Don't Cash Flow the Rehab - Colin Douthit

Colin Douthit:   0:00
my first time trying to do an eviction or get somebody out. So this was very early on in my real estate career before I had the property management company or anything like that. I mean, this was This is like doors number, you know, four and five. It was a little duplex that we bought, and we went into it. One unit was vacant and the other unit had a tenant in there that was behind. And the tenant was on the lease and was like, Listen, man, just just pay her leave and he decided to go ahead and leave, and I go in there, toe, take possession of the unit back, and his brother is living in the basement. Be happen to be a little bit of a drug addict. So So I go in there and we're tryingto trying to get him out trying to talk to him. Uh, you know, he won't answer my phone calls. Um, you know, we go in there and, you know, like, Okay, we'll just We'll just change the locks on him, right? And then because he's not on the lease now, very green at this point. Hadn't read any of the laws or anything like that. And I learned that was Ah, big. No, no. Apparently,

Colin Douthit:   1:12
according no other investors air romanticizing multi family investing. And I'm looking to learn from other investors. Mistakes I know you are to You found the right place. Welcome to Myers Methods. Presents multi family missteps. Heh, everybody. And welcome to my eyes, methods, presents, multi family missteps. I've got Colin Doubt fit with me the day. How are you, man?

Jerome Myers:   1:51
I'm doing great doing Ray. Just another beautiful, rainy day here in Kansas City, so I can't complain.

Colin Douthit:   1:57
Rainy days. What is the April showers? Bring May flowers, right?

Jerome Myers:   2:01
Yeah. I think we're in April showers now. So we're ready for the flowers and some more warm weather.

Colin Douthit:   2:06
So do me a favor, man. Tell the listeners a little bit about your background and how you got into this waste of multi

Jerome Myers:   2:12
family. Yes. So, by trade, I'm an engineer. Did the whole engineering school thing played college football at all that fun? I did engineering for about seven years, construction related, mainly project management. Estimating, um, the corporate world decided that they wanted to part with me, so I just decided I never wanted to go back. Uh, I was under contract on my first multifamily building when that happened and said, You know what? Let's let's give it a shot. Let's see what we can dio. And it's pretty much brought me to where I am today. Started out as an investor, then started doing my own rehabs. Got my own rehab. Cruz going started my own property management company. And now we're here.

Colin Douthit:   2:56
That's a lot. How long is it taking you to do all that?

Jerome Myers:   3:00
That you're a little over three years now. 3.5 years in Whoa! Yeah. Yeah, we've gone way. Hit the full throttle pretty quickly.

Colin Douthit:   3:10
Wow. All right, So what positions you play? I'm a college football player as well.

Jerome Myers:   3:14
All right, I was an offensive tackle.

Colin Douthit:   3:18
Okay, That was Well, we're

Jerome Myers:   3:20
about you

Colin Douthit:   3:21
play outside linebacker

Jerome Myers:   3:23
outside linebacker. Okay,

Colin Douthit:   3:24
enough of that, though. So you're taking over Kansas City. West Storm, right?

Jerome Myers:   3:30
I'm trying to I'm trying to one step at a time. One the one rental property of time.

Colin Douthit:   3:35
So let's talk about some of these things that you've learned on the journey is you know, you guys have been working on this price Progress in process?

Jerome Myers:   3:43
Yeah. So the first we'll start with is is as an owner. And when we were purchasing some properties So we bought ah package of single family homes and we decided, Hey, you know, it's got decent cash flow Will just Cashways rehabs as these units come available right this You know, we're still pretty young about a year into it, add. So we bought this package of 16 homes and once we started managing them appropriately are vacancy rate went up because people like, No, I don't want to pay. The previous owner was a terrible landlord, and soapy ever is deferred maintenance. Everybody was just done. So we started getting higher vacancies and so that may cash flowing the rehabs much harder. And you know, from that point, we've just worked too. You know, every time we would get a little bit cash flow, we put it into one property and then get it right and we were getting higher rents every time, So it was great. But when you have 16 properties that have a ton of deferred maintenance, it's really hard to get ahead of it and then to take profit out of it. Right? So it's essentially just been pouring everything. Any cash for any free cash, All of this that these properties generated, put right back into the property.

