Mark Ainley & Dan Breslin Discuss:
- EASY Tenant Application Verification “Silver Bullet”
- Choosing the “Right” Blocks to buy (in ANY City)
- Breaking into the Industrial Brokerage Space
- 5 Components of a Turn Key Rental Business
More Info About Mark Ainley at:
GC Realty & Development
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Mark Ainley On Pulling Back The Curtain Of A High Volume Turn Key Rental Business
This episode’s guest is Mark Ainley, Founder of GC Realty Investments, a turnkey rental provider here in the Chicagoland market. Mark runs a full-service real estate brokerage and employs 29 people between 2locations. Mark’s team currently manages more than 500 rental units, 7 condo associations, and more than 1 million square feet of commercial space. I’m expecting more than just a few jewels of wisdom here on this episode. Welcome to the show, Mark.
Thanks, Dan. I appreciate you having me on. I listened to all your other podcasts and they’re very informational. I only hope I could give back as much as the others.
Introducing Mark Ainley
Nice. I appreciate that. I like to say that, too. I point that out on quite a few of the guests have been avid listeners, and it’s funny, I get a chance to meet people. The more successful people that I meet who are audience members who listen to our show, Mark, do listen to most. I think it’s just that hunger for knowledge that successful people develop that ends up leading to more success. How did you get started originally in real estate and then after you answer that, we’ll get onto like how you got started in the turnkey and we’ll talk about that business.
I bought an investment property back in 2003 with my current partner through GC Realty. At the time, my best friend had a real estate license and he always used say, “Mark, get your real estate license.” I never listened to him until that day. I came home with a closing HUD. We used to have the iPhone then at that time, but he did have a little calculator. He said, “Mark, you could have had this commission today.” It was like $3,200. In that second, I said, “That could have covered the cost for this and this.” I realized I didn’t have that money and I was mad. Instantly, that afternoon, I went and paid the money to get the course to get my real estate license.
Within a few months of that, it was probably about 45 days later, my best friend approached me about opening a company. That was GC Real Estate Development. I didn’t know what that even meant back then. I was maybe 22 or 23. I could put president on a business card. I thought that was cool enough right in itself to say yes.
We started GC Realty Development in 2003, really working out of his basement here in Chicagoland area in St. Charles. We sold a commercial building to a client that didn’t need the office, they just need the warehouse. We moved defunct, industrial warehouse office space that I don’t know if the basement might have even been better than that office space, now that I look back.
We started there. He was the manager broker. I was always the number two. We always just planned on growing the company that way. I don’t talk about this too much on too many shows, so your show gets the first on this, but in 2006, my best friend that I grew up with was killed in a car accident. That morning, I was forced to grow up. I was forced to figure out what I wanted to do next.
We had actually had a company established at that point. Value, not too much there, but it was something rolling, something growing, something that we had plans for. I immediately went and got my broker’s license. I took over the company from the family. The name meant a lot to me at that point to hold onto it.
I took over the company. My current partner now, the night of the accident, he was actually starting his real estate license. He’s already coming on board. Later that year, 2006, he became the business partner with GC. Me and him are 50/50 on that front. We’ve grown ever since, diving into the industrial commercial world for both brokerage and property management and then full-blown into the residential property management. Most of our brokerage over the years has consisted of selling investment properties to others, which later on, the turnkey becomes a natural fit to fit into what we do.
A cool thing about the industrial commercial space is that it is neighborhood-specific.
Sorry to hear about the loss of your business partner, Mark. That’s tragic.
It was tough times. It’s amazing. Decades worth of time has passed since, but we’ve accomplished a lot. It’s pretty cool in that sense.
How To Properly Manage Single-Family Houses
What were your reasoning, or why did you choose the industrial and commercial and how did you carve out a niche and become successful in that space? I know a lot of people simply overlooked that, or just don’t even know where to start on something like that.
It is tough. In the commercial world, industrial, commercial, or even retail office space, all that world of brokerage, it’s a much smaller world than on the residential side. You might have the entire Chicagoland area. There might only be 300 or 400 real estate agents that really do 80% of the volume of transactions. When you go into a residential market, there might be 400 agents in a single town that all split up that piece.
It’s a little more exclusive, which makes it a little harder to get into and get viewed as a commercial agent but we’re able to break that barrier by being able to take over some managements and then put our names on some buildings and then be able to get over a couple of agents that have been in the industry for some time to share with other people who we are. That was our angle with that.
Did you have some special edge that you were able to carve out and get those first 1, 2, 3 clients? Were there connections that you or your partner had built up prior to that that planted the seed for that portion of the business?
It’s funny you asked that because yes, there really was, now that you asked that question. When I first got into the first couple of industrial clients, guys who are looking for 10,000, 15,000 or 20,000 square foot buildings, I was very aggressive back then. I drive around looking for buildings for these clients even. I call on these signs, they’re in front of these buildings. One, I would never find them online, and two, these guys would never call me back or it might be a week that they call me back.
I said, “If we just apply some customer service here and just answer our phone or maybe do a little online marketing, there’s no way we could fail at this.” Plus we have some of the largest industrial parks in the country here around the O’Hare market in Chicago. That inventory definitely helped that. In an industry that was very not modern, we were able to carve out our piece just by being aggressive pretty quick.
What The Business Looks Like Today
Let’s talk about the business as it looks now. We’ll talk both about the brokerage, how you’ve been successful, maybe the value provide there to grow to the size that you are now. Also, we’ll start to just paint a picture for the turnkey rental side, because I assume they’re like two side-by-side businesses almost, even if the ownership’s the same.
