REIA 247 Axel Ragnarsson: How you can buy 300+ units in three years at 25% below market value.......

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. Thanks for being with us today. As always, it's a pleasure to be with you. And I am looking forward to learning how we can buy 300+ units in 3 years at 25% below market value by using the power of direct-to-seller marketing. Axel Ragnarsson is the founder of Aligned Real Estate Partners. He is also the host of the Multifamily Wealth Podcast, one of the most highly rated podcasts in the industry. Where he interviews and dissects how real estate investors started, built, and scaled their businesses. So Axel, take us into the show and share a memorable experience that helped you to be who you are today.

In terms of a formative experience, if we want to jump right into that, you know, I think that from a very young age, I mean, from a, just a quick backstory to kind of set the context and set the scene here. My dad was an immigrant. He came from Sweden. And he actually just started cutting down trees. He ran a tree clearing business. And from a young age, I was exposed to business and understanding just the upside that that can have in someone's life. And his business ended up evolving into a business where he manufactured and sold wood grinders, and him and my mom worked in that business. And so I was fortunate enough to kind of be exposed to entrepreneurship and business from a young age. And really from the age of like 9, 10, 11 years old, I kind of understood that That was the route that I wanted to go. And I had a natural proclivity for just wanting to buy and sell stuff and trying to make money in a unique way. So I was always the kid out in the street selling the baseball cards and selling the video games when I got into high school and all of that. And something that my dad said to me at one point that really stuck with me was, and this is around this time, he says, if you're going to work your whole life, if you're going to spend your whole life in some kind of career or just In a professional standpoint, just pouring all your effort and time into something, there better be something left at the end of it, right? So it's a lot easier to just work on something that you build your whole life than to work on something where you're just getting paid and there's nothing left at the end of your career or life or whatever. So he said it in a pretty succinct way, but basically, you know, build something, right? That's the takeaway that I took from that. And so from an early age, you know, I just, I never really could understand wanting to work in a career where if I worked for 5 years, and although I made money for that 5 years, if I just decided to stop working, there would be nothing left, right? So everything, every decision I made throughout high school, college, out of college was I'm going to work on something that I build so that when I stop working, I can either sell it or it's going to pay me into the future. So just fundamentally, even outside of real estate, real estate wasn't the vehicle that I had in mind at that time, but I just knew that that was fundamentally going to be a very significant part of my life. And, you know, I had a couple jobs as I grew up. I worked at a grocery store for a little bit and, you know, I ended up just, because you have to, yeah, you gotta pay the bills in high school. You gotta, you know, you gotta be able to go out and spend money. So I had the jobs here and there, but this really hit me as I graduated college and took a job and I ended up working for 2, 3 days. And this was right as I was starting my real estate business and it was a demanding job that I took. And 3, you know, 11, 12-hour days in, I was like, What am I doing? And I just remembered that in the back of my head, like, this completely defies everything that I know, so there's no sense in doing this. So I ended up leaving that job and went full-time real estate very shortly after school. But it was something that I had always implicitly understood, and I would, you know, that was probably the formative experience that at least framed my professional life in a significant way.

Axel, that's a wonderful trajectory into what we're going to be talking about here, and what an excellent example that your parents left for you. And it's interesting that But the message you got when you were 6 or 7 years old, build something, kind of went in. I, it sounds like it went into the back of your consciousness, but when you actually got into the workforce, even after 3 days, it suddenly came back to you and you had this aha moment and said, this just is not going to be building anything and went right into building something. So marvelous. Axel, we're going to talk here really about the marketing aspects of essentially finding multifamily properties. So take us into this discussion, Axel, by sharing the importance of building a funnel. And first of all, just briefly define what a funnel is. I think most people have an idea, but of course there are newbies who don't. So just define that for us and then take us into the importance of having a funnel.