Colin Douthit:   4:59
So did you buy that is a JV or syndication house. You guys by the property?

Jerome Myers:   5:03
Yeah, I've got a partner on it. I've got a partner on it, so

Colin Douthit:   5:06
okay. And so you are still in the process. And I think the thing that most people don't really understand when they get into these rehab projects is the cash flow is great for servicing the debt. If you can stay occupied enough. But where would you call your vacancy on this property right now,

Jerome Myers:   5:27
35%. Probably. Yeah. So 30% it's it's high in your right. When we bought it, we could sustain cause we got him in such a good price, we could sustain probably a 50% vacancy and still make all over obligations, which has been really good, cause, you know, we've, you know, Florida with that periodically, and I don't think we've ever gotten his lowest 50%. But just knowing that, you know, if we could cash flow all the rehabs that, you know, with two vacancies out of 16 when you're sitting with six vacant or something like that, that just changes the whole dynamics.

Colin Douthit:   6:03
Yeah, it's skeptical when people say, Hey, we're going to do a renovation play. We're going to rehab the units and then they put in a 10% vacancy on their performance. I don't know how you do both, but maybe the uni account that I've encountered hasn't been big enough where you could do that. But the flip side of that is, how long is it gonna take you to get through your innovations?

Jerome Myers:   6:26
Exactly? Yes. So those are the two things. I mean, we could I know the market well enough that we can get them occupied really quickly. So that's that's not an issue vacancy because of, um, you know, just just general vacancy isn't an issue. The vacancy we have is all due to property is not being up to the quality that we want them to be to be rentable.

Colin Douthit:   6:48
Well, so not even rentable quality. Not that you're trying to make him better. They're just not in rentable quality.

Jerome Myers:   6:55
Yeah, so that I mean the whole the whole goal was a reposition of this, this whole asset and, you know, we're like, Okay, this is gonna be a low. See? We're gonna take it up to Ah, high, Cee Lo, be right. It's in. It's in Ah, small town outside Kansas City. It's really okay. This will be an easy reposition. And it really doesn't take $30,000 to rehab one of these units, right? But we're looking at $15,000 or if we need to get a new roof for a new age back, they just start toe. You know, it all starts to add up across the whole portfolio of the houses.

Colin Douthit:   7:27
So what's been the financial impact? Another collateral damage Associate it with this challenge.

Jerome Myers:   7:35
There hasn't been a ton of negative financial impact other than we've essentially got zero r a y off of it for 18 months now,

Colin Douthit:   7:45
Was that part of the plan?

Jerome Myers:   7:48
Not necessarily know. We were planning on being able to get the occupancy up, get it up. You know, I have maybe one bacon, see, and then try to do a cash out refi and you know, just just kind of rock n roll and put everything into the next property. That hasn't happened yet. Ah, And then also being in, ah, smaller tertiary market. It's making, you know, um, refinance a little bit more challenging. So we're in the process of trying to do a cash out. Refi, could We came in with a really good LTV from there. We came in it 60 65% ltv, Ossa base, that based upon the appraisals. So, you know, we're trying to work to do refinance. But now, given the current market conditions and the fact that this is a smaller town, a lot of the big banks in Kansas City don't want to touch it. So we're stuck with limited options on some of the smaller rule banks, which are also getting us, you know, our terms artist favorable. Which is another thing. Another lesson learned. We never got a hard L. A. Y. On what? Our bank terms we're gonna be. We have gotten a verbal that we were gonna get a 20 year amortization, and then the closing table. We got a 15. Woo. Yeah.

Colin Douthit:   8:58
Changes your debt service.

Jerome Myers:   8:59
It really does. It really does. So, you know, this was a big A big lessons learned all the way across the board.