Yes, they’re two side-by-side business. On the turnkey on the development side, we do have a third partner on that side on that front. Yeah, they really run. They’re all under the same GC Realty Development name and all the marketing and all the set staff and all that. They all work together on both.
Let’s talk about the brokerage quick first, how that looks because I have a feeling, and where I’m going with this is I want to paint the foundational picture because I think this is going to help be the answer. I’m expecting certain answers when we get to the turnkey part. I’d like to just touch and paint a picture of what the brokerage looks like now. Who are the clients how many deals are cooking? Things of that nature.
Of course. We specialize really on the industrial side of things, really 25,000 square feet buildings and under, and mostly in that O’Hare market going West out on I-90 out to like the Elgin market. In the Elk Grove market, for three years in a row, we sold more buildings than any other company in that 25,000 smaller space. If you drive around Elk Grove, you’ll see our signs. We’ve really been able to put a strong foothold in and Elk Grove specifically, which is the second largest industrial park in the country.
Is that business comprised mostly of sales, mostly of management, or what percentage split would be the sources of income for that company?
The industrial, on the brokerage side, we do about 50% leasing, 50% sales. The sales have crept up the last couple of years. When 2009 hit, we were pretty much 100% leasing because no one was buying any buildings back then. That’s leveled out to be about a 50/50 between leasing and sales. If you look at the management and the brokerage together, our income stream really is about 50/50 between brokerage and management. The cool thing about management is we have continuing clients. If we manage a nine-unit industrial building, once or twice a year, and those spaces will come up available, which our brokerage will come and lease that out. It provides constant leads.
The management’s always been a great lead generator for the brokerage side of things. If a tenant’s moving out, they might want to go buy a building, we can help them. If that space comes empty, we can fill that space. If the owner wants to buy a new building, he’s talking to us on a weekly basis. We’re right there in a space to help find a new building, or we can bring him buildings that we know of. It’s a constant lead generator is what the property management provides for the brokerage side of things.
O you stick only to those two micro markets or would you work a deal if it came in somewhere 45 minutes outside of that usual market area?
The other cool thing about industrial commercial is it is neighborhood specific. A residential agent might market or feel a specific neighborhood or a specific town, a warehouse really in Libertyville versus a warehouse in the suburb of Chicago, a warehouse in the Western suburbs, similar type numbers to that deal. It’s going to rent for a similar type price. The market’s pretty similar all around Chicago, even going into the Northwest Indiana,
I know I’m asking a lot of questions about that brokerage side and the industrial. It’s just a unique experience for me to have somebody on the show and get to talk about something besides the single-family rentals. To everybody reading, we’ll get to the turnkey, I promise. I do have 1 or 2 more I’d like to ask.
The investment clientele in the industrial and commercial space, Mark, is that typically a business owner who’s generated large amounts of cash, income, wealth, otherwise separate from real estate? Do you get the entrepreneurial-minded investors like we see in a single-family residential market where, “Real estate’s the only thing, I’m flipping houses and buying rentals?” Do we have a delineation or like a client avatar that you could say, “This is like the guys or gals or whoever it is that’s owning property and being the investor owning and renting out commercial industrial space?”
Most of our clients, they’ve been longtime real estate investors and they might own 10 or 15 different properties, or have in the last few years. They’ve hired us mostly as an exit strategy for management or the ability to go down to Florida for four months of the year. They’re more lifelong, larger portfolio holders, but mostly localized to the Chicago market. That’s really what our clientele is for the management.
On the brokerage side of things, is there an intentional ignoring or did we just not touch on the residential aspect, or do you not touch single-family with the brokerage whatsoever?
No, we can’t get away from the residential. I’m not saying we want to, but with the property management, when you manage 500 units, there’s always investors that want to buy new properties. They want obviously the leasing component of that. Time comes up, they sell their properties. A lot of people we manage for on the single-family home side.
We might only be managing it because they became accidental landlords. They had to move or they got divorced, but they couldn’t sell their house in the downturn a few years ago. They’re still trying to get back to the level of what they owe on it. In the next year or two, they might be at that level. They will be at that level, most likely. What they’ll hire us to sell that as well too. We do have the residential division, but it really is drowned by our management clientele and their needs. We’re not out there soliciting or farming different neighborhoods to get listings. We sold the house type marketing stuff. None of that.
You got no REO inventory or anything like that?
No. We dabbled with a few there, but that was a market that we were probably late to the game of getting into compared to guys like Joe Mueller and stuff.
It sounds like a lot of companies, at least from my perspective. You have areas and you analyze your strengths and you figure out, “I can win in this space. Here’s why I believe I can win.” It’s the same thing that you just told me with the industrial. I’m driving around, I’m calling signs, and I’m not getting a call back for a week, ten days, and I’m trying to place a client with 20,000, 25,000 square feet of a 5 or a 10-year lease, and I can’t even get a call back for a week. I can do that better and I can win there.
I don’t know if it’s like a trap in the beginning. It was certainly a trap that I fell in thinking, “I can win in every space.” One day, I’m running around and I’m trying to do office building, purchase investing, getting the guy to hold pay, next day I’m doing a single-family. By not staying laser-focused for me early on, at least I know that that was some of the challenge.
Lately I’ve had that same conversation with myself on a few occasions. “Where can I win? What place in my business? What am I good at?” Me, personally, I’m really good at finding off market deals that no one else knows about. If I keep focusing there and building there and I double that or even get incremental gains, I’m still building a stronger presence in business in whichever markets I operate for myself, my partners, and the people that I’m doing business with.
