Episode 13: From Rental Houses to Apartment Complex Deals w/Joe Fairless

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Show Notes

Anybody that’s followed the flipping junkie blog for any length of time knows I don’t care much for rentals (really, more specifically, managing rental properties). I really enjoy just fixing up a piece of junk house and selling it quickly for a nice profit. I’m sure I could learn to love rentals if I just knew how to do it with as little hassle as possible. That’s why I decided to have todays guest on the show. He is an expert on cash flowing houses and apartments.

This episode was packed full of information from Joe Fairless. He controls more than $21 million worth of real estate, attends more Third Eye Blind concerts than anyone else (probably not too difficult to accomplish this ;)), is an author and comedian, and host of the very popular Best Real Estate Investing Advice Ever podcast.

Joe was very courteous today as I had problems with audio that delayed the recording of the interview for about 5 hours…. Luckily, he was flexible and was still able to be on the show.
So, extra thanks to him for that.

In this episode Joe talks about the four single family properties he bought in Texas (he lives in New York) for cash flow (he sold one to cash out). He shares with us how he calculates the cash flow using the calculator mentioned in the links below.

He also shares insight into his first big apartment complex deal….168 units that he had to raise over a million dollars for!!!!

Do you know the difference between economic occupancy and physical occupancy? I didn’t. Joe breaks it down for us and why it’s so important to find out about economic occupancy when evaluating an apartment deal.

Joe also shares his ingenious strategy for determining if an area is improving or decaying by checking out two local restaurant chains that are in almost every city.

There are some great rules of thumb also mentioned throughout the show. Some are:

* 1 manager for every 100 tenants
* $250 per unit per year should be set aside for cap ex (capital expenses like roof replacement, exterior maintenance etc)

Enjoy the episode!

Recommended Books

Investing For Dummies

Rich Dad Poor Dad: What The Rich Teach Their Kids About Money That the Poor and Middle Class Do Not!

Pitch Anything: An Innovative Method for Presenting, Persuading, and Winning the Deal

Crucial Conversations Tools for Talking When Stakes Are High, Second Edition

Links

Mortgage Calculator

Joe’s Website

Joe’s Facebook

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Episode Transcription


Danny Johnson:
Welcome to the Flipping Junkie Podcast. My name is Danny Johnson, former software developer turned house flipper whipping hundreds of houses. Each week we bring you interviews, strategies and stories, and motivation to help you get started flipping houses and on your way to becoming your own boss and achieving financial freedom. Thanks for spending time with me today. Now let’s get to it.
Danny Johnson:  Hello. Welcome to the flipping junkie podcast. I’m your host Danny Johnson. Now anybody that’s followed Flipping Junkie Blog for any length of time knows I don’t really care much for rental properties, really more specifically managing rental properties. Now I really do enjoy fixing up a piece of junk house and selling it quickly for a nice profit and I’m sure I could learn to love rentals if I just knew how to do it with as little hassle as possible and that’s why I decided to have today’s guest on the show. He’s an expert on cash flow in houses and apartments. His name is Joe Fairless and he controls more than $21 million dollars worth of real estate, attends more Third Eye Blind concert than anybody else, is an author and comedian and host of a very popular best real estate investing advice ever podcast. How’s it going Joe?

Joe Fairless: It’s gone really well. Thanks a lot for having me on the show.

Danny Johnson:  Yeah. Thanks for being on the show. Could you tell us a little bit about you and what type of investing that you mainly focus on?

Joe Fairless: Yeah sure. Basically I raise money and buy apartment communities with investors and we share in the profits. I focus on multi-family investing. When I first got started, I was buying single family homes for my own personal portfolio. Then I realized that I wanted to scale up and get things moving quicker than what they were doing with single family homes and that’s why I got two apartments.

Danny Johnson: Awesome. And real quick about your podcast, now you have over 300 episodes now.

Joe Fairless: I do, about 375 I think.

