From Physical Therapist to Apartment Syndicator in Three Years With Lee Yoder - REIA 476

Welcome to Real Estate Investing Abundance, the show for busy, fulfilled professionals like you to learn how to develop financial independence built on solid passive real estate investments. Now, here is your host, Dr. Allen Lomax.

Hello, enlightened investors. Welcome back to Real Estate Investing Abundance. I'm your host, Dr. Allen. And as always, delighted that you have decided to join with us today. And I am pleased to have with us a returning guest. Lee Yoder was with us about 2 years ago. You can find his previous episode at number 150. Lee went from being a physical therapist to becoming an apartment syndicator. He was getting frustrated with climbing the corporate ladder When he found real estate and he left that job, took a big pay cut and started a real estate hustle. He's flipped houses and duplexes and then bought small multifamily, and now he syndicates anywhere from 40 to 100-unit apartments in Dayton, Ohio. And real estate investing has given him and his family the life that he believes that God has called them to. So Lee, welcome back to the show, and let's just get started by telling us, uh, where you've come in the last, uh, 2 years.

Yeah, sure. Thanks so much for having me, Allen. Uh, happy to be here. And, uh, yeah, it's been a pretty wild 2 years. So geez, 2 years ago, 2022, man, right at this time, uh, interest rates were taking off. So We had— we actually purchased a 95-unit down in Cincinnati 2 years ago, and so we were up to 4 apartment complexes, 283 units at that time. With that apartment came a new property management company because they were already managing that property, doing a great job, so we kept them on that property. And then later in the year, we gave them the rest of our properties. So one property management company, big property management company, they probably manage 12,000, 13,000 units.

Wow.

And they're based in Cincinnati. And so they were managing our entire portfolio. Went really well. You know, after about a year into 2023, you know, yeah. So then I guess from this time, 2022, to this time a year ago, 2023, we didn't buy anything. With interest rates taking off, it was just a really tough time to buy. Still is today. And so we didn't buy anything for 12 months. Really frustrating for me, but we did have a lot going on, you know, switching over the property management. We had— these were some heavy value-add projects that we were working on. So it was, it was a good year, you know, and got our portfolio going. Last year, most of 2023— well, yeah, second half of 2023, we did make 2 purchases. We used seller financing on both of those to get those done. So sellers that were willing to finance us at 5%. Instead of going to the bank and getting, you know, anywhere from maybe 7 to 8%. So that really helped our cash flow, allowed us to pay them a good price, but then cash flow well and do well on those. And then we sold 2 properties. So our first 2 that we syndicated, so went full cycle on those, which was exciting, did really well on those sales. And then we brought property management in-house. So yeah, kind of the first half of the year was a little Sleepy, not doing a lot, and then we had 2 sales, 2 purchases, and brought property management in-house. And so today, Allen, we sit at 350 units. We manage them all ourselves in-house, and so we're kind of building out a team now, or we have built out a team. We've got people on-site at each property, and those are W-2 employees for us, so that's all new to us. And yeah, looking to purchase more, but it's, you know, it's still a really hard time to— to make good deals. So that's where we sit today.

Well, it sounds like an exciting 2 years and a lot of huge changes in terms of your company going from outsourced property management to in-house management. Lots of challenges in conjunction with making that change. But I'd, I mean, I'd first of all be interested in why you decided to make that change from external property management to actually bringing it in-house and and forming a vertically integrated company there?