Aside from that, figuring out the strengths and knowing where to win, Mark, let’s talk about the direction with the single-family houses. I forget what you mentioned. I think in your profile, you said something like 200-plus purchase, renovation, refinance, purchase renovations. You did over 200 deals that way, correct?
Yes, definitely. That’s for stuff that we’ve owned or we’ve purchased and we started that really in 2008 in the downtick. Aside from that, what we did a lot of was probably another 75 or 80 deals. We find a property for a client, he buys it, we fix it up for him, and then we either rent it out or we sell it for him. A lot of that goes back to the conversation we’re having. It’s just not really the vision.
Yeah, we made money along the way on all those things, but it took us focus on things that we could grow faster on. In our experience, we have over 300 various city and suburb deals that we’ve either acquired ourselves, helped our investors that we manage for acquire them, fix them up, and then put them on the rental roll or sell them for them.
When I was preparing for our episode here, I took a look at your site and I’m looking at all the addresses. I’m saying, “This is all on the South side of Chicago.” I know from my own experience in, in doing deals on the South side of Chicago, as you probably are well aware of yourself, each block is not created equal. Me being from Philadelphia originally, I’m like a duck out of water. Mark, I imagine you figured out which blocks are the right blocks to buy on the South side.
Yes. In 2008 when we started buying there. We just bought anything anywhere. If it was under $5,000, $10,000, we were excited. We thought it was a steal because we got this 3,000 square foot single-family home for $3,500. Come time to that first turnover, we want to have a heart attack because it cost us $6,000 in flooring to redo. We learned a lot along the way. Fast forwarding just for a second here, the stuff we sell now, or the stuff we’re investing in now, alongside of the stuff we’re selling, is accumulation of a lot of hard learned lessons or wasted money on neighborhoods, blocks and areas that we steer clear from nowadays.
You just answered the next question I was thinking about asking, which was, how did you learn the good blocks and the bad blocks? It sounds like through sheer experience and costly lessons.
Yeah, definitely. In what we do, we have a lot of relationships nowadays, whether it be the alderman’s office or the local non-for-profits that might be trying to clean up neighborhoods. Also, the caps, which is the police department’s neighborhood meeting groups and so forth. In various neighborhoods, there’s block clubs that you can come affiliated with them and right away, block clubs, there are people looking out for that block. It might only be that that one block, but that block is perfect compared to the next block. I’m just doing our research and growing our network on the South side to help us make very informed decisions on what we buy.
What drove your decision in 2008 to start buying this inventory, Mark?
I took a client of mine that we’re managing some properties for in suburban Naperville. He said, “Mark, there’s an auction on Sunday in the city. Do you want to come and represent me?” I said, “Sure, I got nothing to do on Sunday. It’s not like anything’s going on.” I went with him to that auction and we sat there. I’ve never been to an auction. That was the other motivation for me. It was really cool. The whole talking fast and throwing up paddles, it was pretty fun.
Now all the auctions we do are really online, but that was a cool experience. At the end of that auction, he purchased three properties for $75,000. I just said, “What just happened?” It blew me away. At that point, I’m sitting there in the nice comfy hotel in downtown loop. I didn’t realize where he was buying. He was buying on South side of Chicago.
After that auction, he said, “Mark, we’re going to head down here.” He had a place in Hyde Park at the time. “Do you want to drive by this one? It’s not far from where we’re going.” I drove down there. It was May 2008. It was a warm Sunday afternoon, and there’s a lot of people everywhere. As a real estate agent, I’m trying to get the combo between the auction and the property.
There’s no need because as we pulled up, the door was kicked right open. There’s no need for a lockbox at that point. All the windows were busted out. You walk in, you can see a big sheriff’s sign. It was a condo building, three flats. The sheriff’s sign was on the front. The door to the second floor unit was kicked in. That was the unit he bought for $25,000.
At that point, I’m feeling horrible. As a real estate agent, I was like, “I should never let him buy this. What did I do?” I was feeling really guilty, like, “Should I run?” I didn’t know what to do at that point. He was looking around. He wasn’t saying much, and that was making me more nervous. The whole building is empty. There was a failed condo conversion. All four were vacant. He said, “Mark, can you see if any of the other units are available?” That took the, “What,” type of tone. I’m like, “Are you crazy?” He’s like, “This is great. This is awesome.” I said, “You’ve got to explain this to me.”
He just simply stood there and he said, “All right, we bought for $25,000 and you just round numbers. We’re going to put the HVAC back in. It’s going to be this much. We’re going to put this much and here, we’re going to redo the hardwood and we’ll rent it out for $1,000.” I’m like, “Really?” I just did the quick math in my head.
I shot home that night. I broke out the Excel spreadsheets and I ran the numbers and it came out to be like a 22% cash on cash return. I was very uninformed what the pro-forma should look like at that time. Just as a rough estimate, it came out to be the struggles of at the time of that particular neighborhood. It came out to be like 22%. Right away, I’m thinking even if I borrowed money at 15%, I could still have a gap in interest there, and I can make money, not thinking about what our later on in plan went to be.
Right away, somehow, as I went to my partner and presented to him and that was really how we got into investing on the South side. I got my license in 2003 and the market was on the way up at that point. When I got my real estate license, what I did is I sold investment properties of all these condo conversions. It was easy. Anyone could get loans. I don’t know the exact number, but over that first two years of my license, I sold well over 100 condo conversion units to guys that got 100% financing. The end game plan was to sell in six months once the condo conversion was sold out and make $30,000.
