12 Jul July 12, 2019 – RE Empire Tim Bratz, Inclusion vs. Diversity Raafi Alidina and Travel Security Caleb Barlow
The number one rule of real estate is not location, location, location. I think it is wholesale, wholesale,wholesale.
Tim Bratz is an entrepreneur, real estate investor, and the CEO of CLE Turnkey. He began his career working as a broker leasing ground floor retail units in the competitive New York City real estate market. Tim saw the true potential of real estate to transform lives. He spent his time reading, attending workshops, and networking with accomplished entrepreneurs learning that being resourceful was the ultimate path to become successful.
Raafi Alidina – Author of Building an Inclusive Organization: Leveraging the Power of a Diverse Workforce
Diversity is about getting the right people with the right skills, the right competences. Inclusion is about making sure the mix works.
Raafi Alidina is a co-author of ‘Building an Inclusive Organization: Leveraging the Power of a Diverse Workforce,’ and a consultant with Frost Included, where he designs and implements behavioural insights interventions to improve equality, diversity, and inclusive cultures in organizations. Raafi was awarded an International Development and Management fellowship that sent him to Dhaka, Bangladesh, where he worked with the Aga Khan Foundation-Bangladesh helping them improve their gender equality practices. He returned to the US and to academia as part of the Mass Movements Project with Dr. Stephen Kosack. His research on using behavioural economics for inclusion in organizations and the development of a behavioural measure for inclusion as part of his Masters in Public Policy at Harvard Kennedy School was awarded the Jane Mansbridge Research Award and the Susan C Eaton Memorial Prize for the top HKS Master’s Thesis in Social Policy.
Caleb Barlow – Vice President Threat Intelligence at IBM Security
Its all very simple for the bad guys. There’s a site called HaveIBeenPwned.com. Put in your email address and it will tell you if your ID has been compromised in a prior breach.
Caleb Barlow is the vice president of IBM Security. With Caleb’s global experience in product management, he led multiple software product portfolios including application, data, and mobile and critical infrastructure security and has consulted on more than a dozen acquisition pursuits. Most recently, he led IBM’s acquisition of Trusteer, and was a key strategist behind the recent acquisition of Fiberlink.
Highlights from Tim’s Interview
I was going through college when the market was going gangbusters last time around 2007. And people said, “Hey, you want to make money? Get involved in real estate.” My brother was living in New York City at the time. I moved out there and became a commercial real estate agent, and I’ve been a broker. To lease was 400 square feet in the heart of Greenwich Village in Manhattan, and it was a signed a lease for $10,000 a month with a 4% annual escalation for 400 feet. Insane, right? So you do the math on something like that, and you realize, I’m on the wrong side of the coin. Instead of brokering real estate, I need to be owning rental real estate. So I moved out down to Charleston, South Carolina on a whim, beautiful weather. I had some friends suggest it, and went down there–I’d never even been there before, and didn’t know anybody.
So I’m down in Charleston, and I look at my credit. And you know, I’m a punk 23-year old kid at the time, nobody’s going to give me any money to go buy investment real estate. And this is 2009. So the market shifted, and I didn’t have access to any money, but I had this credit card at $3,000 on the limit. But somebody told me, “Hey, you can call the credit card company and ask them for more money.”
So I call my credit card company. And I said, “Hey, I’m about to make a big purchase, I need you to increase my limit.”
And lady on the other line said, “Yeah, sure. What do you need?”
I said, “I need $100,000.”
And she started laughing at me on the other side of the line and said, “Absolutely not! You need to submit a bunch of financials, and your credit card’s only been open with us for about 15 months now. It’s just not going to happen.”
And so I said, “Well, how much can you give me?” And she gave me $15,000.
And then she sent me over some balance transfer checks. And essentially, I went on the MLS and I found the cheapest property on the entire MLS, which was $25,000. I made an offer, went back and forth. I got it for $14,000. And I showed up at closing with a balance check, like a perforated balance transfer check handwritten, and closing it to the attorney. He’s like, what the hell am I supposed to do with this? I had to come back the next day with a bank certified check and closed on the first property. I bought it and did all the work on it myself. And 75 days later, just knocked on some neighbors’ doors, and found one of the neighbors to come in and buy it from me. So in the course of 75 days, I made about $14,000 of profit. Again, first deal, and I didn’t know what I was doing. I was hooked. So I did it again.
