AIPIS 234 - Client Case Study, Avoiding Bad Investments By Following Jason's 10 Commandments with Sean

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It's my pleasure to welcome a client case study. I love it when we do case studies and actually hear the good, the bad and the ugly from our clients. Today will be one of those. Many of you have said you really enjoy the case study stories. Today we have an actor from New York City and that is Sean Carroll. He and his wife Tanya live in New York City and Tanya was at the Meet the Masters event with her mother. Shawn couldn't make it to the last one, but it's great to have him here to talk about his experience. We're going to talk about property management issues, how to not die by the death of a thousand cuts, which is what can happen if you don't keep an eye on things and just how he got interested in real estate and all the rest. Sean, welcome. How are you doing?

Great. Jason coming to you from sunny, tax free Florida for the next couple months here as I have an acting contract in Florida and every time I spend a few days here, I just hear your voice in my head, you know, thinking about how much taxes I could be saving if I moved here.

Yeah, yeah. Now, is it necessary for your career or Tanya's career to live in New York City or why do you live there?

You know, this is a daily discussion that she and I have.

Daily. Wow.

You know, Well, I love New York City. We both love New York City. We love the vibe of it and the energy of it. And as an actor, you know, there's a lot of trouble training opportunities and casting for theater. I mean, it's the epicenter for theater definitely in the United States. But what I found is it's a lot of fun for me too to go out of town and book jobs in regional professional theaters across the country. So we're talking about it. We may do a hybrid approach where we start spending more time in places like Florida and maybe eventually set up shop here. And sometimes I think it would be cheaper to fly back and forth between Florida and New York than it would be to rent in New York City.

And Pay the tax bill in New York City? Absolutely, yeah. That's for sure. Of actor, are you?

My focus is primarily musical theater. My college degree is in voice performance. So I've been a singer, you know, for going on 30 years now. Always been interested in theater. I went into teaching for a while and then got into real estate. We'll talk more about that. But I really love the theater. I love the live aspect of it. I love the things I learn about myself through the process. And so I typically will get booked for a run of about 30 to 40 shows at a regional theater near you, and we'll rehearse for a month, put the show up for 30 performances, and all that, while I continue to aud, you know, looking for the next opportunity. If that opportunity is in New York City, great. And if it's not, I go where the work is because I, you know, I'm passionate about it. And one of the reasons I like real estate is. Does provide an additional income source for me to be able to do that and not necessarily have to stay in one place, you know, to earn that.

Right. Good stuff. And what does Tanya do?

Tanya works in human resources. She works for a media company in New York, and she's had a few careers as well. But, you know, I'm really proud of the work that she's done over. We moved to New York City, she changed careers. Wasn't quite sure what was, you know, what was gonna happen. We kind of just decided, let's try this move. And she's built quite a nice career for herself as well. But I think, like me, she's always been interested in this, you know, the wealth creation, the passive. More passive income approaches diversifying. I think she's craving a little more location independence as well. So it's weighing that income stream that she has with her. With her W2 job is also helping us qualify for mortgages. So that's. That helps.

Yeah. Yeah. Well, keep that W2 job to get all those mortgages. You know, it's pretty handy for that reason. So keep it for while at least. So what got you interested in income? Property. I mean, you've alluded to it, but I just want to have you share for the listeners, Sean, your evolution. And was it you first or your wife first or kind of both of you together that got interested in this topic?

Yeah. So how it started was when I was a school teacher and I was directing a choir in a public school in New Jersey. I had a friend of mine who was also a public school teacher, and he Was a realtor part time. And this was right around the. When the real estate boom was crazy hot, like 2003, 2004. And he was selling a couple houses in the summer, and he said, hey, you should get your license. So I did, and I made a sale right away and thought I was hot stuff. And I really just. I loved everything about real estate. I loved the wealth creation component. I love looking at houses. I love seeing what I could do with houses. And I certainly loved the money I could make at the time. Actually, to back up even further, when I was 17 years old, while I was in high school, I purchased with my dad's credit card. Unbeknownst to him, I purchased the Carlton Sheets. No money down.