Colin Douthit:   9:06
Wow. So what process changes have you guys made in orderto make sure this doesn't happen again.

Jerome Myers:   9:12
Well, really, it's if we're gonna do a project like this and, you know, I've done it before in a reposition of six duplexes on another loc that we have is take out a construction loan, Don't try to cash flow it. My biggest lesson learned was was take out, take out a construction loan and then have your back and financing at least a really good idea of where it's gonna come from.

Colin Douthit:   9:34
So the permanent that kind of the take out already negotiated before you start?

Jerome Myers:   9:39
Yeah, And even if you don't have that, at least know that you've got a decent option to roll into. If the if the bank that's doing it says able give you six months or 12 months or whatever for your construction period, and then we'll roll you into a 20 year fixed product. At least you've got that on the back end despite knowing that Hey, well, I'd really like to have a 25 or 30 year amortization, depending on the property. Uh, yeah. So those those two things between the high vacancy and the no construction loan and then the, um, the amortization get in shortened at the last minute. Really? Kind of You made this deal a challenge.

Colin Douthit:   10:15
So you guys going to stay in it or What's the plan for the dough?

Jerome Myers:   10:18
Yeah, we're going to stay in it. We're working through it right now. We're, uh, still shopping around for additional lenders to try to refinance it. Put us into a construction loan we've got. We've got some opportunities started working with more of a of a broker instead of going directly to the banks. Cost us a little bit to use the broker, but we'll at least get something done.

Colin Douthit:   10:39
I like it. I mean, those brokers should be earning it right? I mean, if they can get depending on the size of alone, if they can your rate down enough forget you in a more favorable product.

Jerome Myers:   10:52
You Absolutely, absolutely so, yeah, we're we're working on all those things we do plan on staying in, and I still like the market long term. I still like that asset class long term, but then that kind of gets in tow. You know how I got started? I live in a rural community, so I started investing in the rural communities. Our offices is in the suburb of Kansas City, about 30 minutes away, Way like Kansas City as well. But those rural communities, we we know those pretty well and, you know, kind of little niche report out carved out for ourselves as well.

Colin Douthit:   11:24
Nice. And so is there anything particular that people should think about? If they're considering investing in a rural community,

Jerome Myers:   11:33
you need to have somebody local to help manage your properties. Unless you live in it there. Um, you know, typically the thing I like with Roca Museum. We're talking towns of five or 6000 people. Now. We're not out three hours to our from civilization. We're talking were 32 40 30 40 minutes from the suburbs of the city. Right. So whatever city it may be for us, it's Kansas City were 30 minutes outside of Kansas City, So they're still bedroom communities. So we're still able to capitalize on all the employment opportunities in Kansas City. But people want to live in the small town. They want to live with her family want to be where they came from. Fill in the blank eso. That's one thing is I can't speak to a community that's 90 minutes away, two hours away from the next city. I can't speak to those will cause all the ones idea whether are bedroom communities. But one thing to know is, sometimes they are. You know, house prices are lower. Apartment prices are lower. Rents are going to be a little bit proportionally lower. But people are still making decent enough money in this city to afford them for the most part. But they can't afford to buy a house out there, so it's really good for investors. You don't see eye. I'm There is the first time, Homebuyers, but a lot of your competition out there for a a lower price. Single family house is gonna be other local investors. You don't see a ton of outside competition coming in to invest in those communities,

Colin Douthit:   13:01
and it's interesting you bought a single family home. So are the homes contiguous? Are they scattered all over the place?

Jerome Myers:   13:08
The one that we talked about that package of 16 they were scattered all across the town. Somebody was getting out. We bought his whole portfolio. So he was. He was aging out having medical issues

Colin Douthit:   13:21
and did your bank. Was it a challenge? Getting financing on that since it was so many doors at the same time?

Jerome Myers:   13:28
No, no. They were a local bank to that town, so it was easy.

