Latest / The Academy Presents podcast / Renovation Revelations, Ethical Investing & Field Wisdom with Joe Rinderknecht

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Renovation Revelations, Ethical Investing & Field Wisdom with Joe Rinderknecht · The Academy Presents podcast

0:01
Did you know that 90 % of the world's millionaires
0:05
invest in real estate? Well, I'm Angel with the
0:08
Academy Presents Real Estate Investing Rocks,
0:11
and I'm here to help you if you want to go for
0:15
your piece of that pie. Are you new? Are you
0:18
new to this and you just don't know where to
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start? It's okay. Are you someone that has invested,
0:25
but you feel stuck? You feel like you've lost
0:27
momentum. You don't know where to really head
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from here. Are you a seasoned real estate investor
0:33
who is doing great, but maybe you just want to
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hone a few skills here and there? This is the
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place for you. The Academy Presents Real Estate
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Investing Rocks podcast will connect you with
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industry experts so that you can save time, avoid
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costly mistakes, and begin living the life you've
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dreamed of all through real estate investing.
0:56
You're already taking the first step. just by
0:59
joining us here today. So, because I just have
1:05
a feeling like you probably wouldn't be where
1:06
you are right now if you hadn't fucked the system
1:11
a little bit. But then too, it sounds like your
1:14
grandfather was also an entrepreneur because
1:15
owning your own ranch, I mean, being a farmer,
1:18
being a rancher, that's owning your own business.
1:20
And it's like, it's not even a cash flowing business.
1:23
Yeah, it's a tough one. It's a labor of love
1:28
business. I'm thinking back to my friends. I
1:35
have some friends here that own Angus Ranches.
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It's not a cash flowing business. It does produce
1:44
cash, but it's not a constant. It's very much
1:48
the feast or famine like what we see in real
1:50
estate. They usually only get paid twice a year.
1:54
once from when they sell their calves once if
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they sell any like hay or any farm you know any
2:03
crops and then my grandpa sells bulls as well
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once a year so two three times a year you only
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get one paycheck you know so i mean real estate's
2:14
not really that far about or not far off right
2:17
like we get paid when we buy a deal get an acquisition
2:21
fee and then usually asset management fees come
2:23
after the property is operating and cash flowing
2:27
so like don't be deceived my friends asset management
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fees are not like big wads of cash no no they're
2:36
not yeah yeah it's yeah they're it buys a couple
2:43
weeks groceries If you're even taking asset management
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fees, because like for us, we haven't been able
2:49
to pay distributions. We're not giving ourself
2:52
asset management fees either. Yeah. I think that's
2:55
the right thing to do. To us, that was like,
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yeah. To us, it was the ethical thing to do.
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If your investors aren't getting distributions,
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then are you really managing the asset well?
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And I mean, it's not that we're not managing
3:08
it well. It's that these are tough times and
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we're doing the best we can. And we're making
3:13
changes as we go, but it's still, these are tough
3:16
times. And so to us, the ethical thing to do
3:18
was to also put the estimation fees on hold.
3:22
Yep. Yeah. And you can always get them back,
3:25
you know, when you go to dispo a deal or something,
3:28
you know, they're accruing or something. Cause
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I mean, you're technically still owed. You're
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still working the property. Like it would just
3:35
die if you didn't. So you still got to get paid
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for that at some point. I know. And it, it accrues
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and it sits on the back end and there's, there's
3:45
an order when you turn of how you're going to
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pay back your capital stack. Yep. And so you
3:50
could, you could choose at the end to leave the
3:53
asset management fee to the last. There's lots
3:56
of things you could do, but you are legally entitled
4:01
to the asset management fees for the duration.
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So, and. Yeah. Investors should know that. So
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if you're a passive investor and you're listening
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to this, it's in the PPM. Make sure you read
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it. I know hardly anybody reads it. That's probably
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one of the biggest benefits, not one of the biggest,
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one of the larger benefits of AI right now is
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you can upload things like that and have it taught
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to you in real person language. Yeah. Because
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we do invest in oil and gas and we got this report
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back and I was like, what? And so I copied and
4:36
pasted it and put it into ChatGPT. And I'm like,
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can you tell me what this means in real person
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language? And absolutely explained all of it.
