Latest / Real Investor Radio Podcast / Ep. 105 | Video Mailers, Wine Lists, Deal Flow, and More with Justin Spillers (Part 2)

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Ep. 105 | Video Mailers, Wine Lists, Deal Flow, and More with Justin Spillers (Part 2) · Real Investor Radio Podcast

• Jack BeVier (00:12) so one of the other things we were talking about is on the fundraising side. So you guys are like, and guys are borrowing bank debt at, like very attractive terms, credit unions and local community banks in Ohio had very attractive terms. And I'm like, yeah, run with that. Not gonna be able to touch that. Or no one's gonna be able to touch that. Justin Spillers (00:23) that we that we contribute to. ⁓ Jack BeVier (00:35) But then, know, it's the raising equity, a raising capital side of things becomes the constraint, right? Because you guys feel ops is really where you're excelling right now. ⁓ and you had some interesting ⁓ structures that I wanted to chat about. So talk about that piece. Justin Spillers (00:35) We have to do a study of things, but how do we these train barriers? Because we have to get a lot of students, stuff like that. Yeah, so over the last 10 years, Brian and I, we've literally reinvested every dollar we have back into the portfolio. Up until this year, we've never taken any money out of it for even just a draw or anything like that. ⁓ So right now we're in a really good spot. Everything's humming. The team's doing great. Deal flow is great. But capital is our only constraint. And historically, we've never really wanted to syndicate. We've never wanted to create a fund. I used to do that when I practiced law. I saw the good, the bad, the ugly. I wanted no part of that world. ⁓ But now that we're at the spot we're at, we have the luxury of, okay, we have pretty ambitious goals. We want to ultimately get to 10,000 units. How do we do it faster? The only way to do it is to take other people's money. We have to add additional capital. to our cap stack. So we create a real estate fund, a prefect equity fund. It's got some pretty unique dynamics to it. But for the first time, for example, we're buying 111 units in January, we close on two properties will be about 720 units. Typically, Brandon and I will bring all the money to closing. So it's about $3 million for this close. ⁓ That's the capital down the rest will get bank debt. ⁓ But right now we're going to supplement with the funds. So we're going to bring about half and then we're going to use the prefect equity fund to bring the other half and we anticipate that's probably going to be the model. We bring half or two thirds. We use the fund to supplement the difference and it just allows us to buy more faster and just feed the beast if you will quicker. So we integrate into the fund. But what you're adding about how we're doing it even more uniquely, we're constantly asking how do we do it faster, right? We're very much first principle thinkers. It's why can't we do it faster than 12 months? Because banks are like, it takes you two years to return a property. absolute best case. Well, we did it 18 months, they in at 15, they went in at 12. And they're just like, you're not supposed to be able to do that. So it's funny seeing other people say that, well, we're going to do it even faster. Like, how do we prove them faster? just literally ideating with Croc, that's the Twitter chat GPT, which I like much better. It's like, how do we do faster? And it just gives you all these ideas. Two new ones we've implemented is we signed PSAs, the purchase contracts, we signed for these 200 Levin units. We closed on both of them in January. We signed those contracts about 45 days ago and both of them, had the right to turn the vacant units before closing. So why would we do that? Because we want to get those property units turned to our silver level finish, already have all the marketing material, already be pushing for leads, already pre-lease those so that a day of closing, we can already lease a fully turned unit and start hitting the ground running. So the sellers are okay with that because if we don't close, they get brand new turned units that we did. basically give them a business model. both of these purchases, we don't even close on them until January. We've already turned complete units to our standards and our leasing team already has them pre-leased with the deposit paid and a lease signed for moving after we take ownership over it. So that's the first big lever to go even faster. The second one is the seller can only renew the existing leases that expired during the hold period. So when we signed the purchase terms closing month to month terms, they can't sign a new 12 month term locked in at that lower. Craig (03:40) So that is sick. Justin Spillers (03:55) So all these are grossly unrended. So when we take over in January, about a fourth to a third of the entire portfolio at that property will be a month to month lease term. So we can non-renew them, take all the units back, transfer them into newly fully turned units and turn it way faster. So we get about a three month head start to do it even quicker than 12 months. So those are the things we're constantly thinking about and just to go faster. And by keep moving that goal or that finish line forward, capital has been our biggest constraint. So it's kind of been. constantly chasing our tail, we created a real estate fund to help us grow quickly. Jack BeVier (04:29) I mean, I was really impressed that you guys are like, yeah, we put up half the equity, right? Because in typical syndications, a sponsor will brag if they're putting up a 10th of the equity, right? They'll be like, no, no, no, I'm in there for 10%. I'm really aligned with you guys. You guys put up half. And I was like, yeah, like, dang. And then the structure is also. I thought really interesting because it's preferred equity as