AIPIS 81 - How to Make Money in Small Apartments with Lance Edwards

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Welcome to the AIPIS show for accredited income property investment specialists and those who desire to be. This is your host, Jason Hartman where we talk about increasing your income, your productivity and just generally having a better life while serving your clients better with America's most historically proven asset class income property. We have a great interview for you today and we will be back with that in less than 60 seconds.

It's my pleasure to welcome Lance Edwards to the show. He is president of First Commerce Group and the author of how to make money in small apartments, how to finally earn the money you deserve in real estate investing. Lance, welcome. How you doing?

Hey Jason, great pleasure to be here. Thank you so much for having me today.

Yeah, it's good to have you. So you know, I've always been fascinated with a small apartment market. I've done a few small apartment deals myself. One very large deal, lots and lots of single family home deals over the years. More than I'd care to even count, to tell you the truth, in the single family world. Why small apartments? Why is that your thing? What's so good about it?

Well, that's a great question and there's a lot of reasons for that, Jason. I actually I started my real estate career back in 2002 in small apartment. My very first deal I bought was a fourplex and I never looked back. And I got started that way because my first mentor said kind of something similar what you just said, Jason. He said, you know Lance, I made a lot of money doing houses, but I came to realize that meet my financial goals, I needed to shift to multifamily. Multifamily provided bigger numbers in a shorter time period. And so I came out looking to get started in small apartments. And so I teach small apartments to people that either brand new or already doing houses for the advantages of there's lots of them. You get bigger paydays. Whether you're flipping these properties, are buying them, there's less competition because a lot of people disqualify themselves and that's necessarily thinking they can't do apartments, which everybody's qualified to do apartments. You can do it nationwide. You can make offers sight unseen. We make 10 offers a day, properties across the country, site unseen, because it's all based upon the numbers. So lots of different reasons. And I, you know, am kind of the preacher for town people, you know, either get started here or add it to your existing business. It's a great place to start.

So define small apartments. What does that mean?

Yeah, small apartments. This is the Lance Edwards definition. It's 2 to 30 units. So it'll include duplexes, triplexes and fourplexes, which are strictly speaking the residential part of real estate. But it also includes five, five doors and up to about 30 doors, which is commercial. And that's our definition. I think it's a, you know, for small apartments, great place to start.

Yeah. And what markets just everywhere in the. Or any particular geographies you like better than others?

Well, there's two answers to the question. You can do it nationwide. There's no limitation because we don't even need to look at these properties to make offers on them because they are the realm of commercial. It's all about the numbers. The net operating income and the cap rate that we calculate, which is all simple math for anyone that's hearing these terms for the first time. Very, very simple math. So we can make offers across the country, and we do. Now, in picking potential markets, if you're going to buy and hold apartments for cash flow, there's certain, you know, certain sectors you've got to focus on. You know, for example, forget about la, getting cash flowing properties or San Francisco, but most other parts of the country with exclusions of, you know, parts of California, the Northeast, you can find cash flowing properties. Beyond that, we want markets that have a population of at least 50,000 is a minimum, just so there's some liquidity to that market.

Oh, that's small. So you're talking cities of 50, like we like to say, you know, cities of at least, you know, 250,000 and ideally, ideally more. But that's. Those are small markets.

Yeah, but what we're really looking for, I mean, if you combine it all up, what we're really looking for is markets that have good economies because good economy means job growth and job growth means rental demand, which is, you know, of course, good for apartments. So if you could pick your sweet spot, it's, it's large markets where there is very strong economies.

Yeah, okay. So large markets, strong economies are the sweet spot. And a large market is what over 500,000, over a million type thing.

Yes.

In population. And some of the population numbers, by the way, listeners, I want to say, is a little deceiving because you can have cities that are contiguous to each other and if you just look at that city, even though, you know right next door is another city, you know, just, it's just a drive, you know, maybe, maybe three blocks, you know, which.

May be where the hiring centers are even, right?