4:44
I was like, oh, well, that's not, I would have
4:48
never gotten that. It was basically like the
4:50
well was pumping and some machinery got stuck
4:54
in the tube. And a specialized piece of equipment
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went down and grabbed it and pulled it out. And
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now another team is coming in to fix up the mishap.
5:04
everything will be fine soon. And from reading
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the report they sent, I was like, I would have
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never gotten that out of it. That's funny. Yeah.
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So yeah, I can really be your friend when it
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comes to, you know, just distilling information,
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going through it and making it simpler to understand.
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But just kind of another word of advice, just
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make sure that you're reading all your documents
5:27
because there's some shady things going on. People
5:31
don't realize that they signed documents that
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allowed for those shady things to happen. Just
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be careful, my friends. I say that all the time.
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Be careful, my friends. Let's switch gears just
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a bit because I wanted to go back to the construction
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piece. One of the things that I think is really
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hard when you're starting out is understanding
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the current cost of construction. Because if
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you're dealing in an older underwriting program
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or with an older set of curriculum from a coaching
6:08
program, a lot of the costs are going to be off.
6:13
For sure. And because there's lag, there's lead,
6:16
there's things that happen with the hard pieces
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of construction, your wood, your bricks, your
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mortar, like all those things. And then there's
6:25
the cost of the labor. And so when I say that
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they lag or they lead. those costs can be quite
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different than what you've been taught they should
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be. Yeah. So how have you dealt with that? And
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like, how could you speak on that? Yeah, I think
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that's a really good question for anybody bidding
6:43
a project. You know, like you said, because like
6:48
there's so rule of thumbs, right? That maybe
6:50
a coaching program gave you like a cost per unit,
6:54
you know, to build, to buy, you know, what land
6:58
costs should be. um, or your labor per hour,
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like you said, um, like all of that is well and
7:04
good, but just like anything, like things are
7:07
going to fluctuate and change with different
7:09
market cycles. So the best way we've been able
7:13
to hedge ourselves against that, because I did
7:15
have a deal that went sideways, um, a deal that
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I bought in 21 and sold in 24, you know, our
7:23
construction costs ended up being, we had budgeted
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is a 24 plex. that we turned to a 32 unit um
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we had budgeted a million and a half because
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it was a 1951 built property we were like going
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to the studs right replacing everything replacing
7:39
windows and the roof and redoing the entire parking
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lot and so it's a massive renovation right we
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ended up spending three million dollars in renovation
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and the big learning from that is that because
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we went into that similar to what you had said
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like kind of a rule of thumb because my main
8:00
partner um was he he'd been doing a lot more
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of like the development type stuff but not really
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like deep renovations so the way that you you
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hedge yourself and get correct numbers is you
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get minimum three bids for everything right because
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if you go and say like you need to replace windows
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or just like you know what angel and i were talking
8:31
about like i need a guy to come and trim out
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um you know these 16 units so we got labor and
8:38
materials we got to account for you get three
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bids because even though you may have an idea
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of what you think it should cost or how much
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yeah how much it should cost like the people
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are going to tell you what it's actually going
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to cost right whether you get a general contractor
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or an individual specialized subcontractor we
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usually like to deal with more individual subcontractors
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than bringing on a full -blown general um just
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because like we have a pretty good touch on where
9:09
everything is but if you go get three bids then
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the market will tell you what it costs right
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and and so like that's the one thing where we
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we were we failed on this deal in Utah that we
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bought in 21 is because we told our GCs, hey,
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it's going to cost a million and a half. They
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came back and said, no, it's going to cost two
9:31
and a half. And we got it from two full -blown
9:34
GCs that could do the entire project. And we
9:37
didn't listen to them because we thought we knew
9:39
better. And it cost us, right? Cost us dearly
9:43
because we got taken for a ride by two different.
