Aileen (00:01):

Thank you, everyone for joining today’s episode of the, how did they do it? Real estate podcasts. We are your hosts Seyla and Aileen. And today our guest is John Stoeber and days before graduating from the University of Maryland with major in finance and accounting. John realized he wasn’t out. He wasn’t cut out for the corporate world needed to achieve financial independence that led him down to real estate investing, where he currently uses his strengths of numbers and financial models to underwrite properties and manages assets is also the host of his own podcast called the millennials and multifamily podcasts and has a free book called how to analyse big apartments and make them feel small. Welcome to the show, John, really excited to have you on today. How are you doing?

John (00:39):

I’m good. Thanks so much for having I say one, Eileen, how are you guys doing?

Seyla (00:43):

You’re doing well so far. Thank you so much for coming on to our show. We will appreciate your time. So can we start it out by, can you please share a little bit more about your background and how did you get started with real estate?

John (00:55):

Yeah, absolutely. It’s kind of a crazy story. Like you guys just said days before I graduated from the University of Maryland in college park, I had just accepted my first job offer and I got the compensation package with the salary, the vacation, and, you know, the full nine yards and I’m looking through it. I’m just like, I don’t make enough money to do anything. I don’t, I don’t have enough PTO to travel the semester before I graduated. I had just studied abroad in Rome. So I’d been traveling for like four months and every winter break at university of Maryland. We had these really long winter breaks where we, me and my friends and my brother would go skiing and snowboarding for like five weeks. So I get my compensation package and I’m like, well, I have four weeks of PTO. So you know, I can’t ski for five years a week or five weeks out of the year anymore.

John (01:45):

And I don’t even know how am I going to afford this? Because skiing is really expensive. So immediately I started thinking of ways, you know, how do I make passive income so I can get out of this job like ASAP and I can do what I want to do? And that kind of led me down to real estate. I honestly went to Google and was like how to make passive income. And it was like stocks, you know, dividend yielding stocks, CDs, and real estate, well dividend yielding stocks, you might get like 5% annually. So I was like, if I need to make $50,000 a year passively, I need a million bucks, which is going to take me forever on the salary CDs. I would need like 10 million bucks, you know, some crazy number. And that just kind of led me to real estate and bigger pockets.

John (02:29):

And I just kind of dove down that rabbit hole and started learning about real estate. So the first thing I did was I bought a little two unit up here in Maryland, in Baltimore city. And I house hacked. That mean Maryland. The property prices are pretty expensive, but in Baltimore it’s a lot more affordable than most of the rest of the state. While I was up there, I bought this flip two with a partner, a couple of partners, and it was like a complete gut job, 120 year old house and construction and contractors were not my thing at all, not a strength of mine. So for two years, I’m living up in Baltimore city learning how to be a landlord, learning what contractors are really like and kind of how to manage construction. And yeah, that’s honestly how I got my start in real estate.

Aileen (03:18):

So that was really great that, you know you just graduated college, you looked at your compensation package from this like job that you were being offered. You know, and a lot of people tend to take that route and just go down that path of the corporate way and not really thinking about like the passive income side of it and, you know trying to compensate for how they’re going to do the things that they want to do. How did you actually get into that mind-set to actually want to do that, to like, to, to think a little bit differently than how everybody else does it?

John (03:54):

I think I’ve always just thought a little bit differently according to my parents. So I don’t know. It literally came down to, I was just like, there’s 52 weeks in a year. I make this much money. It costs this much to ski. And then I have to like spend this much on my taxes, this much on bills. And the numbers just came down to like, I don’t have enough vacation to ski and I don’t make enough money to go skiing more than two weeks a year. So I have to increase my income and I have to increase it in a way where I don’t have to actively work towards that. So as I’ve gotten further, along in the business, I’ve kind of shifted away from like, I just want to ski and travel all the time. I think I’ve matured a little bit, but that is honestly how it started. And that’s what made me dive head first into that rabbit hole.

Aileen (04:48):

So you didn’t end up accepting that job, but you decided to go full head full feet into the real estate.

