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Investing in Small Apartments with Lance Edwards
In this episode, Larry invited his good friend Lance Edwards. Lance is the author of the best-selling book, "How to Make Big Money in Small Apartments.” Lance has been an active real estate entrepreneur since 2002 when he bought his first small apartment, using none of his own cash or credit.
Lance has done deals ranging from 3 units to nearly 300 units, buying and flipping, but always using other people's money. He has been training real estate entrepreneurs and investors nationwide since 2007 the same exact systems they can use to get started.
- How Lance got started in real estate through small apartments
- How he was able to quit his job
- What his niche is and why he chose it
- How he finds most of his deals
- - Website
- - Brokers/agents
- - Direct mail
- Criteria he is looking for in direct mail
- On doing massive mailing
- On analysing deals
- What cap rate is
- Determining the local cap rate for a specific geographic area
- Average expense ratio of an apartment building
- Automating offer generation
- Finding a good management company
- Number one attribute you should look for in a good management company
- On partnering with his students
- On his book "How to Make Big Money in Small Apartments"
- "Think like a 12-year-old. Just pick up the phone. Nothing can happen."
- "It's all about the math."
- Never self-manage your own building."
RESOURCES AND LINKS FROM THIS SHOW:
- CBRE: United States Commercial Real Estate Services
- Institute of Real Estate Management: IREM
- How to Make Big Money in Small Apartments by Lance Edwards
- Free Apartments Book
Larry: Welcome to the Brain Pick-A-Pro show live from Lake Wylie, South Carolina. I really appreciate you guys watching and listening. This is the show where we interview experts, rock stars, people I know, like and trust. That’s the only people you’ll see on here, people I know, like and trust, been working with, I know I have a relationship with and I know what they are doing and they are the real deal. So, please share, please like, please leave us some feedback, please leave some comments. We really, really appreciate it. Thank you so much for watching and listening and today’s special guest, good long-long-time friend of mine, I’ve known him for years, I have his training right here, gone through his training, he is the man, the legend and the myth and he is really, really good at what he does and I’ve known him for a long time, he’s actually been to my office and we hang out quite a bit, please give a warm welcome to Lance Edwards, what’s up buddy?
Lance: Well, Larry thank you so much. It’s a great, great pleasure and honor to be here on your show and I admire everything you are doing and so really, really great to be here.
Larry: Awesome, awesome. So, tell us a little bit about yourself just so for people who may not have heard of you, I’m sure everybody has, but just that there’s one person up there that has been living under a rock.
Lance: Fair enough. So, my story is similar to a lot of people back in, you know, go back to 2002, I had a full-time corporate job working 60 hours a week and wanted to find an extra stream of income and I discovered real estate investing and I want a little different route than most people. A lot of people got started with houses, I got started in the niche of small apartment either 2 to 30-unit building and my very first deal, you’ll love this Larry, my very first deal I bought with seller financing, a 100% seller financing…
Larry: Yeah baby.
Lance: Did it over the phone with a lady that I did on direct mail campaign, then we met her, bought the first property and that was my first deal which by the way was also turns out my most critical deal and the scariest and I find that with most people with their first one. But in the first deal on my belt, for the next 2-1/2 years, I’ve 50-50 deals, bought more fourplexes with 10 unit, 50, 85 unit projects. Always buying with OPM (Other People’s Money), that’s what I’ve been taught and within 3 years I was able to retire from my corporate job of 20 years and that was back in 2005. A couple of years into that then my real estate club, we have a great club down in Houston and they asked me to come do a little seminar for apartment deals. My very first seminar was in 2007 and since then I’ve been teaching 10 to a thousand of people how to get on their path to financial independence and we are very active in the training business. We love teaching people what we are never taught in school; number one, I love training and number two, I love doing deals. I know you do as well Larry and very often we partner with our students and do deals together. So, that’s my story and I got to give kudos to our host here Mr. Larry Goins and our company has been growing and I got to tell you about few years ago Larry hosted me at his office and he gave me one tip that I took action on it, here’s the key part, I took action on it and as a result our company grew sevenfold and we’ve been awarded three years in a row by Inc. Magazine as one of the fastest growing company in the country. So, that’s my story. Thank you Larry. Thank you for that tip. That’s a good tip.