Yeah. Yeah. There was 3 things. One, we, we were getting frustrated with our third-party property management company, but we didn't feel like there was a better property management company out there. Just, we just got frustrated with third-party management because, you know, Alan, I mean, they're always going to just have a little bit different incentives, right? I mean, they were really good. They had economies of scale. They had a ton of experience that we didn't have. They had a lot that we didn't have, and they did a good job managing our properties. But you know, they just—they're trying to make money off our property and off their property management company. And you know, we just want our property to make money. So there's just some different incentives there. And so we were just kind of getting frustrated with them. So that was part of it. Second part of it was, you know, now we've been in the business for for a handful of years, and being around them and learning a lot from them, you know, as time went on, we just felt like you. more and more comfortable that we could do this ourselves, which a couple years ago, 3 years ago, it was like, there's no way. I mean, it just felt like that's a completely— it is a completely different business. So it was like, we don't want to run that business. We don't know how to run that business. And after being around them and being around property management for a couple years, it was— or for a handful of years, we just felt more and more like we could probably pull it off. And then the third thing, I just felt like God was, you know, opening some doors for us to move in that direction. So the property that we purchased, uh, first last summer— so we got 2— the first one we got was kind of interesting. It was a 48-unit and a 16-unit that we did together. And the seller of the 48-unit, his brother lives on the property and manages it, was managing it for him. Normally I would think like— and I did— I, when I saw, I was like, well, that's not going to work, you know, we want to run this professionally, that it just That's probably not good. This is mom-and-pop. That's who you're trying to buy from, but then you turn in professional outfit. Well, actually, the more we dug into it, he was doing a great job. And so we're like, okay, well, maybe we just keep him. And then we're thinking, well, gosh, if this guy that's selling it to us, if he can manage this property with his brother, he spends half the year in Florida. We're gonna inherit this guy. Why do we need a big third-party management company to come in? And just manage this guy who's doing all, you know, doing most of the work. Now there's a ton to do behind the scenes. You know, you got to pick a property management software and do all the backend stuff. But it was like, man, the day-to-day stuff, like this guy's doing it, he's been doing it, he wants to keep doing it. We can tell he's doing a great job. Why can't we do this? So it just felt like a, and you know, really kind of an odd thing. The property management company we were working with, they, they didn't really want it. So that was kind of weird. We're like, okay, they don't want it. Man, it looks like we could do it ourselves. Why don't we just try it? It's 64 units. Why don't we just try it, see how it goes? You know, if we totally flop, we'll go to, you know, we'll go to our property management company that we're using, beg them to take it or go to somebody else. Like, there's plenty of property management companies out there. We just felt like worst case scenario, we go find a property management company, but let's try it out. So those are kind of some of the reasons we got it started last summer.

Yeah, well, I'm sure there were a lot of challenges with making that, not only getting the appropriate software, And, and implementing that essentially from scratch. I know there's a number of different softwares to choose from. What was your experience really with the implementation of the software to actually do the property management yourself?

Yeah, we use AppFolio. It's a great software. There's others out there. I really like it, but man, it's a lot. Like, just implementing all the The financials and the backend stuff. I mean, you know, how do you pay all your vendors? How do you pay for all your utilities? Pay your taxes, your mortgage, all through there. Collect all the rent, charge fees when necessary, move people in and out of units on Upfolio. Just, there's so many things. And yeah, I don't know any other way to do it, Allen, other than just put a property in there and start doing it. You know, there's really no— I mean, they have a bunch of videos.

Yeah.

We hired some people. I talked to several good friends of mine who were already using AppFolio managing their own properties. So I had a lot of help going into it, but that probably got me 10% of the way there.

Yeah.

And then the rest of it, you just got to learn by being in the fire and just each step. Oh, okay, shoot, we've never moved somebody out yet. Okay, what do you do in AppFolio when somebody moves out? They have videos and tutorials on there. Maybe you call a friend and then you just do it. And then the next time it's easy, right? So it was really just that. But there's a lot of backend and we're still working through it, to be honest with you. We'll be coming up on a year. Gosh, by the end of May, it will have been a year. So we're still learning. I think for the next year, we'll still be learning some, but we're not missing anything big. It's all happening. Everybody's getting paid. We're collecting all the rent. And, you know, the financials look good. And we got our K-1s out on time this year. So, and, you know, over a month ahead, you know, got our K-1s over a month ahead of the April 15th deadline. So our investors are pretty happy with that. Yep. So it's happening, but it's just, you know, it's just jump in there and learn as you go.

Yeah. Well, that's kind of the way it always is. What were the big surprises?

I think the big surprise is, you know, taking on W-2 employees, running payroll, going through benefits. I don't think I fully appreciated just what a big deal that was. And it was a lot. I mean, it was, and it still is. It's a lot to manage people and their emotions and their stuff going on outside of work and, you know, hiring and firing. And then, yeah, just taking care of all the benefits, you know, running payroll and all that. I just didn't fully appreciate how much went into that. But at the same, you know, on the other hand, Allen, I'll say I was, you know, pleasantly surprised with how much, you know, you can go find really good people and they'll take care of your properties and they'll do a really good job. So I've kind of said, you know, there are some— we have had to fire a person, one guy quit. We've had, you know, difficulties with some employees. And so That's challenging, but most of our employees are really good, and hiring really good employees and working with them is really fun. So it's, it's been both harder and better than I thought.

