Bridge Turnkey CEO, Nathan Brooks, was recently featured on the Real Dealz Podcast with host, Tucker Merrihew. The interview covered a range of topics including Bridge Turnkey’s business model, goals for 2020, renovation philosophy, and more. Check it out for yourself:

Follow along with the Transcript:

Tucker Merrihew (Podcast host): So I, you know, obviously on a surface level I’ve got a pretty good idea of what you’ve got going on, but maybe for our listeners – and obviously for me as well – maybe dive into, you know, what your main operation is. You’re obviously based out of Kansas City, Missouri, but just kind of give us a broad overview of what the operation looks like and then we can kind of dive into some specifics and, you know, I’m honestly very interested myself. So I’ve a lot of questions, but give us an overview and we’ll go from there.

 

Nathan Brooks: Beautiful. Yeah. And thanks again for having me, man. I really appreciate it. So, we’re into our fifth year of business. We’re turn-key. Uh, been doing real estate over, you know, twelve years, but as a company we’re into our fifth year. So, I talk about that we’re in our adolescence, you know- infancy, adolescence, and adulthood as a business… So, in 2019 we did just shy of 150 houses. So, bought, renovated, and sold just shy of 150 houses. I don’t know the actual number. If my business partner was in the room he could tell you exactly. And one thing we’ve gotten really good at is just tracking our data. We’re a data house. We know exactly what our numbers are. So then we have a clear, you know, idea of not only how we did, but what went well, what didn’t go well, and where do we need to make improvements. We have a very well built-out sales and marketing department, construction, property managem– or rather, project management in-house. We also have our acquisitions department in-house and we’re just in the midst of hiring a Sales and Acquisitions Manager. And we just hired a COO as well. So I sit in the CEO seat, my partner in the CFO seat, and then we have the COO who just came in, uh, about six months or so ago, five months. So really building out and not just in our ability to do deals, you know, buying and selling, renovating houses for the turn-key side, which I’ll explain here in a second, but also, understanding not just the capacity to do deals, but also lead and manage people. And I think a lot of times business owners from that perspective, if they don’t take both sides of that — so doing deals is exciting and sexy; but leading people and managing and understanding what’s happening within your organization is really, really key too. Our core competency as a business is the turn-key space, which is, you know, there are many definitions for what that is, but our definition is that we buy, renovate, place a tenant, and sell a beautiful, turn-key home to our client, who might live on the West Coast in California, they might be deployed in Afghanistan… Literally from police officer, firefighter, attorney, whatever. Whatever they do, all over the U.S. and internationally, they want to buy cash-flowing assets so they entrust us with doing all of the work on the front end and they invest their capital and buy a great asset on the back end.

 

T: What would you say – just out of curiosity – what the percentage of people that are buying these assets from you is cash versus some form of finance?

N: The vast, vast majority are financed.

T: Okay.

N: So, yeah. And the rate– go ahead…

T: What’s the average price point then, would you say, on the turn-key stuff that you’re selling to these guys?

N: We’ll say $90K-$140K typically is the price point.

T: Okay. Gotcha.

N: And then, “What rates are close”? Were you going to ask that?

T: Yep, going to be my next question. So yeah.

N: Yeah, perfect. So, you know, there’s really 3 components that I really encourage people to look at. So it’s “What is the sales price?”, “What is the rent?” of course, but then also looking at that other two things. So we have that P.I.T.I – we think about it when we buy a mortgage: Principle, Interest, Taxes, Insurance. But in the rental world I think a lot about that “1%”, you know, the $100,000 house, $1000 rent. I think a lot of times people also forget what those taxes and insurance look like. So, you know, in our market we’re close to that 1%, but also our taxes and insurance are very low, comparatively. So the market’s like a Milwaukee or some parts of Texas, so on and so forth. You know, it’s a good appreciation/also having cash flow in the market. 

T: Yeah. I’ve got a buddy that moved to Milwaukee and I saw him. We went to a Buffs game because we both went to University of Colorado. So we went back there for a Buffs game and I was like, “Oh, you had to have gotten a pretty good deal on a house.” And he was like, “No, It’s pretty expensive there.” [laughs] “Property taxes are through the roof there, too.” And I was like, “What are they?” And he told me and was like, “Oh my God.” It seemed really high. Yeah, so.  

N: So a $100,000 house in Milwaukee is $3,500 a year in taxes. A $100,000 house in KC is, you know, say $1000, $1200, maybe – maybe a little higher, you know. It’s unbelievable. 

T: Sounds like the bond measure rush hasn’t come through in Kansas City quite yet.

[laughs]

N: Not like that. That’s pretty insane.

T: Very cool. So then the, I guess, the main crux of your operation then is selling turn-key properties to, uh, call it – outside investors or people that don’t live in Kansas City that want a better return than what they can get in their market?

N: Yeah, absolutely. And I think there’s also another differentiator, which is a lot of times, you know, you have people who want to go and do the “mom-and-pop, buy a handful of homes” and then you have people who don’t want to do anything. So they don’t want to do any work or maybe they love the job that they’re working and they just want to have the opportunity and invest their money elsewhere. Many people that build that whole business around it. So, you know, we have both of those first two. People who want to just buy a handful of homes and we have people, um, or maybe that have future goals that they want to do, you know, some BRRRR strategy kind of deals in the future. “But hey, let me understand the process… What does it look like getting financing? What does it look like underwriting them? How do I do it the most safely and, uh, passive way first and then get my feet wet and move into the other areas?”

