Your property managers are your asset managers. They take care of your property, fill vacancies, maintain the property, take care of the tenants who are your customers, and deal with the law and liability. They need to be understanding of the environment, speaking of the law and liability. Dave is the co-founder of Great Jones, a venture-backed business on a mission to make property management efficient, effective, and delightful for owners regardless of their portfolio size. He has a lot of industry exposure and experience. He was the director of construction for FirstKey Homes, a massive company that has purchased an untold number of homes. He oversaw operations across ten markets. Before that, he was the regional director of another massive company called Waypoint Homes. Dave talks about building his own company and gives his perspective on real estate investing.
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I wanted to get inside the head of a property manager and find out his perspective on real estate investing. During this interview, we bounced around talking about different things. We started off talking about him in this great venture that he has started. He built a company called Great Jones, which they planned to take nationwide as a property management company with some very unique services that come from the corporate world actually from Wall Street because he used to be with Waypoint Homes which is part of Starwood. You might know the hotel chain Starwood and they used to be with FirstKey.
He comes from a background of publicly-traded companies and companies that are backed by tens of millions of dollars. These companies were literally buying thousands and thousands of properties. In fact, he was part of that whole acquisition, which is still going on but he decided to branch off and start creating a nationwide property management company. It’s small but this guy has got the smarts and his team got the smarts to make this a very big deal. You think about property management, I talk about this often and they’re not just your property manager. They’re your asset managers. They have to take care of your property, fill vacancies, maintain the property, take care of the tenants who are your customers and deal with the law and liability. They need to be understanding of the environment speaking of the law and liability.
If you missed our last episode, be sure to listen to Mindset Matters! Leveling Up Your Life Through Real Estate Investing.
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A Property Manager’s Perspective On Real Estate Investing
Dave Diaz is the Co-founder of Great Jones, a venture-backed business on a mission to make property management efficient, effective and believe it or not, delightful for owners regardless of their portfolio size. He was the Director of Construction for FirstKey Homes. For those of you that don’t know FirstKey, they are a massive company that has purchased an untold number of homes. He oversaw operations across ten markets and before that he was the regional director of another massive company called Waypoint Homes. He has a lot of industry exposure and experience. Dave, welcome to the show.
Thank you so much for having me.
It’s my pleasure. You have a tremendous amount of experience. I’m completely intrigued with all the things you’ve done and where you’ve been. Tell us a little bit more about your background and experience, so our readers have an idea of where you’re coming from and what you’re going to be trying to do here?
The quick version is a full circle loop from being a finance MBA and working in institutional multifamily and larger apartments, surviving the mortgage crash. I found that in the local auction purchasing and bringing some institutional capital to flipping. I started out on the high-end finance side. Then ended up on the ground slugging it out in one-off renovations and ultimately flipping 300, 400 properties a year with a local company. I did that for four years. When the reaps came in, when the Wall Street guys stepped in to start buying single-family residential, as Warren Buffet famously said, “I’d love to downturn 50,000 homes. I just don’t know how I’d manage them.” Blackstone and Starwood, they figured that out. That’s what they get paid to do. These big private equity companies that like hard stuff. They stepped in and started buying single-family at $0.30, $0.40 on the dollar from peak and I was very fortunate to be very early in one of the first publicly traded companies in that space called Starwood Waypoint. You would know Starwood from Starwood Hotels the same group behind that.
We did thousands of homes, purchased, renovated, lease managed. Then, went on and ran national construction for another group. I’ve personally had the blessing of doing it all from leasing houses myself and running around showing people apartments to buying them in bulk and staring at huge spreadsheets and dashboards. That’s given me a unique vantage on the industry because I haven’t lost touch with unclogging the toilet. At the same time, I can tell you what happens when you’ve got 25,000 houses going on the same time.
For some context, Waypoint Homes is still around and they’re still buying a lot of properties in markets around the country. FirstKey is still around too buying property?
Waypoint Homes merged with Colony American Homes. It went from 36,000 to 56,000 or some number of approximating that. Then, it merged with Invitation Homes and it’s now all under the Invitation Homes umbrella. Starwood had merged with Colony merged with Blackstone and that has something like 83,000, 86,000 homes nationwide. The largest single-family homeowner in the country is the Invitation Homes umbrella.
Making them the largest landlord in the country.
If you don’t count apartments. If you look at an equity residential or something that might have 200,000 apartment units, they’re still larger but there are 500-unit blocks. Whereas these are all onesie houses. This is truly 86,000 dots on a map.
We were talking about this before, if you count those tens of thousands of homes, it still represents about 3% share of the entire single-family home market. Does it not?
To date, depending on whose numbers you look at there’s something like sixteen million-ish. I’ve heard thirteen million, sixteen million, eighteen million non-owner-occupied homes, condos, townhomes in the United States. When you add up the top 25 large owners, you start getting down to people with a thousand homes and you started to do a pretty low number for a large firm. You end up with less than 3% of the total single-family industry owned by those players.
What are you doing with Great Jones? Tell us what that company is and what you’re doing and how you even got there.