Colin Douthit:   13:33
Do you have, like, substitution of collateral clauses in the deal so that you can sell pieces or you guys saw the whole thing together?

Jerome Myers:   13:40
We don't have substitution collateral, but we can If we sell one property, then they'll just pull that off the principal balance. Essentially pull the appraised value off the principal.

Colin Douthit:   13:50
Okay? And so you have to sell it above the praise price in order to be able to take some money out is that

Jerome Myers:   13:56
he had to get it to get any cash out of it. We would. Exactly

Colin Douthit:   13:59
what? So, guys, is your host your own? I just want to let you know we lost my methods in the fall of 2019 with the ambition so inspiring. New breed of multi family. If you are interested in getting in a multi family, are scaling your current business up over to our Web site at my methods dot com free forceps guy. How did? Now let's get back to the O. Okay. Yeah, You said there was, um, something else going on your property management, right?

Jerome Myers:   14:31
Yeah. No. So you have my other multi family mistake Mishaps was my first time trying to do an eviction or get somebody out. So this was very early on in my real estate career before I had the property management company or anything like that. I mean, this was this is like doors number, you know, four and five. It was a little duplex that we bought, and we went into it. One unit was vacant and the other unit had attended in there. That was behind. And the tenant was on the lease and was like, Listen, man, just just pay her leave, and he decided to go ahead and leave, and I go in there toe, take possession of the unit back, and his brother is living in the basement. You happen to be a little bit of a drug addict. So So I go in there and we're tryingto trying to get him out trying to talk to him. Uh, you know, he won't answer my phone calls. Um, you know, we go in there and, you know, like, okay, we'll just we'll just change the locks on him, right? And then because he's not on the lease now, very green at this point. Hadn't read any of the laws or anything like that and learned that was ah, big. No, no. Apparently, uh, So, um, so he proceeds to tell me that if you want me out, you're just gonna have to evict me. So I go through the eviction process. He wasn't, at least So we serve his brother while his brother doesn't tell him. And, you know, then we go through the whole eviction process. We get re regained, possession the house that we go to do a set out, We settle this stuff out on the curb. Mind you, this is before we had our property management company or another line. So everybody has just got my cell phone number. And so I proceed to get a whole bunch of very unhappy calls threatening calls, etcetera for about two weeks from this former tenant. So Ah, that was really exciting and, um, unsettling for a little bit. There being the screen as I waas.

Colin Douthit:   16:40
Whoa. So how long did it take you to get the squatter out of your property?

Jerome Myers:   16:49
Ever? 45 to 60 days. Probably. Missouri's a little bit quicker than some states are on being able to get people out. So

Colin Douthit:   16:59
60 days, so two months down, plus the guy that was there to in pain before. So where you down four months?

Jerome Myers:   17:06
Uh, probably probably 3 to 4 total. Yeah. Yeah, absolutely.

Colin Douthit:   17:11
Well, then you got him out, but they had to fix it. And then you

Jerome Myers:   17:14
Mandiri, and we're planning on rehabbing it anyway. And then they both least up quickly. And we've had good tenants in there and ever since. Wow, you know what we learned? I mean, that one really taught me to dig into the laws, right? So ever since then, we've been into the laws reference books, working with attorneys to make sure we're doing everything correctly. And, you know, in the state of Missouri, if you're an owner, you can go file your own evictions a za long as it's not an LLC. But now that we're an official property management company, we have an attorney and tons of processes to streamline it and make sure we don't have any more large missteps. Wow. What?

Colin Douthit:   17:57
So I mean, is there anything that you should have or could have done differently?

Jerome Myers:   18:03
I know what I should have done was start with the legal process right away, not let the tenant get behind right? So I mean, now you know, we've we've got our processes in place internally, you know, with myself in the property managers. So somebody you know, doing the first late on the fifth letter on the 10th. They haven't paid by the 15th. It's getting filed without exception. Yeah, well, we have to have. We have to have rules in place, and they have to be followed and applied to everybody equally. Otherwise, we run to the possibility of having the fair housing complaint if we're applying the rules differently to different people.

