REIA 314 Caleb Johnson: THIS is How to Manage Your Assets

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 the show. Delighted to be with you once again today. And we're going to take a look at how it is that we can manage our assets and do it The right way. With us is Caleb Johnson, who has been an entrepreneur since the age of 18. He founded the From Trial to Triumph podcast, where he interviews notable guests who are leaders in their fields. Caleb owns and operates B and C-class apartment complexes. So Caleb, take us into the show and share a memorable experience that helped you to be who you are today.

Allen, thank you so much for having me. And that experience for me is the reason that I got started into real estate investing. And that was when my mom, she had both of her knees replaced. And after the surgery, she had 3 months to heal. And during that time, she was living off of her savings. And at the end of the 3 months, Allen, she was not healed all the way, but she could not continue to live off of her savings because she was also planning for retirement. And so she was dipping into her savings and that would affect her retirement timeline. And she was probably about 60 years old at this time. And she had an age in mind of when she wanted to retire. So to meet that mark, she had to go back to work. And Allen, I would see her come home in tears from just the pain. And she was a therapist and being on her feet all day. And that did 2 things for me, Allen, just seeing my mom come home crying. The first being was I did not want that for myself. I did not want my future kids to see that and think, oh, well, that's what I have to look forward to. That's the example that we have. And I did not want that for them. And also I did not— well, I wanted to help my mom financially through that. I wanted to help her retire early. And so I'd say that was the reason that I got started into real estate investing.

Well, interesting story there. And it's interesting how oftentimes it is those misfortunes in life that lead us on more productive and meaningful paths. Well, Caleb, tell us how it is that we should be managing our assets.

Well, I think whenever you do acquire an asset, there are usually— there's someone that's managing the day-to-day. And the way we run our business, every week we get on a phone call with our property management team and go through our project list, what the rent roll's looking like, where are delinquencies. And so it really takes consistency and making sure you're on top of your managers. And especially at the beginning, this could take from 6 months to a year. And depending on the size of the asset as well, you know, it will be different for 20 units to 200. You know, you're talking about $1 million to $20 or $30 million depending on what market that you're in. So that is a very serious asset. And we're investing investors' capital as well. So just making sure you're consistent with your property manager. And, you know, we have a spreadsheet and we copy and paste it every week and we have the same questions, you know, delinquency and the project list, you know, being what interior renovations we're working on currently and what large projects we're working on, you know, signage, monument signs, landscaping, and, you know, if there's large CapEx items. Like the parking lots or the roofs or even aluminum wiring and things of that nature. So making sure everything is in line and our business plan is being fulfilled. And so I'd say the first thing to really focus on whenever it comes to asset management is consistency and, um, just consistency with the property management team.

Great advice there. Well, Kaleb, just to give us an idea of your journey here, how did you get started in real estate? What was one of your first experiences and how has that grown over the— over time?

The reason that I got started into real estate investing was my mom. And also around the same time that all that happened was I learned that 90% of millionaires had gotten their millions through real estate. And I thought that was crazy that 90% of the wealthy had gotten their wealth through one investment tool. And so I knew I had to do more research. And from there I started looking into BiggerPockets and YouTube videos and just different asset classes and kind of just how to become financially free. And from there, after I'd say about a year of research and I found a mentor, and that was very important for me, was to find a mentor to kind of who had done what I had already, or he had done what I wanted to do. And so he could kind of guide me through what steps to take. So I found the mentor and my first property was a house hack. So I lived in one unit of a fourplex, rented out the other 3, and I inherited some tenants, one being a drug dealer, one being a hoarder. And these were 2-bed, 1-bath apartments. And so there were 7 people living in this hoarder's unit with roaches and mice. And so that was around 2019, I believe 2020, when I acquired that property. So I'm from Phoenix, and during that timeframe, I mean, 2020 to 2021, we had some tremendous growth, rent growth, appreciation growth. So that was such a blessing to invest in that time. And through that first investment, I sold it within about a year and a half and did a 1031 exchange from that investment into a retail facility. And that was kind of a really pivotal moment, was that first deal really bolstered me into another large asset and just kind of scaling, scaling from there.

