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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 two, John and Sean discuss what to look for and what you need to invest out-of-state, the 1 percent rule for real estate investing, evaluating turnkey properties, and valuable resources for all real estate investors.
John: Let’s move to the residential side. When you look at a cash flowing residential property, what are you looking for? Can you drill down on some of the cash flowing aspects that you look for in terms of rentals or turnkey?
Sean: A really rough way to look at it is a 1 percent rule. I liked when if I bought a house for $100,000, it’s renting for $1,000 a month. My rents minus loan payments and expenses, what does my cash on cash look like? That’s my most important indicator… how far can I stretch my dollar?
When I’m doing value add, on both single family and commercial, I look for significant upside. That would allow me to go buy a rental, renovate, rent it, refinance it, and pull out some, if not all of my initial down payment so I can go out and repeat it over and over again.
BRRRR: Buy it, Rent it, Renovate it, Refinance it and Repeat it.
Because of the value of a commercial building, you double the income. You can nearly double the value of the building in a lot of cases.
Those fundamentals are similar in both assets classes that we look at. For me, value add has become such an important part of what I buy and why. It can mitigate risk and create bigger spreads and margins. If we had to lower rent, we still have good spread and good margins there.
John: We have viewers and clients from all across the country, as you may know. You’ll find that we have investors who want to stay focused on their local market, use their IRAs, Solo 401(k)s, HSAs, other tax-advantaged investment accounts, and only want to invest in their backyard.
Admittedly, I am one of those people. Hopefully there will come a day when I diversify across markets and real estate asset classes. But on the other side we have investors from other states who use their retirement plans to invest in other markets because of exactly what you said.
With a self-directed IRA, most people are buying real estate as a cash buyer with a self-directed IRA or solo 401(k), they’re not taking on a loan. Financing with an IRA can be more challenging.
What I wanted to ask is for somebody who is looking to invest in turnkey assets, what do they want to look for as an operator or in the actual asset themselves? We have to look at both when investing across state lines.
Sean: So, everything in my portfolio now is third-party property managed. It wasn’t always that way, but look at can they do what they say they’re going to do? You can interview maybe 50 property managers and find 2 or 3 who are exceptional. It’s scary when you don’t know but look for referrals from people you know or trust who have multiple properties.
The company we use to manage our Texas portfolio has thousands and thousands of units so they can realize some economies of scale that mom and pops can’t. They have deep relationships with vendors and others who can really help.
I’ve heard horror stories obviously of things falling apart.
I look for good school districts too and then if I can get newer bones, newer construction, that’s always more desirable so things are falling apart.
So really vet those property managers. But you brought up another interesting point, do people want to self-manage?
The reason I went away from that is that it started to become an opportunity cost debate. My time spent dealing with tenants, termites, and toilets, was preventing me for buying another deal or finding another investment.
We decided to push it all off, as a relatively low-cost, low-return activity to self-manage, and I can pay 5-10% of my rents while I can go find another 6 or 7 figure deal that’s time much better spent.
If you’re a successful doctor, dentist, or attorney you’re probably better off working with more clients to increase your income to participate in or buy more deals. It’s a personal preference.
As we sat down and looked at that it felt like we were leaving money on the table by self-managing.
John: When you started off you managed your first deal right?
Sean: Yeah, and a lot of lessons learned the hard way, but it got me in the game and got me going. I’d rather see someone do that than not. I’d say have a second set of eyes, have a mentor or coach who can really poke holes in it.
You’re going out and doing your first deal without experience and there are a lot of things that can come up.
John: I think that’s great for our audience. Some are very active real estate investors but there are still some that haven’t done their first deal. Doing your first deal and having the ability to work on managing properties to better understand what questions to ask when interviewing a property manager can be helpful.
If we’ve never managed on our own though, we might have a more difficult time interviewing those managers. However, if you haven’t managed or don’t plan on it, you brought up a good point, get referrals and ask people. It will lead to more trust.