We are a venture-backed through venture capital after serving private equity players for a long time joined up with some venture capital guys who put it in a lot of money to democratize what we call efficient single-family management. When Wall Street stepped into the industry in 2012 it was the first time anybody had the scale and money to make real operational improvements in the way single-family homes are operated. A mom and pop property manager with 200 houses cannot afford or would not be economically incented throughout seven figures on a new leasing module to take ten days off their average vacancy. The numbers don’t make sense, it’s not their fault. Why would you do that when you give a very small pool of properties that would benefit.
If you have $8 billion property or dollars’ worth of properties under management and you can move your margins a few basis points, a few hundreds of a percent then, the output is huge. The gain on spending a million, might be $25 million on a few basis points of efficiency, so it carried forward year after year. It made a lot of sense for these people to bring in amazing process design experts and spend a lot of money on technology. We wanted to democratize that to give the guy in Ohio who owns three houses and they were in Naples, Florida. He now, through us, can pay the same amount for an air conditioner that Invitation Home pays. If not better because we pay faster than they do. We’ve truly democratized that experience to say we’re using a real software stuff that we build not this canned stuff that everybody’s a slave to. There’s other than financing capability where you’re not going to be Wall Street with their ability to borrow money cheaply. Then everything else we can do as if that person owns those properties inside of a Wall Street group, which would never a third party manage.
Essentially, what you’re saying is you are bringing the scale efficiencies and the benefits of having a massive management company that would manage thousands of homes and have the purchasing power. You’re bringing all that down to a very small level where smaller investors what I lovingly call mom and pop real estate investors that may own anywhere from five to 50 homes or more can get those same benefits. Is that what you’re saying?
100% correct and then aligning interests most importantly, it’s one thing to get a great deal on an air conditioner. If you mark it back up 20% and take the money for yourself, you haven’t done your customer a favor. We would look at something like that. We don’t mark anything up. We pass everything through. Then it goes further in aligning what has become a very broken industry with all these junk fees and charges to truly benefit the property owner. We firmly believe that property management is an inefficient and misaligned industry. Just like getting a cab Uber was not an enjoyable experience for very fixable reasons.
It’s like, “When is it going to show up? What’s going to cost to get there? Who the heck’s going to be driving me around? Are they going to take me for a loop?” It’s still a car that comes and gets you and takes you from point A to point B. The difference is, you know when it will show up, you know what it will cost and you know he’s coming to get you. They solved very obvious problems, but through great technology and experience we’re doing essentially the same thing but for a property management. We’re taking away all the guesswork and making it transparent. By fortune of that scale, we’re well-informed. A dentist doesn’t have to lecture me on what an air conditioner cost. I’m telling them.
What markets are you in? I know that you are working your way to become a nationwide company. Where are you now?
We started in Southwest Florida just because that’s home court for me. We serve Tampa and Orlando as well and we hope to expand at least two more markets inside of this year. Over the next couple of years, we should be in the top 25 markets nationwide. We build our technology onshore. We have an office in Lower Manhattan, actually in Chinatown where we build our tech, and we handle all of anything pretty or cool that comes out of our company probably are there.
We’re going to learn more about what you’re doing because you’re in one of the markets that we are opening in Southwest Florida. You might be tied into that pretty darn quick.
I’m obviously bullish on Southwest Florida. I wouldn’t live here.
I’ve invested there twelve years ago. I had four houses there and a one on a canal. I love the market. It’s beautiful and it’s a good hybrid market where you’ve got cashflow, you’ve got a decent rate of return, but you also have good appreciation potential. For investors looking for the best of both worlds the growth and the cashflow, it’s one market that makes a lot of sense. You must be a real estate investor you’ve been in this space for a long time. I assume that you invest yourself. Why is real estate investing important to you?
I grew up poor. I didn’t have a dad. I could go sitting around the country club to get me money. I got into management early on because I realized for every ten or fifteen properties I manage, it’s like owning one. When you’re a 26-year-old kid who comes from nothing and you have no capital, that was a way to effectively own houses without having the capital to own them. I believe that this is one of the few things an individual can do where they can get leverage there. We can margin stocks, but it’s not the same as the leveraging effect on real estate and more importantly, where other people contribute to your basis over time.
If an investor buys a property a year for every ten years and they put 20% down and they let a resident pay it off on a fifteen-year amp. At the end of a 25-year cycle, they’ve got fifteen paid for properties. They’ve got a choice of amazing annuity cashflow with no debt service or they can sell out in capital gains and make a ton of money on the eventual appreciation that’s what’s happened over that timeframe. If you go back, I have a life insurance saleswoman who takes care of my family and I love her to death, but if I were to lay out the same net present value calculation of giving somebody let’s say $20,000 a year for ten years, putting in $200,000 and letting that ride for the next fifteen and then coming out the back end and saying, “I’m going to have $2 million in equity and I’m going to have an annuity stream of $200,000 to $300,000 a year they would laugh at me. They would say, “That’s absurd. You can’t do that. There’s no way you can put in that little and get that much out.” They’re 100% right.
Real estate’s the place where your resident does that for you. It wouldn’t be possible if there weren’t people and every one of those properties paying you every month and paying down that loan? You can be me. You can come from nothing and you can aggregate great wealth and cashflow over time serving the owners that we’ve served. the Wall Street guys were already rich before they picked up the phone and started the business. Seeing people who have built amazing lives for themselves over the course of a twenty, 30-year investment cycle, whether it was her full-time job or part-time job, it reaffirms that every day that, this is something I’m not saying people should do it with 100% of their assets, but if they’re not, they shouldn’t be doing this.