9:48
gcs that acted as gcs but they couldn't keep
9:51
up with the number of units that we were doing
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so that's why it's so important to go get multiple
9:57
bids because that will tell you what you should
10:00
be paying and i would even you know even do this
10:04
before you you know purchase the property i think
10:07
that's the most important thing because like
10:10
And like when, you know, underwriting basics
10:13
is you got to have good renovation numbers to
10:15
know like what your rent premium is going to
10:17
be. But if you're off by 20 % or more, like even
10:23
10 % is a lot, right? Then, you know, you could
10:28
get in trouble there. You know, another example
10:31
is we just bought a deal in Texas, 292 units
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in San Marcos, and we had got a PCA report. which
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for those of you don't know pca is it's a property
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condition analysis and on the pca it stated that
10:48
we need to replace siding and that was a four
10:52
hundred thousand dollar job and before we bought
10:55
it we went and got actual bids and it actually
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is going to cost us eight hundred thousand right
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and so it's like if we would have just run with
11:05
a 400k and bought it and then got bids for And,
11:09
like, because we got two or three bids on that,
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right? And they were all the same. And we just
11:15
went with the best one with the best reviews.
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Like, that could put your property in some hurt.
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Because, like, if that siding is, like, a CapEx
11:25
item, you know, the siding is falling apart,
11:29
right? Like, if you're going to go repair siding
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or replace siding, like, you need to do it right
11:34
the first time. You can't just half -fast it.
11:36
because like if you put new siding with old siding
11:40
like for one that hurts your sellability in the
11:43
future and two it wears differently yeah it wears
11:46
differently but it's just like we buy these apartments
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and we do these renovations to harden the asset
11:52
not give ourself more routine maintenance to
11:55
do you know so it's just gonna so i guess that's
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those are both really good examples get two or
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three bids figure out what your pricing is even
12:05
before you purchase the property even if they're
12:07
kind of high level bids and then once you buy
12:09
it then you know get like hard bids you know
12:12
that you sign and pay for right like that that's
12:16
very important too because like construction
12:18
is like one of those variables that can make
12:22
or break you you know so especially if you're
12:26
because you're either going to raise for it or
12:29
you're going to get a loan that covers part of
12:31
it and that's right if your loan doesn't cover
12:35
it and you didn't raise enough something's got
12:39
to give you're either going to have to cap call
12:41
it or you have to try and refi it with another
12:43
loan that'll cover the capex and right now with
12:46
the tightening on loans like yeah your refi is
12:49
not going to happen you'd have to do a cash in
12:52
and now we we've um yes we're in the middle of
12:57
a refi right now So far, it appears to be cash
13:00
neutral. Hey, I'll let you know more. That's
13:03
winning right there. But it was, I don't even
13:08
know the number that we went through that we're
13:11
all going to be cash in. And honestly, even though
13:15
it looks like it's going to be cash neutral,
13:17
there's still the chance that at the end of all
13:19
of it, we're still having to put in a few hundred
13:22
thousand. Because that's just how it works. So
13:26
in my mind, I'm thinking about if you said your
13:30
CapEx was going to be a million dollars and they
13:33
added that on to the loan. So it was a $5 million
13:35
property. Now you've got CapEx of another million.
13:38
So $6 million loan. And then it turns out your
13:41
CapEx is actually double that. Well, where's
13:46
that other million coming from? You're not getting
13:49
it in the loan. Unless you're going to be cutting
13:53
things that you had originally planned on your
13:56
CapEx and then fingers crossed that they let
13:59
you reallocate where the CapEx funds go, because
14:02
you also have to identify and say, hey. this
14:06
much of the capex is going to be towards plumbing
14:08
or this much of the capex is going to be towards
14:10
windows and windows like window screens this
14:13
part's going to be towards you know any kind
14:16
of plumbing upgrades in the restroom like internally
14:18
so like you're going to put in low flow toilets
14:20
or low flow shower heads like you have to identify
14:23
all that stuff going into the loan and so if
14:26
not all of them will let you reallocate so if
14:29
you mess up like We're not playing in the minor
14:34
leagues here, friends. We're playing in the majors
14:37
and you need to have your bases covered or you're
14:40