Yeah, yeah. So it doesn't always, you know, say the whole thing. It's more the metro area really. But yeah, you gotta avoid places that are expensive. You know, the cash flow never works. I mean, I can't believe the kind of numbers people are willing to accept in places like the Socialist Republic of California.

In California, the people, people are investing in California. Let's take la. People are investing in California, not so much for income, they're investing for land value. And, and so that drives your price.

That's a speculators game.

Yeah, it's more speculation. And so you're just, you're not going to find cash flowing properties in California. It's a different investment model. But you know, that's why I say most other parts of the country, even, you know, here in my hometown of Houston, great cash flowing properties, Dallas, great cash flow even in Florida right now, which I'm really bullish on, great cash flowing properties. That was kind of unheard of before the recession. So you've got to find it has to do with something called the market cap rate. But you know, depending upon those market cap rates, it's a specifier of whether you're going to have cash flow or not on these apartment buildings.

When you say market cap rate, are you talking about a market cap rate for a metro area or the specific.

Property which market cap rate per metro area.

Oh, okay, tell us about that a little bit.

Well, let's say you can go to Los Angeles or let's take Houston, Texas. Houston, Texas today has a market cap rate on class C apartments of 8, 8.5%, which means the property would produce an 8 and a half percent return if you paid all cash. Well, we're not going to pay all cash. We're going to borrow money to buy these buildings. But the cost of money is 4.5%. Well, if you can borrow money at four and a half to invest in something that pays eight and a half all day long.

That'S why there's cash flow. The property returns has a greater return than the cost of money. But if you go to Los Angeles, where the same apartment would have a market cap rate or the same area, the metro area, the market cap rate of four and a half.

Or four or four. Yeah.

And the cost of money is four and a half. Well, you can borrow the money, but the investment doesn't produce enough income to pay for the cost of the money and so you end up with negative cash flow.

Okay, so I want to ask you about a bunch of things here, but one that comes up right now, Lance, is the concept of, you know, one of the criticisms of small apartments is that you don't have economy of scale. You know, it's sort of typical in the industry that people say you've got to have 75 units to have on site management. And that's when things start to hum. When you got a good manager on site, of course, you know, it doesn't mean they will for sure, but they have the chance. So with the small apartments, how do you do the management? I mean, management is just such a critical component, obviously.

Oh, it is. And as a matter of fact, here's the rule. Never, never, never self manage on these small apartment buildings. If you start self managing, you will burn out. You just, you'll leave. So that means we hire management companies. And the key word here is companies. We're not hiring, you know, a guy who does property management on the side. No, we're hiring management companies whose sole exclusive focus is managing multifamily buildings. And we're looking for a company that manages several hundred doors on behalf of multiple clients because we want to tap into their economy of scale. For example, you know, if I own a six plex, I can't afford to have an on site maintenance person. But my management company will have on staff, you know, a certified AC tech, a guy that can do light electrical, another one can do light plumbing, another one can do the rehab. And so when my six unit building, when my small six unit building needs work, my management company dispatches one of their guys on staff and I get access to them through under their management, but I get him at their cost. So I'm saving money because they have an economy of scale. Another way I tap into their economy of scale when it comes to buying power. If they manage several hundred doors, they have buying power. They can get discounts on carpet and paint and stuff that needs to run a building and they provide me those materials for my building at again at their cost. So I'm saving money while having it professionally managed and tapping into their economy of scale.

Yeah. Okay, so do you put a clause in your management contracts that they're not allowed to mark up the cost of these maintenance and repair items?

Oh absolutely, yeah, I get it. At cost. That's part of the, that's part of the interview process. We go in our pre screening selection process.

And do you find you're able to attract good management companies for these small apartments? Because you know there are management companies that are more the institutional kind of brand that manage the larger apartment complexes. Of course you have on site management as well or maybe a blend of the two or something. And then there are managers that manage single family homes. Where's the distinction in this type of manager if there is one or is it the same? And how do you find them? Are there certain key terms you search for?