You have the ability to leverage five to one, you have the tax benefits, and if that wasn’t enough you have an asset that beats inflation. At least it keeps up with inflation, not only in terms of price, but your debt is eroded away every single year as inflation continues to chug along. You’re getting paid virtually from every angle and every dimension when it comes to this asset class and you can’t do that.
The other thing I would add is it’s inefficient. I feel like if you’re trying to trade cryptocurrency, there’s always somebody running algorithms ahead of you. If you’re playing the stock market I know just enough Wall Street guys to firmly believe that that is largely rigged. There are too many people in the same cocktail party that we’re not at, that I would never play that game other than the long-term. You cannot trade in that and be successful against guys who do it for a living. A true story, I recall buying a duplex with a partner where we were standing outside. The guy walked out of the duplex catty-corner to us screaming and cursing up a storm just had an eviction, “I’m going to sell this blankety-blank.” We walked over and were like, “Are you having a bad day? Are you serious?” In that conversation, we made $40,000 on the buy. We bought something breaking ink that was worth, $129,000 as it’s sat. Eventually, you held it for a couple years and sold it for close to $200,000. I couldn’t do that, trying to guess between Amazon and Facebook stock. I would have no basis and I’m a finance MBA and I couldn’t tell you what any of that we’re going to do.
That fragmentation and inefficiency is a huge benefit to an investor who is active and aware and looking for deals or making deals because it allows us to scoop up good deals when they come along or create deals that wouldn’t work otherwise. You were smart enough to be aware and see that opportunity, make an offer to someone who is in distress, gave it up and way you go. You can’t do that with any other asset class.
It’s the hunt. We’re all hunters at the end of the day and finding a deal is so rewarding.
Let’s tie these benefits of real estate back to where we started with the property management side because I always talk about the importance of having your property manager on your team and having a good property manager. I jokingly say you live and die by your property manager. Let’s talk about from your perspective, what are the key attributes of a trouble-free well-performing rental property?
It’s important to understand that first, I look at asset quality. I look at the location. I do believe there is a floor and it depends on every single market. I’m sure you’d agree with this where the Spreadsheet looks a lot better than the reality. As an investor, even if I’m super yield-focused, I’m still going to try to find the minimum viable neighborhood or level where I’m not turning the asset every 45 days. I’m able to put people in there that have a chance of staying two or three years and then making the turnover cost worthwhile that can have a decent credit rating. That inflection point is where you typically find the highest yield and the most potential in the asset.
Gentrifying or transitioning neighborhoods can be fantastic. Having traveled all over the country, it’s been amazing to see people invest well when a city or a municipality makes it hard go to neighborhood and there’s infrastructure investment and incentives alongside. I’ve seen that. There’s an area between Indianapolis and Carmel, the central area. The name of it escapes me where they gave these inventive tax credits to owners that were willing to hold for so many years. I think they gave up to $50,000 towards the improvement of the home and then made it a deed restriction. What happens is all these yuppies move in, they start doing these amazing renovations with that money. They hold the house long-term and so areas that nobody wanted to live in five years ago are new constructions going up. Every other house is tear down, great architecture. If you can identify those things, whether it’s in your hometown or not and nail one of those on the way in, what was the $60,000 tear down there it’s probably $500,000 house.
In order to be able to do that though, you need to be very active and aware in looking at different neighborhoods and locations to try and catch that trend or know in advance what’s coming up. Maybe that’s dealing with the city council or laws and regulations and zoning changes that are coming up. Isn’t it a lot easier to start off and invest in neighborhoods that make sense? What I would classify as a B, B plus, and A minus type of neighborhood where you know you’ve got a good demographic stability, consistent cashflow because there are jobs for those types of people. Would that be the easier way to go?
If you’re remote, that is by far the most stable thing you can do. That neighborhood’s not going to swing wildly. Like you said you’ve got a high competence in the future five to ten-year outlook and if you’re still in an infill location, meaning you’re not on the furthest edge of a town you can count on growth and traffic only making your location more valuable over time. The thing I would say as a wise investor, you don’t have to buy at the absolute bottom and sell at the absolute top. It’s more important that you can reasonably predict the next five or ten years that something’s not going to wildly swing the wrong direction for you. Go with that and then have a systemic approach to it.
Part of that too is finding an asset. We call them diamonds in the rough, but I can look at two homes and one’s going to be an absolute home run and literally the same floor plate two blocks away. The structure of one home has a major flaw that nobody’s talking about or the wrong roof line or the huge oak tree that’s busted up the foundation that nobody’s talking about. You can literally look at two homes and one of them is a money pit, one of them is not. Getting them from a credible source, knowing that they’re not leaving like massive latent issues inside of those things if you’re not able to inspect them yourself and making sure they are manageable locations. I wouldn’t let my kids live somewhere while they’re in college there, I wouldn’t buy it. That’s my litmus test is what I feel safe living here myself. If I only had this much money to spend on rent, what I live here, the answer is yes, by all means.
Let’s go back to that same question. If you were to pick three, what are the top three attributes that you would look for in a rental property that would probably put it in the bucket of well-performing and trouble-free?