opposed to Mez debt. So your guys' equity is going in at first loss ⁓ and a big chunk, and you're in half above the bank. ⁓ Talk about that preferred equity structure and what's the difference between preferred equity and just Mez debt? Why do you say preferred equity? How does that work? Justin Spillers (05:22) Yeah, so the banks don't like to see a second bank on either a portfolio or property. So getting that Mez debt is a little trickier. I actually had a good call with Fred about how you could structure his corporate debt, which I'm going to start exploring a little bit more. But basically, I wanted to be in full alignment with our investors, make sure the terms that we gave them were fair to them and fair to us and we could underwrite to them. So we kept it super simple. I've never actually seen a structure like this. Being a real estate attorney, I can kind of get a little bit more creative. but I had a really good ⁓ CPA at CBiz managing director there and then our securities attorney in Columbus. We kind of had a triumvirate agreement of how to structure this and it came out pretty good in my opinion. So four things first, it's preferred equity. All of our investors get an ownership stake in the entire portfolio. It'll carve anything out. You have an equity stake in everything we have now and all future purchases. So you are second in the capital stack. So bank gets paid first, our investors get paid second. and only next is me and Brandon as the common equity, which backstops the entire investment. ⁓ Second, we pay fixed 12 % annual return. It's paid out every December 31st. It's not aspirational. We actually pay it out. And then you as the investor, you get two options. You can either take that 12 % payout or you can reinvest it. A lot of our investors, we only have 12 investors so far, just family and friends. We just started capital raising. ⁓ A lot of them are looking for that reinvestment though, but the some that do want that cashflow paid out, you can take the 12%. But the beauty of how we have it structured is that's actually considered a return of capital tax distribution. So you get the 12 % and you pay no tax until year nine. So you're going to defer all the gain into the future. So it allows you to change the timing of when you realize gain versus return of capital. So every year you get that 12,000, if you invest $100,000, for example, you get $12,000 those first eight years, it's just depleting your capital account for tax purposes. And only in year nine, do you deplete your entire capital account and then and only then is it long-term capital gains. So you get an eight-year runway of taking that cash and redeploying it and using it as you will. So that 12%, we like to say the effective yield is like 15 to 19%, depending upon what tax bracket you're in, because you pay no tax on it. And then lastly, the liquidity part is what I always hated about syndications. We give our investors a liquidity off-ramp every year. So after the first year, if you give us 90 days notice, you can get all or some of your money back at any time. So it's an evergreen fund. can invest as long or as short as you want past 12 months. And you can kind of invest on your own timeline. So those four things we stack together to kind of make it a really good way. We say you can hit a triple with us every year. You're obviously never going to hit that home run, but the risk adjusted return we think is very fair. I like to equate it that you're dollar like 51 in our capital stack and you're protected by all of our equity. Whereas in like a syndication, you're like dollar 90, right? You're the first loss. So there's never going to be a capital call. and then you have all the common equity and goodwill we built up over the last nine years protecting your investment. So we structure it pretty unique. I'd say the biggest challenge has been me explaining that to people because they're not used to that. But once they get it, it's been really well received. So just for the first time, starting to do a capital raise push on that. And it's been going pretty good so far. Jack BeVier (08:35) Yeah, it's super interesting. think it's a really interesting approach. It makes sense to me from your perspective also, you know, like you're like, Hey, we're the one grinding here. Like I want to, I want to put my money where my mouth is in terms of, put us at first loss. But you know, we're capital constrained and we want to grow and want to grow faster. think Ops is, know, better than, you know, Ops is running that we can do more. So we do need to raise additional capital above the bank. So I think it's a really interesting structure. I haven't seen a lot of comps for it in terms of other folks doing it that way, but I've also never heard somebody talking about ops the way you guys have. So I get that this is the formula that fits for the way you guys approach the business. Craig (09:21) Jack, jump in here as well. How do you go to market ⁓ to outside of friends, friends and family ⁓ to raise the capital? How much are you looking to raise? then like, what's, what's the marketing plan to get out there in front of folks who, know, who are interested? Justin Spillers (09:41) Yeah, so this first purchase, it's $3 million. We're looking to raise about half of that. We got a sizable amount raised, but still looking to raise for sure. I just started with my friends and family network. I literally went through LinkedIn and I have a bunch. We have a huge virtual ⁓ team and I just did a Lume video, which is a screen recorder. And I went down every person and just said, send them this email, send them this email, send them this email. So if any of my friends and family are listening, my virtual assistant actually sent you the email I told him to. But I went through all 2000 of my connections. took days and just sent those out. And that's been filling up my calendar