Interesting. Well, talk to us about how it is that, that you go about sourcing off-market properties.

That was actually the first way that I got started into commercial real estate. I know for me, when I first learned about commercial investments and multifamily, and just the scale of economy was so key to me, it really sounded like a no-brainer that I could own 100 doors under one roof compared to one door under one roof being a single-family home. And just the scale of economy really made sense to me. And from there I thought I would raise capital and that would be the value that I would bring to an offering, right? So there's usually different partners with different responsibilities on a team to take down a deal. And so I thought I would raise capital. And after going about that for about 6 months, I probably raised a couple hundred thousand across a deal here, maybe 2 deals, and it just wasn't really that lucrative. And I wasn't taking, I wasn't meeting the mark that I wanted to meet. So I started sourcing deals. And the way that I started doing that was I went to LoopNet, CREXi. It's, and if you're not familiar with those, those are just, it's kind of like the MLS for commercial properties. And even if a deal wasn't what I liked in a particular market, so let's just say Oklahoma was a market I wanted to start investing in, I would go to Oklahoma and I would see a list of properties that were on the market to sell. And the broker that listed that property and their contact information was right listed with that property. And I thought, well, I'm going to write down all of the broker's information and I'm going to call all the brokers. And even if I don't like the deal that they have on LoopNet or CREXi, then I'm still going to call them. And ask them, hey, do you have anything else that's in this unit range at this price point and that's value-add? And that is how I went about that to first sourcing off-market properties. And it didn't work like that. It didn't work right away. The first acquisition did work probably after about 2 months of calling that list of brokers. And then from there, other deals came from that.

Mm-hmm.

After building relationships for about 6 months with some of these brokers, they brought opportunities that did work. And so that's really just how I got my foot in the door and started sourcing off-market opportunities.

Well, interesting. People do it different ways, but that is a good way to do that. LoopNet is going to take you to brokers who are probably in smaller firms rather than the large commercial firms who oftentimes do not want to even give new operators the time of day. So that's right. Yeah. So it's a good way to get in touch with brokers who are more willing to do that. And also, probably, I'm suspecting that you were probably finding properties in more tertiary areas and secondary markets than probably the primary markets. Is that correct?

You know, the first acquisitions, they were actually in primary markets. So The primary market in Oklahoma was Oklahoma City. And then in New Mexico, Albuquerque's the primary market there being the capital of the state. And so those first acquisitions did actually come from those primary markets. But yeah, I do agree with you. A lot of those, you're looking for opportunity. And so a lot of that opportunity is usually in tertiary markets that other people aren't investing in, right? Those emerging markets. And so that can be another opportunity there.

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. I'm sure none of this came easy. You make it sound easy, but it never really is. So talk about persistence.

Yeah, I, like you said, it's, it's never easy. And, you know, someone can work for 5 years and just show the results and people can look into that and think, wow, that just happened overnight. And it, it kind of reminds me of bamboo. You know, bamboo will, you can water it for 5 years and in 5 years it'll grow about 6 inches, but then the last 6 months of the 5 years it'll grow 40 feet. And so you ask, well, did it grow That last 6 months, 40 feet, or was it the watering for 5 years? And it was obviously the watering for 5 years. So for me, persistence, the first thing that really comes to mind is when I left my job, my W-2 job last year in 2022, I was in the process of selling my primary residence and that disposition was going to afford me the opportunity to walk away from my day job and support myself financially. I would probably make, let's say, $50,000, $60,000. And I left my day job. And then about 2 weeks before closing the property, the federal— the Fed started hiking interest rates.

Mm-hmm.