Danny Johnson: 375. It’s amazing. Now I was episode I think 294 and we talked about building credibility. That’s already been a little while since then. So just bear with me, I’m still new at this. We’ll get going. What is your backstory though? How did you get started in the business? What got you interested in real estate in the first place?

Joe Fairless: Well, what got me interested in real estate is –I’m from Texas. I lived in Dallas Fort Worth for anyone who is from that area for my whole life basically. I lived in Houston a year when I was very very young, but basically grew up in Fort Worth Texas. I went to school at Texas Tech and I majored in advertising. I wanted to compete with the best of the best at advertising. I moved up to New York City and climbed the corporate ladder working at advertising agencies. That went really well, but if anyone knows anything about marketing and advertising professionals or at least that career, you’ll know that you don’t make any money when you first start In fact I was making less than minimum wage when you factor in all the hours I was working. I didn’t have any money and I I thought, “Well, what I do have money, I’ve got to be prepared.” So I started doing some research and I was reading books and I read one book called “Investing for Dummies.” And that book talked about investing in LCs, stocks and bonds in real estate and they really gravitate towards real estate. And then, I read “Rich Dad Poor Dad.” And after that, as the story goes with most investors, I was really hooked on real estate.

Danny Johnson: Wow, yeah. The Rich Dad Poor Dad book I read that as well and really has changed the way a lot of people think about money and investing and everything. It’s an incredible book.

Joe Fairless: Yeah, yeah. It changed my perspective on things and to compound that interest, once I say saved up a $1,000, I didn’t really know much about investing and I went to my bank, I saw that there was a CD, certificate of deposit. It was like one point something percent. It was much higher than what I was making in my savings account, so I thought that was a really good deal. Well they held my only $1,000 for 12 very very long months, 12 months $1,000 and I finally got to return of like $18. And then it took taxes out of that $18. I was like, “Oh, my gosh I’ve got to figure out some other way of making things happen.” And that’s when I got really serious about real estate. I took my studying to the next level and then started being active on different online forums and go into different seminars. I went to a Rich Dad Poor Dad seminar, a three day seminar. The one that costs like $200, not the one that cost thousands.

Danny Johnson:  Right so one of the entry ones to sort of get you into the more expensive one.

Joe Fairless: And I thought that it was well worth it and I learned a lot and then just kept on learning and eventually bought my first house in 2009.

Danny Johnson: And you bought that as a buy and hold.

Joe Fairless: Yeah. I bought that as a buy and hold because I was living in New York City, but I bought in – well, the first house was in Duncanville Texas, so about 15 minutes south of Dallas.

Danny Johnson: How did you find a deal if you were in New York?

Joe Fairless: I just found it through my real estate agent. My sister is a real estate agent in Dallas Fort Worth, but she didn’t work with me on the first property. She was focused on some other things, so she referred me to one of her friends who is a real estate agent and 1500 miles away I was able to buy a place without ever visiting it because the real estate agent took pictures, took video, we got an inspection report and there’s really nothing for me to do. Other than knowing the area, there is really no need for me to be president and so I had never made the trip.

Danny Johnson:  Did you give the agent any sort of criteria to look for things before she passed along information about any of the properties to you?

Joe Fairless:  Yeah I was very very specific on the properties that I was looking for. One was I wanted to cash flow at least $100 a month. Two was that I wanted to have at least $10,000 worth of equity built into the property before I closed on it and three I wanted to be close to move in ready. In hindsight I understand especially you’re probably, chopping it a bit like, “What the heck are you talking about move in ready.” You’re buying it at a premium and perhaps I was buying at the right time and what I know now there’s more money to be made in properties that have a little bit of dirt on them. But I didn’t want to get into that and I didn’t know how to get into it. It was first property, so I was wanting something that was polished and ready to go.

Danny Johnson: Right. I’m assuming it would be a lot more difficult to be managing the rehab when you’re not used to managing rehabs especially if you’re in New York and the property is in Texas.

