Part I: How Sean Katona Got Started in Real Estate, Why Commercial Real Estate, and Evaluating Potential Markets

John Bowens interviews Sean Katona, who left corporate America over a decade ago to become a full-time real estate investor to discuss current real estate strategies and tactics.

In part one John and Sean discuss how Sean got started in real estate, how he diversifies across different types of real estate and in different real estate markets, why he started moving towards commercial real estate as an investment, and key economic indicators to look for in a real estate market.

Sean: My journey started like a lot of people’s journeys did. I was working at Microsoft and actually read the book Rich Dad Poor Dad and real estate made a lot of sense with me for a lot of reasons.

I think many of us are aware of cash flow, loan pay down, appreciation, plus tax advantages all getting combined and compounded, and I was very attracted to the investment class.

I fumbled my way through my first rental property which accidentally became a flip about a decade ago. That got me started and also made me realize all the things I didn’t know now as I’m reflecting back.

Fast forward to today and I’m primarily focused on commercial real estate. I still buy fixer-uppers as I did at the beginning of my career and I do it mostly with friends and family now.

I’ve invested my own self-directed IRA into real estate, but I’ve also had a lot of partners over the years use that to participate in deals as well. Whether that’s private lending against single-family homes or owning a piece of an apartment building or shopping center inside their portfolio. So, all those benefits we talk about to happen inside their IRA so that can grow tax-deferred and compound over the years to turn into a fun and exciting number.

I’ve probably done $20+ million in acquisitions and over 75 deals. From single-family, fix-and-flip, turnkey out of state, new construction projects, apartment buildings, I have a stake in a mobile home park, self-storage, so I have some decent diversification against both asset classes and geographies now. I’m getting more and more passionate about the passive side of the business.

I can have my property managers or another active sponsor doing a lot of the heavy lifting, so I don’t have to do all the hand-to-hand combat and deal with tenants and termites and toilets on the real estate investment side.

John: I think the first topic of conversation we want to jump into is, you’ve mentioned you went from residential to commercial and now you’re focusing more on commercial. Can you elaborate on why you did this? Was it driven by the market or was it driven by you and your expertise?

Sean: I think a lot of friends and family reach out to me and say, “Hey I have some extra money sitting either in cash or a retirement account, what should I invest in?”

It’s different for everybody. One of the pain points I went through was being a small mom and pop. Dealing with the dirty work and trying to get to economies of scale.

There was one summer where I had about 15 flips going on simultaneously across four or five different contractors and they were all falling behind schedule… because those projects were taking longer it was eating into profit margins and it got to the point where I lost six figures on two back-to-back deals.

I had to take a step backward and assess if it was the business model that I want to be doing. Is it getting me to my goal? And my goal was ultimately passive income.

I was looking for predictable certainty where I didn’t have to be involved in the day-to-day and building a fix-and-flip business wasn’t really getting me that.

It was my rental properties and turnkey out-of-state stuff that was doing best. When I looked at the commercial model, the fundamentals were similar.

I could go in, buy a fixer-upper, force appreciation, add value. I would make money while I was improving it. I’m paying the loan down, so there’s a lot of things there.

It ultimately ended up being that I could make a lot more, work a lot less doing a handful of quality deals. Higher quality, bigger deals, versus many more deals that were smaller.

The fundamentals were similar but with an extra comma and more zeros.

John: As far as commercial real estate is concerned, is it only shopping centers or are you also venturing into multi-family?

Sean: As a sponsor for deals where I go out and actively find and lease and manage and oversee the construction, I’m very focused on shopping centers, specifically in Phoenix.

I do passively invest with friends who are experts in their craft and their market.

We have ownership stakes in pretty significant size apartment buildings in Dallas, St. Louis, we’ve investing in a mobile home park, self-storage. I still have some single-family rentals in portfolios which we’ve done in both cash and our retirement account.

That’s given us good asset class diversification and geographic diversification. I don’t have all my eggs in one basket. I can be really really good at the one thing I’m good at. Then I let the partners I work with do what they do best.