Yeah. So the funnel being, you know, kind of the traditional sales and marketing terminology of you have leads coming in the top, right? Just a wide open, you know, top of that funnel. If you're looking at it on a page, right, you have the top, the top part, which is all Wide and expansive. And that's where all your leads and opportunities come in. And kind of the top bar of that funnel, if you were to chart it out, kind of as you progress down the funnel, that top part is leads, right? And those are just, in the real estate world, the way I describe that is somebody who might be interested in selling a property or really someone that just owns a property that we might be interested in buying. And our objective is to fill the top of that funnel with those individuals. We want them to contact us, and that's the purpose of our marketing. And as they work down the funnel, you go from leads to maybe productive conversations, and everybody assigns different terminology as they work down the funnel. But basically, it's taking a lead to a productive conversation, to an offer, to a negotiation, and then ultimately a closed deal. And again, terminology is dependent on everybody's business, but that's the hypothetical or the fundamental understanding of that structure. And early in my business, I got started in real estate by just buying small multifamily properties with my own money, and that was my segue into the real estate business. And at the time I had no money, right? I was in college, so I knew that I had to find a really great deal to convince somebody to lend me the money to feel safe doing that. And to take it a step farther, I knew that I had to go look at a lot of deals to ultimately find the good one, right? So from early in the business, or from very early on in the business, I should say, I really focused on speaking with a lot of sellers, speaking with a lot of folks in the business, and doing a little bit of marketing, right? And I didn't have a lot of money, so I couldn't really build a direct mail marketing machine at thousands of dollars in marketing a month, but I'd send some mailers to some very targeted lists. And just because that's what I was told, that's how you look at deals. That's what you should do. And I talked to 5, 10 sellers a month, and eventually after a few months, I made an offer on a small 3-unit property and it stuck. And I knew that in order to scale my business, I had to keep building that engine in order to find the good deals to where people could lend me high loan balances, high loan-to-values, and feel secure with that. And I was bringing in private investors, and that became a real core focus of my business moving forward was The good deals are made when you get in front of a seller that's motivated to sell in some respect, whether it's tenant issues, whether there's some kind of financial distress, whether there's partnership distress, or they're just trying to move to a different stage of their life. And maybe they're not in distress, but they're open to doing a deal off market. So everything I did was centered around getting in front of those folks. And I never even really talked to brokers, right? Brokers was not a part of my strategy at all because that was more of an efficient market, right? And I was looking for inefficiency and inefficient pricing. So everything that I developed in my business was to build that top of the funnel, right? So we started doing a lot of direct mail, started doing a lot of direct emailing to sellers. We started cold calling sellers. We started going online looking for for sale by owners on Craigslist. We'd email owners that had for rent ads up and say, hey, I know you're looking to rent your property, but would you be interested in selling it? And we basically developed this whole machine. I say we, it was me and an intern and a VA at the time, virtual assistant. And to just get in contact with all of these owners. And by sheer volume of effort and work, we started doing more and more deals, and then we started doing larger and larger deals, and eventually it compounded and grew and snowballed. And this is, you know, 6 years ago is when I did deal one, and here we are 6 years later. And as with everything in business, you know, it's typically a bit of a hockey stick growth curve. So really the last 2, 3 years we've seen significantly more traction because we've really dialed in this process.

Axel, thank you for that introduction to marketing and how it works. And thank you for really explaining that, like everything, it always starts out slow. And after you've really stuck with it and been stable with it, it starts to have what we can call some phenomenal growth, but that doesn't usually come until year 2 and 3. of your endeavors there. So Axel, you talk about the fact that you didn't use any brokers, and then you also are really focused up on using deal structures that can increase returns for you and your investors and doing that in a creative manner. What types of creative deal structures are you specifically referring to?