Larry: Awesome Lance. I really appreciate that. Thank you so much. I really, really appreciate that. That means a lot. I’m glad I was able to help.
Lance: Oh, man it was a nice tour. Thank you Larry.
Larry: Awesome, awesome. So, you got started, you did your first seminar in 2007 and you were able to quit your job in three years and now you teach people how to do multifamily. Now, you are not really talking about, you know, 100, 200, 300 units, what is your niche?
Lance: All right, that’s a great question. My niche is small apartments. We define it as 2- to 30-unit building. So, it’s duplexes, triplex, fourplexes and the small and medium commercial, 5 units up to 30. And it’s interesting and the reason I picked that niche is because I think it’s the best place to start. By the way, the way that I teach to do a fiveplex is the same way you do 500 units. It is all based upon, apartment is a very simple math that we analyze the deal, etc. but I believe to set upfront the most critical deal is gonna be the first deal. It’s also gonna be your scariest and so my job is to get people into their first deal and get that boost of confidence and then from there your brain will take over to start doing like big deals. So, we chose this niche of small apartments and I say this, there’s a lot of advantages to them. Let me share this with everyone, first of all, there’s lots of small apartments out there, there’s plenty of them. Two things you do, just like Larry does with houses, you can wholesale them or you can buy and hang on to for cash flow. Well, if you wholesale them, there’s lots of buyers as a matter of fact, single apartment landlords have a biggest buying group of small apartments so there’s lots of buyers, you can match them up too. And when you are buying them, you know, even with their apartments, they are not like really giant items, you don’t need a lot of money for the downpayment. You can buy them on seller financing, the same thing that you teach Larry or buy them on seller financing and it needs a little bit downpayment then we go raise that from a small IRA investor. So, all you need is one, to get started. And so it’s a great, great niche. It’s a very lucrative niche. A lot of people is not aware that you can wholesale small apartments. People is only aware you can buy small apartments on seller financing just like you teach and so we chose this niche as very really lucrative in its own right but it’s also the gateway in moving into midsize and large door apartments.
Larry: That’s awesome. That’s really, really good. So, you mentioned several things here. I want to touch on about small deals, a lot of them are single family investors, they move into that, it’s a great way to get started, how do you find most of these deals? Where are you finding them? Are you doing direct mail? And if so what’s your criteria? Or you are doing, you know, going out and talking to property managers or are these mostly mom-and-pop self-managed or what?
Lance: Yeah, it’s a great question. There’s three primary means that we teach and use into getting deal flow and we are doing it across the country by the way. Number one is website, number two is brokers and agent, number three is direct mail. And websites are places like MLS. People don’t realize if they’ll think of MLS they’ll think of houses, it’s primarily houses but you’ll find a lot of small apartments on MLS. Another website of course is LoopNet.com which is commercial listings. Those are properties that are formally listed for sale. So, that’s the one source. Another source is brokers or realtors who the thing is you can go to LoopNet but when a broker gets a new listing, the first thing is they don’t necessarily put it on LoopNet the first thing. The first thing they do is they go to their people who they have a relationship with. It’s called a pocket list and so we use script, we teach people how to on their first call, call brokers and develop a quick relationship so you can get on their radar and there’s a process of followup to make sure they are receiving this pocket listings. Now, I wanna share something, Larry you’ll appreciate this, up until recently the youngest student I had who was successful in calling brokers using a script is an 18-year-old who was calling brokers, he didn’t know nothing from nothing but he knew how to read scripts, we got him on the script and he found a deal that he and his dad went out flipped and wholesale. The building made $30,000 the first deal. So, I used to brag about him and I still brag about him. He did was great. Until recently I was at one of my event and a 12-year-old was there with his aunt and uncle, coincidentally his name was also Dylan and the 12-year-old has been calling brokers using the exact same script and I said Dylan that’s phenomenal. I said, aren’t you nervous? First of all, didn’t they ask you for proof of funds? No. Did they ask you how old you are? No. Well, weren’t you kind of scared talking to them over the phone? He said, “what should be scared of? They can’t come to that phone and get me. We are just talking.” And I shared the story to anybody who is a little nervous about getting on the phone like I was when I was getting started, listen, think like a 12-year-old, just pick up the phone, nothing can happen. So, the second way to get a deal close is through broker. The third way is direct mail and as far as I’m concern this is the secret weapon because it puts a direct contact with an owner, there’s no competition, most often the property is not even for sale and that’s how I get our owner finance deals is talking straight to the owners through direct mail.