Location, for sure. The asset quality from a standpoint of construction, latent issues and large CapEx items. Does the roof have three years left on it? Does it have a fair amount of useful life? I will do basements, I did a lot of stuff up north, but again, it’s another thing where you’ve just got to be sure that you’re not working on a 30-year-old basement that’s never been improved because I can bet you with reasonable certainty what’s going to happen in the next ten years if you don’t. The last thing is having the local partner. If I had to choose between identical homes but felt stronger about the management execution or my team in one area or another, I would always obviously, go for the more certain execution. When a venture capitalist identifies what they feel like is a good investment, almost always they’ll say founders or execution certainty more so than industry or business plan because those things can change, but if you can’t execute you’ve got real problems. A bad manager can turn a great asset into an under-performer and a good one can overcome a lot of sins if they have to.
This is why I say property management is so critically important to have a good manager can take a mediocre investment and I’m not suggesting that you know what we sell is mediocre. We try and focus on good neighborhoods and have a good product with no deferred maintenance, no CAP expenditures. To your point, you take a similar type property in a similar location, but two different managers. I would take the better manager all day long because I know I’m going to get a better screen tenant. They’re going to probably stay longer, they’re not going to get upset because if they have a question or concern, it’s not going to get addressed right away. It makes such a big difference. I like to look at tenants as customers. I am providing them a service by giving them safe, clean and functional housing. I need to treat them as a customer and if you do that they’re going to be happy. They’re going to stay longer, they might even refer people to you.
We take that one step further and I learned this from Waypoint Homes on the part of that we didn’t even call them tenants. Legally, you have to in documents, but we always referred to our occupants as residents. It’s easy to forget that these people have holidays and birthdays and, in the asset, we provide by the fact that we keep stoves in storage locations so that when big-box stores are closed the night before Thanksgiving, we can still deliver one. Those things mean the world to people and as a management company, being prepared to execute when it counts, that’s the difference in the renewal. That’s the difference in getting more rent. You are providing an experience, this is a very important part of people’s lives. Housing insecurity is the scariest thing you can ever face as a child or a parent. We also view our vendors that way too.
I even expand the ecosystem women are our owners, obviously our primary client. That’s a huge team we’re on, but we believe the best way to serve them is to have amazing relationships with residents without giving away the farm and pay our vendors promptly and build cool teams of people who are all aligned on these things. If you’ve got vendors who will live and die for you, if you’ve got residents that you uphold nothing short of miracles to service them when something goes wrong, you’ve got people willing to jump out of bed at 2 AM and you’ve got people willing to give you the grace to get through those situations when there is something beyond your control because you built that relationship.
We’re on this theme of management here. I know you might be a little biased in how you’re going to answer this question, but it’s a good question. When you talk about the characteristics of a management company or a property manager, what do you look for? What makes a great property manager?
There are a couple things your readers should be aware of as an industry and how things are changing. I don’t think this is widely talked about because nobody cares about property management that much. The industry itself evolved quite a bit with the advent of cloud computing. Most of the industry uses one, five or six platforms. This could be like your AppFolio where you’re building them through Propertyware, PropertyBoss those such things. What’s interesting is that over the last several years, those companies, in an effort to increase revenue have taken many of the fees that used to be otherwise pass through fees to property managers.
I had a nice BMW in 2007 paid for by my residents paying their rent. I paid something like $0.50 for a Propertyware ACH transaction I think charged $4, so I made $3.50 every time somebody paid their rent that paid for nice car. They charge for $4.95 and they get all $4.95. That is a revenue stream they have completely captured. The same things for many of them with application fees and other things that they process. Your AppFolio, you charge $1.50 a unit, but you make $5 a rent payment and $15 or $20 every time somebody applies online. You can’t go to your board and say, “I want to give back all these fees because frankly, you’re making a lot more money on the ancillary fees than your other basic subscription. What does that mean to your audience? It’s like jet fuel prices rising all of a sudden and still trying to maintain ticket warfare. Everybody’s pricing of the same experts in a brand or their pricing their management services.
You enter the junk fee because the easy give-me-junk fees that were platform level fees are taking about the platform you as a manager, if you aren’t efficient and don’t have large scale and all this fun stuff, you’re forced to subsidize your inefficiency with additional junk fees. What do we see on that? We see onboarding fees, inspection fees, maintenance markups, call fees. Essentially, the push for the entire industry and these are entire companies that exist to help managers accomplish this change like they’ve written letters and everything that they send out telling people their fees are going up. The entire approach is that their base level fees are give-me and then every time they take action they actually have to do something they should get paid more. It’s a function of the unit economics they have at their scale and it’s a function of what’s happening with the software. I don’t think the average consumer is aware of this.
The even scarier thing that we’re seeing lately is in order to compete with groups like us that are going off and saying, “We’re big enough. We don’t need the junk fees, we’re going to price fairly and transparently.” Some companies have tried to price back and we’re seeing this like, “No, we’re priced like that.” Then, you get a copy of their lease. I was going through a lease, a third of the security deposit was a nonrefundable admin fee to the manager, guarantee the owner didn’t know that. The $1,200 they hadn’t deposit $400 of it at the time it would be exercised, it was going to be taken and given to the managers as an admin fee.