T: Gotcha. So, within that branch we’ll call it of the turn-key business, you’ve got your project manager- well, you’ve got your acquisition department, you’ve got your project management, you obviously sell. I’m sure you’re connecting with these people you’re selling to in-house as well. You’re selling to them…

N: Yep.

T: And then, are you maintaining property management? Or what does that piece look like? 

N: So we don’t have property management right now in-house. We did for a period of time when we first started and we ran pretty quickly from 0 to about 140 doors in a little over a year. And uh, definitely got our butts kicked in property management. Frankly, we shared with our clients even and said hey, at least at this point and what we built there wasn’t really serving the clients in the way that we should. So, uh, we brought in a third party property management company and we’ve been working with them for a couple years now. It’s gone very well. Certainly with anything, let alone in property management, where, you know, nothing really is perfect. But, how do we do the best job both on the front end of the sell side and helping explain to our clients what their experience is going to be? Also saying, “Hey, this is a house. Things do actually break.” And um, it’s still an investment and there is still risk. And then, how do we also the best job from the construction side, too, and go through and say, “Okay, well these things are coming up on inspection reports or these are being brought up by our project managers in the field.” Or hey, the construction guys are like “Hey, why aren’t we dealing with this now?” So I’ll give you two examples with that, too. So from the plumbing and electrical perspective, we were having– as you build new houses, you get to put brand new plumbing and brand new electrical in it and have a good sense of what’s happening. Not that you don’t have your fair share of troubles…. I’m certainly that…

T: Oh, we’ve been through the gamut. [laughs] No question…

N: In construction there’s a challenge, but uh… You know instead of wondering who the person on whoever’s crew that day was, was the plumber, you know, we’ve now brought in masters in plumbing and masters in electrical and that way all that rough and stuff is already done and we know for sure that everything’s done right. For the client, you know, it’s awesome because we can share that story that this was a place that we weren’t sure. So rather than wondering exactly “hey is this getting done every single time?” We see it on the inspection and we’re doing the third party inspection, but hey let’s make sure for real that it’s done right. And then we also have the single source if there’s something that is an issue, we can come back and say, “Help us out.” Number 2, from the tenants experience too, because part of owning an investment property is that management of that property and that relationship built with that tenant. They move in and they have 2 and 3 and 4 and 5 problems with their house and they’re going to have the sour taste in their mouth about that experience. So how can we make it better and have less issues as people move in? So we’re obsessive about that.

T: Very cool. So let’s back up then real quick and kind of go through, um, I guess the lifecycle of a lead that comes into the business, right. So — and I’m assuming that the majority of — do you guys do stuff outside of the turn-key sales model um, that maybe leads that come in and things like that? Or is everything pretty much pushed down that funnel?

 N: So currently, we have three buckets: we have the turnkey bucket, which is the vast majority of our deals, vast majority of revenue, that kind of stuff. We have an emerging side which is new construction. So we’re learning that, watching you with the — you do some amazing stuff on that end. So, we have a goal of doing 30 new construction projects in 2020…

 T: That’s a lot, by the way. So… that’s a big goal.

[laughs]

N: Well, you could put 10 of ours into 1 of yours. So, I don’t know… [laughs] But it is a big goal and I hate small goals. So, even if we hit 27 or 20 or whatever it’s — I love big goals, and it makes us think big. A mentor said, “When you create small goals you achieve small goals and when you create big goals you achieve the small goals along the way to the big ones.” So, why not just set it up that way? Yep, so, and then the third is our holds. We didn’t hold a lot over the last couple years. We were really focused on serving our clients and building that and now that we’ve continued to build that construction and capacity acquisitions, renovations, sales, we’re going to hold roughly sixty singles and a target to buy a handful of apartments as well. So, building up that target. So, there’s the three buckets.

 T: Okay, so then I’m assuming that the buckets all kind of…they start with the acquisitions department, I would  imagine, so what does that look like? I’m assuming you’re doing a lot of direct marketing trying to get the phone to ring, getting leads to look at, conversations to be had with sellers. What does that part of the business look like to you guys?

N: You know the crazy part is that we don’t send a single piece of mail right now. We don’t send a single thing, so we have two full-time acquisitions people and we buy some direct-to-seller stuff that comes directly to us, but a lot of wholesalers. MLS, still we can buy 10-20% of our deals from MLS. I’m really focused on, and with our team, focused on just building relationships and how can we be the fastest? How can we be the fastest to the property? How can we make it the simplest process to close? What does it look like when it’s a hand-off from acquisitions to transactions and we go through that title process? How fast can we close? How simple can we make it for their team? Those are the things that I personally coach on a lot, talk about a lot, and just frankly, how do you get better at having those conversations when somebody wants to make “X” dollars on this property and we need to negotiate to this number, so how do we work together on that?

T: Gotcha. I’m assuming you got a pretty good roll of decks of wholesalers that are calling you guys every week, maybe stuff they’ve sourced on top of a number of local realtors that probably look at you guys as a clearing house for anything they get in that maybe isn’t quite retail ready or needs work.

N: Absolutely and the other component I didn’t mention in the first triad of things is we have a meetup too. So we started at December of 2018 and said what were 13 or 14 months–whatever it is–into that. We literally overtook the largest organization in K.C. for real estate in history in four months.

