He Started Working in Apartments at Age 12 - Earl Cline! || Ginny Bolling

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Thank you. This is Ginny Bowling with Pivotal Real Estate Investments and I'm here with Earl Klein and I am going to interview him to talk about not just multifamily this time. He has a very diversified background and so why don't you tell us about yourself?

Great. Yeah. So I'm a lifer when it comes to real estate investing. I always tell people I started when I was about 12 years old. My dad was a builder and I used to go to work in the back of his truck and pick up lumber around the houses. But graduated from college and did an internship down in California with a fairly large property management company. They happened to be an RTC contractor at the time, which meant that every single week I was introduced to a new property, sometimes very large four or five hundred unit properties that we took over. It gave me a really, really solid background in multifamily. Worked for one of the largest developers in the country where I ran one of their renovation teams on large apartment complexes. I at one time was the vice president of a publicly traded REIT. They managed over 80,000 apartment units and I ran the whole western United States for them. So very diverse background in multifamily. I have been doing my own real estate investing for going on 20 years now. And we're here to seminar. I met Ginny at dinner a couple nights ago and she says, man, you've got an interesting background. I want to, I want to talk to you a little bit about, about what you do. So.

Right. So. And go back for a moment. RTC Resolution Trust.

Yeah, correct. I'm old enough that a lot of people don't remember the, about the late 80s, the federal government changed the tax code. It was the 86 Tax Reform act and prior to that apartments traded on their cash flow value plus they added in a tax value. You're basically buying tax shelters through real estate with accelerated depreciation and they outlawed that. What happened to the, to the apartment market is all of this disappeared. And so stuff that people would pay 25,000 a unit for back then became worth 18,000 overnight. And people couldn't, even if you were cash flowing, which most of them weren't, they weren't designed to cash flow. They were designed for tax losses. But even if you were cash flowing, you end up losing the, you know, 10, 15% of the value. And you couldn't, you couldn't refinance them when your loans came due in a couple of years. And So I think 80, probably 80% of the multifamily in the country went back to the banks. The RTC was the federal government agency that took over the failed savings and loans and tried to dispose of all those assets. And so, so if you wanted to learn multifamily, you couldn't have started in a better time in the world, in the history, because so many assets were going back to the banks and being repositioned and sold again. And I was working for one of the contractors that was doing that stuff.

I wish I had thought of that. That's when I was an appraiser. The RTC was my client. A lot of times, yes, had I thought about it, been a little more advanced thinking, I would have been buying if I could have. But anyway, so come fast forward to today, and we've been in a very unusual period with COVID There's a lot of people also now with the inflation, worried about making a move to invest. And as we've discussed, the smaller investor now has opportunity to get involved because of syndications and other crowdfunding type models that allow for people to participate more. What's been your experience over the COVID period? Have you all been acquiring?

My son and I were in Albuquerque. We had 50 units under contract. And because I'm from Utah, I was watching the Jazz game on television in the hotel, ready to go walk my units in the morning. And that was the night that the Jazz shut the NBA down. We're sitting there watching for the game to start. And it didn't start. It didn't start. And finally they made an announcement. So and so has got Covid. And the next day Chris and I were out, went to eat lunch and it was like, it was like I was in a third world country. You know, everywhere I went, they were hauling toilet paper out in massive carts and people were stocking up on food. And I thought, the world is changing right now in front of my eyes. And I, I Walked the property, but I came home. I drove home that time through Monument Valley and took a little couple day vacation. So I had some time to think about it. And my conclusion was I'm not going to go sign on $5 million worth of loans when six weeks from now my tenants, probably none of them will have money to pay the rent. So we shut those down. Lucky to get my earnest money back and everything. But, and, and we, we looked at a few deals, but I didn't pull the trigger on anything. It was about eight months later that I, that I started pulling the trigger on some small deals again and again, just not sure. I mean we had a year and a half where tenants didn't have to pay rent. I mean it was unbelievable.

That's what gave me pause too.

Yeah, we were really lucky on the deals that we had a, we were kicking a lot of them out to renovate their unit at the time. And the markets that we were in, we, we generally, I shouldn't say this, but we generally try to avoid blue states and invest in red states that are a little more landlord friendly when we go in. And I have to say that tongue in cheek because my favorite market right now is Albuquerque. And honestly it's more of a blue state than it is a red state. And they just fought rent control. Just last week they, the legislature was trying to push rent control again, which would just crucify that market.

And so we have the same situation in Orange County, Florida too. We have one county that's trying it, it's going to the electorate two weeks and now that would only be valid for one year. But, but the message it sends just really turns people away. All investors pretty much. But as far as after that, when you did start pulling the trigger, did you also experience a great result though with your performance?