Joe Fairless: Yeah.

Danny Johnson: Did you start buying any that needed doing rehabs out of town?

Joe Fairless: No, never. I ended up buying four homes from 2009 to 2011 maybe 12 and every home I purchased, I bought it with less and less of my own money. So I bought it more intelligently or more leveraged. My first house I put 25% down on a $76,000 purchase. My second house it was an $81,000 purchase, I only put 10% down. It was done through a home path program. That was again, there is actually a tenant in that property whenever I purchased it. That was built in 2006. So it was relatively new and it was just a really good buy. My third house, it was a foreclosure, but it was on the MLS and that was –I think it needed a couple of thousand dollars but that was it, bought for $65,000 and then we got it appraised a month or two later for $86,000 so I had a significant amount of equity in it and I bought it all cash for $65,000 and I had a credit card that I used that was 0% interest for 12 months. I think that was $10,000 and then the rest was my own cash I had made from advertising. At this time, I’d climbed the corporate ladder and I was actually the youngest vice president of a New York City advertising agency, so I was making six figures. I was able to save some cash. I’m still living the lifestyle that I was living from an expenses standpoint whenever I first moved to New York. So I never increased by my cost of living and I did a cash out refinance on that third house. So I essentially got all my money back since it appraised for $86,000 and it’s tax free so I took that money back. I put it in my savings account and then my fourth house I got approved for a line of credit of $40,000 and I bought that from wholesaling. This would be the closest one I got to the rehabbing because I purchased it for $35,000 and the wholesaler said it needed $5,000 worth of improvements. Well, it ended up needing about $15,000 once we got into it and instead of taking one month, it took about four months to do the improvements, and before we purchased it the tenant allegedly was renting it for $795 a month and I thought for sure after $15,000 worth of improvements I’d be able to get at least $900 dollars. Well, we rented it for $795 again after trying to put it on the market and get that premium price, which it all had to do with where it was located – location, location, location. I got a taste of a rehab. I didn’t like the taste because I was trying to do it from 1500 miles away while having 60-70 hour full time job and it just wasn’t my thing. But then at that point, I also realized that that’s how you make good money in real estate. So I decided to take that similar type of model where you buy properties that need work and then increase the value and cash in on it. I decide to take that approach not to single family but scaling that multifamily.

Danny Johnson: Right. So with the single family though that you were doing, so you were shooting for a cash flow. It’s like you wanted some equity built into the deal, but then you were shooting for a cash flow of $100, so how were you confidently calculating in doing analysis to figure out that you would get $100 dollars at least for the cash flow.

Joe Fairless: Yeah, I would just use – there’s a free online mortgage calculator and I can send you the link. But it was just something I stumbled across on the Internet and I just would plug my numbers into this online calculator and it would factor in all of the expenses that are incurred whenever you buy a home and then I use that information and ended up just evaluating the properties and running the numbers through that spreadsheet.

Danny Johnson: So were you accounting for vacancies and different things like that and maintenance?

Joe Fairless: Yeah, yeah. I’d account for vacancies, I’d account for the property management fees on the lease and on the renewal and then also maintenance on an ongoing basis. Property taxes, I think those are the big ones.

Danny Johnson: I’m interested in finding out what kinds of numbers that you use and it probably various for each location at least maybe, but there are certain numbers like 3% or something for certain things new or 10% for vacancy. I mean, are there any kind of rules of thumb for any of these numbers?

Joe Fairless:  You know I haven’t bought a house since 2012 and I’m not actively buying homes anymore. I could answer that question with multifamily because I’m buying multifamily. It’s a different type of analysis, but with single family I don’t remember the rules of thumb. I just would plug it into a calculator that I had and then run the numbers.

Danny Johnson:  Okay. Well, we can talk a little bit more about the numbers when we get into more of the multifamily. So tell me, how did you make the transition from buying the single family homes up to the bigger multifamily and what do you mean by multifamily? Rebuying duplexes and fourplex at first? How did you transition into that?

