AIPIS 62 - Using Your Real Estate Leverage With Joe Fairless

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Hey, it's my pleasure. Welcome Joe Fairless to the show. He is an investor who has an amazing story about how he moved from four single family homes to doing his first big apartment deal which is 168 units. And I think you'll be very anxious to hear this. And he's also got some other deals going which are very exciting as well and he's coming to us from New York City today. Hey Joe, welcome. How are you?

Hi Jason. I'm doing well, thanks for having me.

It's good to have you on the show. And by the way, you do a great job on your show which is about the best real estate investing advice ever. Let's hear your story. I mean it's really a pretty amazing story because it's, you just took a literally, quite literally, Joe, a leap. You know, you didn't do what most people do, which is this sort of iterative approach where you have a few single family homes, then you have a couple dozen and do your first apartment deal and you know you took a pretty big, a pretty big jump, right?

Yeah, yeah. And you know, that's how I approach things. I found that I might not do the take the typical path that you know, that others have done with my whole approach. With anything really, and I'll get specific in a second but with anything is to find out who's successfully done what I've done, model after their success, have people along the way who are advising me who have successfully done and are successfully doing what I want to do and then simply follow that same path and get the same results or similar results. So what my background is I was in advertising, working advertising agency in New York City. I was the youngest vice president of a New York City ad agency. I was 29 years old and had climbed the ladder. The only other place for me to go was president and I didn't want to do that. It wasn't fulfilling anymore. While I was in advertising, I invested in single family homes and I had four homes in Dallas, Fort Worth. I'm From Fort Worth, Texas, was born in Flint, Michigan from Fort Worth and now live in New York City. Kind of did a little triangle there.

Yeah, that is quite a. That's quite a mix.

Yeah, very, very much so. Big old mix.

And now. So I was in advertising and I wasn't feeling what I was doing anymore. Wasn't growing, wasn't learning. And I saw an opportunity to learn commercial real estate, specifically multifamily. I reached out to some people who were successfully doing it, learn from them. And then I decided to leave my job. Well, when I left my job, I realized that and I knew this before I left. But one of the disadvantages, slash secret advantage, is that I couldn't get approved for a mortgage. So that necessitated me to bring in investors and raise money for my first deal. So that's how I made the transition from advertising to single family to then, you know, looking at a large multifamily.

Okay, so you raised money for which deal? The first single family home deal?

Oh, no, I raised money for the multifamily, the single family homes I bought with my own money.

In different ways. The first one I put 20% down of my own money. The second one I put 10% down with a home path loan. Which home path is going away? I read recently. The third I bought all cash, but then I did a cash out refinance and appraised for more than what I purchased it for and essentially got all my money back out. And then the fourth one I bought with a line of credit, personal line of credit. And then for the multifamily, I started looking at different.

Properties. I thought conservatively I could raise $100,000 and perhaps aggressively I could raise up to 300,000. So I was looking at around the $1 million price point and I was going to grow into that deal. And the more I looked, and that's about the market I was looking at, which is Tulsa, Oklahoma. That's about a 30 unit.

And I kept looking, kept looking. And then after about four months of evaluating properties, I came across this 168 unit that one of my team members showed me. And it was in Cincinnati. But the challenge was that it was $6.35 million and that was nowhere close to the $82,000 home that I purchased before. And so there was a mental leap that I had to take. Initially it was presented to me that I would only need to raise about $500,000.

So there wasn't that much of a leap from what I thought I could raise. But then the deal changed and eventually I had to raise $1.3 million for the deal and ended up acquiring it by raising money with investors.

Okay, so take us through that deal. What was the total purchase price?

6.35 million.

Okay, and how did you structure the financing? Just give us the whole breakdown. You raised X and then you financed, you know, what's the whole thing.

So we got it through a master lease with option to purchase. The reason why we did a master lease is because it has a large prepayment penalty on it. It's called, as you know, defeasance. And it was cost prohibitive to, to the seller or us to put new debt on it because of that large prepayment penalty. But the seller wanted out and we wanted in. And so what we did is we structured it where we gave them a down payment of 1.3 million, agreed on his purchase price is 6.35 million. Did a master lease with option to purchase for four years. After the four years is up, the defeasance penalty is going away. At that point, we'll put new debt on it or we can sell the property. Whatever. We have a couple different options.