Course, a lot of people bought that.

And I remember reading about this thinking, like, I don't know, I mean, a lot of those techniques may not work today, but at the time, I remember reading just his philosophy and going, this makes a lot of sense, you know, this idea of having a tenant pay down a mortgage and build your wealth. So that's where the seed was planted. I got into sales in 2004 and started buying some speculative investments. Bought some properties here in Florida based on, well, they'll go up. And of course, they did go up, until they didn't.

Right.

Well, we got crushed.

Yeah, you were in that crazy. I mean, the Florida market, and we wouldn't do it back in that point, remember, I started doing the nationwide investing thing and teaching it. I was just doing it at the same time I was teaching it, you know, to my clients. I mean, obviously I had a long background in real estate, so I had a long history as an investor before that, But I wasn't doing it nationwide. And I remember back in 2004 thinking that these areas of Florida where all of the speculation and the massive amount of construction was going on, that was just a bubble. I could just see it now. We did do a little business in the panhandle, and I still own those properties there, actually, in the panhandle of Florida. And, you know, we helped a lot of clients invest in those much more conservative areas like Pensacola. You know, that. That wasn't part of the nuttiness that was going on. Yeah, I just knew that had to be just crazy. I mean, the stories just so the listeners have some context. And Sean, feel free to add to this. During the boom time were that like, contractors were signing people up and saying, look, I'll build a house for you. The people were buying the properties. They never went to the areas they Never saw them. There was really like no employment center in a lot of these areas. And then the contractors would take the money and walk off the job because they would get a more lucrative offer to build another house. That's how nutty it was. And you know, the same thing happened in another area. You know, a lot of times the best decisions you make are the things you don't do. Another area, I'll tell you that we did not do was the oil rich areas up in North Dakota. Exactly the same thing was going on where people were like they were building so fast during that boom time. And that was later than the real estate boom. You know, that was after that. Those weren't at the same time necessarily. The contractors would just walk off the job. Like people would literally go to construction sites and say, look, if you come over and work on this property, I'll pay you double. I mean, that's, that's how hard it was. So there were all these like unfinished properties and it was just a mess. Now, I don't know that that's your story at all, but I just wanted to.

It was, you know, the, the sentiment was the same about like, I couldn't. It was just that frenzy is the best way I can describe it. That fear of missing out, that frenzy of fomo.

Fomo.

Yeah. And so what happened, you know, basically our story was that we, we had a couple of condos and I made money on the first two. Oh, I know, listen, listen. You know, when we found you and your podcast, it was like, okay, this is what we should have done the first time. It's like the properties make sense the day you buy them versus on what I think I might make, you know, if I hold on to them. And so we made a couple hundred thousand dollars and then I bought a property site unseen in Daytona Beach Flor for $500,000. Jason. We closed on it October 1, 2005. And my thinking, along with everybody else's that I was partnering with at the time was like, oh, well, once we see signs that the market's cooling off, we can start unloading some of these assets. And of course we never had a cool off period. It just crashed. And so I couldn't sell. We ended up, we had to restructure multi six figures in debt. And so we couldn't do anything with real estate until about 2013 was when all of that finally cleared for us and we paid back hundreds of thousands of dollars.

Right, right. And by the way, folks, the next time there will be another cycle. It probably Won't be this severe because this was a one in 70 years type of cycle that we had. The Great Recession, right. Just the second worst thing after the Great Depression in, starting in 1929. But there will be cycles and you know, there may be a time again when millions of people make a decision to walk away and just do a strategic default. And you know, the one thing looking back on the Great Recession, I look back and I saw the people that, you know, made the decision to walk away, the people that did loan mods and workouts and that kind of stuff. I think the right decision, kind of hearing all the stories that I've heard from people and interviewing all these, you know, strategic default advisors that I interviewed during the Great Recession, the people that fared best, if they did it right, it's obviously best to get a loan modification. And you know, millions of people did that too. But the people that fared best were the ones that did it early, walked early because the credit contraction was so big that nobody could get credit. It didn't matter how good your score was, you know, and just let that clear and then by the time the market starts recovering, your credit will be clean and you know, you can do it again. Right.