Yeah, and I think, you know, using creative structure is is almost like a must if you want to build a portfolio quickly. And I think to set the stage for some of the strategies that I use, because some people would deem them riskier and they were inherently a little bit more risky, I think it's important to clarify your goals, right? My goal was I want to grow a portfolio of real estate that can replace my income, which was working as a real estate agent at the time, just to stay in the business. And I did that for about a year, but I wanted to get to 50, 60, 70 grand in passive income every year so that I could really be full-time in the business and then take it to the next level, which is maybe hiring a person or 2 and going to double that, triple that. And for me, I wanted to create the shortest path from deal 1 to deal 10 to create that passive income. And I just say that's, I set the context for this because that was my endgame. Some people's endgame might be to buy a property a year for 7 years, keep their job, and it's just supplemental, right? In which case, doing all of this might not be in the best interest of that. end goal. But for me, I knew that in order to get there, I had to put down as much money upfront at closing or put down as little money as possible at closing. And I had to really be mindful of the velocity of capital, right? And fundamentally, my goal was I didn't want to lock up significant chunks of capital that I had because I didn't have a lot of money to really work with in the deal. So everything that I did from a deal structure standpoint, on the acquisition side was how do I put the least amount of money in this deal as I possibly can? So there's a few levers that I used to do that. One was just taking on more debt. And for example, if I found a 5-unit deal and the market value was $500,000, but I had it under contract at $400,000, which we were consistently doing every deal, we're buying 20%, 25% below market value. And that was just a A hard prerequisite. I knew that at closing I could afford to take on more debt because the overall debt load would still be comfortable from a loan-to-current-value standpoint. So while a lot of traditional banks would look at a $400,000 purchase price and say, hey, we want 25% down, we want $100,000 down, we're going to give you a loan for $300K, I would go out to private individuals and say, hey, this property is worth $500K today. I have it under contract at $400K. Can we get your loan amount to to 375, 385, 400? You know, can you loan the entire purchase price? And yes, in a common, you know, if you just think loan to purchase price, you're highly leveraging the deal. But if you're looking at current loan to value today and not thinking about what the actual purchase price is, we're still in a safe range of leverage, right? So for me, that was step one, and it was just putting in a lot of work to find the private investors and the private lenders And this is debt at 9 to 12% at the time. I mean, it wasn't cheap money to do that, right? And in order to do that, I'd sometimes get desktop appraisals and I'd really validate, I'd get some third-party validation from brokers, broker price opinions to show these lenders saying, hey, this is what it's worth today. This is what the market says it's worth. I'm not just telling you this. This is, here's some third-party verification. And then basically I was bringing none of my own money to deals. Fundamentally, that was the outcome. The other strategy I used was incorporating seller credits into deals. So instead of, to use the same example, I got this $500,000 property, I put it under contract at $400,000, and instead of, that's what I could do, but I could also put it under contract at $450,000 with a $50,000 seller credit. And the seller walks away with roughly the same net to seller. He has to pay a little bit more in transfer taxes, but Net to seller, it's roughly the same, but I'm basically taking on a loan for the amount of $450,000, but I'm getting 50 grand back at closing. That is basically reducing my required equity in a really significant way. And that was another way to reduce the cash that I had to bring to closing. And then I would also do some other stuff like second mortgages. Let's say I had a bank coming in in the first position.

Can I stop you there?

Go ahead. I was going to stop on number 3 because I know I'm rambling, but Absolutely.

I'm not following you on the seller credit. I'm not following how that actually works.

Sure. I can give you some mathematical explanation of it. So in that example, let's say you could either buy it at $400,000 or you could buy it at $450,000 with a $50,000 seller credit. So let's say you have a lender that's willing to lend you 75% loan to value. So if you were to buy it at $400,000, that would be a loan amount of $300,000. You'd have to bring $100,000 to closing. If If you paid $450,000, but with a $50,000 seller credit, 75% loan-to-value of $450,000 is, you know, we could quickly do the math right here and I'll just pull up my phone and do it. It would be a shade over $300,000. It would be, you know, $337,500. I still have to bring $100,000 and, you know, let's call it, let's see, times 0.25. I have to bring $112,500 to closing in this scenario. But if I have a $50,000 seller credit, that's reduced from that $112,500. And now I only have to bring $62,500 to closing. So by structuring it with a seller credit, and fundamentally the seller still walks away with the same price, instead of me bringing $100,000 down in that scenario, I'm only bringing $62,500. So it allowed—

So what's the credit to the seller? Is that the seller gets that when you refi or you resell or you're making monthly payments on that or How's that $50,000 work for the seller?

So it's just, it's just at closing. So it's basically a credit that he's providing the buyer at closing. So, you know, similar to, for example, you do some due diligence and you find out, you know, the AC unit's broken and you ask for a $5,000 credit at closing to help you take care of that. You know, this isn't tied to anything. It's just a large credit at closing that is, that's on the seller, the buyer's side of the HUD statement. As a reduction in what they need to bring, and it's just a reduction in proceeds on the seller's side.

Oh, okay. Okay. I get you.

Okay.

Thanks for that.