Okay, so with the master lease, that's really interesting. So you basically got around the prepayment penalty. And this is an interesting discussion because I've got 125 unit apartment complex that I'm working on selling with my partners. Now that one's got a big prepayment penalty and if we do a deal on that, we're going to pay like $400,000 prepayment penalty or some insane amount like that. Yeah, and so, you know, here I'm getting an idea from you, you know, so, so how did you structure the lease terms and price? I mean, you know, that's such a sort of a subjective. It's pretty hard to do on a property like that. You certainly don't have comps.

Yeah, I mean, essentially it's kind of like evaluating as though you're buying it.

And the master lease payment that we make to the seller is equal to the mortgage payment. We actually pay the lender directly. We got written approval from the lender prior to entering into this agreement that they were fine with us.

Because you were afraid they'd call a due on sale and say that you got to pay the prepayment penalty right then, right?

Absolutely. Well, we were afraid. Not only that, but in the loan document it states that the seller who has the loan with the lender cannot enter into a master lease agreement without written approval. So if we had given the seller $1.3 million, we might not have a way of getting that $1.3 million back. If the lender says, well, you entered into a false agreement, so I'm surprised.

That they wrote you a letter and said it was okay. That's pretty surprising, right?

Well, I don't know if it's surprising or not. I know that from the lender's perspective, they have worked with this seller before, so they want to keep his business, number one. And number two.

There'S little increased risk to them because the person who was originally on the hook is still on the hook.

The seller is still personally guaranteeing that we, my group, will pay the mortgage. And so none of their original documents have changed. We've just got somebody else who is operating the property. So then it becomes a matter of who's operating the property.

And.

And they wanted to make sure that we had a reputable and experienced third party property management company in place. And once they knew that we did, and we got written confirmation or proof rather, that that's who's going to be managing the property, they were fine with it.

Okay, good, good. Okay, so tell us more. Take us through the rest of the deal. Did you finish all of the structuring on exactly how that, all that worked, or is there more to tell on that?

Okay, I think that's the gist of it.

For structuring it. How did you find the property?

I found the property through a consultant that I had hired and he was helping me learn the business. And in addition to learning the business, he's also a broker and he came across this property through one of his connections, friends, and they presented it to me.

Okay, fantastic. Okay, so what, what happened next?

Well, at that point, I needed to raise a whole lot of money. I.

How long were you able to tie the property up for in order to raise money?

It took about.

Two months, I'd say. I'd say it took two months.

At that point, I immediately drew a thermometer on a piece of paper and I put 1.3 million at the very top and started filling it up. My approach to raising money is something I kind of fell into. I had never raised a penny before, but from my marketing and advertising background, I've done a lot of different campaigns that were quantifiably focused. And so what I did is I approached it as though I had a goal for any type of marketing or advertising campaign. And we had to get certain number of downloads or certain number of signups. And I know that One of the specialties whenever I was in marketing and advertising is word of mouth. And I've written some chapters in word of mouth books. And so I know that if you get one person from a network on board, then that person will likely talk to others, and more importantly, other people in that network will be more likely to be interested and consequently invest if it makes sense to them. So what I mean by that is I created a spreadsheet, and in the spreadsheet on each column, I had each network that I'm a part of. So I'm on the alumni advisory board at Texas Tech. I listed that as a network. I'm on a flag football team. I'm the captain of a flag football team. I listed that as a network. Advertising, Dallas, oil, gas, all the different industries that I'm a part of, or all the different networks I'm a part of. And then my goal, after writing down the names of people I know in each of those networks, was to get just one person. Because once I got just one person each of the networks, it was a lot easier to have a conversation with the remaining members of the network and say, so and so is investing, and I'd love to share this opportunity with you as well.

Okay. Okay, good. So who was your first? So, okay, you had to create your documents and so forth and tell us a little bit about that. You know, how did that all work, the documents?

My mom is paralegal and she used to work for an attorney in Fort Worth called. His name's Ed Cox. He has his own law firm. So he was a family friend, someone who I trust implicitly. And he was helping, he was the one working with me on creating all the necessary documents.

So you created a private placement memorandum. How much did you raise from your first person?

First person.

That.

Said he was going to Invest initially said 250,000.

I got thrown a bit of a curve ball on that about a month before it was supposed to close and that it went from 250 to 125 to $50,000 and ended up, you know, that's one of the lessons learned on my end. I now know that I need to raise 30% more than what I think I need and be completely transparent with the people who are in that 30% category and just tell them, hey, you're on deck. If something were to change, then you'll be in the deal. And that's a lot easier conversation to have than to be caught flat footed and need to raise money from scratch like I had to in this scenario. So the first person ended up investing $50,000. But if it weren't for his initial commitment to me and of the 250, what I thought he was going to invest, then it would have been psychologically a lot more challenging and tactically to raise the money because of the extreme amount of difference that I had to make up.