Larry: That’s awesome. So, tell us about the direct mail, what’s your criteria that you are looking for? Do you look it up on like list source or something like that and send out a list and if so how wide of a geographic area are you looking at?
Lance: So, what we do, first of all where we get the list from. A couple of things, you can certainly go to a list broker like ListSource. We have a service called ProspectNow.com and you pay them a little bit of money and you can actually go on their website, you can pick up a criteria, the location, the size, etc. You can download a list. But another source you can use, I think people don’t realize is the old County Appraisal District ‘cause every county maintains a database, all the properties, who is the owners are. Well many counties you can call them up and they’ll send the database for a free or a few dollars. To me $4 is the cost and they’ll send you the database so that’s very, very low cost and it’s not free. In my county, Harris County in Texas, they’ll do that. So, you call the county, get it for free or you can use this website. The next criteria is and I’ll share with you we run a lot of campaign nationwide on behalf of our students. It’s actually Done-For-You-Service, we do for them. So, we have thousands and thousands of postcards constantly out across the market. So, we are choosing markets all over the country really with a criteria of 2 to 30 units and there are many ways to get more scientific than that in terms of, you know, how much equity do they have, are they on probate, we don’t do any of that as a choice we can make, we just send the postcard and see what comes back and then we will make a decision based on what comes back. What we will do with this, are we gonna wholesale it, are we gonna buy it. We will just let the market tell us what to do with each transactions. So, we are just doing massive, massive mailing.
Larry: That’s really good. I’ve often wondered because we wholesale and this is kind of a sad question, I’ve often wondered, is there a way to find a list of single family houses that have tenants in them that are rented? Not just absentee owners but actually have tenants in them. Is there any way to find those?
Lance: Well, it’s such a great question. You certainly can find rental houses by finding the property that either one of two things, the owner has a different address than the property address or that house is not homestead. So, you start to find rental houses now if there’s someone in there or not, that’s a great question and I’m sure there’s a way but often tip here, I can’t say what it would be but that would be a great source to go after.
Larry: I was just curious about that because we buy a lot of houses from landlords and of course a lot of the people we direct mail to are absentee owners, the house is just vacant, you know, maybe a family member is using it or something but it’s not got a tenant in it. I was just curious about that. Okay, so, you’ve talked about you get them off the MLS, LoopNet, direct mail, you use ProspectNow.com to get a list, now let’s talk about analyzing these deals. You say, you really analyze the deal, a small multifamily, pretty similar to the way you would analyze 100 units or whatever, can you give us a kind of a not quite a 30,000 but maybe a 5,000 foot overview of how you analyze these deals.
Lance: Well, one of the things that are important to everyone, so we are saying small apartment of 2 to 30 units, they get segmented, if they are 2 to 4 units is residential, 5 plus units is commercial. Now, if it is the residential sector, you will run comps the same with you Larry you would teach on pulling comps, it’s just its cost. When you get into the commercial space, 5 units and above, you evaluate apartments based upon something called the cap rate which means capitalization rate which is basically if you buy a building plus return on investment because these are income producing property and the cap rate everyone know that is a very simple formula, you take the NOI (net operating income) and divide by the price of the property, that’s your cap rate. And the NOI (net operating income) it’s simply the revenue minus the expenses and so when you know the cap rate the way we analyze it is you wanna buy, think a little bit backwards everybody, let me try and set you through this but you wanna buy at a cap rate higher than what’s called the market cap rate. The market cap rate is determine by each individual market and it’s the cap rate at which the retail market is willing to accept on an apartment building. So for example in Houston where my operations are, so the market cap rate there on a class C building is 8.5%. That means the market will pay a price that will yield an 8.5% cap rate on retail price property. So, I wanna find property that I can buy at a cap rate above 8.5% because if I’m buying at a cap rate above 8.5%, I’m paying a price that’s below the market price. So, we are trying to buy properties above that cap rate. So, you know, that foundation going back to the question you are asking Larry, so whether it’s 5 units or 500, the way every commercial apartment building is evaluated is based upon cap rate. It’s an NOI evaluation.