It's incredible what we've seen. And I, because one of my degrees is in economics, I watch the market really, really carefully. And I have been telling people for 15 years, you know, we've got high inflation coming, right? We, what the government's doing, it's going to create high inflation. And we've been lucky. It wasn't really, really. We had a little recession in 08 and it kind of took the edge off of that inflation bug and then it started to creep back in again. But it's just been, it's been incredible the last little while we bought and there's only a few markets in the country anymore that I can find stuff that really makes sense economically. But some of our first deals we bought in, in Albuquerque. The, the average price per unit of the deals that we bought a couple years ago was in the 45 to 50,000 a unit range. And the rents were over 650amonth. If you know anything, you know, the simple rule of thumb that I use is a market that makes sense has to meet the 1% rule. And so if you're buying a house, that means you spend 100,000 for the house. You need $1,000 a month in rent in order to make that work. Most people don't equate that to multifamily, but I do. And so I'm looking at what is my cost per unit and what is my rent per unit. And, and so we, we're. When, when I can find something that meets the 1% rule, I am excited to, you know, in various markets to do that. And we've done fairly well in Albuquerque. The, the stuff that we bought two years ago for 45, maybe 50. But anyway, somewhere in that range, rents of 650amonth. Today they're over a thousand. And we are, I think they're worth 150,000 a unit. The NOI cash flow model says they're worth 150,000 a Unit. The problem is that we bought a bunch of four plexes as a pool and we can sell them off separately. But I'm not sure if I can get the comps for a fourplex because fourplexes don't necessarily sell using cash flow. They, you have to get them to appraise as a, you know, like a single family, a conventional type appraisal. And so we know they're worth 125,000 a unit. I think they're worth 150 based on, based on the income and expenses that we've been able to achieve, but just incredible growth.

That's great.

That is.

And it's reported by all these people here in the conferences that we've been attending. I've been to several this month and I wish I had been investing through Covid. It's just really been the reverse of what you would expect.

We scared the heck out of us. We pulled back for. It was lucky, lucky enough to have enough saved up to. I, I had a brand new gold wing on order. My wife said do me a favor, put that off for a little bit. And we lived on the, we lived on the goldwing money. I had more than that too, but I, but I had to put my gold wing off for a little bit of.

Did you get it now?

I Haven't got it yet. So I've got to sell one more project to and which we're doing here in just a couple of weeks. I have three other bikes in my garage, so don't feel too bad for me.

So how many projects have you done on your own in the 20 years that you've been investing? Do you have any idea?

Yeah, it took me a little while to, to. I, I think. I'm hate to say this, but I think I'm an expert in analyzing and evaluating and all that kind of stuff because that's where I came up through the. In the multifamily industry. When you work for a big company like I did, they purposely separate the raising money side from the operations side. And because. And so the operation side, I can run it with my eyes closed. But it took me a little while to figure out the raising money side. And the truth is, we've been the most successful the last little while is because I have a team that does all that for me. I don't even have to. I get involved in it, but I've just put my team out there and said, hey, you guys take care of it. I'll find the projects and monitor and make sure that they. Make sure that they produce what you guys are promising investors that we're going to deliver.

And your team seems well rounded.

Oh yeah, I've got an absolutely great team and this is the third or fourth one I put together. But over the history of my career, it's been over 80,000 units that I actually been involved. And people look at that, they're like, that's not even possible. But when you're managing huge projects and I'm not going to the project every day, I'm just hiring a team of people that on each and every project, they're all their own little business and they have their own little marketing department and their leasing department, maintenance department and stuff like that. And my job was just to keep them from killing each other. I always told people I was the highest paid babysitter in the world. And unfortunately, that's what operations is.

Well, so what kind of a return are you looking for for your go, no go decision? What are you looking for?

So because they're value placed, we're typically trying to sell our projects in 18 months or some of the bigger ones. They take a couple years to be able to completely turn a project around. But we're trying to get. I don't hold them as long as most people. What that means is that while you're Renovating them. You can't afford to pay a huge cash on cash. We're typically, we're increasing that a little bit because some of the stuff were. Because of the. What we think is going to happen in the future. We are starting to buy stuff that's not as much value play, but that has a little stronger cash flow when we buy them. So that we, if we do have a downturn that we can, we could sustain ourselves through that. So. But we're typically looking at 5 to 8, cash on cash. I won't look at a deal if I can't get 15 to 18 for my limited partners. Most of my deals are the deal itself is going to carry 40 to 50% return annualized, and then you're going to split those up over the waterfall, various percentages to this and that. But we've been very, very successful. And I have to be careful. My attorney's gonna yell at me for sharing this, but this is for educational purposes, not to get you guys. But our last deal, we just sold one about six months ago. It was a small project we did up in eastern Idaho. My limited partners got 42% return. We, we projected 18, but they got 42. The general partners that put money in got between 120 and 100, 180% return on their money. That was because they were able to double dip. They got the gp, which they didn't pay for, plus the LP that they put their money in. When you add those both together based on the money they put in, I was incredibly thrilled.