T: Was it a hostile takeover? [laughs]

N: No, no, no! Just as far as the biggest.

T: I know, I’m just messing with you. 

N: [laughs] 

T: You guys have grown a lot. I see your stuff out online, so I know you guys are blowing up that meetup for sure. 

N: Yeah and still bringing value and then, therefore, we still have a cool form to be able to share what we’re looking for and people understand that we’re legit. I think that’s the thing. People understand, hey, if I can bring a deal to you and I can close it and I know it’s simple and I know if you tell me, “Hey, you’re going to lock it up”. We’ve locked it. We’re in escrow. It’s closing. There’s a lot to be said for that.

T: Yeah, I know a couple of guys here in the pacific northwest that have started meetups and it served them really well, not only just for friendships and people in the business that they’ve met, but also as a steady flow of deal opportunities that then people bring to them. I’m sure you have a lot of conversations off stage on your meetup nights that are kind of like, “Hey, I got this!” and you’re like, “Well call me tomorrow and we’ll take a look at it.” Something like that.

N: Absolutely, yeah. That’s the thing, too, when you have full-time acquisitions–people that can actually be focused on that. I think it’s interesting because you think about what your role is and what seat you sit in and I really think about it. There’s a great interview with Tim Ferris and Eric Schmidt, the former CEO of Google and Eric talked about how everyday he thought about how to remove obstacles for his people and so I really think about that. How do I remove obstacles for our acquisitions people to go and do what they’re good at? And what are the things they personally like doing and sitting in the “like it, love it” box and then how best can we move anything else that’s not in that off of their plates so that they can build those relationships because that’s what I’ve continued to do. How do we show people who are wanting to bring us deals what that system looks like, how simple it could be. We show them how to do it, here’s how fast you can do it, yes you can actually do it. Let’s repeat that. It’s made a world of difference.

T: Gotcha. So these acquisition guys–you said you’ve got two of them–would you say a majority of their day then is focused on, I don’t know, reaching out to agents, other wholesalers, connecting to people you’ve done business before with? Does that make up the outward marketing side of their day, and then of course they’ve got intake stuff and people that are calling them.

N: Absolutely, yeah. Underwriting deals…Really we look every morning: what’s in the pipeline? What’s cooking? Where do we need help? Where do we need to review a deal or re-underwrite? Then specifically, how many do we have? How many homes have we looked at? How many people have we talked to? How many offers have we made and then how many offers did it take to get us one deal, two deals, three deals, whatever. So it’s absolutely underwriting what’s coming into the door to us and then reaching out and building those relationships and continuing to say, “Hey, what can I help you with? Where do you need help?”. We have a lot of people who come to us and say, “Hey, can you help tell us what it’s worth? I don’t know this area” or “What could pay for it?”. So that’s pretty cool, too.

T: Gotcha. So let’s say the lead comes in, looks like something you could buy, whether it be age in wholesale or whatever, you guys decide that you can do it. Then from there, obviously there’s the acquisition. What are you guys using, as far as the financing, to take down? Because 150 houses–that’s a lot. I know price points are a little less than some of the stuff that we play with here, but still, 150 houses–that adds up to a lot of dough at the end of a year, right?

N: Yeah.

T: What’s your guys’ main financing mechanisms or what are you guys using for funding to take these down before you resell them?

N: Great question. I was curious on the math, so 150 by…let’s call it 85. Is that right? We ran to, let’s say, 16/17 million, something like that, in funding. Again, if my partner was here he could pull up the 47 spreadsheets and tell me in five minutes, but I can’t find the folder that has the spreadsheets in it, so I’m in trouble. That’s why he’s so good at what he does. From the financing perspective, I think a lot of people struggle here and we’ve built an incredible–again, to relationships–group of private lenders and funders who do that, so we build just shy of 10 million dollars in private money. People use their IRAs and retirement money and whatever. Of course it’s a big responsibility for us too, so to have that be that…responsible for their money and giving them great returns and then in return we have a great, stable source of financial resources that we can buy in and out of.

T: Gotcha. What would you say–because I know this is a big hang up for a lot of people in trying to raise private money–what would you say has been your most successful way to get in front of these people that have means that can lend you? Because for us, personally, we’ve done some stuff like we’ve mailed a Deed of Trust list, so people that have lent as an individual in a first position Deed of Trust. We marketed to them. We happened to have a gal…and I know it’s questionable for whether or not that’s legal or not, but I’m kind of an ask for forgiveness instead of permission guys and so one of the people we mailed was a gal that lived up the street from our office. She walked her dog one day and she walked in to the office just to see if we were real and kind of give us a sniff test just to make sure we weren’t  scammers or something like that, and here we are eight years later and she’s got probably a million, a million five out with us at any given time. But that’s one way. Then, of course, you’ve got your network marketing. You infiltrate some of those higher network circles and you can kind of show people, “Hey, I’ve got a legitimate business. This is what we do.” Generally people are interested in real estate, I’ve found, especially the higher turnover type real estate. It has an allure to it, so to invest in it, people are definitely interested in it. If you can pair that with great returns, it’s pretty easy to get people’s money. But what has been your most successful way to have raised this large pool of money? I mean, 10 million dollars is a big chunk of cash, especially in your market there.