going to find yourself in a really not great
14:43
situation. I'm not trying to kill people's desire
14:46
and I'm not trying to kill their entrepreneurial
14:49
spirit, but just reality of the situation. Make
14:53
sure you're covering your bases and you're getting
14:55
all the information that you can. If you didn't
14:59
find it out, this is one of those times where
15:01
you got to fact check. You could be in the best
15:05
coaching program there is. The curriculum's 10
15:07
years old. The curriculum's 10 years old. And
15:12
when I say best coaching, I'm not like the best
15:14
people, the best ecosystem, but you've got to
15:18
fact check it. You've got to go out there and
15:20
get your own information too. Yeah. I think,
15:23
you know, a couple of ways that I think people
15:25
need to fact check it. Even, you know, me today
15:27
is like one, you need to get on site and do your
15:30
own inspection. check everything you know too
15:34
when you have your seller's disclosures like
15:38
you need to make sure how old's the roof how
15:41
old are the acs how old are the furnaces and
15:43
and it's like when you get into hundreds of units
15:46
or even like 50 if you're not used to even doing
15:50
like 50 units like it's a lot of units but you
15:52
need the age of every single furnace every single
15:56
ac unit because like if you don't know that information
15:59
like you could just bought a property that has
16:01
10 plus year you know acs and you know those
16:05
are not cheap either right so you got to be there
16:09
yourself to inspect it you got to get information
16:13
from the seller on what they've done what needs
16:16
to be done and then even though a pca report
16:19
isn't expensive like that's going to save your
16:23
bacon right pca report You get a mechanical guy,
16:26
electrical guy, roofing guy, you know, sometimes
16:29
one guy can check all of those things and check
16:32
the condition. But like all of that is going
16:34
to help you create your construction budget,
16:37
especially your CapEx or your like deferred maintenance
16:40
items. And, you know, like Angel was saying is
16:44
like, if you don't have those accounted for and
16:46
you buy that property and day one, you know,
16:49
something blows up, it's on you. If you didn't,
16:52
you know, have any account for it, then any.
16:55
you know that's the other thing you got to have
16:56
a sufficient amount of reserves for those things
17:00
that because you won't find everything there's
17:02
skeletons and all the closets that you don't
17:05
foresee so you got to be prepared for those things
17:08
too but like if you can do multiple of these
17:11
things um then you're more prepared than not
17:15
so i would say too like we've been fortunate
17:20
enough that i say fortunate enough We haven't
17:23
had to inspect every unit ourselves. I'm not
17:26
saying that every unit was not walked. Every
17:29
unit was walked. But you can sometimes get a
17:32
company that will come in and help you walk units.
17:36
So like our first property was 72 units. We weren't
17:40
able to walk them all. But the company that we
17:43
hired in walked more of them than we did. And
17:46
they said they would walk all of them within
17:48
10%. over the next X number of days. And then
17:52
the property manager that was on site was required
17:54
to do that remaining 10 % so that every single
17:56
unit would be walked. So people will tell you,
18:00
you need to walk every unit. Yes, you do. But
18:04
there are firms that will help you take care
18:05
of that. But yes, absolutely. Every unit needs
18:08
to be walked into so that you have an idea of
18:10
what you're going through because even one unit
18:12
that needs to be taken to the studs can throw
18:14
off everything. Because what used to be, you
18:17
know, seven to ten thousand dollar turnaround
18:20
is probably closer to 15 now um so you just have
18:24
to watch out for that and having grown up watching
18:26
my grandparents do their rentals i will say that
18:29
mom and pops it's not that they're doing a subpar
18:33
job it's that they're doing the best job they
18:36
can with the money that they have available yeah
18:39
and they're not going to have the same level
18:40
of record keeping so if you're purchasing direct
18:43
from seller and it's a mom and pop You need to
18:47
make sure that you go back through and really
18:49
check things at an, a deeper level because there'll
18:54
be things you just don't patch. I think my grandparents,
18:58
if somebody's cause they, they supplied fridges
19:00
and all that stuff. So if somebody's fridge went
19:03
out, they would go to like the local appliance
19:06
repair guy. And either have him fix that one
19:09
or they would get a new used one. I say new used
19:13
to put in. And it wasn't that that was bad. It
19:17
still worked. It's just that if you're looking
19:20
at something multifamily, you can't really put
19:23
in used stuff in somebody's apartment. They want
19:25
the new. And it's kind of your responsibility
19:27
to make sure that it is in working order, good
19:31
condition working order, or you put something
19:33
new in there and you just have to kind of be
19:35
ready for those things. Yep. Yep. I would say
19:39
though, too, it's just like, if you're new, like
19:42
go walk as many units as you can, because like,
19:46
if you want to learn the business, help your
19:49
friends walk units. Yeah. Like that's one of
19:52
the best ways to learn is to just get there.