They were charging the residence for maintenance calls. Some people say, “I don’t care what you charge my residents.” You should because if they’ve got a $50 fee, every time the resident picks up the phone to call them, they’re not going to call and that turns a very minor work order issue. “I’ve got a pinhole leak in the shower.” Maybe they’re moving out in three months, why would they spend $50 to tell you, you’re already taken a bunch of their deposit money anyway if you read their lease. The next thing you know, you’ve got a $2,000 shower rebuild, and mold remediation because somebody wanted $50 for a phone call that you were unaware of.
What I tell customers is whether you’re in our market or not, get a copy of the management agreement. Obviously, read page 27 all the mumbo-jumbo. They bury this stuff deep, you’ve got to get way in the back and the paragraphs that make your eyes roll and get a copy of the lease and see what they are charging residents that they’re not disclosing because they don’t have to tell you in their management agreement anywhere what that lease says. If you read those two documents, you will have a good idea of what that interaction is and more importantly where the alignment is between you and the manager. They have a 20% maintenance markup. You just got a phone call saying you need an air conditioner, but they’re going to make $800 or $1,000 on the phone call and you’re sad, they’re happy. We don’t think that’s an alignment. We think, “This sucks. We’re both spending money. If I do it with no markup, I’m as upset about having to do it as you are because frankly it’s one more thing for me to deal with and I’m in a money-losing situation administratively.”
It’s the responsibility of the landlord, the investor to review that document, to read it or have their attorney read it. It happens, but it shouldn’t come as a surprise after the fact to discover that there was something in there that you didn’t know about it.
I think they’re creative. I’ve read no less than 50 or 100 of these contracts. Obviously, being in the business that we are and we see people come over from other companies some of them are so cryptically worded. It’s like, “We have the right to potentially charge fees associated with A, B, and C.” They not even disclosed what those fees are. You have to literally be looking for vague wording that might allude to a fee. It’s not like there’s a paragraph with bullets says, “You’re paying A, B, C, D, E and F these things get pretty cryptic.
The other thing is locking provisions. We as a business personally don’t believe anybody should be stuck in a contract they didn’t want to be in. Obviously, fees are different, but for the actual service provider, people that insist on X period of time or have massive cancellation penalties, that should be a big red flag that these people don’t want me to exit when I figure out what’s going on. If they thought I’d be happy, they wouldn’t need my firstborn child as a cancellation penalty. That’s another big red flag for us. Just looking at it from your side and make sure you look at it from the resident side. I completely agree. One of the hardest things for us as we’ve marketed our business has been that if you look at the eight bullet points at everybody’s websites, they sound the same. We have a vendor network. My number one competition locally has a vendor network. Their vendor charges $5,000 for the same ACF and pay for $2,800. The bullet on the website says amazing vendor network on both websites. How do you know that as an individual?
The other thing I would counsel people to do is to ask about common repairs that you have a frame of reference for. You know what this has cost you in the past. You know what does a three-ton HVAC cost from your company. If they say something like, “I don’t know. I’d have to get a bid.” I’d hang up because if they don’t know what an HVAC costs, they shouldn’t be in property. If they come back with a number and you know that’s different one way or the other you know whether you’re getting a good deal or bad deal. If they’re basically pricing Angie’s list or their answer is, “I don’t know. We get bids on that.” I don’t get bids on air conditioners. I know whether it’s a vertical or horizontal install, heat pump, heat strip, what tonnage. I can tell you on a Spreadsheet the exact cost of that item from the manufacturer plus labels installed. If they don’t know the answer, they’re not a pro.
Would you say all of this is a trend or is it the status quo?
I think it’s a whole industry of status quo. I’m embarrassed to say, and we actually looked at this and we started great chance if we could have called ourselves anything other than property managers we would have, but unfortunately, that’s what people search. That’s the service they think, but it actually has a negative connotation. It’s like saying, “I’m a transmission mechanic.” Everybody’s used to like, “This is some guy who’s going to lie to me about the repair my car rolling needs.” The industry itself acts as a very negative connotation. Buildium does a very interesting survey every year and the number of people who respond in the negative about how they feel about their provider is frighteningly high. It’d be the equivalent of saying, “48% of respondents don’t like the pizza they order, but they need pizza, so they keep ordering. You’d have to think, “There’s a better way to make pizza.” That’s why we’re here.
There are some other firms trying to change the industry for the better as well. We’re in a very small group, but this is happening, and I don’t think the existing status quo can hold up because we are bringing these things to light. Unfortunately, for the mom and pop property manager, they don’t have the money to spend on the tech. They don’t have the team quality, they don’t have the reference knowledge to improve. It’d be like that same cab company saying, “I’m going to take on Uber head-to-head.” How would they? They can’t even get to download an app for a company that serves like two zip codes. They’re not equipped as we would say, there’s a large moat around the business if you have the money and the knowledge because our competition can’t do what we do. I had an owner come over and called out their property manager on some costs. I’ll give it to the prior manager, he was incredibly honest. He’s like, “I can’t afford to run my business like that. I don’t know how they’re doing it.” My owner is like, “That’s why you’re going to lose. You don’t make any money at half of your charge. I don’t know what to tell you, but I’d be looking for another gig. It takes forever the way you’re doing it.”
Let me ask you a couple questions about your perspective as a property manager on real estate investing. This is shifting a little bit away from what we were talking about, but it’ll fill in the rest of the picture here. As a property manager and as an investor, what do you think is the single most important thing that you’ve learned through your experience in real estate investing? I know you’ve had a lot of experience across the board with big companies and small.