I made a lot of people a lot of money, and that’s how we were able to grow early on. You make anybody money, they come back or they refer or they talk about you. That was a big boost early on in my career, but I didn’t know what cashflow was in, in 2003. I didn’t realize. It took that Sunday afternoon to make you realize that’s huge. This is what it’s all about right here. It just was totally like eye-opening that day. That’s how we got into the South side there.
Acquiring Accidental Turnkeys
You’re doing like these 75 or so, I’ll call them accidental turnkeys, where you bought with the client managed construction, then managed the rentals. It was like a turnkey deal. You did somewhere around 200 of these properties yourself. That 200, Mark, were these like you and a partner renovating and doing refinances, like buying, getting your cash back out? Was that the model up until maybe a few years ago?
That turned into the first model and we said we’ll borrow short-term money, do everything cash, and then we’ll cash out. Now this is 2009. Our first cash out loan was about eight and a half points and 12.95% interest with some private equity firm out of California. That was pulling teeth. That was horrible, that first deal.
Obviously, as time went on, that loosened up and that was our motto as far as cash out, our goal is always to get 90% to 110% of our money back and always average shot that we got most of our money back. We had that partner there. We ended up partnering in with the gentleman I took to the auction, and my current partner that is still my partner in GC, and we did 142 units at that point.
We were actually approached by private equity to run and operate a fund, a $10 million fund that he was starting up to do the same thing that we were already doing, but to really be funded, I guess, at that point. We wouldn’t have to worry about money or financing or cashing out or any of that stuff. Ultimately, the deal, it was very lots of thick signing of stacks of stacks of legalities and you had to commit the deadlines and budgets and all that.
Ultimately, I said, “No, I didn’t want to do that.” Our third partner ultimately went ahead and he elected to do that, and then he left me and my current partner we were going to go back to GC Realty Development and work on the brokerage, the management there. We teamed up shortly after that with our current third partner who we’ve really worked with for a few years now.
Is the new partner the managing the construction component of the business?
The new partner is our CFO. He is our guiding light in the sense of he’s got the big vision and he’s able to recognize small details. He’s able to bounce back and forth on both. He’s really able to really strategize and ask the right questions now that we make decisions on that will affect something that’s going to happen eighteen months down the road. He’s been a huge addition to me and Brian that has changed us and really the way we think altogether.
In this scenario, the 142 units, quick question, would you do packages of five? Would you refinance each one out? Would you try to buy 4 or 5, 10 at a time? What was like the cookie cutter strategy numbers wise for these units before you would go to the bank and door refinance?
Are you asking how we refinanced out? Is that what your question was?
Yeah, like, so along the way of the 142 or so, maybe like your first one, you did a cash out refi on number one. Would you literally refi them one off one at a time, or would you make a model of say, buy 5 and then refinance to do like one blanket mortgage or would you try to put 10 into each package for the refinance mortgage? Was there a number, a target at which point in time you’d have to do the refinance?
That was a struggle early on for us, because at the time when we started this biz model, we never realized how tight the capital markets were. We thought we had a property, we had $50,000 into it, and it’s making a lot of money back on a monthly basis, and there’s no way no one won’t give us money for this.
We never realized how tight the markets were, how much in trouble so many banks were. As I said before, that first cash out we did was like for ten properties. We paid a boatload of fees and huge prepayment penalties and huge interest rates. We almost reanalyzed our model at that point to see if this is even feasible.
Shortly after that, the local community banks started opening up and we took a few packages to a few different banks and got 5-to-10-unit portfolios financed, in one five-year term balloon. At the same time, there was some new banks popping up or banks that were buying out other banks that all of a sudden, they needed to get some loans on the books. They’re being a little more aggressive in working with people like us. Things open up clearly a lot faster after 2010 and to what they’re now. It’s pretty good.
Components Of The Turnkey Rental Business
Yeah, I remember the tightness of the market in those times. It was not fun. Let’s talk about the components of the turnkey rental business. From my perspective, I’m just thinking out loud here. I have deals. You got to have a source of inventory. I have to have certainly short-term capital, whether that’s my own cash, whether that’s you.
In your case, whether it’s your cash, whether it comes from private money, you got to have capital to at least buy the deal and then renovate the deal before you either refinance, sell it out to a turnkey buyer or whatever the exit strategy is. I got the deal, the capital, the construction component. Somebody’s got to do the work, get it in on budget, and that’s why they’re a mountain of legal signatures necessary for that fund because it’s such a high risk for investors. You then have the management aspects. I’m counting four. Are there any other little components that would be a part of, from your perspective and your business model the turnkey rental business that I’m missing here, Mark?
At the beginning, we thought sales and marketing would be a huge component. Due to demand, it’s actually not been as much of a strain or push or dollar amount to actually market it. We originally first got into turnkey. We said, “Every time properties were due, we’d sell off 2 or 3 of them.” We figured, as construction’s wrapping up, we’ll put it on the market. There’s usually a 60-to-90-day lag time before we cash out. If we don’t sell it by the time we cash out, we’ll just keep it. We build everything out the same whether we’re selling or keeping it, so it wasn’t a big deal. It really turned into some pretty high demand pretty quick where we sold almost everything for that first year.