Absolutely. So, and then I'd sometimes combine those 2 strategies between a higher loan-to-purchase price on the buy side with a seller credit, and you start to blend some of those things together and next thing you know, you're not really bringing any money to closing. And the 3rd thing that I did really significantly early on was utilize second mortgages. And again, get the property under contract at $400,000, $300,000 mortgage from a bank. I'd go get a $50,000, $60,000, $70,000 second mortgage from a private investor and pay them 10% monthly or something like that. And all of these strategies are all contingent on finding a good deal, right? You can't really buy a deal at market price and put these to work because then you're just overleveraging and you're just not investing wisely.

Right.

So the step one before we get to all this is you gotta find that really good deal to where you can then employ some of these strategies. And that That's how I minimized my cash out of pocket upfront, and it was able, you know, I could do more deals, I could get into more deals, and the return on my cash was so much higher and it allowed me to accelerate the growth of the business more quickly. And, you know, later on that turned into raising private capital and the syndication structure, and that's what we're doing now. But that was the catalyst to get to that point quickly.

Well, interesting strategies there and powerful strategies. So Axel, I know you have a lot to offer. So share with our audience how it is that they can get in touch with you to take advantage of that.

Sure. So if you want to learn more about the properties that our company are buying, or you want to partner with us on deals, we buy throughout New Hampshire and Central Florida. You can go to alignedrep.com/invest to get on our list. We also send out a great newsletter every other Monday. It's called Multifamily Mondays. It's a value-packed newsletter where Talk about insights in the market and what we're seeing in our business. And you can also just shoot me an email, axel@alignedrep.com.

Axel, give us some tips here on how we can identify our competitive edge as real estate investors.

Sure. So I think especially in the large multifamily space, which is where we're playing in the mid to large 50+ unit multifamily business, which is our business. I'm a huge fan of competing where there's less competition. So similar to, this is a very broad brushstrokes analogy, but let's say you're going to start a business. Do you want to compete against, do you want to start a computer business and compete against Microsoft and Apple? Probably not, right? The hypothetical comparison in the real estate world is, do you want to start trying to buy multifamily in Tampa or Austin or these tier 1 markets with national, deep national competition with a lower cost of capital than you? Or do you want to compete on the other end of that spectrum on the business analogy? Do you want to start a flooring company that's local to your city where you're competing with someone that doesn't use technology and doesn't do a great job for their customers? Right? And that real estate hypothetical scenario or crossover would be kind of these tertiary markets and maybe smaller assets where there's less competition and more inefficiency. So for me, very early on, I understood that real estate was all about inefficiency. That was fundamentally where you could really earn outsized returns. And I didn't want to go to the Tampas, the the Orlandos, the Atlanta, Georgias, and try and compete with local folks, regional folks, and national folks. Like that just seemed like a poor use of my time and I didn't think that I'd actually gain traction. So, you know, I live in Boston and I'm originally from New Hampshire. So we started buying property an hour north of Boston in a city called Manchester, New Hampshire. It has good fundamentals. Population's growing, incomes are growing, very low vacancy rate, strong rents. And I knew that, hey, this is a city of 125,000 people. I'm really only competing with people from New Hampshire and some people from Boston that are kind of thinking the same thing I am, but I'm not competing with folks from around the country or even more than a few states away. So I really started to gain an edge there from a relationship development standpoint, from a marketing standpoint. And I really, I like to think I've become one of the go-to investors that is top of mind for folks that are operating in that market, which has helped me find more deals. It's helped me really tell a better story to investors like, hey, We've nailed this small market and we know it in and out. And I think that's a, from a market selection standpoint, I think finding where you compete and where your competitive edge is from a market standpoint's important. And then from a property-specific asset class or asset type standpoint, again, I know that I can, we have a great direct-to-seller machine. I can find these 20 to 80-unit deals much more effectively in terms of I can get in front of more of these folks. I can tell a better story. I can build better relationships. And there's a higher likelihood that those sellers are more mom-and-pop. They don't run their properties that well, and they're not as plugged into what's going on in the market as the sellers of 100+ unit assets that are more sophisticated or institutional. So by blending an inefficient market with a more inefficient kind of unit count range, we've been able to gain traction more effectively. And I think that thinking about markets and product type outside of, hey, what's everybody else doing? I think is really important. And you can make plenty of money in secondary and tertiary markets. We do the same thing in Florida. We buy in Central Florida, not in Orlando or Tampa, but between the two where there's still a little less competition. Although now it's starting to become a little bit more known here in 2022. But that's how we've decided to approach the business is we want inefficient markets so we can secure really, really great pricing when we buy, which mitigates all of the risk in the business plan and the hold period and the financing and all of that. So I think understanding the dynamics of that and how it interplays with your strategy is really important.