Yeah. In terms of finding employees, what have you found to be the most effective way to find good employees?

Yeah, you know, a lot of our employees have been Through referrals, or we've assumed them when we took over. So it's really, it's people in the business that are already doing a good job, and you hear about them and hire them on. 2 of them, see, 2 of our employees were with the previous property management company that we were using to manage our properties third party, and then we assumed one at a property we took over, that we bought, I mean, last year. And, or no, we assumed 2.

2.

at 2 different properties that we bought last year. And then the others, Indeed, you know, throwing up an ad on Indeed and going through a bunch of interviews and finding, you know, the best one. Those have been the ways we've brought people on.

Enlightened Investors, if you haven't done so already, be sure and click that like button and also click that share so others can take advantage of the content. And finally, be sure to subscribe so you don't miss a single one of our upcoming episodes. Well, what is the— I guess in going through this process over the last 2 years, certainly you're not the only one who has been challenged in finding properties. It's not just because of interest rates, it's partly because sellers by and large are still wanting to get prices that they were getting in '21 and '22. With interest rates being what they are, the market just doesn't, doesn't hold that, but there's— sellers are still holding on, hoping to get prices that they could get. So a lot has, has been going on in conjunction with that, but you have transitioned from— made a huge transition in terms of your management processes there. What has been the most rewarding part of making that transition?

Into managing our own properties? Yeah, yeah, I think it's been working with the employees, just having more people on our team. I really like being a part of a team, being the leader of that team, you know, did that with sports growing up and, and with other companies, and just, I really enjoy that. So I think having our own employees, again, most of them really great, And working with them and then like implementing the plan that we have for taking care of our properties and taking care of our residents and seeing that happen, that's, that's been really rewarding for us.

What has this done for the bottom line for your, for your NOI? Is it challenging to maintain that by going vertically? Or has it been beneficial to the bottom line?

It has been beneficial. It's been— I'll give you an example, Allen. So our previous property management company, they charge a 4% property management fee. But what kind of gets hidden is that they also charge all of the administrative costs that they incur because of the property, and they also charge the advertising costs, you know, that are for the property, which makes sense. Well, on one of our properties, it's a 96-unit, so almost 100 units. It pulls in about $1 million a year in revenue, and so that 4% fee is like $40,000. But between the administrative and marketing costs added on top of that, the total cost was about 9— where were we at? Like 9.4%, so like $94,000. So you look at that and you go, oh, it's just a 4% property management fee. You know, some property management companies, like especially when you're managing small properties, their fee might be like 8 or 10%, but it includes those other costs. So when you look at it, you think, well, it's all— this is only 4%. Well, yeah, but they're charging you all the marketing and administrative costs. So it was 9.4%. So what we've done, Allen, is we've said we can make it work with a 4%— or sorry, with a 7% property management fee. So we're now charging that property 7%. Which, you know, again, on $1 million is $70,000. So we're saving about 2.4% or $24,000 for that property per year. And 7% is good with us. That's able, you know, to pay us a nice fee, pay for all the marketing, all the administrative costs. It kind of forces us to operate with that 7%. Whereas, you know, third party is like, well, we're going to charge them all the administrative costs and we don't— who cares what those are? The property will pay for it. We'll charge all the marketing. Who cares how high the marketing goes? The property will pay for it. And then we'll take our 4% fee and that'll be, you know, our profit or, you know, I'm sure they have some costs that are incurred in that 4%, but it's like they can just charge all that. Whereas for us, it's like, no, we're only charging 7%. So we've got to manage that well. That's got to pay for all the administrative costs, all the marketing costs. And then, you know, whatever profit we want to make, we've got to make that work. And so we're saving the property money by doing that.

Well, one thing that in terms of maintenance, it would seem like with a large property management firm, they could be getting really discounts on the repair and maintenance side of the coin, where it seems like with going on a smaller level on that, it would be more challenging for you to get those discounts in terms of the repair and maintenance cost. What have you found in conjunction with that?