N: For sure, yeah. I’ll give most of the credit to my partner, David, who’s done the vast majority of that, but I had brought in some and I think it comes back to what the conversation looks like and whether I’m at the local cigar shop or hanging out with buddies somewhere else or at a dinner party, I’m always talking about real estate and talking about things that I’m passionate about. So I think it naturally comes up like, “Oh! You do real estate? Tell me about it!” and “How do I get into it?” and I was just literally sitting with some folks last week and this gentleman and I had the same conversation. Well hey, you have funds in your IRA. You can be the bank or you can have other people who are in your relationships and network that you can bring in. I think people are a lot of times just afraid to ask and instead, if you can rephrase in a way that says, “Here’s an opportunity!”, it’s not just about me asking you, Tucker, to lend me a $100,000, it’s also to say, “Hey Tucker, you probably have a million places that you can invest your money and I totally respect that and I’m probably not even the guy for that, but hey, if you wanted to do that, here’s what it looks like.” For instance, we had one person who had his retirement funds being rolled over from his work to being able to put it in a self-directed IRA and he was just literally asking for help like, “Hey! How do I invest? I want to do real estate” and we said “Here’s all the options: You can buy this and you can invest in apartment syndication and you can lend money.” “Well where do I lend money?” “Well shoot, we can help you with that!” I think a lot of times, I have a line that I’ve said a lot over the years which is, “Ask for what you want and be prepared to get what you ask for”, so I constantly ask and no is fine. I don’t care. No means that I asked a question and yes means that I have an opportunity to explain more. The other thing is, know what you’re actually asking for because a lot of times it’s like:

 “Hey, I need some money!” 

“Well, what do you need money for?” 

“Well I want to do real estate!” 

“Well, what kind of real estate?”

“I want to buy some flips.”

“Okay, well what kind of flips?”

If you came to me and I would say, “Okay, great Tucker. We need somewhere typically between 80-100 grand. I’m going to send you an address. I’m going to send you an amount and it typically runs for this period of time. It pays this much return. You typically get your money back in this period of time”. This is how we communicate, right? So I gave you all the details and made it simple and what the barrier to entry is and how to do that.

T: Now that would be the professional way to do it.

[laughs]

T: I like that though. That is good. As far as protection mechanisms and just how you structure it, because I know for us we have two ways that we structure private money, but do you generally do one investor, one property, one Deed of trust? What does that look like behind the curtain?

N: Exactly.

T: Okay.

N: Exactly. There’s some occasions that we will put a couple together, but we’ll have those conversations with those individuals and make sure they understand. Yeah, one Deed of Trust and we pay them monthly so there’s something about that excitement about that literal mailbox money that you get paid every month and have that return.

T: Yeah, we’ve had it set up two ways: one is, we had about three and a half million dollars of just, we had free reign to invest how we wanted for a sustained amount of time and we paid that monthly at a lower return because it was basically a guaranteed over twelve months. So my job became money manager, right? I’ve got to deploy these funds and make sure we can meet our obligation plus hopefully make as much as possible. The other is deploy per property as we get properties to buy. It pays a higher rate in points we’ll call it, but I’m only paying once the money’s out and it accrues and then it pays off in full once we’re done with the project. I kind of lighten up, just like you mentioned there. “Okay, here’s the property. Here’s the valuation. Here’s what we can use on acquisition and here’s the expected payoff. Are you in?” and it’s usually just an email back, “Yep, in. Where do you need me to send the money?”. Done, you know?

N: Exactly. Well and your price point got to be so much higher, so also finding individuals that can write a five or six or seven or a million dollar check is a little different than a 80 or a hundred thousand dollar.

T: Yeah, the dynamic is definitely different. I’ve had people come to me that like 150 grand, which there’s a lot more people that have 150 than 750 and I’ve just been like, there’s not much I can do with it. I can go buy a lot in a very questionable part of town for 150 and try to push price points on new construction, but it becomes very difficult. For us raising money, we have to really find those people that ideally have at least 300 grand because that’s enough for maybe an acquisition for a lot and then we can pay for vertical in a decent part of town, something like that. But yeah, it’s a little more difficult here because we’ve got to find that thinner airspace in terms of people with a little more cash on hand. 

N: Did you say 300,000 a lot?

T: Yeah.

[laughs]

T: So we have a lot right now. We sold one last month, a month before last, for just under three and a half million and we paid 750,000 for the lot. 

N: Sheesh!

T: We’ve got another one right now that we’re about to start construction on. It’s a lake view house. 

N: A big one.

T: Yeah, we bought that lot for 475, which at the time was a lot of money, but we’ve had a standing off for 1.3 million just for the dirt, but we’re going to build it out and sell it for probably 3 million itself. We’ll see. It’s crazy what lots go for. There’s another that we just got under contract yesterday. It’s two lots, but we can do three units and we’re paying three and a quarter for that and that’s in a little bit different part of town, but that’s cheap in comparison. The lake house where we go where we do most of our stuff, the bigger builders that are trying to conveyor belt this in-field game, they’re paying 500, 550 a lot. Just bam bam bam bam. They’ve got millions and millions out on the board at any given time before even going vertical into construction.

N: Yeah.

T: It’s purely land acquisition, so the numbers get crazy here quick which is nuts, that’s for sure.  

N: That is nuts.

T: Yeah, it eats up your working capital or your private lenders pretty, pretty fast.