So what is your next venture? What is the long-term vision for you?
Sean: I’m in the process of portfolio clean up right now, I’m selling off some of my residential, legacy deals that I’ve accumulated over the past years and I’ve basically exited Washington. I’ll probably double down on more fixer-upper shopping centers in Phoenix because I’m making more money in that area and asset class by margin compared to any other areas I’m investing in.
The stuff that I invest in is daily needs, things that are Amazon or internet resistant, it’s withstood the pandemic pretty well. Things like nail salons, dog groomers, daycares and schools and things that we’re still going to be using for the foreseeable future. It has me very excited.
I think what I’ve done is methodically built my portfolio safely, little by little, so we can do three to five times more. I’m expanding to a wider group of friends and family that I have relationships with to get more people to join us. We’re historically seeing double digit returns consistently here, which is better than a lot of other things I invested in.
I’m not telling people what to do with my money, but I didn’t know this existed for years in real estate. I wish somebody would have told me to take a look at commercial, multi-family investments in other places.
Our tenants help us with paying down the year, we increase our rent yearly, we keep moving through deals and get the tax advantages with real estate and doing it at scale.
Everyone can participate in that seen benefit without having to do any of the hands-on management. That’s what makes commercial such a unique and special platform.
Like we talked about, people can do it with cash or inside their retirement accounts. I estimate that about half of my investors are doing so from within their self-directed IRAs, they’re getting those tax-advantages and they’re putting their money to work in an area which I feel personally has more certainty and predictability than the stock market.
That’s what I think about, and what gets me excited and keeps me doubled down on this.
John: I can tell you’re incredible passionate about commercial real estate and I’m sure you’ll continue to have success in that arena.
I always to like to ask this next question to help our audience learn how to get access to good information and education. I’d imagine that you plug into a lot of resources and forums, what are some of the top online forums that you plug into, books, courses, etc.
Do you have any recommendations for our audience to get more education on commercial or residential real estate investing?
Sean: I have a wide range. I’m a big fan of books, I gobble up audibles when I exercise. Some of my personal favorites are Rich Dad Poor Dad by Robert T. Kiyosaki, The One Thing by Gary Keller, The Millionaire Real Estate Investor by Gary Keller.
I’m also a member of a couple mastermind groups. I’m not sure if I’d recommend that for a passive investor or part-time investor, but because of the nature of my business it makes a lot of sense to surround myself with other millionaire real estate investors at a high level.
All those things help me raise the game a little bit. Masterminds aren’t cheap, but I’m getting the collective experience of hundreds of years of successful real estate investors and their best practices and mistakes they made to avoid.
I always strive to be the dumbest, brokest guy in the room when I’m at these masterminds to continue learning.
I’m all over YouTube, I’m listening to podcasts a lot, I’m reading articles. I’ve been spending a lot of time on Clubhouse so in real time I can drop in and have conversations with other active and passive investors and what they’re doing, how they’re doing it. It’s a networking conference on steroids that you can do in your pajamas.
John: Can you tell us about Clubhouse?
Sean: Clubhouse is the name of the app and it’s like drop in audios. Imagine you’re joining a conference call that’s available to the public and people can listen passively or jump on as a panelist or presenter. They have fire rounds too, I’ve asked how commercial brokers get listings or how do you find your best deals right now.
It’s like a real time mastermind. But it can be used to talk about whatever you want: sports, religion, politics, etc. But I use it to talk about real estate.
John: That’s great. In terms of masterminds, like you said it might be not best for passive investors but there are organizations all across the country and a lot of them are handling all of their networking-type meetings via video conferences.
So, you can search REIA (National Real Estate Investor Association) and you should be able to find a local group you can join.
I’m a member here in Cleveland and I’ve gotten an incredible amount of value from the relationships. About a year ago, I bought a property from a person I met at one of the meetings. He was a wholesaler and I told him exactly what I was looking for and it was a great match.