It all starts with acquisition. It’s such a balance, Dan. You have to have enough, enough properties coming through, but enough properties where it’s not too much for construction. There are only so many available quality tenants out there. You’re trying to balance all this stuff and then you want to cash out and pay out the private money we have for the short-term financing or do you need more private money? If you have too much private money, then you’re paying interest on money that’s not being used.
That’s really what the challenge is for us. Don’t get me wrong, some of it’s good problems to have, but it’s trying to balance all those different things together to be able to make the most out of your money because sometimes, you have a property sit there for 3 or 4 months that eats $3,000 or $4,000 out of your profit of either if you’re keeping it that’s just your money or that’s your profit if you’re selling it.
Sometimes, a property sits there for several months, eating thousands of dollars of your profit. Learn how to manage it properly to make the most of your money.
I like that. The balance is the same challenge I deal with in my fix and flip business. We generally don’t pull the private money out of the million or so that we have available until we have a deal on the table. We have access to the money without any cost, but by the same token, we’re racing against accredited investors who have money and know how to invest it for similar rates of return that I can offer them through our fix and flip business.
We’re constantly at risk for like our private money sources dwindling. When we have the right opportunity, it’s the same thing. Is the money still available for us? Money’s like a little bit of a challenge to keep at a consistent pace. The same thing, we might find ourselves invested with $1 million in fix and flip renovations, but then our construction team, we literally might have a piece of inventory, a house sitting on a shelf for 3 or 4 weeks after settlement before construction starts.
I’m like pulling my hair out because there’s just no way to control it. Do I try another contract? It’s the same thing that we deal with, I guess, as everybody who’s in the real estate business. As far as the turnkey rentals for you, even these 200 units, let’s talk about the source of deals. Where do you find these houses? What is your criteria, your average acquisition price? We talked about choosing the right block in the neighborhood a little bit, but let’s talk about the numbers and the amount of construction and where your deals are coming from, Mark.
When we first started doing this, our average unit price was between purchase and rehab. When we looked back after first three years, we were right around $43,000 per unit all in. Now we’ve moved more into a single-family model, and we do a lot more in the beginning. When we first started, we really tried to get by and if the furnace is in there, like, “We might get a couple more years on that furnace,” and then that comes expense 24 months down the road, or 12 months if we weren’t that lucky.
Now we go in and we just change out that furnace and don’t even mess with that. Our cost now I believe our average cost between, it’s off single-families and you have some flats in there that will adjust because it’s just a little off. I believe we’re right around $62,000 that we have that per unit. That obviously goes back where some properties are in around $70,000 and sometimes, we get good deals and we’re in the $45,000 or $55,000.
Our criteria for buying properties, that’s another thing that’s really changed since we started in 2008. You heard me say before the $3,500, 3,000 square foot house that I used to brag about. Now, I run the opposite layout, something like that. It was a frame house too. We really try focusing on brick. We stay between that 900, or actually some of the house in the smaller end are even like 750 square feet to about 1,200 or 1,300 square feet is our biggest.
That gives us the ability to control and predict our costs on turnovers. At the same time, it’s an average sized home where someone could probably add a person or two in there if their life situation changes. If a person or two leaves, they’re not going to be running and say, “I need an apartment because this is too big for me.”
We say what we like to think it helps with our vacancy or our consistency of keeping our tenants consistent. You have a one-bedroom apartment, you almost positively know that person’s going to grow out of that more than likely in the next couple years. There’s no way you’re going to get seven years out of that person. The neighborhoods, obviously, that was something else that changed since 2008. We just bought wherever, it didn’t matter, in 2008.
If it was under $25,000 and we could fall in that that $40,000, $50,000 all-in type price, we bought it. It didn’t matter. That’s the other thing. Our price per home probably went up a little too because we’d rather pay $5,000 more and being in a little better neighborhood than not be because that the return overall, the ease of management, all that comes into play as you go on with that property.
The neighborhoods we focus on, right now we’re in about 5 or 6 neighborhoods in the South side of Chicago. A couple of neighborhoods we are in have more multi than a couple of neighborhoods where we have are almost all single-family. We have a mix of that. We like single-family. I hear those questions come up all the time in the different forums about the single-family versus multi. Honestly, I could argue either way, but if I had to stick with one decision, we’re bigger fans of single-family homes.
I’ve heard that from quite a few investors. There’s 1 furnace, 1 tenant, 1 set of issues to deal with. Whereas duplexes have multiple sets. As you just said, there’s a case for either way. Mark, what is the purchase price of the last three deals that came through your pipeline?
We put a property at the judicial sale under contract, or we bought it. Technically, we buy it right away with there for I believe $20,000. I put a HUD property under contract for $29,000. Another one was to another agent that got accepted through the MLS and that was $23,000 or $24,000 right in there.
Are you finding these pretty much like listed in an open market source or do you guys do like mainly signs and have relationships with wholesalers and do off market stuff too?
We bought three wholesale deals in 2015. I really tried in 2015 to really build more relationships with those because I think as the HUD or the MLS or traditional sale either becomes more popular or less inventory, which is inevitable, I want to make sure that these wholesale people are coming to me or to us to bring us deals. We even offer it to pay their commission or more to bring it to us first to present us stuff. One of the goals that we had in 2015, ‘16 was more off market deals, along these lines of stuff you and your guys work on, because that’s where it’s going. The MLS will dry up. There are still some deals on there, but it’s inevitably going to dry up in the next 12 to 14 months.
There are still some deals in the multiple listing service, but it will dry up in the next 12 to 14 months.
