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Real Life Examples
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.
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.
I don’t have all my eggs in one basket. I can be really, really good at the one thing I’m good at.
Sean Katona, Real Estate Investor
Then I let the partners I work with do what they do best.
John: Yeah that’s interesting. It sounds like you have assets really all across the country. Where’s your home base or home marketplace?
Sean: I live in Huntington Beach, I’m originally from Seattle. I was finding that in Orange County, you’re barely beating inflation.
When you think about debt coverage, I wasn’t finding super compelling returns in my backyard so I started looking in markets where I could stretch my cash and my investor’s cash a little further.
Where it was a landlord-friendly state, where we see job growth, and where employers move such as Florida, Texas, Arizona, and the sunbelt in general is just on fire.
If I can find fixer-upper deals that are in the path of progress that can achieve super-charged returns, I’m willing to jump on a plane and go to those markets every other month to view those deals.
John: I focus on the Cleveland market, that’s where I’m sitting right now. I’m looking for single-family properties, that’s where I am as an investor. I’ve talked to a lot of investors that tell me, “You should start looking at this. I know that’s not of interest to you right now, you’re a landlord and do private loans, but if you don’t start looking at some of these other real estate assets you may be missing out on incredible opportunities.”
How do you connect with others? Are you connecting with investors in those local markets who are helping bring you in? Or how do you get involved there? Can you talk about the networking that has to be done to invest across state lines?
Sean: I play both parts. I’m an active investor, deal sponsor syndicator where I find the deals, and my friends and family invest alongside us in those projects.
If I bring them an interesting deal in Phoenix, for example, they raise their hands and can trust me. They can invest in their retirement accounts or with their cash regardless of where they’re at.
A lot of our investors are in California and they see the returns in markets like Arizona nearly double what they can get in their backyard. I’m doing a lot of the on-the-ground work so they can enjoy those passive returns.
On the flip side, I’m in that boat as well. I see markets like Cleveland where we see good opportunities. I like where I live but I don’t think it’s the juiciest market from an ROI standpoint. It appreciates but from a cash flow standpoint, it’s not ideal.
I encourage my friends and family to look at their portfolios and do an audit. Some of them aren’t making even a 1 percent return on it and they’re getting eroded by inflation. Looking at some of those other asset classes and markets I think is worthwhile for everyone.
John: You mentioned Cleveland and Phoenix. What other markets are you looking at and what do you look for in that market?
Sean: I like to see a landlord-friendly state. I’ve dealt with a lot of shenanigans in Washington and it’s a place where it’s hard to get some things done as a landlord.
I like to see good job growth. That is a big driver of rents. When it comes to retail, we want to see good rooftop density and demand. Where the jobs are, are where the people and that can support all the retailers.
When I was doing more residential investments, I would think about the price-to-rent ratio. If you look at that in California compared to Texas, they’re very different. You can get more favorable returns in other places.
Connect with Sean Katona:
Can my IRA purchase real estate that I currently own?
How do I sell a property owned by my IRA?
What investment options are possible with an Equity Trust account?
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