Yeah. Yeah, I will agree with that. I don't think we saw a whole lot of savings with them for administrative and marketing costs. But yes, going to Lowe's, going to Home Depot, if you're spending millions of dollars there, they're going to give you big discounts. So we did see the benefit of that. So if you're going in and you're going to renovate a ton of units, you're really going to benefit from that scale. Now, now that we're managing our entire portfolio, you know, we're still not there. You know, we'll get there eventually, but that's where we would lose out. But I'll tell you, Allen, it's interesting because, you know, materials is, is just part of it. Uh, labor costs is another part of it. And the property management company we were working with, they weren't doing it all in-house. They were, you know, they had crews that they worked with, and those crews were good and were quick and were available because they pretty much just did work for the property management company that we were working with.

Mm-hmm.

They weren't super cheap. So, you know, we've kind of run a model where we're using our maintenance guys to do a lot of the turns, and that's way cheaper. I mean, that's— there's not all this overhead of these, of these construction companies, these contractors. So we're, we're not seeing, you know, really a big difference. We're actually doing very well on the unit renovations, and that's the big thing. And then, you know, we use all their same relationships. They introduced us to some great companies as far as like putting down new asphalt, new windows, new roofs, stuff like that. So we're kind of getting some of the same pricing. I'll give you one example. The flooring company that we use, as soon as we stopped working with our property management company, they said, hey, we're gonna, you know, you're not gonna get their discount anymore. So there's an example right there. But again, you know, using our maintenance guy and using some of the crews, we've kind of made up for that. And, and we're not doing a ton of unit renovations anymore, um, so we've kind of been able to make up for that. But yeah, that's, that's something I would certainly acknowledge, uh, that, that we're losing out on that as far as some of the scale with, with, uh, doing a bunch of unit renovations with the material costs.

Well, where are you, you looking to, to the future here? You said you had been frustrated and that you just haven't been able to get into the acquisition side of it to the degree that you want to over the last 2 years, which many people are expressing those same frustrations. Where do you see yourself going in the next 5 years?

Yeah, I don't foresee myself making any changes. I'm just really trying to be patient. I think, I think great deals are coming. I think we've got to be patient. I think there will be a time when prices and interest rates and all that will make more sense. I, you know, It doesn't stay high forever. I think there'll be a correction. If not, you know, rents will eventually catch up and expenses will calm down and stuff like that. So it's, it's not always going to be like this. There'll still be challenges. They'll just be different, of course. But I do think this is a uniquely difficult time to purchase because prices are still so high and interest rates are so much higher. I mean, you can say interest rates have been much higher in the past. That's fine. But prices were way, way lower. So It's, it's just, it is kind of unique to me. So I'm just trying to stay patient. But, um, I will tell you, Allen, we've, we've started to see some things break loose. Um, I'm seeing more inventory, which is good. And I'm seeing a little more distress, uh, and, and, and not like serious distress in our market so much here in the Midwest and Southwest Ohio, but to the degree where just owners are just kind of, it's not going so well anymore.

Mm-hmm.

Um, you know, in 2021 and 2022, income was just skyrocketing and expenses were, were, I mean, yeah, did we have the material costs skyrocketing? Yeah. But taxes weren't skyrocketing yet. Insurance costs weren't skyrocketing yet. Labor was, but it's, it's had a long way to go today. You know, income is stagnant. Income is flat, right? In some of the hotter markets, income is down. Expenses are skyrocketing. Everybody got their tax increases. Those were, those were huge. Insurance premiums are way up, right? So those big expenses and then now your interest rates, of course, that's the biggest one if you've got variable rate. We don't, so we're not experiencing the interest rate increases. But a lot of people, that's the one that's really crushing them. So, you know, 2023, we saw the bad side of inflation as apartment owners where on the expense side. And so owners are starting to feel that. And so You know, they've been able to kick the can down the road, but that's coming. We're going to have more and more forced owners. And, and it's even some guys and girls that jumped in, Allen, in '21 and 2022 because they're like, this is easy. Well, it was, and now it's not. So they're going to be like, I mean, I've just seen even some owners again, it doesn't have to be a ton of distress. It's just some owners that are like, hey, I bought in 2021, 2022. I'm, I'm not cash flowing. My interest rate's up. Taxes are up, interest. I'm not cash flowing. I want out. I'm just going to sell. I'm going to sell, you know? And so they're going to sell for what they sold for and maybe a little loss. And that's where we're going to start seeing opportunities. So just stay impatient waiting for those opportunities, just trying to manage our stuff really well, get capital ready. And I think there's going to be some really good deals coming.