I cut my teeth in 2006 market. That was my first year in the business. I had my ten-year mark for the day that I went to the real estate seminar. I went to the real estate seminar with the Rich Dad’s style marketing. I remember how hot the market was in 2006 and even into 2007. You couldn’t touch anything on the MLS. I remember the REO properties being bought.
Obviously, we had much more loose money and people could get mortgages on that stuff. Certain deals, we would get at rehab numbers and we would just mop and glow the floors and we would put it on the market and sell it as a handyman special. They were like, “You just have to renovate that house.” People would buy it for like almost not a full retail rehab value, but certainly like the same profit margin that you would’ve had when you rehab that.
Will we see back at that point? Depending on the supply of money. I’m not 100% sure if we’ll get to quite that point, but you’re right, the inventory and being able to survive in a, in a more competitive market with less inventory. The key is definitely the off-market deals and those who have those relationships and have built those systems will definitely be a little more in command of their destiny than they are now.
Price Points OnThe Other Side
Let’s talk about price point on the other side. We have a turnkey rental, you’ve purchased it through your sources, Mark, you’ve done the renovation and you have this inventory. Are you still at a point you don’t care if anyone buys it, you can still do a refinance? Are you still doing that as part of your business right now, keeping a few of the turkey?
Yeah, this time in 2015, our goal was to keep 70% of them and that changed. Now it’s like, “We’ve got to do more so we can keep more.” If anything, that is our motivation, because at the end of the day, we don’t want to sell the away everything. We all have our product. You can make wax on each deal, but at the end of the day, you still got to be left with something. Why we got into it was for that positive cashflow.
I think that’s important to note for anybody who’s looking at turnkey rentals to have somebody whose aim is almost your interest or in competition with somebody who would want to buy the property there. By the same token, or on the flip side, you could say, “This guy believes in these neighborhoods and these blocks so much, he’s buying them for himself.”
If I want to grab one just because my access, my resources, cash construction management, whatever is limited. If I want to buy 1, 2 or 3 off of somebody like Mark, this guy, in one sense I’m competing with him. I’m going to have to pay whatever price is going to make everybody happy. I’m not going to be able to like steal the property from Mark. On the flip side, you’re also investing side by side in those neighborhoods because you believe in it, you know the results and you’re willing to put yourself there long-term just like you’re putting your clientele and their money and their resources long-term into the same neighborhoods.
Price-point wise, Mark, on these deals, are you selling these units with some equity? Is this like the possibility where somebody could buy it with cash, do a refinance and get 90% to 110% of their money out of the deal, or is this going to be strictly on an ROI basis and it’s more of a cash investor looking for 12%, 13% return on their money? What LTV or what equity position, if any, would be expected in the turnkey rentals that you sell and offer to the market?
The last three appraisals that came back, three appraisals came back in a week. We’re always curious. We always have the buyers come in because we’re pretty confident that there’s a gap of equity there. Be small. The last three appraisals all came in, it was $5,000 and one was $13,000 higher than actually what we’re selling into. Those price points were all right around $100,000. That’s 5% to 10% equity that’s actually even built in there already.
I guess in one faction is good. You get equity but also can provide a buyer with a peace of mind that they have an exit strategy. If they have to sell this thing, that 5% or 10% can cover their closing costs or the commissions they need to do it and be out and actually make $1,000 or $2,000 still back. At the same time, the cash and refinance cashing out, that’s always the opportunity that should have no problem getting that 80% or 85%, maybe even 90% LTV based on the new appraisal.
Can you tell me the avatar for your client in the turnkey rental? Have you seen a common thread of maybe what industries, what background? Is this a professional who has some money to invest or is it more the entrepreneurial investor? Can you just describe maybe the ideal people or the people you’ve seen come across the desk and buy turnkey rentals?
It is the Millennials. I’m on that that top edge of the Millennial age. It’s all these young professionals that might have lost confidence. I’m making assumptions there, but they might have lost confidence in the stock market or they’re not in the industry or working jobs or feel are going to be in the same industry or a job that the 401(k) or some pension’s going to provide them with money after they retire.
They’re looking at other means of setting themselves up down the road. You got websites like BiggerPockets and all these other forums that you could go to. You’ve got all these guys that are talking, pitching real estate, larger seminars. It’s always in people’s ears, especially the younger generation. I say millennials, I believe they’re 34 or something like that. Probably 40 years and younger is the majority of what are looking at.
We sold a property with property under contract and I was talking with the buyer. Her problem was, she’s been at one company for a long time, which is rare, but she’s about ten years out from retiring and her 401(k) is nowhere near where she needs to be. She started buying properties and Chicago’s going to be the last one. She’ll have money to invest in. She’s bought a few in different places. They’re just looking at it as a means of cashflow after retirement or a means for them to exit their 9:00 to 5:00 at some point sooner than 60 or 65 years old.
On one of your recent deals, Mark, let’s say that the buyer paid $100,000 for the deal and he had to put, I don’t know, $15,000, $18,000 into the deal to get it closed, closing costs, mortgage, however he took the property down. After his refinance, what kind of a cashflow is he receiving above the mortgage? What’s the rent, what’s the mortgage and how much should somebody expect to make on a turnkey rental for it to be a good deal or a fair deal?
On a finance deal where the guy’s putting 20% down, we’re projecting people are getting anywhere between 17% and really 21% return on that money. For all in cash deals, we’re generally looking between nine and 11%. Translation, with a finance deal. It comes out to be about $200 to $300 a month. The cash deal, it comes out to be about $500 to $500 a month. Right in that ballpark. I don’t have the spot on, but because I always work off the percentages.