And so for me, I got kind of nervous thinking, oh, I just left my job. I'm selling this property. And so are we going to close? And then the buyer started asking for extensions. And so I got really nervous and, you know, just praying, God, you know, I know you want me to do this. So if this happens, praise your name. And if it doesn't, then praise your name. So really just wanting to rely on him through that moment. And through that time too, I was, you know, living off of credit cards and really just thinking, okay, this is what's going to happen. And so So every day that's in the back of my mind, even though I'm working on my real estate business and trying to source more opportunities and more offerings, knowing or thinking, is this going to happen? And it did end up happening when I probably had like $1,000 left in the bank account. And so that was a very intense moment for me, but it really gave me the resources and kind of the reassurance and the confidence that just to stay persistent and do everything you can to, uh, to get it done.

What led you to the decision to leave your W-2 job when there was so much at risk?

No, Alan, I, I love that you brought that up, and I actually have an interesting story behind that. And that was I had dinner with a couple of mine, so a husband and wife, and he had left his job earlier, maybe, uh, the year earlier to focus on real estate investing full-time. And I asked him, how did you do that? I want to do that. What do I need to do to really get that done? And he said, Caleb, I think you just need to do it. You have a couple rentals, you're on this path, you know the industry, so you know how to make money, so you can do it. And I believe you're just resourceful enough that you can figure it out. So just quit and then go forward from there. Because earlier I had the idea that I needed to have, let's say, $3,000, $5,000, my monthly expenses covered through income before leaving my job, and then I would be happy and secure. And at the time I did not. Let's say maybe I had $500 or $1,000 coming in and there was still a delta that was not accounted for. And he really said, just take the first step and do it. You know, I think you, I think you can figure it out. So that was really the moment where I thought, you know, I've been, I've been I've been saying this for 4 or 5 years that I'm gonna leave my W-2 job and I just need to do it. And so within 6 months of having that conversation, I left my job. And again, through that disposition, kind of everything just happened. And again, figuring it out, that's kind of the story behind that. Yeah.

Well, that certainly was a big step and took a lot of courage. I think it's easier to do it at your age though than—

Right.

Yeah.

It's a little different when you have kids and married.

And so yeah, definitely blessed to be single You had mentioned you had a mentor and you had had experience, so it wasn't like stepping out in the dark and not having any idea where it was that you were going with this. Still, it was a big and courageous step, still the same.

That's right.

A lot of people I talk with and interview tell me that the why is very important. So what is your why and how is it that that My why was starting off was my mom.

You know, I wanted to help her financially and I even have a check with how much I want to give to her annually written out. And it's posted on the wall right next to me so I can look at that every day. And, you know, the why has developed. And I think for me, I even had to understand and develop my why over time and ask myself, why is this my why? And there's It's an interesting process where if you ask yourself why, let's say if you want to buy a home, your primary residence, or if you want to achieve this goal, asking yourself why 5 to 7 times can really give you some clarity as to what is the root behind that why. And finding that out has really given me insight and perspective and make me actually understand, is this really a goal that I want to be pursuing? So right now I do want to experience life and travel more. And so that's also a big reason for wanting success and just helping others, being able to do more mission trips and still aiding my mom financially is a big why of mine. So there are multiple whys for me and that's kind of how I have figured that out over time.

Well, good process. And many people have told me how important that has been to their, their focus and their persistence. Well, underwriting is important. Tell us about your underwriting processes.