Colin Douthit:   18:38
So that part is really interesting to me, and I'm terrified a fair housing, which is why I will not touch property management with a 10 foot pole. You know this whole concept of working with the person because you don't want to vacate and have to do to turn costs and all that stuff. We've had one resident who ended up being, and I think she was two months behind. And then last month she got to a place where she was a month ahead. And so psyched, man, like working with people work sometimes had somebody who was two months behind. And then he just moved out in the middle of the night on us One day it isn't how what kind of being your experience with working with people, if you don't mind talking about that a little bit

Jerome Myers:   19:20
Before we started the company, when I was just managing my own property that I would be more flexible with people. However, if you own over four units, you still have to apply by fair housing rules, even if you're operating your own properties. If it's more than four doors, fair housing applies. So that's something I really encourage. People that be aware of is you can't can't discriminate for any reason. Ah, family, no family, you know, race, sex, religion, gender, age, you know, fill in the blank musher in California. Then there's, you know, umpteen protected classes. Uh, but Missouri's not quite that way. Yeah, if you own over four properties. You have to You have to apply them. Um, apply everything equally, you know? And they're like, Well, if you go and this was, you know, the example that the attorney used If you go in, this single mom is crying to you and you decide to work with her, and then some young man comes and he's way more aggressive. And you're like, Nope. You're done. Well, that's discrimination. Wow. Yeah, And then you could get sued. And there's, like, $10,000 violations,

Colin Douthit:   20:26
$10,000

Jerome Myers:   20:28
if I recall correctly having to pay any yet, Thank goodness. And don't plan on it because we're keeping everything tight. But yeah, I believe that you can get about $10,000 at least for housing violations.

Colin Douthit:   20:41
Wow, It makes it not worth being in property management business. I mean, how much money will you make off of a property and to give me a year? Let's say it rents $4000 0 my $12,000 you charge 10%. That's 1200 bucks.

Jerome Myers:   20:57
But we do carry an additional insurance called, I believe I can't remember exactly, But there's Arizona omissions slash discrimination insurance. So If you do have a fair housing violation, you've got insurance to back you up. I

Colin Douthit:   21:11
didn't even know that was a thing.

Jerome Myers:   21:13
I didn't either until I started working with good insurance people.

Colin Douthit:   21:16
Wow. In their the big bumping. Your premium for doing something like that.

Jerome Myers:   21:22
A couple 100 bucks a year, I think.

Colin Douthit:   21:25
Do you get Do you do that because you're you have the property management company or do you do it because your owner too?

Jerome Myers:   21:33
I started doing it because it's a property management company. Even if I was still, you know, before I start the property management company, I was managing about 60 of my own doors that I was either owner in partnership with And, you know, I was still able to get fair housing complaints at that point at that size, it was my own properties, and I and I was I was unaware of it. You know, this has been revelations. Once we started the property management company once we started, you know, really getting everything tight, getting the legal processes in place that we started learning, You know, all the different nuances. Now, you know, you'd say OK, well, it doesn't make me want to do property management. And that's exactly you've got people like us that are willing to do that and, you know, know the laws know the rules. You know, just same thing. You do somebody that's doing a syndication, right? I don't I don't know all the rules and the I don't want to deal with all those filings right with with the syndication. But the property management, I just I just got into it and we got it figured out,

Colin Douthit:   22:33
okay? And so do you guys manage for others as well?

Jerome Myers:   22:37
You'd be absolutely. Yeah, we're managing. Ah, just over three and a doors. Right now. Well,

Colin Douthit:   22:42
that's quit. Oh, yeah. What's been the most eye opening piece of being a property management? And I ask this question because people will say, Hey, well, I'm going to get doing property management because I want to say that 5 to 10% that we pay the company.