Worst Situation In A Single-Family Rental
What would be the worst situation that you have ever seen on a single-family rental, whether it was yours, clients, what was the worst, craziest situation that unfolded for you or under your watch?
You go on these vacant properties and you never know who’s going to be in those. I don’t know, I’ve seen a bunch of crazy stuff. In the old neighborhoods that used to be in, there’s a couple shootings and UPS guy got shot. My partner was there for the UPS guy got shot in the butt. There’s been some crazy stories like that. I actually wrote a blog on it about one where everything was justified, every decision we made or every problem we came up to, we said, “It doesn’t matter. We’re only into these for $40,000.” The cashflow is awesome.
The blog goes into talking about how one day it all came to reality when I had it ducked down in my car because there was shots being fired in this particular neighborhood and it’s just not worth it anymore at that point. I always feel horrible. I’m a big animal lover and you go in these houses and you’ll see people went up and left and they left their dog behind. That always that eats me up inside on that note.
One of my Philadelphia friends told me the story he had. I believe it was like his first rental property. It’s in one of the South side style neighborhoods. It’s in the Highland Garden section of Chester. He said the tenant was paying for 4 or 5 years straight, and I forget if she went bad or what, but when she moved out, she must not have ever took the diapers from the baby out to the trash. She just chucked them out the back window. There was like 3 or 4 feet of diapers piled up in the backyard when she left. I’m like, “That’s unique.”
I’ve had that happen a few different times. Right out the window. It’s always in the multi where they don’t want to walk downstairs.
Strategies In Choosing And Billing Tenants
It is what it is, but we have to shift a bit. Management techniques. What strategies do you have for placing and choosing the right tenants in these neighborhoods, Mark?
There’s a bunch of different stuff that we do. One of the bigger ones that makes me feel good inside about moving forward with a tenant is the cleared rent checks. If someone’s renting somewhere else, we feel that they should be able to provide some proof that they paid the rent. Not the handwritten receipts, which usually that’s a red flag. Once you get those, that’s a red flag.
They got a job, the money goes into their bank account, most of the time is deposited, and we want to see a paper trail of that landlord get paid. If they can’t prove that, we don’t rent to them. That’s one of the bigger ones that we really live by. We try to limit dogs. We’re not crazy on dogs, especially bigger dogs, but we make sure we always have photos of every dog in the application process. That’s something that we started. I got sick of the 40-pound mixed lab that turns out to be the 110 pound pit bull. No one ever knew it. If you don’t see the dog, you don’t know, but so we add your pictures up front then on all of that nowadays.
Do you guys do home visits or anything like that when you’re choosing a tenant?
We do. We don’t do it every time. We like proof. We like verification. That makes us feel good about moving a tenant. Once we feel good that this tenant’s the right person, we want to treat them like gold. Until we feel good that they’re going to treat us back gold and pay our payments and not destroy our place, we have a hard time really throwing our customer service at them. We like that feeling. Sometimes in that later step we might say, “Let’s go check this out,” to give us tour. Everyone feels at ease when we go there and the place looks good and so forth.
Landlord record is another one. Anyone could put anyone’s name down for being their landlord. We’re very big on the tax records. If Joe Miller is your landlord, then why does it say Tanya Smith on there as the taxpayer? Explain that and prove it to us of what the difference is. That’s a big red flag for us. If those facts line up there, it’s easy to prove. That’s all public records.
Obviously, we run the eviction reports and all that, but the other big one is first time tenants. I have a hard time putting first time tenants in my in our rentals because Chicago’s full of tons of slum lords and they can’t appreciate us until they’ve been screwed over by a slum landlord. At that point, the newbie, the first-time home renters, they have experienced life. They have experienced the gas bill, electric bill,. They don’t realize that it’s not just a rent that’s $1,000. It’s the other $500, $600 plus your food, all that stuff that you have to incorporate into your monthly.
It’s usually the landlord that gets screwed on that. They don’t appreciate. They see one little ant, they call the city because they say the place got bugs. It’s that experience that these tenants gain of going through a few other landlords that will only make them appreciate us as their landlord when they finally get to us. We try to stay away from first time tenants. Single-family homes, we don’t get too many applicants for first time renters, but we actually got one and it raised a lot of these questions.
Do you have any specific billing strategy for getting the rent? Do you send a statement each month? How does that process work for your management clients?
We don’t do the statements, but we have an ease of payment. We have our management software, which we use AppFolio. It’s helped us make huge strides in service we provide and tracking and the communication with the tenants. Through that system, we’re able to email them various statements. If they’re behind, we’re able to email them their ledger. We’re able to text message them, “Your rent’s late,” or, “Today you’ve been charged a late fee because it’s the sixth of the month and we don’t have your rent.”
We really stay in constant communication with the tenants on a daily basis throughout the month if they’re behind. Twice a week, someone’s actually trying to communicate or stop by there. It’s a moving target of how you handle collections. How we do it changes a couple of times a year because we have new strategies or new approaches.
One of the new things that we were messing around with to do is if the tenant is not calling us back, we call it emergency contacts and tell them we haven’t heard from her and they haven’t paid rent. That is immediately embarrassing. “We’re really worried about the tenants and she hasn’t paid rent for this month and it’s the 15th and we haven’t heard from her. We want to make sure she’s okay.” All of a sudden, that mom or that brother-in-law, now she’s embarrassed and she’s going to come and contact us right away and pay rent. Hopefully, that’s the goal. It actually worked 3 or 4 times. We actually really got a good kick out of that. That was actually fun for us to do that.