Joe Fairless: Well, I went my buying that fourth house that I mentioned that was $35,000 and then the next thing I purchased was 168 unit for $6.35 million.

Danny Johnson: Wow. That’s a big jump.

Joe Fairless: Yeah. There was no transition my friend.

Danny Johnson: Did you have a mentor for something like that?

Joe Fairless:  Yeah, I did. I found a couple a couple people that I paid and they helped me learn the business, learn how to evaluate the deals, learn how to underwrite properties and find the right markets and then learn the best ways to position yourself and then ultimately how to raise money because I’ve never raised a penny before and I raised over a million dollars on my first deal which isn’t typical. There’s many things I would do differently if I could go back. One of them as I would have raised the money before I had the deal because it was quite a stressful experience having something under contract but not having the money to close on it.

Danny Johnson:  Especially with that kind of money, but I guess that forced you to really take action and do what needed to be done. Could you tell us a little bit more about maybe how you found that property and where it was maybe and then walk us through how you did that deal?

Joe Fairless: Yeah sure. I found the property through a broker that I ended up getting to know and how I found the deal through him and how I found him initially was just – I attended a seminar and in the seminar they just market report, I was actually in Tulsa Oklahoma, and I got to know people in Tulsa and then that network effect just expanded and expanded and I ended up meeting a broker who shared with me this opportunity in Cincinnati where I’d never been. I was actually looking at Tulsa Oklahoma, but this deal in Cincinnati just came about and it just made a whole lot of sense. So what I did, I ended up reaching out to a couple of my investors that I thought initially that I need to raise about $400,000 and that was a major stretch for me. I thought I could raise about $200,000-$250,000 dollars perhaps. But again, I’d never raised a penny before, so the dollars were quite scary to me.

Danny Johnson: Do you remember the price of the property and then what you ended up getting another contract for?

Joe Fairless: Yeah. The initial price was $6.7 and ended up getting into a contract for $6.35 and it appraised for $6.7 whenever we went through the process.

Danny Johnson:  Wow. And so, how many units was that? You said a hundred and—

Joe Fairless: 68.

Danny Johnson: 168 units. What kind of shape was it in?

Joe Fairless:  It was in decent shape. It had high occupancy, but one of the things I’ve learned to ask is, what’s the economic occupancy not just the physical occupancy? The physical occupancy or accounts for the number of people in the apartment community, how many apartments are leased and then the economic occupancy is how many of those apartments that are leased are actually paying you rent – a very important distinction and I didn’t—

Danny Johnson: I guess they could tell you there is that many people there, but maybe they’re not all paying the rent, huh?

Joe Fairless:  Yeah, yeah. That’s the important question.

Danny Johnson: Was that property one where you learned that you should have asked that?

Joe Fairless: Yes.

Danny Johnson: Okay. Was it a crazy number of people that weren’t paying?

Joe Fairless: It ended up being, I’d say, a physical occupancy – so the number of units leased of about 96%t and that economic occupancy of about 80% I’d say whenever we took it over. So it was, I’d say, a significant difference.

Danny Johnson: Yeah, but that’s a good number of people not paying.

Joe Fairless: Yeah. Especially when you got to 168 units because if you’re at whatever 96% percent of 168, what is that? – 168 x 0.96, that’s 161 – so you’ve got 8 units that are vacant essentially. But if you got 168 x 0.8 now you’ve got 34 units that are that are either vacant or you have people in there, but aren’t paying. So it’s a difference between 34 and 8 units which is quite significant.

Danny Johnson: Wow. What kind of things did you look at in determining whether you wanted to buy that property or not? What made you pull the trigger on that one?

Joe Fairless: I’ll answer that just to close the loop on the economic and physical, so that I don’t leave people hanging on like, “Okay, you should ask for it. How the heck do you check it?” Well, how you check is during due diligence, you ask for the bank statements of the LLC that owns the property and that LLC’s bank statements will show deposits and money going out and you’ll simply verify that they actually are receiving the money in their bank account that they’re reporting on their profit and loss statement.