with my warm network first. And then I pulled over our cold team. our acquisition team and leasing team, we have a lot of really good SDR appointment setters. We do a lot of really good things in the marketing side. So flip them over. So we are starting to run some paid ads. It's a 5060 fund, so it can be publicly marketed. So we're starting to some paid ads. I have a lot of really good email lists from all the brokers we have and then all the owners. Jack BeVier (10:19) Thank Justin Spillers (10:38) So those are pretty good targets for us brokers usually know people with money and then the owners if they're looking to sell or recently sold usually have some capital and like to invest passively if they're no longer active operators. So we've been sending a lot of emails to them as well. And then everything's just been a call to action to book a meeting with me and then I give them a 30 minute pitch. I have a presentation on offering and I've just been doing that as many times as I can. And again, going back to that volume negates luck. I'm trying to do 10 of these calls a day. For as long as it takes to race for this deal and then in perpetuity beyond that so I drew the short straw on having the capital raise Brandon gets to be out in the field So I'm the one that doing it, but I'm probably better suited because I do the bank pitches and a lot of that And so it's it's a pretty easy pivot from the same pitch you give to a bank about you to a retail investor So that's been the approach so far. It's been pretty good It'll be interesting to see what that flywheel looks like from like just word of mouth friends of friends those first investors tell other investors. So I'm really hopeful that that picks up and makes it a little bit easier. And it's not as much just first contact, first communication. They haven't heard anything about it, but it's a, I invest with these guys. It's gone really good. You should reach out to them. Craig (11:52) You mentioned about 15 minutes ago in passing on ⁓ how you the outreach to potential sellers and sort of staying in front of them all the time and just quickly you said something about video marketing. ⁓ You care to share the sauce on that? Like what does that look like? ⁓ Justin Spillers (12:11) Yeah, I wish I had one in my office. don't. ⁓ So there's a company called Mark Media. They have this little like five by seven mailer. It's literally like if you remember like those birthday cards where you open it up and it's like your mom singing you happy birthday. It's like that but there's an LCD screen and it plays a video. So we send those out and it's usually try to tailor it to that seller. And it's a video of me literally talking about that property. Craig (12:27) Right, right, right. Justin Spillers (12:41) about us, what makes us different. If we submit an LOI, we always close, we do faster diligence, we waive finance, the contingencies, et cetera. We do 1 % money hard, a little bit about us, really just trying to get them interested in it. So we do that for say our higher tier one targeted properties. Like I know there's a hundred properties up I-75 corridor here in Ohio that I would love to buy. So those are the ones that we're spending way more on targeted acquisitions for. So. We're calling them, texting them, emailing them, just doing regular direct mailers, doing video mailers, right? So we're trying to hit them with as many ways as possible. ⁓ Craig (13:18) Can I ask you, ⁓ I've looked into the video mailers several years ago and at the time they were pretty prohibitive for like a single operator like me that was, you know, to send that out in bulk. ⁓ And I really couldn't figure out like the use case for it. And I didn't think the technology was that great back then. Jack, you know what he's talking about, right? You open up a card and it's got the little video screen in it. Very cool. Yeah, that's what, that was my question. Like has the cost of that come down at all? Jack BeVier (13:35) How much is it? Yeah. How much are they though? I have no idea. Justin Spillers (13:47) Drastically, yeah, it's about $50 if you buy 500 of them. It's usually what we do a run out. So it's not too bad. Craig (13:55) Jack, I've got a list that I think we need to hit ASAP. ⁓ Jack BeVier (13:59) Hell yeah, hell yeah, that's a great idea. Justin Spillers (14:00) So then what you like is not only has the cost come down the technology wild so Yeah, so they have it comes in this little padded sleeve There's a little QR code sticker and when you open that sticker It's like the Apple terms of services like by opening the sticker you agree to everything and by meaning There's a GPS tracker in this thing. It tells you when someone opens it Jack BeVier (14:01) Dan, 50. Craig (14:05) It's much better. Yeah. Justin Spillers (14:26) how long they opened it, where they are when they opened it, if they gave it to anybody else to open it, it's absolutely wild. And on top of that, you can change the video now remotely. So I can change what it says ⁓ if it's like a second watch. If I know they watched, I can change it say like, hey, you've watched this, here's some more information about us. So you get all that and then we get notified. So my outbound team, they're calling them, right? If I see someone open this and watch two minutes of the video, our guys are calling them, right? Hey. Craig (14:36) Yeah. Holy sh- Jack BeVier (14:47) Really? Justin Spillers (14:55) you watched our video mailer and they're just hitting them again. You're in your bathroom watching the video. Craig (14:57) Hey, you were at 3006 Woodside Avenue and watch my Jack BeVier (15:00) What are you doing? Craig (15:04) Yeah, right! Jack BeVier (15:05) get at Panera? I love the bread bowl. Craig (15:07) haha Justin Spillers (15:07) You But yeah, that's been interesting. I don't have great data on how many of our acquisitions I can directly tie back