Larry: Good. Good. Good. Now, what’s the best way to determine the local cap rates for a specific geographic area?
Lance: Yes, that’s a great question. It all hinges upon this, there are several ways and I’ll tell you a number of ways, I mean you can go on the CBRE website they will publish market cap rates for the major MSA, the large market, it’s probably about 44 market cap rates. Now, if you are not one of those major markets then what are you gonna do? Well, a great source if you can get an access to it is a commercial appraiser. Commercial appraiser in that local market will have the market cap rate and that’s how they are evaluating properties. But the simpler and the quick and easy way to do it is calling commercial brokers. And you are gonna call and I recommend you get 3 opinions, call a commercial broker in that particular market you are interested in and you want to ask them what is the market cap rate, you know, make sure they are all kinda consistent like an average.
Larry: That’s really good. Good stuff. Good stuff. Is there any specific rule of thumb because, you know, you and I both know especially in the small multifamily space, the owners, the small operators, they don’t keep as good records as the professional management teams that are managing the 100 to 200 plus units, so how do you I mean you are gonna get a seller on the phone and they are gonna say, “oh man, I spent nothing on repairs last year.” Do you have some rules of thumb if a seller doesn’t have any records or they are being evasive of like you know, X percent, you can count towards income or X percent as expenses?
Lance: That’s a great question. That’s a great question because in the world of small apartments and its niche, Larry spot on, these are mom-and-pop owners and then by the way they have been private managing the property for years and the number one reason they are thinking about selling is because they want to move on, they don’t want to mess with it anymore. And because they are mom-and-pop individual, they don’t have a management company, they are self-managing and so their idea of a management system is a shoe box full of receipts and that you can ask them for major report and they don’t gonna have anything. So, what we do and this is very, very important, we could estimate the expenses through what’s known as the average expense ratio on apartment building. For the average expense ratio for apartment buildings is 45%, which means if you take what’s called the gross scheduled income which is simply the number of doors times the rent, let’s say you got 10 doors and the average rent is $500. So, 10 doors times 500 is 5,000 a month times 12 months and that’s 60,000 a year gross scheduled income. 45% of that 60,000 would be the average expense and it’s $27,000. Now that 45% includes a management fee because I don’t want anybody self-managing this building, you want to hire a management company. The reason that owner is selling is they got burned out managing it. So, with that 45% expense ratio includes everything, the taxes, the insurance, the management, repairs, and that you can use 45%. Frankly, you know, when we are making offer, we don’t even ask for the finances anymore, we will just use the 45%. We will try to get any financials once we get under contract and the due diligence.
Larry: So, you are saying you can really make an offer and move through and close on a deal if you just use that rule of thumb of 45%?
Lance: Absolutely. Absolutely.
Larry: Wow! That’s a lot of work. I’ve never done it.
Lance: It does. I mean you can make offer just like that. As a matter of fact, what we’ve done because of that we’ve actually automated, we have software tools that we use, we’ve automated a lot of the analysis and we’ve actually, you’ll appreciate this Larry, we’ve automated the offer generation. So, once I know the market cap rate in the market and if I know the rents and the number of units and the vacancy, I’ve got software now that will literally compute the offers and spit out a letter of intent automatically so we can shoot offers off to the sellers right away. It’s all about the math. It’s simple math.
Larry: So, correct me if I’m wrong, let’s take that house that property that is bringing in 60,000. So, 60,000 and 45% is 27,000. So, you got 60,000 minus 27,000, right?