Danny Johnson: Alright. So that’s a common thing to ask for and you should expect to be able to see that especially I guess for that sort of price range of property.

Joe Fairless: Exactly. Now as far as the indicators where I knew it was a good purchase, because it was a good purchase, is one going back to my mistake on the fourth house I bought where it didn’t lease for the amount that I wanted it to. This had the location that I desired. It was in the path of progress. What I mean by that is there is a Chipotle that was built about three years ago that was within a football field distance away from the property. The properties on a main road that has $40,000 cars passing it in on a daily basis. If you’re driving the speed limit then you’re passing the property for 17 seconds. I mean major major frontage for people to look at. It leases like crazy. And the second largest Kroger Marketplace in all of Ohio and Kroger is headquartered in Ohio, so the second largest Kroger Marketplace. If you’re not familiar of the difference of a Kroger and a Kroger Marketplace – a Kroger just has food, a Kroger Marketplace is much larger. It has food. It has clothing. It has mechanics stuff, houseware, all sorts of things. And so the second largest Kroger Marketplace in all of Ohio was built there two months after we closed on the property. So we closed and two months later that opened up. So the people headquartered at t Kroger have identified this area as being an area of growth as well. So check the box on the area. It’s an incredible area.

Danny Johnson: You it’s an awesome idea though to determine whether that area is growing or decaying, right?

Joe Fairless: Absolutely. Any time I look at a property, I always just Google McDonald’s and lately it’s Chipotle because McDonald’s just aren’t popping up like they used to, but I used to Google McDonald’s and just find where the closest McDonald’s is then I drive there and I’d see what type of shape is it in, how recently was it built and see how far away it is from my property because the McDonald’s people are pretty smart. They know where to put their real estate. McDonald’s is a real estate corporation and by the way they sell burgers. So that’s one thing I always look for. And McDonald’s is also – it’s even closer than the Chipotle for this property. So it was a great area. That was the main reason and then had the opportunity to increase rents over time and put in better qualified residents who have the ability to pay and then see that upside. And we also bought it with something – I know you’re familiar with this, a master lease where are technically –we didn’t purchase it, we’re leasing it from the seller with an option to purchase whatever we choose to and the reason why we did that is because there’s a large prepayment penalty on the property and we would have triggered about a million dollar prepayment penalty to the lender if we were to purchase it outright, which we’re not going to do that, nobody would do that. We did a master lease where we’re taking over the income, so we receive all the income. We have to pay all the expenses. We pay the mortgage. We pay the tax. We pay insurance and all expenses. We also receive the principal pay down, the equity that results from the principal pay down on the mortgage. So we’re getting equity from the principal pay down while we have it under the master lease and while the prepayment penalty or also called defeasance burns off.

Danny Johnson: Did you ever find out what the reason behind them selling the place was?

Joe Fairless: Yeah. They’re developers at heart and they wanted to take the cash and go develop something.

Danny Johnson: Nice. And so what kind of cash flow numbers are you looking at as soon as you bought it? Do you remember?

Joe Fairless: Yeah. Oh, vividly. By the way, while we were talking, I looked up the mortgage calculator I use. I also looked up the formulas that I use for a single family homes stuff. So if you want me to quickly mention that I will.

Danny Johnson: Yeah sure. Go ahead.

Joe Fairless: So the mortgage calculator I used and let me just make sure it still works, the link is still good.

Danny Johnson:  I’m wondering if it’s going to be the one that – is it not working anymore?

Joe Fairless: No, it’s good. It’s good, it works. It’s www.goodmortgage.com – it gets a little ugly with this. You just Google –

Danny Johnson: Yeah. We’ll include it in the show notes.