to that. But it's like that silent evidence though, right? The acquisitions we usually buy, we've hit them at least 10 times, right? Over the course of a period in a myriad of ways. And I don't know which one is that final point. I mean, I have had a seller just point blank say, you win, stop contacting me. When I want to sell, I will sell to you guys. Craig (15:17) Yeah. Justin Spillers (15:37) but just stop sending me stuff. So I get that too, which is kind of tongue in cheek, ⁓ but it's just volume, right? I mean, we're going to follow up with them forever. I mean, if I know what their mom's favorite pie is to bake for them, we're baking the pie, right? Like that's our mentality. Craig (15:52) think the bigger the biggest point of all is that it's the customer experience, customer service type creative aspect of it that I love. Like no one's doing that man. Like no one's Jack. Do know anybody, any operators that are sending out the video cards? I think it's brilliant. It's so different. It's so creative. And the fact that you can cater the message, it's dynamic, right? Like it's, it's not high. We're looking to buy your apartment building. It's hi, John. We're looking to buy 606 maple, right? Like I just think it's wonderfully creative and congrats on that. What's the name of the company that you're getting those from? Justin Spillers (16:29) ⁓ I'm pretty there's been two reviews. I think mark media and they are see media is the one reviews most recently Yeah, it's been good I'd say just in that same vein you're right Craig. I mean, it's that's everything We have a wine list too There's about a hundred people we send a bottle of wine to every quarter. We don't miss they get a $50 bottle of wine every quarter and I get yeah, yeah ⁓ Jack BeVier (16:52) got my wife. You added me to the list. got my wife. By the way, my wife loved it. Loved it. Craig (16:54) I I like wine. Justin Spillers (16:58) Yeah, so that, mean, when we send that, pray half of them are brokers. 50 % send us deals like, Hey, I forgot about you. Here's the deal, right? And it's just, it's a $50 bottle of wine. And they're sending us stuff before it goes to market just because they haven't done a deal together yet. They don't remember us, but we do a ton of that. Even like my best title closing agent. She's like, she'll go to war for us. And she's always just like, just keep sending me wine and I'll ram it through. Jack BeVier (17:26) Thank Justin Spillers (17:28) There's just like small stuff like that that goes along. Craig (17:28) So. Jack, how many investors have we talked with ⁓ who, you know, they're starting up an acquisitions operation, and they're going to, you know, maybe do some direct mail, but they're going to start a realtor referral network. And they go out on this, you know, binge of like, I'm going to meet with 10 realtors a week for, you know, for as long as it takes. And what they find is, is that they meet with a realtor and the realtors like, ⁓ yeah, Jack BeVier (17:46) Yeah, yeah, yeah. Craig (17:58) I got deals, I'll send you deals, no problem. And they and they don't teach the realtor like you said, you've got to teach them your buy box. Second, there's no follow up, you know, everybody walks away from that meeting feeling great. But as soon as they get in their car, they forgotten about you, you know, and what you're doing, Justin is just so smart. It's it's that constant touch. It's that small but meaningful touches, the ones that really stick with people and give you that mind share that you're looking for. So Jack, you know, maybe you can speak to that as well. It's not an easy thing to build a referral network if you don't focus on it constantly. Jack BeVier (18:31) You know I love it. Yeah. And it's hard to do it and you got to commit, you're committed to it, right? Like that's not an insignificant spend, right? You're spending a couple hundred bucks a year for particular people, but you've just decided that like, that person is worth a couple hundred bucks a year. like, but I love that approach, you know, in terms of just like bifurcating being like, Hey, you know, if it's, if, know, for It's not like not all Legion is the same, right? I'm not going to send postcards to everybody. There are high value people. There are super high value people. There are whales that like I may never hit, but if I hit one, my God, it's going to change my life. And then there's postcards, you know, like, and bifurcating, you know, that your, your outreach into those different things and spending different levels of money on different levels, I think is the smart way to do it is, know, and you guys are, you know, I think have some great examples of that with, both of these, both these ideas. Justin Spillers (19:31) Yeah, it's gone a long way. mean, those small touches definitely make the difference. I can tell you that stuff is a direct lead for a lot of our acquisitions. I don't know which one by itself, but in totality, it's worked great. Like one of the two properties we're buying 111 units, the broker called us up first. Before we put it to market said, hey, this guy's owned this property for 16 years, out of state owners, never been to the property. Some little old lady's been running it for 16 years, way under rented. What would you guys put an opinion value on this? in 24 hours, we had him under contract. Never brought it to market. Gave him a fair offer. He thought of us first. He called us first. We did it all within 12 hours. We always underwrite stuff quickly. He knows it. We prioritize it. We make it a red alert. And we just drop everything. And that stuff just is everything. That makes the difference between you and everybody else. Craig (20:20) Yeah, I mean that I think that's where a lot of people fall short as well. They don't execute on the promises that they make and you just bust up a relationship immediately that way. You'll