Besides obviously making money on the buy, like I’m not trying to give you two answers for one. If I had to give one, it would be spread risk where you can. I think the single biggest downfall for us as smaller investors that might only own a few properties is that in the absence of a network like yourself, we might not feel comfortable and buying in multiple markets. I see a lot of people with high degrees of concentration, “I own three condos in the same building.” You are one assessment away from having a bad year. Why not buy one here, one in Indiana and one in Memphis? Why not diversify the asset type a little bit? If I have money to buy three houses, I personally will go get a partner or two. We’ll form a little LLC, then buy six in the same bucket just so that we’re not one move out from a bad cashflow month or one bad resident from having a pretty poor year on that outcome. To the extent, we can and you want to individually own. I’m not saying go invest in reads, trust me, you don’t need 38 money managers between you and your asset, but wherever you can, however, you can spread your risk. It will always come out better.
We refer to that as geographic diversification. My very quick and dirty rule of thumb is to have three to five properties in three to five different markets. I don’t think you’ll ever need more than five markets, but three would be a minimum and you can have ten or twenty properties in that market. Create a footprint of three to five properties in one market and move to another geographically different market. Build a footprint there and then work on the third market. That forms a great foundation for a portfolio.
That’s something I would advise everybody to do as soon as they can.
What about you personally in terms of your investment properties? What do you look for? Do you have criteria that you work off or do you have a set range of things you look for?
Personally, because I’m in the business I only buy where I manage, but that’s because I am a car dealer, therefore, I only by the cars. That’s just me. I wouldn’t be afraid to do it if I was somebody else. I like things inside of my control. I feel like I’ll know something bad is coming before anybody else because I’m on the ground. If it wasn’t what I did for a living, I would diversify as we just talked about. I have a very bad case and my wife yells at me all the time about this, that I have deal goggles. I am stuck in 2012, 2011 pricing. Things often look very expensive to me. What I have learned as I’ve become more patient as the markets recovered is I still want to buy a good deal. I try to buy something below market if I can or find a way where I can add value.
One of the things that we can do as individuals to stay ahead of an individual of a large Wall Street investors, is that typically they have a buy box that’s very set like. They’ll only by 1990 and newer properties in many locations, some or even 2000 plus in vintage. Most of them have a CapEx threshold and initial renovations threshold because they don’t want the lag on their portfolio of a six-month renovation. If somebody has the capacity, I like to buy fuzzy deals if I can. Stuff that everybody else thought was hairy, but I know if I can deal with it or I’ve ever have a good partner to deal with it, then I’m going to come out with a bit of initial equity in that deal. There are some places all over the country where a new construction has an arbitrage where if you’re a building with a great builder locally, you can actually end up in an asset for less than what they’re selling for in retail. You are buying higher quality asset. You’ve got some downside protection. You’re already up 5% or 10%. You may not exercise it, but at least you’ve got a little bit of hedge to the market. That’s a big one for me.
That’s one of the reasons why we’re looking at Southwest Florida right now. We will likely have new construction homes coming online. Possibly with you, possibly with another builder, we’re talking to maybe both. It’s an interesting market. There’s cashflow and there’s a good growth potential and if you can come in with a cost basis below what the fair market value is you’ve got that cushion on the property.
There are other markets in the country that it makes a ton of sense for it too. If I was buying a new construction in most locations I would look for a product, multifamily is one thing, duplexes, quads. The other thing I always ask myself is, “What is the end game of this property? Is this a tried and true rental? It gets in that B, B plus area. It’s priced at a point where it’s either a super entry level home buyer would pick it up if I sold it or more than likely it’s going to be another rental investor. I hear so many people who buy properties and when I ask them, “What’s the goal?” They have crickets chirping, “I want to make money.” “What are you doing with this? Is it five years and then sell it to an end user? Is it five years and then I sell it to another investor? Is it I’m going to own this so when the day comes I hand it over to my kids for cashflow?” I would improve that property completely differently depending on the answers. I don’t ever like to spend money twice. I see way too many people go in and do a lipstick and then they come out and they find out, “This property is a resale and user property. They’re in there ripping up cheap floors and putting expensive floors to try to resolve it.”
Literally, spending the exact money twice on the deal. Whereas if you know what the outset, “I may rent it for five years, but someday this is going to an end user, maybe I titled this one instead of going in with LVT or vinyl or something.” I would do it completely differently if I knew what my endgame was. Maybe I put it in a nice kitchen because even if I have to swap the appliances, chances are you’re not going to destroy my cabinets and granite depending on the home. I would do that and get the rent bump for the whole ownership period and then go in later and repaint the place to sell it.
We refer to that as an exit strategy. For most people, it’s buying hold for the long-term, which can mean virtually forever unless you do a tax-deferred exchange to leverage up. Even then you have an exit strategy, are you selling it retail? Are you selling it to another investor? What you’re talking about, applies more to an active real estate investor, not a passive person because as a passive real estate investor, you’re acquiring a performing asset. The work that’s done is already done. You can’t make the choice between tile, floors or carpet. That’s not even an option, but the point is well taken. Obviously, you have to have the exit strategy in mind. It might be a five to seven-year hold and then you cash out of that market. Take that equity and leverage up into a larger portfolio and you do that tax-free. I think that’s what a lot of investors do that are in appreciating markets.