19:54
You know, it's just like the last couple of deals
19:56
that we bought, like anything under like 50,
20:01
60 units, like my partner and I, we will go walk
20:03
every single unit, but like we'll split up. You
20:06
know, just because, like, I'm a little anal like
20:08
that. I like to see every single unit and have
20:11
all the furnaces and all that documented. But,
20:14
like, we bought a 48 unit in Boise a couple months
20:17
ago. And, you know, Levi, my partner, and I,
20:22
we split up. And, you know, we each hit 24 units
20:24
and went with one of the property management
20:27
maintenance guys, you know. to every single unit
20:31
and they documented we documented and so it's
20:33
like we all have kind of different documentation
20:35
and we did a pca report as well on top of that
20:39
so getting hands -on experience can help you
20:43
become more intelligent a lot quicker yeah and
20:47
you'll get to where you notice things yeah we
20:51
walked a property again Like, were we going to
20:54
be a part of it? I don't have any idea. We met
20:57
some people in Oklahoma City. It's like two hours
20:58
away. And we walked units with them. Because
21:01
again, that's how you learn. But we walked through
21:05
the laundry room. And I want to say it was down.
21:08
It wasn't working. And yes, there's going to
21:12
be a stagnant water smell. But there's something
21:15
different about collapsed pipes. And the smell
21:19
that comes along with that. it's like not just
21:23
stagnant but like a weird decaying kind of smell
21:25
like if you've ever if you've ever smelled a
21:28
clutch burning up you'll always know that smell
21:30
whenever you smell it because it has a very distinct
21:32
smell yeah it's the same for me with collapse
21:35
pipes and if they weren't collapsed they were
21:37
severely clogged with roots or something because
21:40
it had that decaying kind of stagnant odor it's
21:45
just different And you're going to learn those
21:47
things. And when you're getting something, when
21:49
you're doing your due diligence, you need to
21:51
have all the lines scoped anyway, like with cameras
21:54
and all that good stuff. But you will get to
21:57
a point where, ooh, there's a reason why this
22:01
laundry room is down. And it's not just down
22:03
because it's not making money. There's something
22:06
deeper going on. And if you're new, you may not
22:10
know that. So that's one of the reasons why it
22:12
can be really important to work with people that
22:15
are experienced and have done it before. That's
22:19
probably one of the things that was hardest for
22:21
me and Jason, because we were the lead sponsors
22:23
in our own first deal. We have people on our
22:26
team that are experienced, but it was our first
22:29
deal. And when I say we've learned a lot, just.
22:33
Yeah. That's a way to get. what trial by fire
22:41
right yeah 100 yeah you read all the books and
22:48
think you have all of this information all this
22:50
education and i felt like i knew nothing when
22:55
we first started in 2021 when we first bought
22:57
it so all 22 all 23 i felt like i knew nothing
23:00
and everything was new and i was learning it
23:03
brand new and i felt like such an idiot and like
23:06
why do we ever do this and we're so stupid It
23:10
was just the learning curve. And I guess that's
23:13
one of those times where you do learn because
23:16
you're uncomfortable. Because I was way uncomfortable.
23:18
I was very unhappy. But I feel like we are exponentially
23:24
more knowledgeable now. Oh, yeah. We can take
23:28
care of a lot of things. And my husband can walk
23:30
a unit now and identify problems that he wouldn't
23:33
have been able to identify three to five years
23:35
ago. So it's been, we get that experience by
23:38
not showing up and making those walks, you know?
23:43
No, absolutely. And we, we've experienced all
23:47
manner of craziness at this point. I won't even
23:49
talk about them, but it's like, if it could happen,
23:52
it's going to happen. And don't for a moment,
23:56
think you're not going to have a plumbing issue.
23:58
You will triple the budget you've set aside for
24:01
anything plumbing. Just triple it up front. yeah
24:06
that's yeah i think it really depends too on
24:10
like especially if you're buying like 80s and
24:12
older you know like that's especially true for
24:16
that