never get a call again from that broker if you don't deliver. Jack BeVier (20:32) Yeah, yeah. Justin Spillers (20:32) Right. And we don't beat them up on their fee, right? I let the broker take their full fee. I want them to do well, right? We're not trying to get every nickel off the table, Taking the last nickel has never done us any good. So we want to make sure we treat them fairly too. And they know that. We tell them that up front. Hey, we got to overpay a little so you get your full fee. We're going to overpay a little. Jack BeVier (20:34) Thank you. Craig (20:53) Hey, you're, you're a big tech guy. So tell us about like the tech stack that you're using in the company to run all 600 units and the construction and all that stuff. And if there's any AI that you're interested in, love to hear about it. Justin Spillers (21:06) Yeah, so AppFolio is our property management software. It's been great. Do everything through that. ⁓ Acquisition side, we have a couple different CRMs we stack together. Pipe Drive is probably our best one though that we use. Instantly is a great email automator, so we have. Craig (21:08) you Justin Spillers (21:23) I don't know, 200 email accounts sending out cold emails every day to all of our lists. So instantly has been really good addition. It's pretty cheap. They did a really good job of making sure the emails live in the inbox. We use open phone for all of our team members for SMS, texts and outbound inbound calls. Slack is everything in communication. And I know these numbers that we were talking about before, because every day I get an update. We have a KPI and scoreboard for every single part of our business in Slack and set in group channel. Everyone sees it. exact numbers from yesterday, how many shows we had, the show break was, what the collections was, everything's done in Slack. That's been really good to make that forefront for the entire team to see and not hide anything. Google Sheet Empire, we do everything in Google Sheets. I have one Google Sheet that now has 211 tabs. We've had it since the beginning. Everything I've ever done is in there. So very big fan of Google Sheets. And then Grok is our AI of choice. Craig (22:12) my. Jack BeVier (22:13) you Justin Spillers (22:23) We're very much AI driven. don't let anybody ask me a question anymore if they didn't ask Rob first. What'd Rob say? Why would you agree with their answer? And it's better than that, right? Craig (22:32) Do you train the ⁓ GROK agent to sort of know your business so that when they answer the question, it's sort of sensitive, context sensitive? Justin Spillers (22:43) Our team, our team members have have to an extent like if one of our virtual team members does property management, they'll have our main FAQs. They'll load that and then they build in, they bookmark that chat and they use that chat every time. So it's gotten really good for them. For me, I have a different one bookmarked for each part of the business. Like I have one for acquisitions that I've built up. I have one for leasing that I built up. We do a lot of light tech properties. So I have one for light tech compliance that I've built up. So we do a ton of that. It's gotten really good at just knowing and be able to re remember something, but in the past we did or something I told it not to do or update on the prompt. But yeah, I can't believe how much AI we use now. I'm probably in grok two hours a day, every day, just. bouncing ideas off of it, reframing things. mean, being an attorney, like all of our legal stuff is now done by Brock. I obviously review it, but it's 98 % better than me every time now, and it's done in 30 seconds. So a ton of AI. We haven't made the jump to agents in terms of like answering calls, doing our outbound. We've tested some. just, they haven't been that good yet. So we use real virtual team members for that, still mostly in the Philippines. ⁓ They just are really good and reliable, more so than AI, but it's coming fast, right? I mean, we're gonna be using AI for everything in the next 12 months for sure. So we're always trying to stay on the front edge of it. ⁓ But that's our big tech stack that we use every day. Nothing crazy or shattering. ⁓ I'd say AI is the biggest one, just asking that first questions for everything. Craig (24:21) And it's all sort of organically made. You don't have anyone specifically on staff who's sort of like the AI guy who's helping out with this. Justin Spillers (24:34) Now it's, it's all, yeah, we, we just use the out of the box, Croc stuff and just update, a con it's called a context update. So we use that a lot. Um, just telling it about us, giving us more information before we ask the question and then it remembers, um, new team members. try to train it up. have a couple of Google docs. That's just like a context update. tell them, Hey, copy paste and put this into grok before you start to use it. Just so croc knows what we are, what we do. But yeah, I mean, when we first started using Grok, I went through all of our Google Sheets, everything that had like all our FAQs, like our most common tenant questions. I uploaded like our, ⁓ we call it our moving checklist, our welcome packet, all of that uploaded everything into Grok. mean, just hundreds of pages of data and information to get it ⁓ updated on what we do. And it remembers it all and it does really good. And then. If we ever need to change or update, just say, based on all our conversations, are like the five things I need to update the welcome packet? And it's like, hey, you don't have a section on this. There's the frequently asked questions at this section here. And it's literally just a copy and paste. And now we have a new welcome packet. I mean, it's so slick. It's crazy. Craig (25:47) What I find most amazing ⁓ several months ago, beginning of the year, Jack inspired the company to really dive into AI. Like all of our jobs