The other thing I see people do that they make a bunch of mistakes on is we were helping, we don’t broker. I was helping a friend try to sell at 26-unit portfolio the other day that we’ve taken on in management, but we weren’t previously managing. We got this thing up through a bulk sale website and we realized in underwriting and in fairness to the previous manager, they’d never had a conversation. We talked to our customers once a year and say, “What’s the game plan? What’s happening next year to the best of your knowledge?” This guy had the equivalent of $500,000 in lost value due to the loss to lease in his rents, meaning under market rents present in that portfolio.
Normally, we would both agree that you’re in almost all cases, you’re best off keeping a resident in not suffering term cost and vacancy and all that. Maybe you’re not pushing you 100% of market if it’s between that and a trunk. I’ll be the first manager to say, “Don’t move somebody out over $50 in rent. That’s a poor choice.” If it’s stale year, that’s a completely different conversation. The $200, $300 might be under market at the end of the day who had repeated that process for years as obviously this guy’s prior manager had. He had units at $800 that should have been eleven. Capped to the six, you’re talking $25,000, $30,000 discount on that unit for what could have been $3,000 week ready and a replacement. In that case, we repositioned and said, “No this year it is market or bust. That’s totally fair. Just do your manager a favor.”
For all the property managers out there, I know we’d beat them up a lot on this. I do find that no matter how good a relationship you have with your customers, it seems like sometimes they were the last to know. I think people fear like, “If I say I might sell, they’ll stop working as hard or whatever it is.” First of all, if that’s the relationship find somebody else like. You are not comfortable and you’ve got an issue of distrust there that should be your first warning. Keep them in the loop because your decisions do change based on you’re going for refinancing. You didn’t have to be selling at him. I want to pull a new loan on this. Let’s get it to the best rent we can. That’s going to affect your loan proceeds in theory. I agree. Keep them in the loop in it and it’s a long cycle, you might have renewed three months ago. You’ve got to have these conversations, a twelve-month outlook on decision making, not a next month outlook.
We have two kinds of investors that we work with. We have those who are just getting started and they haven’t purchased the first property or maybe they have one or two under their belt, but they’re still relatively new. Then we also have investors who have 10, 20, 30, 50, 100 properties. They have a large portfolio of single-families, duplexes, triplexes, fourplexes. They have built up a nice portfolio and they don’t need to keep investing. If I were to ask you what advice or direction you’d give that newbie or smaller investor, what would that be? Then, I’m going to ask you the same question regarding someone who’s a little bit more advanced, sophisticated, and has that larger portfolio?
I think it’s never too early. If this is a path you’re setting out on and you know this is going to be something you’re going to repeat over a number of years, I would standardize early and often. As you said in many cases your investors are buying previously improved properties, so they may not have 100% of the choices left to them as you would have gotten an auction house or something. When I buy something I still want to know what are my paint colors? What kind of floors down here? Anything that I can do to spare for their repair. Once you buy something, taxes and insurance and management fees are basically fixed. The only variable in that performance is occupancy and what you spend on turnover and maintenance, assuming you’re taking decent care of the resident, your whole operational jobs essentially becomes keeping costs at a minimum and to do that it’s much easier if you know exactly what paints on walls. You’d be surprised how many colors of white there are, but if you were to go pull our Sherwin-Williams color deck, you would realize that somebody saying, “We’ll use flat white paint on our walls,” means nothing. You can easily end up in full repaints.
One of the things we did very early on my fifth house is I used my initial flips back. I turned around and saw a tile with ivory grout and near white carpeting, which is what we used in our flips. I turned it to her and I said, “This is never going to work. This is not a rental.” Very quickly after that we had glue down dark brown LVT floors that’s bombproof plastic stuff you glue on and can heat gun off. I put that in 3,000 properties and if somebody gored it with a butcher knife I could go in and rip three pieces out with the heat gun and slap them back down. My floor and replacement cost went from the whole house to $6. That’s a huge difference. Whether you own one house or a bunch of houses. Making things repeatable. I also see from standardized stuff that, “Do you have to have Whirlpool appliances in every house?” Probably not. You’re not carrying appliance truck in your work van anyway. There are times where I thought some of the Wall Street groups felt like we got a little crazy about standardization with a high turn number stuff paint and flooring, just knowing what it is or making sure there’s a record of that going into a purchase or that you’re buying it from a guy local youth operating and he knows what all that is, that’s going to be a huge reduction versus I have no idea what’s on my walls are on my floor where I ever get it again. I’m starting over on the next turnover if somebody does bad things to this property.
That’s the Southwest Airlines model where you have a limited number of items and choices and you stock the same amount of the same things, but in larger volume and you get discounted pricing and it just makes sense economically for everybody. I think that’s what you guys are doing, are you not?
It makes it super easy. I have three floors, I have a tile, I have LVT and I have a carpet. If one of those three things have to come out of our property, we put back, I don’t care what was there, we put back our thing and then we know what that thing is. It can never have to go back in again for a full replacement. Obviously, if an owner knows what’s on the wall but you would be shocked and again to PMs out there everywhere I have mom and pop owners that are sitting there staring at paint wheels saying, “We like a baby blue.” I was like, “No. We’re vanilla ice cream here.” 70% of ice cream sales have been vanilla-based. You can have the gray color, the beige color but those are two colors. We’re not going to go paint this thing, some nutty color and try to remember what color it is three years from now when somebody moves out that’s just not in your best interest. You don’t live there. It’s not for you. You want to make sure it’s something you can touch up later for $200 versus repainting. We painted 36,000 homes the same color inside.