N: For sure, not to mention the overhead on that money is substantial.

T: Yeah and even if you’re accruing–you know, that overhead–you still have to meet the obligation at some point, so you got to hope that you can preserve your margins and that you can hit your–

N: Absolutely.

T: Anyway. Yeah, that’s pretty wild. It’s different in your case. You can raise a little bit less money and it’s easier to do those deeds of trust with smaller amounts of money, which is just an easier thing.

N: Absolutely. 

T: Alright, so you get the house, your acquisition guys, they run through whether it be agents, relationships, wholesalers, things to lay in your lap for your meetup. Once they get it and you acquire it, you said you’ve got project management in-house as well. So you’re doing construction in-house, you’re not hiring outside contractors to complete the work.

N: We have subs that are outside of the office and then we have project management. We have quality control and then we have an estimator full-time on staff as well.

T: Gotcha. So is his job then to basically build out the budgets for these rehab projects?

N: Exactly, and then identify the contractor, marry that, and then hand it off to that PM to run the project.

T: Gotcha and how many PMs do you guys have doing 150 houses a year?

N: Two.

T: Two, okay. So they’re busy because what I found, and maybe you can enlighten me and figure out how they can do more, but I found most PMs are good up to about four projects on the rehab site. Now given some of our rehabs are much bigger, but after that, you got to have a pretty high quality individual to be able to balance more projects than that. What have you found is kind of the threshold for your guys?

N: I think it’s an all in approach, so it’s the relationships that are built with those contractors. So how do we help coach and teach with those guys is what we’re looking for? How do we make it a really, really clear system? You know, we’re not dealing with a half a million dollar project. We’re dealing, you know, we average in the low 30s for construction. We also started doing something where a lot of times it’s like, what’s going on in that project. We have a photographer who we pay by the project and so they just go one or two times a week. They’re in the house, they take a bunch of pictures, and so whether your PM is in there that morning or whatever, you can still see guys are on site and what’s happening. We use Slack for communication as well and Slack has been great because then you can see what’s happening in that channel, is what they call them. We use a Slack channel for every project, so that photographer goes. Say Monday morning the PMs in there so they have to update pictures and then Monday afternoon that contractor’s also in the channel, so hey, everything’s going great. Paints going or whatever. Photographer shows up Tuesday, now all of a sudden, you can really see everything that’s happening in that project even though you didn’t necessarily have to have your PM in there every single morning to understand that people were on job site.

T: Wow, so you guys are actually scheduling the photographers to basically go through and take progress photos and post them to Slack on a daily basis.

N: 100%.

T: Wow.

N: All the time.

T: Have you had any issues with…because some of the subcontractors are kind of blockheads, right? Let’s just be honest. Have you had issues getting them to adopt Slack or do you kind of say, “Here’s your phone. Here’s how you do it” and just walk them through it and then you don’t get as much push back, we’ll say.

N: Well I have to give the credit where the credit is due, so I don’t know the answer to that, Tucker, because I am not responsible for putting them into that Slack channel. I will say this, that we don’t work with people that can’t do that. So if you can’t figure it out, you’re not the contractor for us. I know that our guys will through and say, “Here. Here’s the channel, we’ll create it. Here’s how you create your profile. Do you work in Facebook? Do you scroll on Facebook? If you can do that, you can do this” and it works well. it’s also, frankly, a good way if you don’t have a working cell phone, you’re probably not the contractor for us.

T: I agree, 100%. I just have never heard anybody using Slack with their subs, so it’s an interesting concept to me. Generally we’re just babysitting grown-ups with the cell phone all day saying, “Where are you at? What’s done? What needs to be done?”, all that.

N:  I think we can learn a lot on the coaching side with those contractors and now, like I said, I’m not a part of this piece. I’m two or three layers removed from it, but explaining to the contractor, this is how this process works and when you come in and here’s the contract and here’s all the things that are on this contract and this is the timeline we expect and this is how it works and this is how you get paid and in order to get paid, these are the things that you do, and by the way, we’ll communicate this way through Slack. Of course I’m sure there’s texts and e-mails and phone calls that happen, but we can see that running thing of what’s happening in the Slack channel and it really gives us a lot of visibility and it’s also the transparency both ways that our team is aware of what’s happening or if there’s a utility issue or something like that, we can really jump on it quickly. And then there’s a transparency/expectation for that contractor too to say, “Hey, this is when you’re going to update. This is when we’re going to know about it.” When the repair is done, you can just post a picture right there too and we can see it and have a very good and timely communication.

T: Yeah, it’s cool. You being, let’s say three layers removed, can poke your head in and say here’s where we’re at exactly on any of these projects, right?

N: 100%

T: Cool little thing. I’ll have to keep that one in mind.

N: Another cool thing about Slack, I’ll just say, is any person on your team can communicate with you too. I think a lot of times we might think, “Oh gosh, it’s the owner or the CEO or whomever it might be”, but now there’s really opportunity and visibility for everyone, whatever seat you sit in. Some people don’t want that, some people do want that. In our organization, we expect people to bring stuff up where there’s issues or opportunities or whatever, so you have a direct line of communication with anybody on the team. The other cool part is there’s nowhere to hide, so people who don’t want to do their job, it’s very easy to see that this is the expectation, this is when you jump on there, and this is what you do, and then everybody can see.

