really analytical, trust your numbers and trust your gut. When you see the right deal, don’t think of all the reasons that would potentially falter or fail. Trust the process and just jump in.

 

Rod Khleif:              That’s great advice. Because this business really is 80 to 90% empirical, it’s really numbers. Sure you got to check the areas, you got to do a comparative analysis on the rents, and you wanna check the demographics. Make sure you’re in an area that’s not declining.

 

But you’re absolutely right. It’s empirical. So that’s great advice for you guys that are analytical. From somebody that’s analytical, and that is trust your numbers. Love it.

 

You went out there, you found mentors. You mixed it up. You networked. It’s so great that you’re saying all these, and my listeners are hearing this because that’s just very, very important.

 

I told you I wanted to go back to war stories. And I love to hear victory stories, and war stories. I’m not even gonna bother asking you to tell me a victory story, because you first two deals are just unbelievable… I mean the big ones. Now, let’s talk about when you guys got your butts kicked and got bloodied. Tell me one or two of those stories.

 

Mike O’Connor:      It would probably have to be the 16-unit deal. It’s all come out okay in the end, but we had plenty of nights where it’s two in the morning and I’m sitting there, staring at the ceiling, wide-eyed, just running through numbers.

 

It was covered floor to ceiling in mold, with a lot of these units. We’re going through and doing rehab, doing turns, terrible property management company. I remember we were at a point where we had about one unit left, and granted we didn’t realize that we’re about to have to evict five of six of the tenants because they were so terrible.

 

Well we got a call from our management company that someone had gone in and just completely vandalized our one down unit that we just got done turning. One of the kids whose parents we had to eventually evict, went in and ripped sheetrock out of the wall. You could see between rooms. They destroyed cabinetry. That was pretty bad.

 

Matt Wood:             I was gonna say, sorry finish what you were saying…

 

Mike O’Connor:      No. So we also had another unit there where we failed inspection after inspection, after inspection; from plumbing, from electrical. We put up drywall, and we found out that we then failed electrics. We had to take the drywall down. We had some plumbing fixtures in place; toilet, sink. Had to remove them.

 

Just stumbling over ourselves a lot because we jumped into these 16 units that required a huge rehab. It was definitely an experienced investor project.

 

Rod Khleif:              What would you do differently? Because I’ve heard all of these different things that went wrong, I just wanna hear your take on what you’d do differently. I know what I’d do. I wanna hear what you guys would do.

 

Matt Wood:             Honestly, I don’t think we would change necessarily what we did, as far as our tactical steps as much, because we really had to get our hands dirty and learn the process, learn the renovation. I think what we would do differently is have a little bit of a different mindset, because our goal in all this is passive income, and cash flow. We want to experience that.

 

We haven’t taken any money out of the business yet. Because we’ve used cash flow from one property to subsidize this renovation.

 

Rod Khleif:              Right.

 

Matt Wood:             And so I think there were times where we just wondered, should we sell or should we get out of this. I’m glad we stayed in. We wanna keep the properties long-term. We’re down to our very last unit that needs to be turned before we’ll have full occupancy at the 16-unit complex. It just took a mindset shift for us.

 

Mike O’Connor:      And one other thing is our house [overlap talk]

 

Rod Khleif:              Can I… Hold on one second. I just… I’m sorry. I got to hammer that one home because whenever you’re dealing with what you guys dealt with, you always wanna keep the ultimate outcome in mind.

 

Mike O’Connor:      Yes.

 

Rod Khleif:              It’s so easy to get caught up in the minutiae but even the kid that went through and busted up the drywall and a couple of cabinets, it’s just a check. Okay?

 

Mike O’Connor:      Nobody died. You’ve got a roof over your head. You’ve got food on the table. Put it in perspective.

 

It’s just, okay, so you got to spend a little more money, but when you look at the spread on that deal, it’s okay. And that’s what’s beautiful about real estate. ‘Cause just about everything can get solved with a check.

 

I’ve had houses burned down. I’ve had properties with… horrific stories; people killed and all kinds of crazy, crazy stuff, drug busts. But the bottom line is, just about everything can get solved with the check, and this business has so much money to be made.

 

If you put things in perspective, it makes it okay. I’m really glad you brought that up because that really is gonna help people when they encounter these stuff… Please, I’m sorry, you were starting to say something.