will be affected by it, no doubt. And I really took it to heart and ⁓ started playing around with it deeper. instead of doom scrolling every night on Instagram, I would just turn on something that I could learn about AI. And what I find amazing in just that short period of time is how much better the tools have become. I mean, Gemini 3 is unbelievable right now. And I do a lot of vibe coding where it's just, you know, I'm just talking to the computer and it's spitting out beautiful stuff. But what's amazing about that is I don't have to do seven prompts anymore for to get the right output. I can do one and it's a massive prompt and it gets at everything beautifully correct. And that has been a major shift. And I would say just a month in, in a month, it's amazing how much the tools have really come along and I can't imagine where they'll be six months from now. So ⁓ Jack BeVier (26:53) What do you use on the five coding set? Craig (26:56) So right now I'm using cursor, ⁓ cursor 2.0, is sort of like the engine that links to all the LLMs. And you can choose any the, any Grok or Gemini or Anthropic or any of those as your, and you can use them interchangeably. Like this prompt I'm going to use Gemini on and this prompt I'm going to use all inside of cursor. And then it just spits out on the server side. it runs like a local server on your machine that you can see the website that you've built or the app that you've built. And I've built a couple of really cool iPhone apps and just visually stunning stuff too. It's not like, you know, AI crap. It's really good looking stuff. And so I would encourage anyone who's even has a cursory interest in learning about it to just, you know, take an hour a night, one hour a night to just get onto YouTube, learn what the smart people. Like there's a guy, a couple of guys I'll say Riley Brown is one of the coolest vibe coders out there right now. And there's a guy that runs a, it's called the startup ideas podcast on YouTube. name's Greg Eisenberg and they just put out brilliant videos that are just jam packed with content. That's always great. So those two guys I would highly recommend. Justin Spillers (27:58) expect the practice of the test to think about the future. Jack BeVier (28:11) This has been a great episode. I can imagine like if someone's listening to their car, they pulled over when Justin started going through his tech stack and he was instantly for this. They're just, they're going to go replay that and like they're sitting on the side of the highway right now, writing stuff down. cause like do the resource, the resources that, that, that people who are very operationally focused use. mean, that's the, those gems are like really, really valuable Justin Spillers (28:25) Thank Craig (28:34) So the big four for tenant placement ⁓ from Justin Spillers. Here we go. Justin Spillers (28:41) Yeah, so first is income, right? That's the most important thing, being able to pay their rent. So we do two and a half times. That's a non-negotiable for us. They have to be able to prove to us that they make at least two and a half times income to rent. So if the rent's $1,000, they have to make $2,500 a month consistently. We got that from the LIHTC world. LIHTC compliance requires income verification. So we just do that for all of our properties, just as good practice. Second is the background check. We make sure that they have no prior felonies. Felonies just... I mean, it's tough to shake those and unfortunately it screens out price and good tenants that have been a change of life, right? Rehabilitate, right? That's what I was looking for. Thank you. But we just do that as a hard screener right now. 525 credit scores are pretty hard going first too. Looking for anybody above that. ⁓ And then ⁓ lastly, is no prior evictions in last seven years. So those four are really tough to overcome. We do have some empathy. There is some subjectiveness. We have placed people for Craig (29:18) rehabilitated. Sure. Justin Spillers (29:40) unique circumstances outside of that. Some of our leasing managers have been with us a long time and they kind of know. And then lastly, that, that smell test, right? Whether it's a virtual showing in person showing, you just get that, that feeling of if they pass all those forward. And the last question is, are they going to destroy my unit and are they going to pay rent? Like that's all I care about at end of the day. ⁓ that's the big thing. So that's what we look for. We've talked about adding on a factor of, this person going to stay and renew? just because if they're saying, hey, I'm a job hopper, only here for 12 months, they may be a great tenant, but we know they're gonna be gone in 12 months. We haven't got that far down the rabbit hole, but that's the next thing we're looking at is how do we screen to make sure for longevity, that's where we make all our money out of that renewal time, not having to return the unit. But that's how we typically screen all of our candidates. Craig (30:27) What's your average tendency? Justin Spillers (30:30) So we're very tough because we are value add. So typically we almost turn an entire property after we buy it. So once it's stabilized, we're looking for 80 % retention. And then long-term, a lot of our larger properties we've only had for a couple of years, so I don't have great data. So those are, a lot of them are the original first-term tenants. So that's going longer. I just don't have a great amount of data to say like, yeah, on average it's 3.1 years or something like that. But the ones we've put into our fully turned units, that renewal rate's about 80 % right now. We're trying to get that higher. And then there's the second renewal is about the same. So if you extrapolate that out, that's probably the average tendency. I don't know if that math's out too, but that's a good goal for us. Jack BeVier (31:16) ⁓ so you