Yeah, they are different. There's an institutional, I mean even depending upon the different classes of apartments. But you know, we're dealing generally in B and C buildings, which means low to moderate income buildings. And so we're looking for again a company that has scale and you know, you will find them in the apartment sector. You know I used to have had, I've had a few houses over my career, frankly had a hard time finding anybody that would manage houses. But you find them managing apartments now you find them. The best way that I teach people to do it, there's websites you can go to, but the best way is get referrals from the local brokers and agents in that market and you can find them on the websites that have apartments for sale. Contact those agents, say listen, I'm looking for a good management company who can manage a 10 unit apartment building in town. Who can you refer me to? Because referral is much stronger than just blindly going to the website, which you can do. But I start with referrals and then from there it's a selection and screening process that make sure they meet our criteria.

So if an investor is new, they just. And I want to talk about acquisition, of course that's really the first part of this. But we got off on the management thing here for a moment. But if an investor is new in a market, say they just bought a 25 unit building and they need a manager and you know, how are they going to find one if they don't have a network in that market? You know, now maybe the, the person they bought it from has a management company. Probably they weren't happy with them otherwise they wouldn't be selling the unit. Or maybe it was a mom and pop guy that, you know, guy that's swung his own hammer and managed the building himself. You know, there's lots of those out there. You know, what do they search for? Online apartment manager or you know, just. Any thoughts on that?

Well, you can, yeah, you can Google management company, multifamily management company. There's websites. You can go to.

One of them. Oh, one of them is irem.org.

I think it's that org and you can find them there. They're actually categorized by different categories. Another way is join the local apartment association and get referrals from the apartment association.

Yeah, great resource, by the way. We did a whole show on apartment associations. They're great. Okay, so let's talk about, more importantly, acquisition. You know, how do you find deals? I mean, are you looking in the mls? You're looking on LoopNet, you doing mailings, you know, the famous yellow postcard with black print.

We do all the above, which there's three areas that we, that we teach and I actually talk about in, in the book is websites. And that includes. There's lots of different websites. And you mentioned two of them here, Jason. There's LoopNet.com there's. And your MLS, your multiple listing service. People think of that as primarily houses, which it is, but you can find apartments up to 50 units for sale on MLS. And so websites is a source speaking with brokers and. Or realtors is another source who have properties for sale. And sometimes they have properties not on the websites. They're pocket listings. And then the third source is letters and postcards and direct mail. And we just kill it with postcards. We get really fabulous responses with our postcards in particular markets. But those are the three areas we're always, always using to create our deal flow.

So do you recommend that an individual investor listening to this just start mailing to apartment buildings? I mean they gotta. The key is in having the right list, right, Having a good list first. Right?

Well, you've got to have a list of. Yes, you need to have a list of apartment owners. We just, we send to the list and let the postcard do the work and just deal with the ones who call us back.

And so I wouldn't even say you get too fancy on the list. Just get a list of apartment owners. Now it's got to be small apartment owners. You know, you got to be able to sort that out of the list and mail to them. But I'd say the first place for someone to start is, I mean the fastest way is go to the websites and start looking what's on there. You can make offers on deals on websites and then you could talk to the agents who are listing those properties on the website to see if they have other properties. I mean, we make, we make. Let me tell you, here's the secret of websites. Not all deals are created equal. So you have to know how to sort through the trash from the treasure on the websites. But you know, that's the only trick to it. But we make offers. You know, we're making 10 offers a day coming from those three sources. I just, just told you.

Absolutely, absolutely. So any tips on what you say in your postcards where you get a good list? I mean, do you go to the data companies like CoreLogic and so forth? Is that how you get your list or where do you buy them?

Here's, Let me, yeah, here, let me get everyone on an inside tip. If a lot of lists you can get from the county appraisal district. So for example, I'm in Houston, Texas. That's Harris County. And now if I go on, they have a website. But if I go to the website.