It was blind, blind ignorance and just trying to figure it out. But if you buy a house for $14,000, you probably can’t lose on that. Worst case scenario, I could have rented it out. But fortunately, I was able to sell it, and did it again, did it again and then got into like some kind of selling assignment, always selling for a little bit. Because I thought, when you get involved in real estate, a lot of people say, “Hey, I need to build up my cash reserves before I can go and buy passive income producing assets, right?” That’s the idea that everybody thinks before they can get into rental real estate, and it’s not true, it’s not accurate. I didn’t realize that you can raise equity and borrow private capital from other investors who want to be more passive. But for me, I thought, I need to be active, I needed to stockpile a bunch of cash on my own. And it wasn’t until a couple years later that people said, “Hey, Tim, I got money, but I just don’t have the bandwidth to take on any more projects. I don’t have the knowledge or the experience that you have, why don’t you do the work? I’ll bring the money and let’s split up the deal.” So I found some private lenders. That’s how I got my first couple private lenders, built up a small portfolio in Charleston. Love took me back to Cleveland, Ohio, which is where I’m originally from. So I ended up getting married and lived up there, and ended up building up a small apartment portfolio. I was doing a little bit of everything, flipping houses and high end, low end, single family rentals. And I got into apartments, and really liked the scalability of the apartment. So I doubled down on that, built up to about 140 units, and then had a bad partnership that broke up, and had to liquidate everything and start all over again in 2016. So for the past about three and a half years I’ve been doing my own thing. It’s kind of weird how some things that seem like big setbacks in your life are actually big set ups for something bigger and better.
So it was it was awesome. And it’s been amazing and opened up a lot of doors of opportunity for me. And I’ve been able to focus on growing my own portfolio now. So just doing that, my portfolio value is up around $200 million. Now we’re pretty fired up. It was all hard money loans and private capital. I didn’t use banks until probably two, three years ago. I was using it in a good way, though. Buying a distressed asset, buying it undervalued at wholesale price, and enforcing the appreciation by putting in sweat equity.
Once people realize what you’re doing and how you’re doing it, and they see a little bit of success, then people start coming out of the woodwork and said, “Hey, I got $25,000, I put in a deal with you. I got $100,000, I got $40,000.” So my brother sold his apartment in New York City, and he set down a couple bucks and said, “Hey, man, let me put $60,000 with you.” And that was my money for two years that I just kept on flipping and turning over and over and over again, and utilizing for all these different deals. He got a 10% return on his money. So you make $6,000 a year, and I just kept on rolling the money forward. Back then, this is what I was best at, was making $25,000 or $30,000 a year, scrambling to keep my head above water. I was really bad at real estate before I got good at real estate. I got good at real estate about three, four years ago. But I was really bad for a long time. I’ve been buying for 11 years now. So early on, I had different partners, different people that would bring equity, bring capital to the deal. And then sometimes they’d be in a straight debt position. Sometimes they’d be in an equity split position, sometimes a debt equity type hybrid. It depends what other options they have, depends what other options I have, what we can negotiate together, and what was fair.
A couple things that you can do is, when you’re getting started, there’s two things that are important to be successful in real estate. The only two activities, and the most important two activities you should be focused on if you want to be a real estate investor are one, finding deals, finding good deals. And number two is finding money. If you can go out and find deals right now, it’s way harder to find deals. But it’s pretty easy to find money. 6, 7, 8 years ago, when I was first getting started, it was really easy to find deals. You could buy whatever you wanted, but it was very difficult to find money. If you can do both of those things all the time, then you can have a lot of success. And that’s what I spend a lot of my time on, that’s the highest and best use of my time. What I realized is just going out and finding really good deals for deep discounts, finding motivated sellers, who care more about getting this headache off their plate than they care about getting top dollar for that property. So we find really good deals that way, distressed properties, they’re physically distressed from a management perspective, they’re distressed, and then we package it up with our equity investors in a way that’s very fair for them. We pay our investors a fixed rate of return of 10%. Plus, we give them some equity on the back end of the property in perpetuity. And we’re able to turn over the money pretty quickly.