T: Yeah, very cool. So the rehabs are running, on average, let’s say 30 grand-ish to do the updates that you need to in order to create that turn-key product.

N: Yep.

T: From there, once it’s done, who does the PM hand it off to and then what’s the process look like from there to sale?

N: Yep, great question. The PM will send that to our maintenance and he’s going to go through and just fine detail, make sure everything looks good.

T: And kind of punch out, basically.

N: Yeah, exactly. The PM will do it and then our quality control guy will come in and literally handwrite a list and make sure, so we hit that punch list and then that goes on. We also have a third party inspection at that time too. We fix and repair every single item that’s on that inspection report and then we give those buyers the spreadsheet that has the item, what we did to repair it, and then a picture of the repair. Again, how can we be the most transparent and understand exactly what’s happening. From there, the PM hands it to quality control. Quality control hands it to the property manager and then they go lease that property and put it on the market.

T: Gotcha, so you sell them leased then?

N: Correct.

T: Okay, gotcha. Basically you look at it kind of like a multi-family where they want to stabilize the asset and then they sell it as a “it’s already cash flowing” type property. You guys look at it the same way with the single family turn key model.

N: Exactly, and I wouldn’t say that every single one is leased, but we do offer a rent guarantee on that. The intention is that when an investor comes in to that deal, they understand what they’re getting. They know what price point they sold it at, they know the range for the rent rate, and once they’ve closed on that for the first twelve months or when we’ve set that initially, anyway, for the rent that, hey, if it takes six weeks, no worries. We’ll cover the six weeks of rent to make sure that they know that they’re getting it.

T: Gotcha. Well here’s an interesting question for you—one that popped in my head.

N: Alright.

T: You get finished with these projects, right, everything punched out. Basically you are creating an excellent turn key brand by punching out everything essentially by having that quality control person is what I’m gathering from this conversation.

N: Yep.

T: But upon completion, how would you correlate value to what you guys are able to sell them for to a turnkey buyer versus potentially a retail buyer. Is there a difference or do you think so?

N: Great question. We typically ride the line where we’re selling them at value. So we’re not trying to sell them overvalue, we’re not trying to sell them under value. We’re selling them at the market value and so we approached that from the perspective of: How can we best do it for the investor? So, what does the return look like? What is the money they’re investing, but also from us in the range of properties that we can buy and be able to have a good margin. Right? Because we have a business to run and it needs to be profitable for us, so from both perspectives it’s one of those things where we mark them at the value that they are and I think it was interesting early on because we’d have these conversations where people would say, “Is there equity in this property?” and I wanted to be able to say yes and what I realized was, in order to do the great job that we do on the construction side, we need to spend that money on the rehab. Otherwise, people who are expecting us to give them our property that’s quote on quote “turnkey”,  is not. And then, how do we make sure that if we’re telling them something and then we’re not doing it—what we’re doing in action is not the same thing that we’re doing in communication, then there’s a disconnect. So we started telling the story which is, “Hey, we’re selling this at market and we’re selling it at market because that is what it’s worth and it’s worth it to you to buy it from us because we did everything in this thing that needed to be done and therefore you’re getting an awesome property.”

T: Yeah, I mean, you’re better off buying something at market that needs zero work than something that hypothetically has 15 grand in equity, but you’ve got a $10,000 curveball coming your way, plus the heartache and headache of dealing with it.

N: 100% or the roofs. We approach it if it doesn’t have a ten year use supply or more. That’s the intention or the spear behind it, then we fix it or replace it. I think when you look at a lot of other turnkey companies it’s like, “What can we not replace?”. For us, we’re just really making sure we take the holistic approach to say, “Hey, if the HVAC is 10 years old, it’s not turnkey because it’s going to need maintenance. It’s going to need help and how do we fix it on the front?”.

T: Gotcha. So then when you hand off for sale then, do you guys do traditional-type listings for sale or are you trying to line it up for people that maybe have reached out to you that you’ve cultivated relationships with and sell it directly that way?

N: Yeah, great question. We have the great privilege of having many amazing clients, so we have sold a handful through a third party aggregator-type relationships. [Coughs] Excuse me. Sorry, I don’t know what’s going on with my throat, but it’s gone a little bonkers.

T: Ah, Chris has the same thing in my office here so don’t worry about it.

[laughs]

N: From the sales side, we have the marketing sales component of that, so we’re building those relationships, understanding what those people are looking for. We have a pipeline of people who are saying—raising their hand and saying, “Hey! I’m ready to invest in real estate and this is my criteria” and so we can really marry those things. Once they’re in construction we have a good sense of the timeline because we track it. We’re in the low 40s for the days from when we started to when we’re finished and under a 100 days from the day we bought it to the day we sell it. So we track that a lot or Al does details a lot. We have those conversations so that that investor knows what the process is and then from there, they send their earnest money, we send a contract, and it goes to title just like any other would, except we don’t typically put them on MLS.

 

T: Gotcha, so that kind of helps then with, I guess, preserving margin we’ll call it, essentially.

N: Yeah, absolutely and it’s just simple because we can do a simple contract. They know what they’re getting, our team can have that relationship, run that all the way. How few touches can we have on that person in that contract to the time it comes to close and make it as simple as simple and transparent of a process.