They don't allow me to download the database. But if I call them up, but ten bucks they will mail me the database, the entire database for Harris county and many, many. And they'll send it to you in Excel format. Now you've got every real estate listing and you can sort out from there. Many counties will give it to you for free or for a very nominal charge. If your county does not, then there are services where it's paid services. We use one called prospectnow.com and they go to the same source, the same county database, but they will, will allow you to sort and segment data and for a fee they'll send you so many names per month. And so that's two sources I refer. People just get a call to county or just go to Prospect now.

Yeah, yeah, fantastic. Okay. And what do you say on your postcards? What pools are you looking for? Just, you know, when you sort your list, first of all, are you looking for, you know, where the owner owns it free and clear, so they can do seller financing or, you know, bank financing. Okay. And, and then what do you say, you know, to those owners?

Well, we just, we just send the list. We just send the list. We don't, I don't do any kind of pre estimating if they're going to be motivated or not. We just send them, send a list, let them, let them, let the postcards do the work and let the math come back. And basically on the postcard it essentially says if you're interested in selling, I'M interested in buying and it is.

Designed to get a response. And. But the key part of it, the key to it is you've got to follow up with the people and you know, someone will call in and, and in response to my postcard, but we got have somebody follow up with them because we give them a 24 hour message they can listen to. So we have, you know, people calling in 24 hours a day and that. But immediately I have someone follow up behind them. And that's the real key part on any kind of direct mail campaign is through the follow up behind it.

Yeah. Okay. Okay. So this. So definitely you got to have that follow up. So what do you want to tell people about negotiating and structuring deals? And we didn't kind of answer that question on the last round, but are you really into the seller financing angle or. Either way, it doesn't matter to you? You know, bank financing or seller financing.

We make offers and on our offer we always have three options. There are three price options. Two of those options are for seller financing and the third option is for cash. So we're giving the seller a choice and of course they get a better price with seller financ. And we make it a point in our offer to explain why they get more money with seller financing. And so we give them the choice. And approximately half our deals that are done either through myself or through our students using the same format of the offer letter, half of them are seller financing, meaning there's not going to be any bank involved in the purchase, but the seller is going to take back payments over time, monthly payments, and it removes bank qualifying. So we give them the choice that when we get them on the phone, of course we want to make sure we explain to them the benefits of seller financing. But you know, half of them don't do that. So we do cash offers, but it's a lower price.

How do you negotiate and you know, say you want to get the seller to take financing. You know, tips on convincing them to do that, making the deal look good to them. You know, just kind of negotiating and working that deal out and, you know, doing it from a distance. I'm going to ask you some questions about that too, Lance, because that's, that's an art too. You know, when do you tie it up? When do you get due diligence, etc.

Well, you know, negotiation. I do entire trainings on negotiation. But you got to understand at the heart, why are they interested in selling? Are they really interested in selling? I mean, there has to be some level of motivation on their part in order for us to have interest because, you know, they want retail price or even a premium of a retail price. There's really nothing there. And so we need to understand, understand what their motivation is for selling. And then from there, if we are, you know, we really want to get people to do seller financing because it eliminates the bank, which means deals close faster. And so the benefits we point out with doing seller financing is they're going to make more money because they're actually going to earn interest when we pay them. They're going to spread their tax burden out over five years instead of having a tax hit right now when they sell the property. And they in fact will earn what they've been wanting to get with their apartment building, which is passive income. They're going to receive a monthly check. They're never going to deal with that apartment building again. And I will tell everyone, my very first deal I ever did, that fourplex that I bought was 100% seller. Finance lady, lives in Hawaii. Never met her. I did over the phone. And I didn't have to know what I was doing. I was brand new to this business. And if there's any secret to seller financing, it's this ask, you've got to ask. And, and this lady had explained to me how she wanted to get a monthly check, that's why she bought this building. And she didn't want to deal with a management company, she just wanted a monthly check. So I said, alright, Ms. Manson, how about if I send you a monthly check and you never talk to me again in life? How would that be? So that was how we ended up on seller financing. She wanted passive income, I gave it to her and she never looked at the department again.

Where do you find, you know, the, your, your best deals are you talked about the size of the market, you talked about the structuring and so forth. But where do you like to invest the most? Do you like to do it in Houston? You know, are there certain cities that are kind of like your sweet spot, favorite ones or what?