Mark, what about the late fees? Who gets the late fees in a management situation? Does that go to management or does that go to the owner who’s sitting there waiting on that payment to make his mortgage?
That goes to the owner. I know I’ve seen that happen both ways, and I never understood how the manager company could get that. Maybe I’m wrong. Maybe I’m eliminating a source of revenue for us, but we always felt that it doesn’t make sense any other way but to go to the owner. Sometimes we justify renewing a tenant’s lease because they’ve paid late 9 out of 12 months, and the owner just got another $1,000 for that month and for that year. That could be huge sometimes for an owner. If they’re getting $12,000 a year and they get another $1,000, it’s in their 8% they made.
What fee does a landlord expect to pay with your company for management? Is it 10% across board 8%, or is there a sliding scale based on the number of properties?
Generally, 8%. For our turnkey customers that buy from us in the city, it’s all 8% out in the suburbs. Our management starts at 8%, and then as the rank declines higher, then it obviously goes down. I think at $1700 per month, that number breaks and goes down to 7% or 7.5%.
Is there a minimum charge if you’re dealing with like $600, $700, $800 unit at 8%?
There is a minimum charge. Our minimum charge is $100 per unit.
I’ve heard a couple different stories on this piece here, and I know a couple turnkey rental people do this part differently, but if you have a client who has mortgage information and you’re collecting, or they have a mortgage on the property, are you willing to make a dual disbursement one to the mortgage company with the escrow check, etc., and one to the client for their cashflow or do you guys strictly do one disbursement to the owner and the owner handles paying his own mortgage?
On the manager side, we push all the mortgage payments back to the landlord. There’s too much at risk there with FICO or things getting screwed up or late fees. We definitely push that back to the owner. The same with in association fees, we push that back to the owner as well too in the townhouse community. We really push all the things back and we really try to push property tax back too. For our turnkey properties, we pay all the property taxes for the owners on the behalf.
Final Words Of Wisdom And Recommended Books
Were there any other pieces of management information that you think I missed that you think would be important to mention, Mark, for the readers?
Management is we developed our turnkey company in the city only because we were confident that we had the correct management in place. Our management that we started in the city was really only developed around us buying properties down there because we weren’t confident enough in subbing that out to another management company.
Management is such a key component to everything, whether it’s turnkey property or just a regular property. I saw something on one of the forums that said it’s better to have an average investment and have a stellar management company than a stellar investment in an average management company. However you can translate that, it just translates to me as the management company is such a key piece to your success because you’re really investing in that management company to set you up for the rest of your life if you have 7, 10, 15 properties with them.
I have a couple more questions here for you, Mark. Do you have any decent book recommendations for our readers?
I read the Rich Dad Poor Dad. I see that was on the last episode, and that was the book back in 2004 or ‘05 that made me realize that I’m never going back to the corporate world. I was already in the GC and work on that, but I’m staying away from the corporate world and going to focus on being an entrepreneur. That was a big eyeopener back when that first out.
In 2014, I read the book The E-Myth, which is why small businesses fail. That was huge eyeopener for how we were running our business and how we were gauging our business and how we were planning and so forth. That was huge for us. That was a big game changer for me. That only rolled into the best thing that I did in the last eighteen months was realize I could listen to books on tape. Awesome.
I love knowledge really, like you were talking about earlier. I love learning all the time, 24/7, anytime I can be. I open up a book and I don’t care if it’s 3:00 in the afternoon or 3:00 in the morning, two pages later, I’m sleeping. I don’t know if it’s my ADHD, but I can’t read a book. It’s tough. I’ve done a couple, don’t get me wrong. The book on tape has been awesome. I listened to 30, 40 books in one year and the other big one was Work the System. It’s by Sam Carpenter. This is really my answer for your question. It’s all about systematizing your business and being able to be repeatable for the ability to scale.
I believe you’re referring to Audible, correct, Mark? We’re going to plug the book audiobook, Audible, run by Amazon. It’s a great app. If anybody does not know about that, I’m amazed when I run into people who haven’t downloaded that or they’re not aware that they can just get these books for $8, $9, $10, $15 on Audible and listen to them while you’re driving. It is definitely a real game changer for knowledge consumption, that’s for sure. Do you have any final jewels of wisdom to share with our readers?
I listen to this podcast weekly, and then it’s directed towards newbies. It’s directed towards experience. I read forums about every level of people. It is tough to really get into real estate without jumping in. My jewel of wisdom is that right now, we’re in a market that you could buy a property and even if it wasn’t the best purchase, you could still turn it into a successful purchase. Jumping in for these newbies and doing what they really want to do is probably one of the biggest lessons they could do. That’s far better than all the books or forums or podcasts they listen to. Don’t stop listening to this show.
We are now in the market where you can buy a not-so-good property and still turn it into a successful purchase.
How can people get more information about you? Do you have contact information you’d like to share, Mark?
Yeah, you can and we can find our information. We have we have our website, GCRealtyInc.com. Also, we have our turnkey website, which is GCRealtyInvestments.com. They both link to each other. If you end up on one, you can find the other. All my information is on there. My cell phone’s on there so anyone can reach out.
Thank you, Mark, for coming on the show. I’ve taken a couple of pages of notes here and had some great insights, especially on the management piece there, so I’m hoping our readers did as well. I appreciate you coming on the show.
All right. I appreciate it. Thanks for having me.
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