We buy an apartment building that’s worth $10,000,000, we’re all in to that apartment building for six and a half million dollars. I’m able to buy it, renovate it for 6.5 million, and then 12, 18 months later, I’m able to turn around and refinance it with a 75% to value loan. So $7.5 million gives me enough money to pay off my primary loan and my equity investors. Then there’s also a spread of a million dollars of tax free loan proceeds in there. Like it’s carved up amongst all the equity partners and the joint venture partners in the project. And then it’s only house money and play. It’s a fixed interest rate, to 30 year amortization, it’s a 10 year loan term. And it’s not a recourse loan. So that’s a way that you can reduce a lot of your risk.
The fixed interest rate, you saw a lot of people get in trouble with variable interest rates, so now you have a very predictable debt cost. That’s why we go with fixed 30 year amortization, long amortization schedule means the payment’s going to be lower. You don’t pay it off as fast, but it gives you options. If things do shift, you don’t have as much of a nut to cover every single month on your debt service. And if things don’t shift, everything’s going great, then you can make extra payments and pay this thing down in 20 years if you want. So most commercial banks, local banks only give you maybe a five year loan term. And I think that’s pretty speculative, I think it’s very difficult to predict where the market’s going to be five years from now. But it’s very easy to predict where the market’s going to be 12 months from now. So for me, I’m always looking for where’s the market. It might like bump up, the interest rate’s a little bit lower, the values might come down a little bit, but it’s pretty predictable. It’s very unpredictable where you could be five years from now. I mean, we might have three different presidents in that time, we might have a war with China, I don’t know. But there’s a lot of different things that can go over five years. And I think you’re speculating on that. The other thing is, if you have at least a 10 year loan term, which is what I put on my properties, then even if you bought in 2006, at the height of the last market, even by going through the Great Recession, you can come back out of that. And by 2016, the property is actually appreciated more than what it was when you bought it at the peak 10 years prior. So I think you can ride out any sort of economic storm that happens if you have long loan terms. And then the other thing is nonrecourse. Obviously, there’s some bad boy carve outs, and if you ever lie, cheat, steal, they come after you personally. But if you don’t, and something happens with the economy out of your control, then the only recourse that the bank has is against the property itself and not you. So as you increase your net worth, and as you increase your balance sheet, you’re always trying to decrease your liabilities and your risk. And that’s one of the ways that I do it.
A lot of other people out there who are buying apartment buildings today, they’re paying $10,000,000 for a $10,000,000 apartment. Me, I don’t like that. I think the number one rule of real estate is not location, location, location. I think it’s wholesale, wholesale, wholesale. If you’re always buying at a deep discount, then it doesn’t matter if the market shifts by 10%, 20%, 30%, you’re still all into your property for less than what the value is. That way you have options, you can always sell it, you can always rent it, you can always refinance it, there’s a lot of different options. So that’s my take on it. And as long as you’re buying at the right price point, you’re in good shape. I’ve done a lot of studying of real estate investors who made it through the last downturn, and who got completely wiped out. And the difference was the people buying for speculation, buying at retail price today, hoping the price would go up tomorrow got wiped out. And they were buying things and trying to flip it, they were trying to sell it, they were not holding it. So speculative investors got wiped out. The people who were able to ride out the storm were the ones who bought for cash flow; they bought at a wholesale price, and they bought for cash flow. That way, worst case scenario, if they couldn’t sell the property, they could always rent it. And that rent would bring in enough money to cover their operating expenses, to cover the debt service on the property, and put a few bucks in their pocket at the end of each month. Even if the values all go to zero, if you still have renters covering all those expenses and all that debt service and putting money in your pocket, there’s still value to that. And not only were they able to ride out the storm, but they were able to thrive. Because they were the only ones that were still bankable, they had assets on their balance sheet that were performing. They had cash flow. And that’s what they were looking for when they weren’t lending to anybody, they were still lending to the people who had rental real estate at low enough loan values. So they were able to go buy everything for 20, 30 cents on the dollar during the downturn, and now they’re worth four or five times as much money.