I think that applies more to the management company, not so much the investor or a landlord because they typically don’t have the option to suggest or make changes to the materials being used.
Correct, but you can look forward all the way in. I have a sneaking suspicion that the same people who are supplying this product in the market know exactly what’s there. One of the things we tell our owners to do is if it’s a newly renovated house, we just ask for it at closing. What paint did you use? I can save it in my system and then I know exactly what base, what level. It’s not like, “It’s this color.” Behr has four different levels of paint. It’s literally saying, “It’s Behr semi in sand dollar means nothing. That means absolutely nothing to me if I don’t know that it’s Behr premium versus ultra-premium. If you try to paint with a different base substrate, even if you have the exact color and finish it will still flash. I can’t tell you how many times I’ve been in houses where people have tried and all for something that like you had this information at one point in time you failed to capture it and it’s costing you $1,000 or something that it didn’t have to cost you in three years, just get the info. My builds don’t use the same color because our builder uses a different shade but we know what it is. I’m like, “I don’t care what you use. I just need to know exactly what it is because I’ve seen it coming down the road, so I need to know how to touch it up now.”
It might sound like it’s a little overhead on some people’s heads or it’s immaterial, but at the end of the day, it’s the capital expenditures in the maintenance and repairs that eat away at your annual cashflow. Being able to control those costs and standardizing the components and the materials will save you money every time you have a turn on your property. Whether it’s annually or every three years and that adds to your bottom line. It’s actually an important tip. Any last comments, tips, anything you want to share with our audience?
Just be wary of what you’re signing with anybody. I am not impressed with our industry in its current stand and its alignment. That is not to say there were not some amazing wonderfully motivated property managers throughout the country. Absolutely, of course, there are, I just think you have to be careful. It’s no different than a sales agent or anything else. Your team and I have been so blessed in this and my career, your team will determine your outcome, especially if you’re remote. I have to say this, even as a local guy and investing locally my agent, my title companies, and my vendors are the reason for my success. Getting me in and out of deals, smoothly, making my life easy. Of course, you were providing a lot of that. One of the fast track ways to get a great team, if you’re not local or this isn’t what we do for a living, is hire one of them. Whether that’s you or that’s me or that’s somebody like me in another place or you, you can get my whole vendor network by hiring us and that should be what the first party, whoever you align with going into a place that would actually be almost my most important thing is when I hire this person, are they filling in the rest of my blinds? If they you’re off to the races.
I put a lot of importance on the team having the right people around you who are competent and smarter than you because that’s how you’re going to make your life easy and you’re going to be far more successful with less brain damage, so the team is critically important.
What is amazing to me is I questioned when I first started in national construction I had done an amazing job in West Florida. I’ve been doing it for years. I knew everybody or I felt like I did. Somebody asked me, “You’re going to be able to get the same AC price as the Indie.” 30 phone calls later I did and when I found the AC guy and I have 29 people will tell me I was a lunatic, “We make money in Indiana.” I had every possible outcome of that call where you’re going to be hung up on. Once I hit one, my next question was, “You’re a general electrician?” and that guy immediately is like, “I know who you want. We have a plumber. I know that guy too,” because once you hit the vein, it’s like mining gold. When you hit the first one, you find the investor’s title agent. He knows the investment agency, he knows the right property manager. If you can find the one, you will find the rest of them through.
Dave, tell our audience how they can find you and/or your company, Great Jones. What’s the web address and whatever else you want to provide?
We’re out to change property management for the better of the owner and you can find more on us at GreatJones.Co. There are several places where you can email us. We are not experts in every market, but if it’s east of the Mississippi I probably operated there at some point or know somebody who has where they’ve got you as a resource. If you email us at Hello@GreatJones.co, a wonky question, we review management agreements. I drove 100 homes personally after Hurricane Irma when other PMs wouldn’t answer the phone. We were ready and we showed people that their houses were still standing. You don’t know us, you don’t have to trust us. We mean it when we say we’re here to help people. If there’s anything we can ever do for somebody who’s got a question, “I’m going to look at the contract term, I want to ask something,” fire it in. Let’s see what we can do. You’d be shocked who we might know.
How far do you guys want to grow? How far out will Great Jones be so people who are in other markets that don’t have you there yet and maybe interested can ultimately find you?
We want to be in the top 20, 25 markets at the end of the next few years. We believe this is a service that would be amazing for people to have consolidated. I’d love nothing more than that geographically diversified owner that we’re talking to you here to have one management company in five places. The reporting is tough, the tax stuff comes in and that’s another major pain point and we’re blessed that we have the capital and the team level expertise to get there. We opened two markets in the first half of this year in addition to our first and we hope to open two more by the end. We hope to double that again. We’re moving fast and it’s been a wild ride but it’s fantastic to see what it’s doing for our customers.
Dave, I want to thank you for your time. It’s been a pleasure having you on.
Marco, it’s been great talking with you.
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