Yeah, I'm, I'm, I'm hearing of that from a lot of operators that a lot of bridge notes are coming due. Variable rates are adjusting. And folks who got themselves into those 2 and 3 years ago are heading for difficulty.

Right.

The thing I'm also hearing though is, is that most of those are not making it to the market. Most of those are, are off-market deals with folks who have, have had ongoing relationships with lenders and also just straight off-market from from seller to buyer. But I think that, that dam has to break. I think those things are going to start approaching the markets here.

Yeah.

Within the next 6 to 12 months here.

I agree.

So yeah, you can only hold so much water back, and it's, it's going to come over that dam sooner or later there.

Yep, yep.

Well, Lee, what is your, your last words of advice for us today?

I guess I'll just stay on that same note, Allen. I would really advise people to stay patient and remember that real estate is a long game and that 1 year, 2 years is not that long of an amount of time. So, you know, to be, you know, for us, we, you know, we went 12 months and didn't purchase anything. But, you know, Allen, as you know, that was the 12 months that a lot of people made purchases that they're regretting. So we're pretty happy that we did that. You know, we don't have any deals, any distressed deals. In our portfolio, I mean, in fact, we're you know we're paying eight percent distributions on ours right now. You know they're cash flowing very well, and so it's really tough. I'm you know I'm preaching myself too because it is really tough to stay patient. But real estate is is meant to be a long game. You know people were able to make really quick money. Gosh, really from 2019 all the way, if not even going back a couple more years, 2017. But man, there there was a great 5, 6 years running up to the peak. But the peak was, you know, beginning of 2022, uh, when the Fed started raising rates. And so, you know, we're 2 years past that now. Things are very different, and people are finding out that, you know, how real estate's supposed to be. And that's supposed to be a long game, um, and you're supposed to play it conservatively and, you know, get good debt and, and play for the long term. Uh, people that didn't do that, you know, are the ones that are hurting. So I would just encourage people to stay patient. And remember that real estate's a long-term game. If you, you know, you don't have to be that smart. I'm a great example of that. You can, you know, get in, but if you can operate well, you're gonna win, but only if you can stay in it for the long term. And you gotta set it up that way. So if you're patient and you look at real estate as a long-term game, you're gonna do really, really well and build incredible wealth. But if you try to, you know, make money quick, there's times when you can do that and other times you'll get burned really, really bad and you'll be out of the game.

Right. Well, we are talking today with Lee Yoder, and he is the CEO of Threefold REI. So Lee, tell us about Threefold REI and what it is that you have to offer our viewers and listeners.

Yeah, sure. So we're, we're, you know, a private equity company that raises equity from investors, and we syndicate apartment buildings, which just means we bring a bunch of investors together and go buy apartment buildings together. And then we operate them in-house, as we talked about, Allen. You know, we're real local. We do everything here in Southwest Ohio. We like to be right on top of our properties. Even when we weren't managing them, we wanted to be right on top of the property management company. Now we're managing them, so we're really right on top of them. So we really like to stay local and be on top of our properties and operate them really well. I believe so much in operating. I mean, yes, you have to buy right, finance right, all those things, but you have to be able to operate. So we really put a lot of focus into that. You know, Allen, there's a lot of great groups out there. I mean, for us, you know, having high character is utmost importance. We're Christ followers. You know, a lot of our investors aren't, but a lot of our investors are. And we really feel a higher calling to do things a certain way and just treat our residents really well, treat our employees now really well, love them well. And so we really try to give back to our residents and just kind of go above and beyond to give them a nice place to live. It's really a mission field for us as well, and our investors like to be a part of that and like to come on. So that's maybe something a little bit different that we offer, although again, I know other groups that do that really well as well, but that's something we really focus on. So that's kind of our approach. And all that being said, we've been able to provide great returns. So, you know, we expect to continue doing that so we can do good and do really well financially. And so that's what we've been able to do and what we want to do more of. Yeah, and I would encourage them to jump over to our website. You said our name, Threefold REI. That's the website, threefoldreisinrealestateinvesting.com. And now we've got a bunch of great material over there.

And you can also go to threefoldrei.com and get hold of Lee's ebook on passive investing, 5 Steps to Passive Investing. So Lee, thank you for being with us again. It's been a pleasure having you back on the show. Thanks for being with us today.

Thanks, Alan.

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