What was your holding period on that?

It's about 18 months.

18 months.

So we got it, we got the money back to them very, very quickly. And people ask me all the time, why do you try to sell these so quickly? And the answer is really simple. If in year one my return is negative because I've spent the money, but I haven't raised the rent, so the value hasn't gone up in year two or the end of year one. I've raised the rent sometimes 50, 60%. Right. The value of the project almost doubles from year one to year two. But what happens is I can't double it again in year two to three or three to four. I'm getting just a little cost of living. So the value is technically going up a little bit. But your rate of return looks like this or the value and then it tapers off, but your rate of return goes up. And in year two, it starts to come down because you're taking what you did in year One plus year two and dividing it by two. And so it takes this, all that you made in year one and cuts it down and so your rate of return tapers off. And people I go to seminars with, multifamily gurus, they're all talking about five to seven year old. And I'm thinking, you guys are out of your mind. Because if I was promising, if I was, if you, if I was, if you were one of my limited partners and I showed you that chart, when would you want me to sell it? Right? It's when the routine, when the return is the highest it can be. And so we try to, we try to sell those. And I equate it to this. You could go and somebody will give you a 6 to 8% cash on cash and you can, you can enjoy that for five or six years and then you sell it and you end up with a 50 or 100% return on your money or whatever. Or you can do it in a project and you sell it after year one and you get 100% on your money. You take that money and you throw it back into the next project. In year two, you get another hundred percent return on your money and so on and so forth. Your return is going to be exponentially higher if you're turning your projects over.

That's that velocity of money.

Yes, yes. So that's been our philosophy for quite some time. It may change a little bit. The market is changing, interest rates are causing cap rates to go much, much higher. And so that emphasis on pure value play may have to come back around to more of a buy and hold market. But buy and hold does make sense. When cap rates are so low and interest rates are going higher, there literally is no cash flow leftovers. You borrow money at, you know, at 6% and you invest it at a 4% cap rate or even a 5% cap rate. You're losing money on a cash, on cash basis. And so we really like the value play market. That's really where we go.

One more thing I do want to ask you, you being the expert on probably the operations and turnaround when. Well, for your typical rehab, if you've got say a 1970s vintage multi family, 200 units already well occupied into the plus 95 percentile, how do you, what do you do? Do you try to get whatever units you're going to renovate, gear towards all or part in two years or since you're doing the short hold or what do you do? Do you vacate as much as you can, then.

It'S Most of the time it depends on how big the project is. Right. I have no problem asking people to vacate. One of the things we look for when we buy a project like that, if we know we're going to vacate it. I'm looking at the leases and everybody says, oh my gosh, we got a whole bunch of one year leases. Well, I used to show up years ago with a pocket full of hundred dollar bills in my pocket on Sunday afternoon and I'm like, look, we want to get this whole 22 unit building. You know, it was a 500 unit project, but I'm doing it building by building.

Right? Okay.

And I'd show up and the one guy's like, yeah. The manager asked me five times if I'll, if I'll move and I'm not moving. You can't make me. And I get a little smile on my face and I'm like, okay, well how much is it going to cost you for a truck and how much is it gonna. And what's your security deposit? Because I'm going to give it 100% to you right now. And there was a point where his eyes would get about this big and he'd go, he'd go, okay, all right, you've got me. And I didn't have to do it with all of them. But there's a way, even if they've got one year leases, there's a way that you can encourage them.

Cash for keys is what we call it in Florida, right? Yeah, yeah, yeah. So, well, that's good. And so when you're, say you're doing a full rehab, what's your typical, what kind of numbers are you looking at? Are you at the 77,000? 10, 15, 20? If you're doing even fixtures and electric and say no electric panels. But.

My typical numbers I can do, I can do paint, carpet, you know, carpets and floors of whatever we put in cabinets, countertops and bathrooms. And there it used to be somewhere in the 15 to 18,000 a unit, it's probably closer to 20 today. And in some cases it's even a little higher. The costs have really gone up in the last couple of years. If you're not doing cabinets, you're probably in the 12, 12,000 a unit range. And you can still, you can still put granite countertops in them and paint the cabinets for, you know, in that range, that's probably 15 now where it used to be 12 or whatever.

Yeah, yeah, it's gone up for sure. Well, I could talk to you for a long time for sure. We have a lot of people starting to walk by and the noise is tuning up but thank you so much. I really appreciate you sharing all that knowledge with us and I wish you well.

Well thank you so much. It was a lot of fun. We we had dinner a couple nights ago together. All group of us went out. The dinner was wonderful. We, we all had a good time networking and getting to know what everybody else is doing around here and and it's really so I appreciate you doing some business sending the offer to become a chair for a few minutes.

Thanks again.

Thanks very much.

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