Larry: So, you got $33,000 net income. Are you gonna take that and divide that by let’s say the cap rate is 8%?
Lance: Okay, let’s get through this. I will make one adjustment. So, 60,000 gross scheduled income and we will subtract 45% for expenses that is 27,000 and I’m gonna subtract 10% for vacancy ‘cause I always fill in a vacancy factor of at least 10% and that accounts for people moving out, not paying, whatever. So, it’s another $6,000. So, my NOI (net operating income) is 27,000 per year and let’s say the market cap rate is 8% so you will take 27,000 divided by 8% is $337,000. That is the retail value that is the market price retail value of that building, $337,000. Now, we are gonna be paying cash, we want to get it at a price lower of the $337,000 and that will leave you some spread. However, I wanna go in and buy for owner financing. I want the terms with the best terms that I can get. I’m willing to pay retail price if I can get the right terms and so we actually make multiple offers to these sellers. There’s two seller financing that offers me making one cash offer and we make all the same letter of intent.
Larry: Right. So, is 45% plus the 10% really 55% and then you just divide that by the cap rate and that’s what the retail value is. Anything below that is gonna be a deal.
Lance: Correct. With one exception. I will pay that price if I can get very, very good owner finance terms.
Larry: Good. Good. How much below the cap rate price like in this case it was what did you say 337,000 or something?
Larry: How much below that would you advice your students to pay for the property?
Lance: What we tell them when we are talking is 17% and that’s the ratio. It’s gonna be a cash purchase or I gonna go raise financing to cash that seller out, we’re gonna start 17% below.
Larry: Yeah, explain that if you will. 17% below the 337,000?
Lance: Let me explain it this way. There’s a lot of people listening that may have heard the rule that you are buying apartments in a thin cap. Well that rule is based upon and assumes the market cap is 8.5% well 10% is 17% more than 8.5%. So, what you really want to do is if the market cap rate, let’s take your example, if your market cap rate is 8, what I want you to do is multiply 17% of that. Let’s take 8% multiply that 1.17 and that’s 9.4 so I want you to buy it at 9.4% cap. So, in Larry’s example, we will take $27,000 NOI divide that by 0.094, so my maximum offer is $287,000 which is $50,000 below the $337,000. That’s my maximum offer at $287,000.
Larry: That’s good stuff man. That’s good stuff. I appreciate you taking the time to explain that because that’s what people want. They want the details and you gave it to them man. That’s good stuff. So, we’ve talked about how to find deals, we’ve talked about how to analyze deals, we’ve talked about the market, we’ve talked about the cap rates, how do you find the good management company?
Lance: Great question. By the way here’s the rule, never, never, never, never, never self-manage your own building because if you get 6 months into that you’ll gonna be out. You are not good at it. So, we hire professionals and so let me say what’s you are looking. You are looking for a management company and by company I mean they have a staff in place, they have processes, they got this exclusive focus on managing multiple properties. They probably have 400 doors that they are managing, they got many, many clients. That’s what you are looking for. What you are not looking for is somebody that, you know, is a realtor and they are doing some property management on the side to earn extra few bucks. No, no that’s not what you want. You want somebody that is focused in this area. So, if you find these, the best way, first of all there’s number of sources, you can go to the website called IREM.org and that list certified management company and that’s a good source. But what I recommend is the best source is always referrals. It’s on the local agent. The people that are in that market place seen the transactions being done and by the way you develop your relationships with them already because that’s one of the ways you are getting deal flow is that ask for referral from these local agents because they know what is the real scoop is and then from there is the interview process. We have a pretty comprehensive interview to really find the true management company to really know their crap and I will tell you in my opinion the number one attribute that you are looking for in a good management company is they are aggressive marketers meaning they are constantly listing your building, they don’t just go stick a sign on the side of the road hoping somebody is gonna stop by. They got massive marketing going on. They got multiple meetings of attracting prospective tenants because you want people 100% on this. You want to have a waiting list. That’s what we are looking for with management companies. They know how to fill these buildings up. That’s what where your cash flow really comes from.
Larry: That’s awesome. That’s awesome. I really like that. And I’ve got the checklist. I have it.