Jerome Myers:   23:01
So what was the question again? What's the most eye opening

Colin Douthit:   23:03
thing that you've seen are that you've realized since you decided to go down this path of manager on and managing for others?

Jerome Myers:   23:11
E guess One of the biggest things. I didn't know what I didn't know. I didn't know that we were at risk for discrimination, right? I just I learned all the laws and everything like that. That's that's been some of the biggest eye openers is all the all the compliance that needs to be done. Uh, everything. You know, all the details that need to be followed. How much you know how much documentation you want and how much protection you want is all all relative. We've taken over properties which took over an 18 unit, No physical lease, no security deposit records, nothing. You know, we take him over, it's a one page lease. And this person has lived in the same unit since 1989. You know, our our least now is including the including the lead based paint disclosures over 30 pages. You know, we've got 18 pages for lead based paint disclosure, and then we're, you know, 12 14 16 pages. That just legal protection on top of that. Oh, my God. No. You know, and they're just all those different things, and, you know, our leases is based upon the bigger pockets lease. I'm not gonna say it's you know, it's, um, least that we created. We've attached a bunch of addendums to it as well to cover us, you know, as we've as we've learned more as we've seen more and try to maximize revenue for ourselves and for the owners.

Colin Douthit:   24:34
I think my biggest frustration with property managers is just not spending money the way they would if they own the property with, would he, since here on both sides of the table, what do you seeing is being the biggest rob between owners and, you know, being a good property manager for him.

Jerome Myers:   24:53
We haven't had a ton of rubs, to be honest with you at this point, and that's in the biggest complaint that you get the biggest two complaints you get about property matters because I would like to ask when somebody switches with us or if I'm in a group with other investors. So what's your biggest complained about property managers. They're going to say either they don't communicate enough or they just spend money without regards and being an investor myself, I was an investor before I was a property manager. I can understand that impact I'm always talking to to our crews because we have our own construction company that performs all of our maintenance and say, Listen, we've got a will. Make sure taking care of the owners. We gotta try do this quick, This possibles economically as possible. You know, when we're replacing the fridge, we don't need to buy Cadillac Fridge, right? We just We need a basic fridge. If we're gonna be doing some repair, like, let's make sure that it's adding value, let's make sure that it's protecting them. The owners in the long term, right? Let's make sure we're not getting We're going to be getting exposed to her getting sued for mold or lead based paint or some other thing that we can get sued for this world. Yeah, no, we do. We try to keep the cost down. That's a tough one. That's a tough one, because you get out there and they're like, Well, why did you spend $150 doing this? I said, Well, you had a leak. It was gonna cause mold. Tenants love to talk about how much black mold they've got. There's 10,000 different types of mold and mildew is out there, but every single one of them that tendencies is 100% black. Mold them.

Colin Douthit:   26:17
You know, I I dealt with this and it turns out like, doesn't people like if you do the research on black Mole, you'll be really surprised what you find and I'll leave it there for because I don't want to be sued for anything, right? Well, he searching what black mold really is, and you'll be absolutely surprised at what you find

Jerome Myers:   26:38
and how infrequently and actually occurs.

Colin Douthit:   26:42
So the last question is, you know what words of wisdom do you have for our listeners?

Jerome Myers:   26:49
So many words of wisdom. Um, no, no, no. The rules for the management side know the rules so that you abide by him and you limit your exposure and maximize your ability to keep your income up. And I lost. That's the goal. And then for purchasing the don't cash flow the rehabs Unless there light unit turns, don't cash flow him.

Colin Douthit:   27:22
Thank you for joy. Be on the show today. This one

Jerome Myers:   27:26
was great. Thank you so much for having me. I really appreciate it.

Colin Douthit:   27:29
Yeah, we'll talk soon.

Jerome Myers:   27:31
All right. I'll talk to you later.

Colin Douthit:   27:33
You made it to this juncture. So you really love what we shared on this episode of Myers Methods presents Multi family. Mr. Do us a favour, give us a five star rating, give us a review and share this with somebody he's interested in.