So that's pretty much our story. I mean, we, you know, we had a lot of credit card debt as well. I was using at the time, I was using because these properties didn't cash flow. Of course I was, you know, and the tenants stopped paying. I was using cash advance credit cards to pay the mortgage. And it just got out of control. I mean it was this, this was, and you know, a lot of this is what has made me such a, I think a savvy investor now is like that pain, like that tuition. I will never forget that feeling. And we were able, you know, we had to, we had to take our medicine. We finished all the payoffs and our credit has recovered and we've been able to buy property again. And you know, but I'm not going to say I won't make any more mistakes, but I tell you, I won't make those mistakes.

Right, exactly. Exactly. So for all of you listening who might be in the world of cryptocurrencies and, and, and you've refinanced your properties to buy Bitcoin or whatever or Ethereum.

Happening, refine their houses to buy Bitcoin.

Oh my God. Yeah. And they're getting credit card advances to buy it. They're buying Bitcoin and other cryptos on credit cards. And this is a bubble. I'M telling you, folks, you know, I don't. You know, it depends where you get in, where you get out, or where you're pushed out. But history repeats itself. It just goes by a different name each time, doesn't it? Yeah.

Yeah. So that's. I mean, I never lost my passion for real estate. I did build up a successful sales business for several years during a recession. What. What helped us pay off a lot of that debt was I got really good at negotiating short sales.

Right, and you were a realtor for a time, right, in New Jersey?

Yes, from 2004 till 2011, when we moved to the city. And I was one of the top agents in my area. I was a ReMax agent, and where I specialized was finding people who were in trouble and helping them. And I think I was able to relate to them in a way that a lot of agents weren't, because it was very fresh in my mind where they were. New Jersey, of course, wasn't as bad as Florida in terms of the speculation, but, you know, people still lost money on their homes, and they weren't putting anything down. So I was selling a lot of properties to people who had employments that just didn't make any kind of down payment. So even a 10% adjustment in the price, they were in a jam, you know, and then their mortgages were adjusting. So I was helping those people short sale and sell, and grateful that I learned how to do that, because that's really the only thing that enabled us to pay off a lot of the debt that we had through our restructuring. You know, I was selling a lot of property and. Yeah, yeah. And then in 2013, we got back in the game and. And bought our first rental property through your network.

So you discovered my podcast. When did you start listening to it?

Late 2013. I found you were interviewed on someone else's podcast. It was a flipper, I believe. And you were talking about the benefits of buy and hold. And it was the first time I had heard somebody say the sentence, make sure that the property makes sense the day you buy it. I had never heard it described that way before. And so my wife and I were drawn to you because we liked the idea of putting money down, qualifying, making sure we can cover the mortgage, you know, and have reserves. Like, you were talking a language that was very appealing based on what we had gone through before, because my wife was very hesitant to get back into investing because, well, we did it pretty stupidly before, to be honest. And so she said, I like this guy. You know, this sounds Reasonable. This makes sense. And so we listened for about a year and then we bought our first property in 2015. We bought two within the first couple of months and we've had some challenges with those, but we'll get into that.

Yeah, yeah, we're going to talk about, we're going to talk about the good, the bad and the ugly here. The first thing I want to say is, yeah, you know, obviously my approach is very conservative. I mean, listen, I've done the speculative thing. I did it for many years. I'm just older now and I just don't want to have to watch things as closely. I don't want to fill my mental energy with trading assets. I just want to keep them and have them give me yield. If you can just get to the point where you're producing X amount of cash flow, everything else is gravy. Right. You know, that's, that's it. And the other thing is that, you know, these properties, they have what I like to call self liquidating debt. The tenant pays off the loan, they pay for the loan every month and then inflation induced debt destruction comes along and gives you a huge bonus as well. Even if inflation is moderate, you know, on a million dollars worth of debt, you're getting a free $20,000 per year. If we only have 2% inflation and you know, it's almost always more than 2% in real terms, but you know, that's just by the official rate. So it's pretty great. Did you come to an event, did you come to any of our seminars or conferences back then or was like Meet the Masters the first for your wife or what?