Lance: That’s exactly right.
Larry: So, Lance you mentioned earlier, early on in the conversation that you partner with your students some, how do you structure that? How does that look?
Lance: So in couple ways, we do it on a wholesale transactions. And so students have been trained, first of all they got to be trained so they know our system on how to find a real deal, they bring the deal and then we will advertise and market the deal to my buyer’s list, we put it on website all across, we put it on my website at SmallApartmentDeals.com but we actively market that property across all different sources and then when the buyer come in, we screen them, we qualify these buyers and then we will negotiate on the assignment fee and then we do a split with the student. That split can vary upon how much work they did if it’s 50-50 or if they are just kinda throwing a lead to it, it’s gonna be less than 50%. But they are bringing us leads. I will tell you some really interesting couple of stories maybe you’ll find it interested Larry, so we did one and I will share with you, this was two properties, two duplexes at Indiana and we are in Houston. Two duplex in Indiana, we put them on a contract using the exact same ratio that I shared to everyone, we have them on contract, we want to wholesale. When we started marketing the property, our buyer came out of Switzerland and the buyer paid us $50,000 for the contract and the other one is purchase prize, that was my property, wired $50,000 into my account to purchase the two contracts and then he went to close in. I shared that story because it really when that happened it kinda really changed my whole mindset because the idea first of all getting properties in Indiana that’s cool but the idea that our buyer based becoming not only from this country but from another continent really, really impressed me. And so we talked about wholesaling this properties, income producing property that a management company that is gonna run you can find him all over the United States and you can market them literally all over the world and I will give you one other case study that is on the bigger end of the side, we had a couple of students, actually up in your neck of the wood, up in the Carolina, they found a property in my backyard at Houston, 294-unit building, we put it under contract to buy for 11 million dollars and wholesale it to a buyer at Canada. So, it’s a very fun interesting space with lots and lots of opportunities.
Larry: I love it man. That is great. That’s really good. Now, you wrote a book, you are a bestselling author as well and you wrote a book about small apartments, right?
Lance: I did. I did. Coincidentally, I have one right here Larry and so I have a book, I wrote “How to Make Big Money with Small Apartments” and it came out number one on Amazon and I’m really proud of this. I put a lot of energy into this and it lays out how the business works step by step, the math, how we find them, how we fund them, everything that we do and I’m very, very proud of this, “How to Make Big Money with Small Apartments.” You can get it on Amazon.
Larry: So, what does someone have to do to get a copy of it?
Lance: Well, I’m gonna make a special offer for your folks and you know, you gave me a tip one time and it really paid off so what I wanna do is you can get the book on Amazon at $14.95 or I got a better offer for you, I’ll give you the book for free, I’ll offer your listeners, your subscribers, the book for free. I’ll give you website to go to and I’ll send you the book for free, we will send you some other resources along with it if you’ll just pay $6.77 shipping and handling which I think is a fair offer. If you’ll pay the shipping and handling, I will send you this book and some other resources. That website that you can go to is freeapartmentsbook.com and we will send this to you with other training resources right away.
Larry: That’s really good. And that really is free plus shipping I know because I pay almost $6 just for the printing of one of my books so I understand. I know it’s not like you are paying a dollar a piece for it and making 5 bucks for everyone of them which is not any money anyway but still guys you need to go get that at freeapartmentsbook.com. So, Lance I really, really appreciate you being on. This has been some really, really, really good content, really good information. Thank you so much for sharing man. I’ve got a whole page of notes here. I’m really excited about it. I’m fired up even more now and I wanna go get some more of these small apartments ‘cause I’m already buying a lot of single family houses, you know, 6 units, 8 units, 12 units, whatever, but they are all single family houses that one person owns. So, I’m gonna add this to what I’m already doing. So, I’m really excited about it. Thanks buddy. I really appreciate you being on.
Lance: Larry, it’s actually my pleasure and I appreciate what you are doing. You are doing great stuff and so I’m honored to be able to share what we are doing with your listener base.
Larry: Sounds great. Thanks a lot buddy. You take care.