So it does go back to the, to the broker relations, Alan. And once, let's say you have an offering, and the information that you really need is a T12. So a trailing 12, which just shows the income and expenses of the asset over the last 12 months. And so that can kind of give you an idea of what the property is doing and kind of what you can project going forward. And that's not 100% the case all the time. Like the trailing 12 is not like, you can't replicate that over 12 years. And maybe there's some opportunity there where you can shave down on the expenses, but that's kind of getting into the weeds. And then you'll also need a rent roll, to show where, what the tenants are actually paying, what their balance is, how much they owe, and what the vacancy actually is today or the last month, however recent your rent roll is. And once you have that information, you need a spreadsheet. And for me, I've been gifted a spreadsheet, a couple spreadsheets, and I know there's a lot of resources out there. of people who have developed their own spreadsheet. I know Rob Beardsley has one and Michael Block has a great one. So once you plug in that information, for me at this stage, I've been underwriting for about 2 to 3 years now. And Allen, when I first started off, I underwrote every deal I could. You know, if I was focusing on B and C class assets that are value-add, 1970s vintage, there was more meat on the bones, you could Compared to an A-class that was built last year. But I would still, starting off, I would still underwrite that A-class property because I wanted the experience. And I've actually had to learn over time that that is not the best use of my time. And so I've gotten to the point where if I have my base template of the deals that I want to pursue, Let's say that's 50+ units, 1970s vintage or newer, value-add, B, C class neighborhood in a particular market. So if someone brings me a 20-unit in the market, I can just say, you know, it's not for me. I appreciate the opportunity. And so that will save me a lot of time. And let's say it does meet my initial criteria. And so I'll request those financials that I said earlier, the T-12 and rent roll. I'll plug the information into my spreadsheet. And again, that might take 2 hours. So we won't go into the weeds on that. But let's say I get the numbers and especially in this financial environment, you know, there's so much uncertainty. This being March of 2023, seller expectations are still, they want 2021 pricing or 2022 pricing and the market's just not there. And that's just what I'm seeing. And so a lot of times I see the returns that we're going to get at the seller's asking price or the whisper price, and we're just on different worlds. The numbers just don't even make sense. And so even if I come in 20% below their asking price, if the returns aren't there when I'm 20% below their asking price, I am respectfully just going to tell the broker, the returns are not just where our investors are, and the deal's just not going to work. And so before I invest more time into doing more studying of this little submarket of the property, you know, the large CapEx items that we're going to need to project to invest capital for, I'm going to save about 3 to 5 hours more of my time and just email the broker and say, this is not going to work for me. So that's currently today, that's where my underwriting process is. And I'm happy to go into more detail about that if you'd like.

Yeah, underwriting is certainly critical and, and to really do it and do it right, it certainly is time-consuming. Michael Blanc does in his program, I think he has, I don't know if it's a 10 or 15-minute offer, but I mean, it is essentially just looking at the net income and expenses there. And just from that, making a basic 10-minute offer certainly is never going to be his final and last offer. But it's a way for him to get back to the agent in a very short period of time and let them know whether or not this deal is going to work or not work. I was listening to— I can't even remember what it was, a podcast or something, and they were talking about the stages of recession. And one of the stages, like the stages of grief, is denial.

Mm-hmm.

And sellers going into a recession period are always in denial because who wants to look at lowering their prices? And so you're absolutely right. That's been my experience here the last couple of months is that sellers are looking to 2001, 2002 and expecting those prices. And it's just not going to happen. Cap rates are going to need to be about 2 points higher than interest rates. And sellers are just not ready to accept that at this point in time.

That's right.

But I still see properties closing. It amazes me. I don't know how they're doing it, but I think a lot of people are going to be in serious trouble in the next few months here.

I agree with you there. And I have had a couple people bring offerings to me where they, to get the deal done, they need to have hard money and at an 11% interest rate with a 15-month balloon, or they have some crazy bridge financing. And that makes me nervous for them. And at the same time, I say this with all the love in my heart, that it gives us great opportunities, right? For as, as buyers in the coming years. So I think that's something that we can look out for.

Yeah. I think there's going to be some good buying opportunities here in the next couple of months and probably into the next year, year and a half as prospective sellers really start feeling the pain. Caleb, tell us how it is that what you have to offer and how it is we can get in touch with Yeah.

So what I have to offer is I do have a podcast called From Trial to Triumph, and it's where I interview thought leaders who have gone through tremendous trials and they have come out triumphant. And it's a free resource. And so we have conversations from marketing, how to better market your business and get more clients, to how to get more deals done. So that is a value that I could add to the listeners. And if you could just go check me out there, we're on over 15 podcast Platforms, and, or you could go to redseacapitalgroup.com, and that's Red Sea like Moses is parting the Red Sea, capitalgroup.com, and you can find more information on what we do there as well.

Well, wonderful. Caleb, it's been a pleasure having you here today. Delighted to have the chance to talk with you and pick your brains here. Thanks for being with us.

Alan, I appreciate the opportunity.

Thank you. Thank you.

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