The most important rule when investing in real estate is not what you may think! Of Course you want to buy low and sell high but is that really the mot important rule? Aaron explains what is the most important rule when investing in real estate in this episode.
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Aaron Fragnito: Hi, friends, it’s Aaron Fragnito with the Passive Cashflow Podcast. I just googled what’s the most important rule in real estate and I feel the answer was wrong. I’m going to talk about the right answer right now. Episode number 26 here, the most important rule in real estate.
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So, when I went to the almighty search engine of Google to find out the most important rule of real estate, it told me that the most important rule is to buy low and make your money when you buy. Now, of course, that’s hugely important. You never want to overpay for anything. You really want to pay $15 for a $20 bill in real estate, but actually, that’s not the most important thing. I have maybe overpaid for a piece of real estate or two in my life and quite frankly if you manage it properly and hold it long term and it’s in a decent market, real estate is forgiving over time.
The most important rule in real estate, in my opinion, is the management, the operation of real estate. Who are you working with? Who are you investing in? Now, if you’re an actual hands-on active investor, then the most important rule is who are you hiring? What contractors are you hiring? I’ve made money in real estate, I’ve lost money in real estate and anytime we’ve lost money it’s because we hired the wrong operator.
As I said, if I paid too much for real estate or perhaps I bought in a market that wasn’t desirable and had trouble collecting rent, these were things that over time we fixed with better management of the real estate or hiring better contractors. Every time we lost money it’s because we hired the wrong contractor who told us one thing and did another, or we hired the wrong management company that again over-promised and under-delivered or just straight up stole money from us.
In fact, we hired a management company one time and it was a nice family-owned management company and this is when we were getting started and we had a 25-unit down in South Jersey. They would meet tenants of the property and collect the first month’s rent in a security deposit and they’d meet another tenant at the same unit two hours later and collect the first month’s rent security deposit and they’d lease out the same unit to three or four people on a day, collect all the money and, of course, it’d be a mess the next day as they ran off with the money.
We had to actually fire their management company and taking them to court and we were forced to start our own management company from that experience. Luckily, they didn’t get off with that much and we held on to the security deposits. I remember the property manager saying, “Hey we need the security deposits. Give us the security deposits.” Something in my gut told me it was the wrong thing to do. We never gave the management company the security deposits. Thank God because they would have ran off with a ton of money.
Raising capital, working with outside investors, and bringing that capital to a management company and hoping the management company does their job properly is really not a great strategy, so we developed our own management company. That way, we can control the assets much more closely. We can control what our employees are doing much more closely and we can make sure that the assets that we’re moving our investors hard-earned capital into our managed to a T.
The biggest flaw in the whole syndication market is that a lot of big gurus out there who are driving fancy cars and flying around in jets and wearing cool hats– Oops, guilty here. They are out there trying to sell you a dream. Right? I don’t like that part of this business. I never liked that whole part of this real estate industry. “Hey, look at me. Let me sell you a dream.” Unfortunately, that is part of what you have to do a little bit to raise capital, but we at Peoples Capital Group, we really do try to say, “Listen, we’re going to take your money put it into good assets. We’re going to make sure that the assets are well managed by our management company and we’re going to make you better returns.”
Is it going to make you a better person? No, but it’s going to give you more time to spend with your family and do the things that are important in life. If you stay focused over time and invest properly and diversify, then and over time you’re going to build a great portfolio in real estate and we’re going to help you get there. That’s what we do here at Peoples Capital Group. We focus on this North Jersey market. We focus on managing our own management company so these buildings are just cash flowing and churning out profits even in these tough times.
Right now in the middle of this pandemic that’s going on, we have over 95% collections on some of our big buildings and that’s really a testament to how well we manage these buildings and the relationships we have with our tenants because we know a happy tenant equals a happy investor.
Again, the biggest flaw with the syndication industry is that we go out there and we put this image out there and people invest in the idea of success and then a lot of these syndicators take that money, put it into markets 3, 4, 10 states away, they don’t even live in, they don’t know. Then they hire some third party management company that they hope is going to send them accurate statements and tell them accurate information or they could just be lying to them and stealing from them.
You really have to be careful when investing in a syndicator who’s taking hard-earned capital from investors and putting into markets that they don’t know, they don’t operate in. They’re hiring outside management companies. They’re going through the guidance of brokers that are many states in a way that you’re just calling up a broker in that state saying, “Hey, what’s-” It’s really not hands-on management. It’s not hands-on investing and it’s a model that I think now as we see the market contract it’s going to really– It’s where the rubber meets the road.
A lot of these syndicators that have been investing out of state and into Class A real estate and hiring third-party management companies and hoping for the best, they’re going to run into a lot of challenges. Because of that, because of all these experiences in real estate, contractors misleading us and stealing from us, management companies doing the same, We’ve come to realize that the most important rule in real estate is the operators.
You have to work with the management company you can trust and work with and that owns the company, knows what they’re doing and you have to work with syndicators that have a good track record, but also, in my opinion, have their own management companies so they can manage their own assets in-house. That’s exactly what we do here at Peoples Capital Group. We also invest in a market we’ve been living in and investing in our entire lives.
Go to peoplescapitagroup.com if you do want to diversify into tangible real estate and get into that North Jersey market. We buy Class B and Class C apartment buildings in New Jersey. Since we manage them with our management company, they really do produce strong, consistent cash flow through good times and bad. That’s peoplescapitalgroup.com if you want to learn more and you could start the application process there today. Thanks a lot, subscribe for a new podcast every Friday. Thank you.
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