Joe Fairless: Yeah. I’ll send you the link it’s goodmortgage.com/calc_investment_property.htm. It’s a little ugly, but then to answer your question about the monthly expenses and maintenance fees because I had this down to science, I just haven’t practiced this science in three years. I took 10% of the expected monthly rent, multiply that by 2.5 and that’s what I used as a placeholder for monthly expenses.

Danny Johnson:  So expected monthly rent x 2.5.

Joe Fairless: 10% of expected monthly rent x 2.5 and those are my monthly expenses.

Danny Johnson: And then you looked at how much rent you were currently getting.

Joe Fairless: Yup and I assumed 4% inflation and 6% property value growth.

Danny Johnson: I’m sorry, what was the last one?

Joe Fairless: Property value growth. And the only reason you had that 6% is that’s just the default in this calculator. So I was just going with it.

Danny Johnson: And this is for the single families, right?

Joe Fairless:  Yeah. And it’s interesting to look back on those single family purchases now because it’s been a good amount of time. The first one I bought for $76,000 it’s worth at least $100,000 and it rents for $200, but that area’s decreased in desirability, Duncanville, now I am renting a Section 8 tenant, but I’m renting for $200 than when I was to someone who wasn’t Section 8. So more rent – and property’s appreciated about $30,000 because I bought it at the perfect time in 2009, but not much upside in appreciation. The second house I bought for $81,000 or $86,000 — $81,000 final answer –and that property is probably worth $120,000. That was in a good area at Fort Worth Texas. It rents for the same amount that it rented for originally, which I believe is $1,200 so that property is in a good area and solid rental and totally maintenance free because it’s so new, built 2006. Third house, that one I bought for $65,000 and it was appraised for $86,000. It’s probably worth around $110,000 according to Zillow and that rents for $1,100 and then the fourth house I sold because it was the ugly duckling. It was built in 19600-something. It had bad karma, we’re out of the gate, and I wanted to get rid of that one. So I sold that actually to a wholesaler so they could do their thing.

Danny Johnson: And you have you had 30-year notes on them?

Joe Fairless: Oh yeah. That’s another interesting thing. I have two 30s and one 15. My first house I bought it with a 30, but then I spoke to my brother-in-law who also invests in properties and he has American Airlines credit union and he’s like, well, I just refinance for a 15 year at – I forget the interest rate numbers, but it was much lower than mine and I was like, “Oh, my gosh.” I can’t believe that. I went that that holiday break to American Airlines credit union, signed up because I could sign up through him, he’s a pilot for American Airlines and I ended up getting, this is so awesome and crazy, plus or minus $10 mortgage payment with American Airlines credit union, but switching it from a 30 to a 15 year.

Danny Johnson: Yeah, it’s crazy.

Joe Fairless:  It was incredible and it was just the result of building up equity, buying it right and just being at the right place at the right time with the interest rates.

Danny Johnson: Awesome. And then for the big 168 unit, how did you go about determining what you were going to pay for that property?

Joe Fairless: Well, it’s all about how much money it spits off, so the NOI, and then operating income, income minus expenses equals the NOI, then dividing that by the cap rate, capitalization rate, for that area. So I had a sense of what the cap rate was and I knew how we were going to underwrite the property with NOI so I just did the math and then I looked at comps. Then we also got the appraisal, but the appraisal was done during due diligence. It just verified that we were correct, went over and we had gotten it under contract for $6.35 and it appraised for $6.7.

Danny Johnson: Do you know what the cap rate was?

Joe Fairless: Yeah. It was, I believe, a 9 cap at the time. It’s fortunately gone down since then because multifamily is so hot right now. So I’d say that area is probably an 8 cap at this point, but when we bought it we are about a 9.

Danny Johnson: Can you explain the cap rate a little bit more?

Joe Fairless: Yeah. So cap rate is capitalization rate. Basically if you pay all cash for something, that’s the percent back of cash flow that you’ll get for it. So if it’s a 2 cap, then I don’t know why you’re buying it because you can probably get better on a bond. But you’ll find that the cap rates are lower in markets that are more mature or hot like more mature being New York City, hot like Austin, and then the cap rates are higher in markets that are not as developed or perceived slower grower or more risk. The 9 cap in this instance was Cincinnati.