So that's no surprise that you had those pitfalls. And I'm. Everybody who's raised money has experienced the broken promises like that. So 30% is your target. What did you do to network into the rest of the group? You know, once you got one person on board.

Oh, what. What I. What I do is I. First off, I have to wholeheartedly believe in the opportunity. I have to believe that this is one heck of an opportunity for people to make money in a way that.

Is not available in other places to them at this moment. If I wholeheartedly believe that, and I did, and I do on my next deal, then I know that it's just a matter of telling enough people about a good opportunity and eventually you'll have enough people wanting to participate.

So what I did specifically is I would email out something saying, hey.

I'd love to tell you about a deal that I'm closing on with investors.

Here's how much I've raised so far. There's only X amount remaining. Would you like me to share with you some more information on it and set up some time to discuss? And then if they say yes, then I will send them the presentation. I will give them a couple days to review. That way, going into the call, the majority of them have already said, yes, I'm interested and reviewed the presentation. That way, we're not having a conversation from the starting line. It's rather just speaking about some other things that they might have questions about with the deal. And then in that same email that I mentioned originally to them, it also says so and so is also either investing or interested in the deal just to throw, you know, just to tie that back to the networking advice that I had.

Yeah, good, good. And I mean, had these people had any interest in investing in, you know, a syndicated real estate deal or any experience in that before? Or did you. You probably didn't know or, you know, what were your assumptions about that?

Yeah, I would say the majority of them had not. One of them had, and the other was also was simultaneously investing, about to invest in another one. So it was a different conversation than.

It wasn't just a conversation about the deal. It was about multifamily. The Benefits of investing in real estate in general. And then we got to the specific deal parameters. I'd say half of them had been investors on their own, though, for real estate, so they knew about it. And then I'd say the other half hadn't. But they had been successful in their careers and in the stock market and other investments. So they had an investor mentality. And that allowed me to cater the conversation to whatever we needed to.

For that particular investor.

Okay, good, good. All right. You tied that property up for what, two months? Right. And that was on a due diligence or kind of free look, period. Right?

Yeah, we actually.

And that's when you went out and raised the money?

Yeah, it interesting. I knew because of the relationship, and I wouldn't recommend this, but because of the relationship that my consultant had with the broker and the broker had with the seller, and because of the unique structure of the deal and because the seller, quite frankly, couldn't sell the property without this unique structure because of the million dollar prepayment penalty, we started.

Speaking. I started speaking to investors before we officially had it under contract. Just because it was my first deal. I wanted to make sure I could actually pull through on closing on it before I put it under contract.

I would say we tied it up for two months, but I'd say three months. Maybe three and a half months is whenever I had the first conversations to investors about it.

Did you have anybody else helping you raise the money? Did you hire anybody or put someone on a commission? And, you know, I know there are probably some securities laws about that, but, you know, any. Any, like, affiliates helping you, or did you do it all yourself?

I worked with the brokers, and they put in their commission into the deal to be 25% owners of it. So they put in about $350,000, plus or minus. I'm forgetting the exact amount. So I raised the remaining amount.

What else would you like people to know about? Maybe the deal itself. Why did you like this deal? How did you manage the deal and how's it going now? We talked a lot about the raising money part, and I wanted to do that, Joe, just because so many people wonder, where does the money come from? What I do want to say to the listeners is a good deal attracts money. The hardest part is finding the good deal and then, you know, getting some control of the good deal for enough time so that you can raise the money. The other part of that really is dealing with the seller. How did you develop that credibility on that side? You know, that they would want to tie up their property. And I know, I know that you didn't tie it up right away as you mentioned. How did they know you were going to come through and make this happen? I mean, you're a 29 year old guy who's never raised money before and you know, was only a single family home investor before that. You know, I mean what, how did they believe in you? You know, you had to get them to do that.

Yeah. And I think that's the one aspect that I completely was unaware of that is critically important with multifamily and that's credibility. I was blown away by how important credibility is.

As far as how many properties you've closed on before, how many you manage. If you've bought this particular type of real estate asset. I didn't know that was going to be so important. And fortunately how I was able to.

Pull up my chair at the big kids table is by having other people around me who had done those types of deals before. I had a consultant, I had a property management company and I had the money from, at least I was claiming I had the money from investors. And then it just kind of, it happened. But I knew it would happen.

I mean a lot of sellers would ask for proof of funds. That's a reasonable request.