I do the stuff that other people aren’t willing to do in order to find deals that other people can’t find. So I’m willing to go down to the courthouse and hang out with distressed sellers, who are the most angry owners of rental real estate, the ones that have to go to eviction court every single week, so when the tenant doesn’t pay rent, and then you got to pay a bunch of money to an attorney to evict them, and then they’re still staying in your property, and you got to store their stuff, and then you had to pay for renovating the unit, then you have to pay a leasing agent to lease it out again, and you’re not making any money during this whole process. That’s the most angry a landlord will be while owning rental real estate. And so you go down to the courthouse, and you hang out at eviction court, and you wait for the landlords and the real estate attorneys and the property management companies to come out and say, “Hey, raise your hand if you want to sell your property. I’m buying,” and those are motivated sellers. Estate sales, probate sales, people who inherit properties. I just bought 400 units from some guy on the Gulf Coast and Florida, and about 400 properties just south of Atlanta, in Albany, Georgia. The guy inherited 400 units free and clear from his parents or grandparents and didn’t want them, didn’t care. He’s surfing every single day. So he ends up selling them to us. I didn’t want to manage them, and we ended up getting them for a pretty decent discount. Those people are out there at all times.
Most of the people that I buy from fall into one of two categories. One is people who have bought and owned the property for a long time, it’s usually a mom and pop operation. And they set on a property for 10, 20, 30 years, suck all the cash flow out of it, put all the money in their pocket instead of reinvesting it in the building. And then they painted themselves into a corner, because you let a building go for that long, the windows start going, the roof starts going in, the parking lot starts going, things start falling apart, all the mechanicals, and they’re not financeable, and they don’t have the cash to put it back into the building. That’s one of the people I buy from. And then the other people are sharp entrepreneurs who have other endeavors and make a lot of money. They’re very successful doing whatever they do. And they treat real estate like a hobby. And when you treat it like a hobby, you don’t give it the respect and the attention that it deserves. I see them getting beat up really, really bad. They don’t have a local partner. I bought 700 units in Georgia from two stockbrokers in New York making millions and millions of dollars every single year in the stock market, throw some money into real estate, they don’t vet the property management company, they don’t respect the property itself. They don’t have a local boots on the ground partner. And they ended up getting their butt handed to them. Because the management company was stealing, they didn’t have anybody to take care of it, they’re too busy, couldn’t leave their job. And it’s like, just because you see apartment buildings doesn’t mean you could own an apartment building. Know a couple of the ins and outs of it before you go and buy this stuff, or you need to partner with somebody who knows what they’re doing.
I’ve taken a look at my business. About two years ago, or about a year ago, I’m thinking, how do I scale my business? How do I grow my business without having to take on more responsibility, without having to take on more overhead and babysit a bunch of grown ups and all that kind of stuff? I thought, these are big deals. It’s hard to partner up a joint venture on small single family flips, where you’re carving up, $20,000, $30,000 a month, a bunch of people, not too exciting. But I’m doing big deals, I’m carving up hundreds of thousands of dollars, if not millions of dollars of profit across all my projects. So I thought, “You know what? I can partner up and joint venture people. I can train them how to do this stuff, they can be boots on the ground, they can get into deals that they couldn’t normally get into. I can bring the financing, or I can bring the money, or they have money and they need a good operator to deploy the capital with. It’s a win-win for everybody.” So I was approached by some education people. I’m not some guru, but I’m a bigger investor, the most presidential and single family type investors. I’m not quite some hedge fund or a real estate trust. I got approached by an education business, a company that wanted to partner up and find somebody that does what I do, and can convey the message and can teach people how to do it. Without partnering and creating a commercial empire, so commercial empire is a three day course, teach people how to scale into apartment buildings, some of the best operators and flippers and wholesalers in residential real estate, come through my course in order to get out of that transactional game, and start getting into the residual income, passive income and the true wealth and the legacy wealth that we all talk about and hope for in real estate. And so that’s what it’s for. We educate operators on how to go out and find deals, how to underwrite them, how to structure the project, how to raise private capital, how to obtain the financing, how to oversee the renovations, the project management, how to fill it back up and get a lease out to quality tenants, and then how to manage the asset and manage the management company to create that long term wealth, and then a couple different exit strategies that we teach. But usually I teach heavily on how to hold these things, how to buy, renovate, refinance, and then hold the money, hold the property, let the tenants pay down your principal, let the property appreciate over time. And that’s how real legacy and real wealth is built.
I’m pretty active on social media, give out a lot of free content on Facebook and on my website, my website’s cleturnkey.com, and then I have a podcast also teaching people how to invest in commercial real estate called legacywealthshow.com. And then commercialempire.com is our coaching program.