Well, there are certain, for example, Houston. Right now it's saturated.

Houston and Dallas, everybody's interested in Texas because the economy was so strong. That's changing, oil prices have dropped and that's going to change. But we go to markets which are not being saturated and we measure it by our postcard response because we're going into markets literally all over the country for ourselves and for our clients because we do a lot of this. We do a lot of the marketing on behalf of our clients. We have the benefit of seeing where the most responsive markets are based on response rates for our postcards. And so we'll go back to the markets that are most responsive. I can tell people right now Houston, Texas is one of the least responsive markets right now because it's so saturated.

Too many people in there looking for deals. So you, you mentioned Houston. So I just got to ask you as an aside here, do you think oil prices are going to go back up? How's that affecting the economy there? I mean, we've, I own property in Houston. I've always liked it, that market, you know, but I'm, I'm a little bit concerned about it with the oil prices for sure.

So oil prices will go up again. The better question is when.

You know, next year or ten years from now. Who can say? I've lived in Houston since 1981. I've seen the whole cycle. But this is Lance Edwards prediction. It is going to affect the economy in Houston, Texas, because they've already people live in layoffs with the oil companies. And at the same time, there was a lot of construction going on leading into before the oil prices dropped. And so we're going to be overbuilt here and prices have gone silly on apartment buildings to where, you know, it's just going, it's going to correct itself. And so, you know, I tell people as long as you follow the fundamentals and you buy if long as you buy your property right, and make sure it cash flows, you'll be fine. But if you got caught up in the hype and overpaid for an apartment building in the last 612 months, you're going to get hurt, bottom line, because you just violated the fundamentals, which is, you know, just what we teach. So that's my prediction on Houston. You're going to see prices come down because they got nosebleed. And it's going to, it's going to come back to within reason again. But Houston is not going to experience what we went through during the 80s because we're more diversified market now than we were in the early 1980s when it just was devastating for us.

Remember the famous billboards? Will the last person in Houston please turn out the lights? Last person to leave Houston. It's not like that.

Yeah, we're not going to see that.

Good to hear. Good stuff. Well, Lance, are there any questions? I didn't ask you that you want to tell the listeners anything you want to talk about before we wrap up?

Let's talk about this real quick. Let me make this point. You know, one of the, there's, there's three fundamental myths that keep people out of this business or they just, or you, they disqualify themselves unnecessarily because they think they have to graduate from houses to apartments. Well, no, you can start just like I did. Most of my students. Do they think they have to deal with tenants and toilets?

No.

You're going to manage management companies. The third one, we didn't talk about this one. Let's just throw it out there. You do not need your own cash or credit to do these deals. You can, you can raise investors.

To help put you in these deals. You can find business partners, put you in these deals. And So I had two students, two clients who purchased $6 million of real estate following our system and they used none of their own cash, none of their own credit. They brought in partners. And so no one anyone listen to this call. I don't care what your financial resources is, how limited they may be. You're qualified to do apartment buildings, right? And besides buying and holding these buildings, you can wholesale them, put them on a contract to purchase and then sell your contract and you earn nice checks doing that. And so this business is for anyone. Don't, no one should be disqualifying themselves when you started Small apartments.

Lance, give out your website or you have a special offer for our listeners, right?

I do. For you know, for everyone that's listening here and for, for Jason's generosity and have me on today. I, I have a best selling book, how to make big money. Small Apartments went to number one and it's everything we do in the business on daily basis. You can buy it on Amazon. It's $14.95. I'll make it available to you for free. And you can get my best selling book for free as well as a CD interview of myself and Ron Legrand. Anyone get started in small apartments. But you can get it all right now and go to my website free apartments book.com that's free apartments book.

Good stuff. Lance Edwards, Final thought, everyone just get out there.

Just do it. Don't. And don't rule yourself out of the game. Just get started. You're qualified right now to get started Small apartments.

Good advice, good advice. Thanks for joining us. Thank you, Jason.

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