T: Gotcha. So then that’s kind of the conveyor belt. From your guys’…we’ll call it on the third layer: the COO, CFO, CEO. CFO is obviously watching numbers all the time, right? That’s they’re job just to make sure that margins are there, that you guys are buying at the right price, selling at the right price, covering overhead, all that. But what is the function, like what’s your main function within the business? What’s your partner as the COO? What’s his main functions in the business because partnerships are tough and you guys have obviously done it really well, so I’m just curious what you each bring to this thing that’s made it flourish and work so well.

N: Yeah, so if you haven’t heard it already, I’ve probably said it a hundred times in this interview, but relationships for me and building relationships, there’s a great book called Traction, if people haven’t read it. It talks about the different seats of visionary and integrator. From the visionary seat, relationships, big ideas are indeed culture. From the integrator, it’s my business partner who sits in the CFO seat, but understanding leading, managing, and holding people accountable and so he’s brilliant on the details. He’s brilliant in understanding and forecasting the financials. Our COO, Francis, she’s the best manager we’ve had in our business between David and myself, and bringing those two sides of emotion and people and then a high details number guy and how do you marry those two things together. So that’s kind of the seat she sits in and then understanding the operations and the day-to-day of that business. It’s been a wonderful…you know, any relationship is hard and you have to put the energy into any relationship that you have and so David—my partner—and I, we spent a long time understanding each other and I think one of the things, and  if you talk to our team, I really believe they would say this, is that’s one of the special sauces of our company is that there’s this one mind, but two very different people with David and I. As a culture, we embrace those things: generosity, integrity, leadership, drive, and how do those core values interact and what do they actually make it look like. I don’t know if that’s a long winded answer to your question, but—

T: No, that’s a good answer. I’m just always curious. It fascinates me because I’ve never been able to do partnership successfully and I don’t think I’m an asshole, I just have difficulty with it.

[laughs]

T: I’m always curious how people make it work and you kind of have to have a yin and a yang, right? People have to bring different skillsets to the table to have a good long term marriage, whether it be marriage or business or whatever, so I’m just curious.

N: I think a lot of times people ask this because they see our partnership and I think there’s a lot of luck involved, so we just happened to meet and connect that way. Also, that yin and the yang. If you have two huge idea visionaries, this can be very difficult because you’re going to be envisioning ideas all day and you’re not going to really be getting anything done. Also, there’s hard conversations in understanding how to shield those conversations and hard conversations that happen outside of that that don’t infiltrate in the work and then finding out common goals as well. How can you set those goals and have a clear vision and then also, back to that visionary/integrator, there’s certain things that, hey, I get the last call on and then there’s certain things that, hey, he gets the last call on. But as business owners and partners, we know the things that we need to stack hands on and make sure that we internally have stacked hands on before we take it out to our team and roll them out.

T: Gotcha. We’ve been going for a little bit here, a couple more questions that I’ve got for you and then I’ll let you back to your day.

N: Of course.

T: Two more buckets and I want to talk about them real quickly. The first one is your big, hairy audacious goal of knocking out 30 new constructions, which I think is fantastic, this year. My question for you is two-fold: number one is, are you targeting certain areas because price points have to be able to absorb the vertical construction and the acquisition costs, holding costs, all of that. There’s a certain threshold. I know here, anything under 500,000 is very rare anybody’s going to do construction if you can’t at least exit for that number. Where have you guys found to be that number in your market? Let’s start there and then I’ll keep asking.

N: Cool and just to be clear, we have broken ground on 3 or 45 and we literally have foundations going in on a handful of projects and that’s the experience of new construction that I have, just to be clear. But, with that said, we’re underwriting two types: we have the build-to-rent type and then we have some in the city, not to high. Literally, the highest price point is probably 275/300 and that’s a very basic, but nice home in the city. And then those build-to-rent ones are literally, how can we build as nice of a rental home that’s simple, as basic as possible, everything as in the order of operation we can run and build a system around. So I don’t know if that answers your question, but it’s really those two pieces—that infill, moderate, second home buyer price point and then that build-to-rent model where we can literally build that home over and over and over and build it for inexpensive costs and be able to not only cash full them, but have a really nice asset. 

T: Yeah, the build-to-rent model is an interesting one for sure. Hard to do here with the cost, but the infill model is basically what we do here, it’s just on a little bit lower price than there, but you found about 275-ish to be the line to sell out to take the equity and then obviously take it or role it or whatever it is you’re going to do with it.

N: Yeah, that’s at least our comfort level at this point and plus there’s areas that I personally am very excited about, designs I’m very excited about. I see yourself all the time and honestly, I don’t even know how you do that. It’s incredible, but for us we kind of look at what we’re good at and what is the closest resembling the things we do really well already, so it’s not so far and so far beyond what our skillset is and find the right entry into that and then we can learn from it, we can understand it, and we can scale it and grow it from there.

T: Yeah, if you guys can master the build-to-rent model there and find a sweet spot, I think you’ll love that conveyor belt just because new construction…It’s more construction, it’s more money, it’s more time, but it’s a very simple process once you get it down, so it’s just bang, bang, bang, bang, bang. You’re not retrofitting anything and it’s just much easier to manage really is what I discovered.

N: Well I’m going to put it in the universe that we’re going to do a hundred in 2021, so either way, we’re going to figure it out.