 

Mike O’Connor:      It’s kinda to your point, keeping the long game in mind and sticking to your principles. We were wanting to fill these places up with tenants so quickly, start increasing our cash flow that we were loosening our guidelines on the type of tenant that we’ll take. We ended up having to evict them three months later.

 

That cost us more money. We had to pay for the lawyer fees, we had to pay for the months of rent that we weren’t receiving, turning the units again, paying people to re-advertise and market and show them. It cost us so much more money in the long-term to say, “You know what, let’s wait an extra month if we need to. Let’s do three X income, it can be three times the [overlap talk]…

 

Rod Khleif:              Really, really check these people out.

 

Mike O’Connor:      Exactly.

 

Rod Khleif:              I’m really glad you brought that up. It’s so easy for a beginning investor to get so fearful because they’ve got an empty unit. They take whoever comes along.

 

Mike O’Connor:      Yeah. Don’t do that.

 

Rod Khleif:              Thank you. Thank you. You guys are adding a ton of value today. That’s a very good point as well. Awesome. So let me ask you this, any books you would recommend people read? Are there any books that you gift to budding investors?

 

Mike O’Connor:      Yeah. There’s one that’s not, and this probably gets beat to death on a lot of podcasts and interviews like this. A book that changed my mindset on how I view income and work was The 4-Hour Workweek by Tim Ferriss.

 

Rod Khleif:              Oh, yeah, his awesome.

 

Mike O’Connor:      I like to work. If I’m not working, I’ll go crazy. I don’t necessarily want a 4-hour workweek, but the ideas, the underlying principles of systematizing, looking for ways to have your money work for you, automating your processes, figuring out a way to pay someone else to do things that you don’t need to be doing, and focusing on your business. Not working at… Work on the business, not work in the business.

 

It was a huge mind shift for me, and I read that in the winter of the 2014, and that kinda geared me up this 2015 acquisition phase. I actually reread it again, the winter of 2016, and here we are going to acquisitions again. It really just gets me kinda geared up and ready to go, and if you had another book, Tools of Titans.

 

Rod Khleif:              Oh, yeah.

 

Mike O’Connor:      I guess I’m kind of a Tim Ferriss fan. It’s a great…

 

Rod Khleif:              Oh, me too. Me too. He’s fantastic. His podcast is awesome. Yes.

 

Mike O’Connor:      Yeah. So I highly suggest both those books. If passive income, cash flow, mailbox money is something that you’re interested in.

 

Rod Khleif:              Now, that’s fantastic advice and I’ll kinda hammer that point home. Every business, every business is two things. It’s people and systems.

 

Mike O’Connor:      Yep.

 

Rod Khleif:              I bought 2,000 houses over my career for buy-and-hold, because I had great systems. I just have a handful of people. In fact sometimes, there’s just one or two people and I was buying 30 houses a month that we were turning. It’s all about systems.

 

That’s fantastic advice, and those of you that take this business full on like you guys have, you’ve got to set up those systems. You alluded to not doing things that other people could do for you. You’ve got to put your value on your time. Great advice guys.

 

Well, listen you guys have added a ton of value to my listeners today. I’m very grateful for you being on the show.

 

Matt Wood:             Thank you for the time. We appreciate it.

 

Mike O’Connor:      Thank you.

 

Rod Khleif:              Absolutely. Anybody in Atlanta that’s looking for a great real estate agent, or a great property management company, these guys really seem to… Are definitely know what they’re doing and I can recommend them.

 

Mike O’Connor:      I appreciate that.

 

Rod Khleif:              And their contact information will be in the show note. No question.

 

Mike O’Connor:      Thank you, Rod.

 

Rod Khleif:              Yeah. Let’s stay in touch, guys. I wanna see where you’re at a year from now.

 

Mike O’Connor:      Yeah. Absolutely…

 

Rod Khleif:              I’m excited to see where you’re at, alright.

 

Matt Wood:             Definitely.

 

Rod Khleif:              Thanks for being on the show.

 

Matt Wood:             Thank you.

 

Mike O’Connor:      Thanks, Rod. Thanks for having us.

 

Rod Khleif:              Alright. Take care.

 

 

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Thank you for listening to the Lifetime Cash Flow Through Real Estate Investing Podcast. If you’ve enjoyed the show, please subscribe, and then take a moment to visit iTunes and leave a five star rating and review. For more resources to connect with us further, please visit our website at lifetimecashflowpodcast.com. Tune in next week for our next show.

 

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