Yeah. And I didn't have it. I didn't have proof of funds and I wasn't asked to present it. Now if I'm asked for proof of funds, I can show that and then some because I've got the track record and I've got the people on my team and the investors who have that. But previously I didn't have proof of funds. But you know what, if they had asked for it, I would have found a way. I know I would have found a way. So that wouldn't have been a stopping point for me.

So as far as other things I'd like to mention about the deal and why I thought it was a good opportunity. Well, it was a classic repositioning in that the seller was wanting to develop. He was more interested in develop than management and he is an amazing developer and he wanted to get out of this management of the property right now it was, or at the time it was family managed and.

We saw opportunities to optimize management and then also increase rents without doing significant improvements to the property. We just saw that there were some.

Opportunities to bring the rents up just by updating the landscaping a bit and you know, having some better processes in place for the resident communication and that type of thing. So, you know, we had a motivated seller and we had a seller who.

Was challenged because he couldn't sell the traditional route. And on the flip side with me and my group, we had never, since it's a company I created from scratch, we had never managed a property and we didn't have the track record in multifamily. So the best way for us to get in and get that track record was to go in under a master lease because we don't have to go through the rigorous approval process of a lender. Even though they approved us, they didn't go through our financials like they would if we were the ones on hook for the loan. So. But at the same time, now we're going to get the credit for managing this property for four plus years and then we're going to build our track record and our experience and that's going to help with the next deal.

Yeah. Okay, so when do you think you'll do your next deal? Or, I mean, well, you're working on a deal now, but I know you can't talk a lot about that. I want to just let you answer that question however you like to. Sorry if I put you on spot there.

No, I'm put on the spot all the time. I can work it.

Go for it.

I've been working on my next deal for the last five months. It's an off market deal. So as you mentioned, I can't say a whole lot about it. All I can say is that it is a large development.

Multifamily development opportunity that I'm going to be doing. And the reason why is because I want to continually evolve as a person and.

As a professional and I want to continue to learn and grow. And I feel like I'm getting one heck of a learning experience with 168 unit repositioning. And it's not that I am.

Burnt out by the repositioning, I actually really enjoy it. But I want a different type of challenge. Ground up development certainly is how I'm able to do that because I've never developed before and I will need to raise a lot of money to make the deal happen is I'm partnering with an experienced developer.

He'll lead the charge on the development and I'll.

Work with him as more of the person who executes on the ground and I'll learn that way. I think that's a much better way of learning development to actually get paid than going to school for four years or six years or whatever and paying someone to teach me. Rather I'm Being paid to learn and building my net worth and helping out investors who will be presented a good opportunity.

Just any other tips you want to close with, Joe? I mean, you know, any other thoughts you have on any part of the real estate investing world and you know, why you like it, what you what, what you think about it, whatever. I just wanted to leave it open for you.

Yeah, I think real estate being successful in real estate, it has three parts to it. One is creativity. You know, finding there that there's any. Any structure that you pass on the street is an opportunity. It's just a matter of can you structure the deal? Can you think of a way to structure the deal so that makes sense for both parties? And 168units is a prime example of creativity. The second is leverage. So really leveraging both time with having people who have been there done that, help you learn the process that has allowed me to be exponentially farther than I would be if I didn't do that. And then also obviously leverage money. And with real estate, I'm a huge fan of not over leveraging, but leveraging intelligently. And then lastly, relationships, the third part.

I wholeheartedly believe that the foundation of business, not only real estate, is relationships. And my number one relationship advice from a professional standpoint is to always give before you ask for anything from someone. I am a proponent of always offering to give someone something before I ask them for anything. And if that mentality is present in all of your professional dealings, it's incredible how much you'll stand out from everybody else and how fulfilling it is to help others get what they want before you get anything that you want.

Yeah, I think that's definitely true. You know, I had Harvey McKay on the show before, and he's got all these creative great book titles. And you know, my favorite one is called Dig youg well before you're Thirsty.

Yeah.

And so that's. That's a great book title. And, you know, so good. That's a good philosophy. The famous, the late, great Zig Ziglar, he used to say, you can have everything in life you want if you just help enough other people get what they want. And, you know, that's so true. The world is an abundant place. It's all out there. You just got to learn how to create enough value, you know, and put that value out there first, and then it will be no problem to get it in return and get people interested in all the stuff you're doing. So that's it. That's a great philosophy, Joe. And we appreciate you sharing it with us. Give the listeners your website and tell them where they can learn more about you and your work.

You can check me out at. My podcast is called Best Real Estate Investing Advice Ever and you can see that@joeferless.com show s h o W Good stuff.

Joe Fairless, thank you for joining us.

All right, thank you sir.

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