T: I like it, I like it. Well you’re on your way, that’s for sure. And then the final bucket, you’re going to pivot a little bit to holding more of the stuff that maybe comes in. I’m assuming that that’s two fold. Number one is obviously long term assets that you can hold to generate longer term wealth, but two, I’m assuming that you guys have gotten to the point where you need some tax deduction and depreciation would definitely help at the end of the year. Is that fair to say those are kind of the two reasons?

N: 100%, yep. Advance depreciation and costing that stuff has been hugely helpful. But I will tell you, the thing that gets me the most fired up is the big long term goals, so I want to have a billion with a “B” in real estate and I want us to find a way to have our team benefit from that too. It doesn’t feel good to me if we were exceedingly wealthy and we didn’t help our team along the way, so that’s the thing I think about is how do we make it so that people are literally knocking on our doors to come work within our team and they’d never want to leave because it’s awesome. That’s the big, hairy, audacious goal and then being able to also, within that goal, certainly well beyond financially taken care of at that point and be able to put money into a charitable trust or a charitable foundation and do awesome stuff for homelessness and low income housing and that kind of stuff where people really need help and we can not only have the know-how, but have the funds and capacity to do it.

T: Yeah, I’ve been screaming from the rooftops that there’s a way to create affordable housing here in Portland, but our politicians and our city leaders don’t seem to understand the economics behind it. Maybe someday!

N: There’s some laws in your state, man, we’ve had some stuff to deal with here too, but man, the laws and stuff that you guys are dealing with there, it’s hard to even imagine people who do have the money to hold those properties already, sticking around to deal with that.

T: Well there’s one today I’ll just throw out real quick before we wrap up, there’s the property that we may be buying for 325,000. There’s a tree on there that’s 36 inches in diameter and so that tree that’s 36 inches in diameter, the lot is big enough, we need more density, we need more housing, but the city is going to charge us $16,000 to cut down that tree.

N: What?!

T: Yeah and that’s city code. Anything that’s 36 inches or bigger starts at 16 grand and anything bigger than 36 inches is 16 grand plus 450 bucks per caliper inch above that. So yeah, it gets a little crazy. Now, I’ll really blow your mind. Those same lots, in addition to paying building permits, we have to pay $30,000 to the city for sidewalk improvement fees for each lot. So yeah, you can see how it becomes very difficult. We can’t hit that 275 price point because we have all these curveballs and things coming at us and then our building permits on top of that are 55 grand. You start adding this up and it’s like, holy smokes. You can’t make it happen and it’s unfortunate, but hopefully someday we’ll come up with a solution.

N: That’s insanity.

T: You’ve seen Portlandia right?

[laughs]

N: Yes!

T: It’s not lying.

[laughs]

N: It’s hard for me to even fathom that and what a shame on the city’s part for doing that because it’s bad business, it’s bad government policy. It’s all of those things. Now thankfully in Kansas City we had a tenants bill of rights and I won’t get into the details of it, but our real estate investment community came together in a big way and we really transformed what it could have been to what it is and I’m so thankful that we had literally hundreds of people showing up and thousands of people online interacting about it. Otherwise, it would have been a very different picture.

T: Yeah. Just on a side note, did that concern you, I’m sure it did, in terms of the appetite for investment real estate in your area based on what was being proposed?

N: For sure. Yeah, for sure. I think we’ll just say that the tenants, certainly there were actual issues that were being expressed and real people in real bad situations and unfortunately there are some investors who didn’t make those choices and I think the wonderful thing is the outcome is, it’s still a wonderful place to invest, still great returns, and we’re seeking ways to find better ways to help tenants who need and have problems and we also still have a great place with, thankfully, a political system that did not pass certain thing that would have really impacted negatively the people that are trying to serve. All-in-all, I think it was a really wonderful outcome for everybody and there’s now a cohort of people working from the investors side and not just the tenant side to make sure that we continue to address the issues on both sides.

T: Very good. Well, I’m glad everything worked out and you guys didn’t get some crazy curveballs like we have over the last year, which there has been a lot of those.

[laughs]

N: That I cannot imagine.

T: There’s been a lot of landlords that have been liquidating their holdings here, that’s for sure, both on a multi-family and single family level. It’s interesting times we live in, but I will say, Kansas City is still very, very landlord friendly in comparison, so even a little small blip there is nothing compared to what we deal with, that’s for sure.

N: I have no doubt. I can’t argue with you on that one.

T: Well hey man, I want to thank you for taking the time to come on here today and pull back the curtain and really kind of show what’s going on in your business. I’m on a mission this year personally, and everybody who listens to this show is just going along by circumstance or the fact that they’re listening, but I’m trying to figure out all the different business models that are out there, the high level operators that are doing them, and really trying to figure out what the absolute best way to do this business is in every different category as I try and figure out on my journey what’s the best way for me to run this business here. I’m sure, just like you, I’m constantly thinking: how can we do something a little better? How can we do it to improve our tax position? How can we do it just to basically run a better, more successful business at the end of the year? So I appreciate you pulling back the curtain and letting me ask some tough questions and dissect what you’ve got going on there.

 N: Absolutely. I love the questions. I think they’re the right questions and I think the cool part about the investor community all over is that there’s a lot of camaraderie, and of course there’s competition too, but it’s like, how can we get better together and understand people’s businesses and how they run them and all the things that make them work. Also, the differences too because there’s so many different ways you can do deals, so many different types of deals and so, yeah, I love talking about it. I love helping and I love learning too, so it’s perfect.