Well, Axel, talk to us about how it is that we go about actually establishing what is going to be a good personal brand and how do we develop it?

Sure. So personal brand has been something that I've really focused on the last year, year and a half. Similar to you, I host a podcast. I'm really active on Instagram and I post a lot of helpful content for real estate investors. And I document our story, our journey as we're growing the business and talk about deals we've done, deals we're selling, and things we're learning. And I think that in 2022, this is, we're recording this in the middle of July, one of the greatest uses of an investor's time is to invest in content creation, in growing a social media following, or just building some kind of a newsletter, but basically a way to reach people at more of a scale. If I'm going to record a podcast, it's going to take me the same exact amount of time to record it, produce it, post it, whether there's 2 people listening or 2 million people listening. It all takes the same amount of effort, right? So for me, I want to grow an audience that I can reach in a more leveraged and scalable way. So for me, that's really manifested itself in producing content on Instagram and producing a podcast. But the actual tangible benefits in terms of a real estate perspective is more deals come to you because you're more known in your marketplace because more people are aware of you. You're more top of mind. So more deals come to you from other investors. There's more joint venture opportunities from brokers. It's much, much easier to raise capital because it's so hard to raise capital early in your business unless you have a great close family and friends network that can invest in your deals. I didn't really have that. I was a younger guy and my family wasn't really interested in real estate. It wasn't their business. So it was really hard to start raising capital from investors. So I was like, the only way I can really do that is to get in front of just more people and talk about what I'm doing. And that's how I've been able to raise capital are people that I've met online. So from a deal standpoint, it's extremely helpful. From a capital standpoint, it's extremely helpful and it really helps to build trust in the marketplace, which is similar to the first 2 points I mentioned, but I'll mention it as a 3rd because it's such a significant benefit. And I could tell a quick story to really illustrate this, but if somebody looks you up, if they Google your name, if they Google Axel Ragnarsson real estate, because they're thinking about investing with me or they want to learn more about me and they see that I have a really fleshed out, developed online presence, there's an inherent element of trust that comes with that. And I think in business, a lot of folks want to work with people that have something to lose. To use a contractor example, do you want to hire Uncle Johnny that does this on the side and doesn't have a website and no reputation? If he screws you over, it doesn't matter. Or do you want to hire a well-developed business with reviews, a website to where They have their reputation at stake on every job they do, so they're going to be more incentivized to perform. Same concept from a real estate investment standpoint. And the quick story to illustrate this, and then I'll wrap it up, is I was at a restaurant in South Boston and when I was leaving, my wallet fell out of my pocket when I was getting in the cab and just landed on the side of the road. And I didn't realize it until I got home. And I was like, so I went back, it wasn't on the street. I was like, oh geez. So I went and started canceling all my credit cards and doing the whole damage control side of that. And then the next morning I get a message on Instagram and it was from a guy named TJ. So maybe TJ's listening to this, shout out TJ. But he was like, hey man, I found your wallet in South Boston. I think this is yours. And sent me a picture of my ID. And I was like, oh dude, that's my wallet. I appreciate you picking it up. So I was like, hey, I'll come by your place later and grab it. And so I went over there and picked it up and I was thanking him and he's like, you know, I saw your Instagram account. And scrolling through all your content and geez, looks like you've been in real estate for a while. Looks like you've been buying multifamily properties for years. I personally have been wanting to invest in multifamily. And after a 15-minute conversation later, he's like, if you find any deals that you need an investor for, let me know. And a few months later, we partnered on a deal and it was purely because of my Instagram account. And now we've worked together on 4 or 5 deals. He's a friend of mine, a good business partner of mine. And purely as a result of creating content and creating a personal brand. So I think those 3 benefits, more deals, more capital, building trust in the marketplace are the easy ones. And you don't really know the benefits until you get into it and do it, but it's paid dividends for me so far.

Enlightened Investors, what a pleasure it was to be with you today and a fascinating conversation we have had with Axel. Axel, thanks so much for being with us. Enlightened Investors, I look forward to being with Awesome.

Thank you for having me.

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