Danny Johnson: Do you shoot for a certain cap rate or is that based on just where the property is and how much you want the property?

Joe Fairless: I want at least an 8 cap because then 8 cap, I can pay my investors and then also pay myself and have some upside in the property.

Danny Johnson: All right. The cash flow on that one with the loan and everything, can you give us an idea of what kind of cash flow that was throwing off?

Joe Fairless: Yeah. It was over 8% year 1 and we put in $1.3 million as a down payment. So 8% on that $1.3 point three million was the cash flow for year one and then we’re continuing to improve it and get it to a place where we’re going to significantly increase the value of the property.

Danny Johnson: Right. So how do you manage these properties? I guess for something that big, you sort of have on site management right?

Joe Fairless: Yeah. The rule of thumb is you have one manager and one maintenance person for every 100 units. So with 168 units we’ve got one point five. We have a full time ___ [0:34:13] manager and a leasing agent part time and we have a maintenance person full time and we have maintenance support staff who help out on unit turns and miscellaneous things.

Danny Johnson: All right. And so do you have sort of the manager hiring those whenever you have turn over from the maintenance people.

Joe Fairless: Yeah, it’s usually a team. But the manager is going to be the one usually on charge on everything.

Danny Johnson: So do you have to go and basically spend time, just keeping an eye on things and making sure that they’re doing things properly. How much time do you spend on things like that?

Joe Fairless: Yeah. It’s important to oversee things. One it all boils down to numbers, so you want to keep track of the numbers and you want to look at that with a magnifying glass every month. And then you also want to take a visit to the property. Especially if you’re local, you want to see it and oversee it more so than you would single family homes. I mentioned I didn’t look at properties, my single family homes in person, but certainly do that with the multifamily stuff because it’s a whole different game and also I’m investing other people’s money.

Danny Johnson: Yeah. And it’s a lot of money at that. So with properties like that I would imagine like knowing what kind of maintenance is going to come up is a big deal because it costs so much, so like the roofing and things like that when you have to replace it for so many units, do you take any of that into consideration whenever you buy?

Joe Fairless: Yeah, absolutely. You got to allocate towards what they called CAPEX, capital expenditures, and you want to allocate usually $250 per unit per year to CAPEX for roof, for plumbing, for pavement, things that just go out that last years but eventually will come up if you have a hold onto the property long enough.

Danny Johnson: All right. So that’s a good rule of thumb, then that $250 per unit per year, you set that aside for all those maintenance items?

Joe Fairless: Yup, exactly.

Danny Johnson: So what are your plans right now? Are you looking for more large apartment buildings and do you have sort of a limit on the size?

Joe Fairless: No limit on the size and I accept that 150-plus is my limit, I won’t look at anything less and the plans are just to acquire the next one. I just got done last month acquiring a 250-unit in Houston and then on onto the next one and also making sure that the ones in the portfolio the 168 and 250 perform.

Danny Johnson: Oh yeah. What cities are you looking in right now?

Joe Fairless: Actually, all over. Really we identify the opportunity and then we make sure that the market makes sense and we have expertise in the local team member in that market that we trust and we’ve worked with before or have referrals.
So really it’s a matter of identifying the right opportunity and making sure it’s a market that we like based on certain criteria that we use. But we’re looking all over the US.

Danny Johnson: Nice. Let’s see here. As far as any kind of mistakes that you’ve made, I know you talked about you know learning about the different types of occupancy and how important that was. Are there any other mistakes that you’ve made that you would have liked to have avoided?