mentioned light tech and I wanted to ask, cause I thought it was a great idea. It's a really interesting strategy to find deals where you can get a great basis going in. then, you know, with a value add plan of a couple of years, ⁓ talk about that light tech strategy that you guys have executed. Justin Spillers (31:36) Yeah, so in the 80s and 90s, there's a massive push for low income housing. they create what's called the LIHTC program. It's a low income housing tax credit. And basically when the builders built new properties or reconverted a property to LIHTC for 30 years, they got this massive tax credit. But for 30 years, you have a lot of restrictions on the property. You can only charge a certain amount of rent, a LIHTC max. ⁓ And the tenants that you rent to can only make so much money. It's like a 60 % AMI calculation. For example, they can't make more than So for that 30 year period, the property is very tough to rent. And as far as maximizing the rental income, because you can only charge so much for rent, it's dictated at the state level. And then second, you can only rent to people who make so much money. So you're kind of threading this perfect needle of, you can only charge so much rent. But with us, have to, the tenant has to make so much money to meet our criteria, but they can't make too much money. So it's this very small window. And we got really good at light tech properties and threading that needle, which allowed us to create a lot of really good leasing practices that are market rate properties. And the reason we went after light tech is I did a lot of light tech legal work prior, so I wasn't scared of compliance. already knew how to do that. Again, I knew how to do it from the legal side, but in practice, it's still very different, but learn very quickly. And so when we go after a property, if it's light tech restricted in that 30 year period, we look to see how many years are left. If there's only like two years left to the 30 years, then it can go to market rate. I only have to do the compliance, something restricted for two years. We can push the rents to the light tech max. And then actually the light tech burns off after 30 years. I get another jump to the market rate level again. So we try to target properties that are at the end of that light tech compliance. And then we bring them to full market rate. And they're just way less competitive. If we go to bid on an open market multi-family property, there's probably 20 groups bidding on it. If we go for a light tech, there's like three, just because it's so difficult. There's so much compliance. If you don't know how to do it, you're going to make a mess out of it. It's very tough, especially the first one. You get audited every year. You have to submit all the information every year and every tenant doesn't stack a document. have to do on the front end for every single tenant. It's just a lot of hoops to jump through. And if you don't have a full compliance team, if you're not like a bigger read or some big operation, it's very hard for a mom and pop to do or smaller guys. So that's been a really good spot for us to target, especially in these tertiary markets that really get overlooked. So we really niche down into that. We have a large part of our portfolios, light tech properties, but now most of them have already converted to market rate. Like we have two more really big ones that end this year. They go to market rate January 1st. So we get a really big rent jump when we can start renting it for a higher amount. It's uncapped how much we can rent for, and we can rent it to anybody. They can make as much money as they want. Jack BeVier (34:26) I think it's a really interesting strategy. You mentioned like the less competition because the going in cap rates gonna be could be really low. Or if you pay a reasonable going in cap rate, the IRR is gonna be great because there's a big opportunity for a market to market. If your equity is patient and can wait out that lie tech period before you those rent bumps. A lot of folks though, you know, if you're a syndicator and you're like, Hey, our IRR is gonna be great, but you're not gonna get any distributions for the first three years. You're gonna turn off a lot of people with that, right? But, you know, for those like longer term thinkers, obviously you guys are trying to build a big portfolio. I mean, the IRRs on those opportunities are probably like, you know, special. Justin Spillers (35:07) Yeah, for sure. I mean, those have been our home run properties by far. ⁓ Buying really well just because it's not competitive. They don't cash flow for anything. So it's really hard to get a bank to understand the trailing 12. We also have the luxury of having a track record with Vitek. So they use the after repaired appraisal usually when it jumps to market. So they're not looking at the past T12 just because it's really hard to make a lot of money. I if you're buying on a past T12 and a normal cap rate, I mean, these properties would trade for nothing. And it's very difficult. And then we just, we're always stacking like creative ideas. So it's funny. So the light tech one, when we buy them, we try to get the highest after repaired appraisal possible, right? To justify a higher capex loan, a higher purchase loan, make sure you know, she's the bank. Then the flip side, at least in our state, they are mandatory. The real estate taxes have to be set by the past P and L for the last 12 months of income. So I get this giant appraisal and I immediately do a tax complaint using a very low appraisal and I have these two appraisals, one's for like 10 million, one's for three million and I get a use of three million for real estate taxes because that's what our law is. So it's so funny, I have two appraisals on the same property that are literally like 300 % difference in the same exact timing for different purposes. Craig (36:24) One of them is marked Do not send to the bank. Justin Spillers (36:27) Right, Jack BeVier (36:30) Dude, we were talking about AI tools. created, because we have to do income recertifications for a chunk of our, we have about 100 units that I have to do income recertifications on. So we built an AI income certification tool. I'm going send it to you. ⁓ Justin Spillers (36:46) Yeah. Jack BeVier (36:47) Yeah, like, you know, because someone you have to gather a bunch of income information and then fill out this particular, you know, federal form and then it'll tell you and then put in, know, put in your location and then it'll tell you, yeah, this person is at whatever, less than 80 % of area median income, less than 60 % of area median income. And that's the compliance documents that that you have to do for a lot of programs, light tech included. And we'd have someone who was, you know, typing in, know, know, opening up a PDF, scrolling through it, typing it into this form here. open up the next PDF, grab the number, type it into this form. And we're like, dude, that is a perfect AI use case. So we built a tool so that we used to have somebody who would spend a chunk of their day, you know, every week, ⁓ you know, doing that. So we were like, Hey, we're gonna, we're gonna write that, ⁓ you know, we can have AI do this. And ⁓ we just built it for us. But I'm like, I'm going to send it to you. I'm also Craig, I'm trying to figure out like, we're starting to build more tools in AI, right? That we're using in the lending operations, but I'm also looking for as many you know, property management use cases and real estate use cases as I can come up with. I'm going to start just like putting them out somewhere, but put them on the web, you know, put them on, you know, the podcast website or something like, Hey, download your, you know, download the code, you know, the code for this. Um, like I'm working on one right now that we get a freaking stack of Home Depot invoices like this every month, right? And then we have somebody go through those invoices and code line by line. This is trim, this is plumbing, because I want that level of reporting detail, right? It's, know. Justin Spillers (38:07) Thank Jack BeVier (38:19) it, think it helps, you know, makes me, helps us make better operational business decisions to understand exactly how much we're spending in plumbing materials versus trim. Right. So, but it's a painful code, right? Like that's a painful thing to ask somebody to do. You could have some, a bookkeeper in the Philippines do that, but I'm like, dude, you can also, you can also train these skews, you know, into AI and just have, and then, we're uploading the home. So the project that we're working on right now is upload the stack of Home Depot invoices. and turn that stack of Home Depot invoices into a QuickBooks file that we can just import into QuickBooks that is already all of the journal entries with the memo lines in the format that we want. And I'm like, dude, could, we're gonna save like dozens of hours of like mindless work. ⁓ a month if we, know, once we've built this. So I'm going to like, just want to like keep coming up with those and just like give them to people. Just be like, Hey, here you go. Here's the code for it. Knock yourself out. Like it's just a public tool. Craig (39:21) think an add on to that idea, Jack, is to really create conversation around just the idea. I've got this idea. Does anybody want to build it out? ⁓ Feel free to do so. And by the way, we're giving you this tool that we've already built out. I just think that there's so many creative ideas out there that people are thinking, but they don't know how to build. Justin Spillers (39:27) you Jack BeVier (39:34) Yeah. Craig (39:44) They're excited about it, but they don't quite know how to start. And as long as you can give them a small runway of start or just give them some ideas on how to get it started, I think that they can execute it pretty quickly. So I'd love to hear, you know, have folks comment ⁓ in wherever you're seeing this podcast or listening to it, comment and let us know about, ⁓ you know, maybe some ideas that you're thinking about to help your business. ⁓ And we'll come back at maybe add another link to the website on some of the resources that we've developed Jack. Jack BeVier (40:14) Yeah, it'll be fun. Craig (40:15) Cool. Justin, man, what a absolutely info packed one and a half hours. This has been an hour and 20 minutes. Can't thank you enough for your time. if folks want to learn more about investing with real estate alpha, ⁓ and all the great stuff that you're doing there, how can they get in touch? How can they learn more? How can they invest with you? Justin Spillers (40:35) Yeah, real estate alpha dot IO. That's our main website. So just real estate alpha. You see it in my shirt. Dot IO and then my email is justin at real estate alpha dot IO. Reach out anytime. Even if it's not about investing, obviously, we'd to have you investor have to answer questions, give it back. Share any additional information we use text that questions etc I've gained so much information from asking other people good smart questions have a ton of really good mentors So I'm happy to pay it forward and give it back to so reach out to me anytime but our website again real estate out to that I owe Craig (41:06) realestatealpha.io and justin at realestatealpha.io. Man, it's been such a pleasure having you on. Love to have you on again in the future. Jack and I always love talking shop with great guys. And so this has just been a real joy. So thank you for taking the time, man. Really appreciate it. Justin Spillers (41:24) Yeah, appreciate it Craig. Thanks a lot Jack. Craig (41:28) All right, everyone, That's Real Investor Radio. Hope you enjoyed the episode. Love to hear it from you in the comments, and we'll see you on the next one.