We did not attend anything before we purchased. We. I got in touch, I think I submitted an inquiry on your website and got conn Sarah. And what actually happened was my wife and I flew to one of the markets that you were recommending in Birmingham at the time and we, we met the provider there and drove the neighborhoods, went and looked at some rehabs because I told myself I, at least initially I was never going to buy a property site on scene again. Of course that's changed now but so we flew down there and I think.

The change is never buy a speculative property site on scene. You know, you can buy good conservative properties site on unseen all day long. I mean, you know, absolutely the vast majority of our clients never look at the properties. And yeah, I still, after I don't know what 12 years have properties I've never seen and they're fine. But yeah, if you're buying in a speculative Frenzy and you're buying something that doesn't make sense. Yeah, you probably better go see it to see what the big selling points are. Or maybe down there.

Yeah, we've since gone to. So I was at Meet the Masters last year was the first event of yours. And then my wife and I came to your Oklahoma City JHU Live and Property tour. And that was fun. We're definitely getting more connected to the network and it's actually been a big help, you know, meeting some of your other clients just to remind us that, you know, we're not on an island. There's other people doing this. But yeah, we went and we visited Birmingham and then we actually, my mom, my wife and I all went to Memphis together because my mom was looking to get into some property. And so we met some providers there. And now once we've met the providers, I did the same in Jackson, Mississippi. My personal philosophy, and this works for us, it doesn't have to be. It may change in the future is we like to at least go to the market once, and then once we've been there, we don't need to go again if we're gonna buy something else. Like that's, that's kind of been our model so far. Once I trust the provider and if somebody says, oh, this is in this, this zip code, I go, oh, yeah, I remember that one. And I can just pull the trigger on it.

Sure, sure. And. And you know, if you don't, if someone listening doesn't want to do that, one shortcut to that is just come to one of our live events, our conferences or seminars, and many times we have have the local market specialist come to that event. So even if you're not in the market, at least you get to meet the team. That'll sort of solidify a relationship. So I would do that for sure, if you can.

Especially the property management team. I had no idea, Jason, like, how important that was going to be.

Totally.

So we got into it.

Okay, so let's talk about that. I know that you have definitely had some problems. You know, folks, I gotta tell you, consider self management. Consider self management. But even if you don't self manage, there are a few things you can do. So you recently, you gotta watch this stuff. You gotta be an astute investor, okay? And you don't just take people's word for it on appliances, repair items, whatever. I know you have an example like this, Sean, I got an example to share too. But you said that a property manager recently told you something would cost a thousand bucks and you got it for 450. And what did you do? What happened? Tell us about that.

So it's happened twice in the last three weeks, Jason, with the same property.

We're doing a timely show here.

Yeah, yeah. So the first one just. I'll run through them quickly. The first one was, you know, it was a repair item. And I've actually switched off all of the what. What they call the not to exceed limits, where they can just charge me without asking me. The only ones I've kept on is emergency. Like if the heat goes out, you know, and it's freezing. Like, I don't want the tenant freezing for 24 hours while I check my email or whatever.

And you don't want a pipe to break. E either. That's.

No, absolutely.