Joe Fairless: My friend, we do not have time for all the mistakes. I would say, another mistake would be I think hiring a property management company is one thing, but it’s another if the property management company has money in the deal in they’re part owners with you and it’s a whole another thing if they raise money from investors and bring their own money into the deal because then they are partner not only a vendor. So that’s one thing that we did with this Houston deal, my last deal, the 250 units where the property manager company actually invested their own money into the deal. Now that’s great for accountability, but the downside is if we get in a disagreement then we’re stuck with them. We can fire the management company, but they’re still partners with us. So you want to make sure that you do that with a company that you know, like and trust to have a long relationship with or have good vibes with and that you’re writing the contracts, so that you can fire the management company, but they’d still be in as partners just what the initial agreement was.

Danny Johnson: Yeah it’s always hard to foresee what might be down the road when things come up in everything. Everybody likes to hope everything ends up perfect, but it’s not a perfect world and being careful up front with thinking through what could happen and then making sure that each of those risks are made aware whenever you’re drawing up the paperwork. So have you had a problem with something like that before?

Joe Fairless: No, not a problem before but it’s always better to add that another layer of accountability because I think as we grow our business, we can always evolve it so that it’s better. I think that’s the next evolution of my business is to have those types of partners. Similar to when people raise money, they typically do joint venture first where they partner with someone, then they do a syndicated deal where they raise money for a deal, and then after that they have a fund where they raise money for a fund and then buy multiple deals within the fund. It’s just another evolution of the company.

Danny Johnson: That’s cool. Is there a book that you’ve been reading and enjoying lately that you’d like to recommend?

Joe Fairless: I just started to read “Pitch Anything” so that’s pretty interesting. I’m only on page 9, so I won’t recommend that. I’d recommend “Crucial Conversations,” Crucial Conversations is all about how to communicate with others whenever opinions vary and the stakes are high and they talk about establishing a mutual purpose where you can boil down the root of each other’s perspectives and start with what both of you have in common on your purpose and then build up from there.

Danny Johnson: Great. That sounds like a good book. I think I’ll get on Amazon after this and order that one. Add it to my stack of 10 books on my nightstand that I’m working my way through.

Joe Fairless: And I’ll just send you the link to the mortgage calculator by the way.

Danny Johnson: Okay, yeah. And I’ll definitely put down that on the show notes page. How can all the flipping junkies out there, all the people listening to the podcast find you?

Joe Fairless: Well, all you flipping junkies out there, I love the many connotations that are associated with the flipping junkies. I will say that my podcast will be very beneficial for you because I interview experts like Danny and I actually have many different episodes with flipping experts. And the best way to find me is just Google my name Joe Fairless and you can check out my website. You can go to the podcast. If you want to send me a note, send me a note through my website, the contact Joe page, I read all those, so happy to connect. You can also find me on Facebook where I give the episode every day. Every day’s episode is publish on Facebook so you can track that and listen to the episodes that you want to listen to or just go subscribe on iTunes.

Danny Johnson: Cool great. So we create a show notes page for every episode on flippingjunkie.com, so I’ll also have links for all of those things for Joe’s website and to the Facebook page and everything on the show and its page. And that can be found at flippingjunkie.com/podcast/joefairless and Fairless is F-A-I-R-L-E-S-S. That’s correct right?

Joe Fairless: You got it.

Danny Johnson: All right, good. I really enjoyed having you on the show. You’re a down to earth guy and I always enjoy talking to people that are somewhat like me and I feel like you are, so that’s really cool. Thanks for being so generous with your time and information Joe.

Joe Fairless: Thanks a lot Danny. I’m grateful to be on the show and really glad that we got to know each a little bit better on this one in addition to when I interviewed you.

Danny Johnson: Cool. All right. Well have a great one.

Joe Fairless: All right. Talk to you later.

Danny Johnson: All right. Bye.

Hope you enjoyed the episode. Be sure to subscribe and leave a rating and review on iTunes as that helps a lot with the podcast. Be sure to check out the podcast next week, I’ve got my good friend Nathan Cron here from San Antonio sharing a lot of great stuff, so be sure to listen in next week. See you then.

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