Right. So let me. Let me just address that. Let me tee that up for the listeners that. So I haven't said this in a while, listeners. So I'm glad, Sean, that you mentioned that. I've said it many times, but not lately. What have you done for me lately? Okay, so I like that song. So look, in the property management agreement, you will generally have two types of expense clauses. One. One is a not to exceed amount for repairs where the property manager gets to make the judgment call. They get to make the decision without you being involved. And this could be written one of two ways. So be careful with this. It could be written on a per incident basis or a per month basis. Okay? So that's the first thing. Now, some of my property managers that I've had some difficulties with, from time to time, I will tighten the reins on them and I will say it's a hundred dollars per month discretionary or 200 per month discretionary, not per incident, per month. Okay? So I know that the biggest thing they can take out of my check every month is a hundred or two hundred bucks, okay? And if they do, you demand a receipt from the actual vendor. Now, many of you have heard about the company that I'm suing in Kansas City, Missouri, Results Property Management. And I have been in litigation with these guys for a long time, and I have found many other victims as well. They basically set up this company that I've accused them, okay? And of course they have their defense, which is, in my opinion, ridiculous. Okay? But I've accused them of creating this company called Metro Wide Billing that would just spit out invoices. And I'm like, what is Metro Wide Billing? Okay. You know that it has no employees, it has no staff, it has no nothing, Right? It's a printer. You know, like the invoice. The point I'm making is the invoice has to be from the actual vendor that swung the hammer or the store that sold the refrigerator. They don't get to just print an invoice on their own letterhead or, you know, like this sort of what I call a shell company that says, this is the charge, okay? You know, someone actually did that work, or some store actually sold that widget that was used as a part. So you got to get an invoice from the actual vendor, not from the manager. That means when your property manager emails you and says, hey, we need to do this, we need to replace the air conditioning component, and it's $700, you say, well, $700 is an expensive repair. So I want to see at least two quotes, maybe three from actual vendors. And you're going to get a document, okay? You're. You're going to demand one that has the name of the company at the top, the phone number. You're going to go look online and check out their website and, you know, just know what's going on here. Now, look, folks, I know I'm sounding maybe overly suspicious here. Once you have a relationship and you verify that, you know, this is a legitimate property manager, and many of them are good. See, you don't hear me talk about the good ones. I only talk about the bad ones, okay? And that's, you know, we all have a bias toward negativity, I think, okay? So we're talking about problems and exceptions. There are good ones out there. So it's per incident or per month. There's a limit, and you can put it to zero if you want, okay? And just say, you know, for every repair, for any money you're going to spend, you got to email me and get my approval in advance, okay? But the duty on you, the owner, is you have to respond quickly. You got to be available. Now, look, I've been to 81 countries. Everywhere I go on planet Earth, I have access to email, text, voxer, the best thing ever. And so I'm always connected. So, you know, you just got to be connected and pay attention and respond quickly if you're gonna make it zero. Okay? Now, for emergencies, that's the other kind of discourse, discretion. The property manager does need to have discretion if there is water leaking, for example, so that they can act immediately and protect your interests. Right. Go ahead, Sean. I just want people to understand.

Yeah, absolutely. And that's a great distinction. And, yeah, I've been dealing with that as well with asking for itemized receipts from the vendor. And you know, I just question everything. And so in this particular case, there were two separate repairs, both of them, you know, to spare you the details, one was air conditioning and one was plumbing and both were close to $1,000. And I had my not to exceed switched off because these were not emergencies. You know, these were repairs. The tenants had called in and reported an issue. And of course, you know, I get notified. And I've had multiple instances with this manager where I didn't do this before. But I went back after the fact and questioned it. And they actually gave me a credit and investigated it and stopped a relationship with one of their vendors because I spoke up because they people, if it's a good company, like they'll want to help you out. The customer service is there. And that's what I found with these guys. But in this case, the repair. I got a quote for $968 to repair this leak in my heat pump. And unbeknownst to them, I used to work in the H vac business when I was in high school.

They didn't know who they were talking to.

Right. And I said, listen, this just seems. This is not five hours of labor. And I see parts. It was a parts line item with no itemization. And so I questioned them on it and they came back with something that was not really a great answer. And I did not approve the work order. I said, I'm having a second opinion. I have a handyman on standby, which helps. I do recommend if you are going to do this, especially if you're moving towards self management. I mean, relationships with somebody local is very helpful.

Yep.

And luckily I have one. And I said, hey, can you take a look at this? And sure enough, I got a quote for the same job for half of what I was being charged. And so they're going to go take care of it. And the tenant's happy. I'm happy. And on we go.

This will be continued on the next episode.

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