John (04:55):

No, no, I did accept that job. I actually still work there right now. I mean, you got to make some money to accumulate some capital and it’s hard to get loans without income. So I did accept the job and I’m just doing real estate on the side right now. Oh, that’s great.

Seyla (05:11):

And you mentioned about passive income. Can you explain what is a passive income to our listener?

John (05:19):

There’s probably a lot of definitions. My, my definition of passive income its money that you earn while you sleep. So if I don’t have to, if I don’t want to get out of bed today, those checks are still going to be coming in every month.

Seyla (05:34):

And then you also mentioned about house hacking. What is house hacking?

John (05:38):

So house hacking is when you buy like a big single family home with a lot of bedrooms or a small multiunit. In my case, it was a two unit. And then you either rent out bedrooms or your other apartments for income. So what I did is I bought this little two unit, rented out my upstairs apartment, and then I had a basement, my apartment, and I rented out that basement. So my tenants ended up covering my entire mortgage payment plus like any, any little bit of like maintenance. And I had like a pest control contract to for the property. So I basically lived for free for two years.

Seyla (06:15):

Oh, wow. That’s really awesome. So why did you decide to focus on multi-families indications?

John (06:23):

I wouldn’t say I’m focusing solely on syndication, but what that flip taught me was we had three partners. It was me, a guy I still work with his name is Fritz. I still work with him today and it was another partner and that flipped just did not have the pie. Wasn’t very big. It was like a $30,000 profit total. And so I and Fritz were in it to learn and ideally make some money. The other partner was a little bit farther along and he was the realtor. So he got the buy-side commission. He would’ve gotten a share of the profit and he would’ve gotten the sales side commission. So I think he would have made like, you know, $20,000, if everything went according to plan, well, he ended up getting into, I think he ended up getting into some much bigger project where the stakes were much higher and he just wasn’t incentivized to perform on ours.

John (07:19):

So that kind of left me and Fritz to handle that entire project. And like, we just, we didn’t have the construction background to handle a big rehab like we did. So that project was really painful for us. And we held onto it for way too long, put way too much money into it. Meanwhile, I had this two unit and Fritz has this four unit. I’m dealing with some headaches with one of my tenants on the two unit, but I’m still getting them to pay every month. Meanwhile, Fritz was house hacking a four unit and he had a tenant, like a professional tenant that made him go through a six month eviction during this flip. But as he’ll tell you, he’s just like, yeah, my other two tenants paid for it. He’s like, I didn’t have to come out of pocket while I dealt with that.

John (08:03):

Because I had tenants paying me rent every month. I mean, just kind of like hit us. We’re like, okay, if we go bigger, we can leverage our strengths and work with other people who are good at like managing contractors and the construction or who have experienced managing these larger properties. And no matter what has happened, like with the flip, when we over, when we paid too much money, like that comes out of our pockets, but with the small muftis, no matter what has happened, like our tenants end up paying for our mistakes. And those two factors combined were just like, yeah, we’re, we’re going to just go into larger multi-family projects.

Seyla (08:45):

So after the flips that you did and your partner did what did you guys do after that?

John (08:53):

We studied for like two, I mean, we kind of started studying while we were in the middle of the flip, getting educated on multifamily. I’ve really started learning how to underwrite during that time, you know, underwrites, just another way to say analyse properties. So let’s say we sell the flip and then it was like an 18 month sprint to get into my first deal where we’re just constantly learning, networking, and going to events, you know, getting out there on social media and kind of like branding yourself as whatever you’re good at. So in my case, it’s like, I’m good with numbers, spreadsheets and analysing properties. Just putting that out there, letting other people know, like this is what I’m good at. And if you need someone who can, or who has the skill, like I’m available, I’m a free agent. So I did that for 18 months, just continuing to learn and build up my own network.

John (09:51):

We started our own podcast to assist with that. And as I’m sure you guys know, like when you get guests on, you start to develop relationships with them and it’s just like a great tool for growing your network. Well, earlier this year I ended up meeting a partner or a current partner at an event, a live event before COVID came around, she had a deal under contract and then it fell out because of COVID and then she put it back under contract and she’s like, I hate underwriting deals. And I like, I don’t like numbers and I don’t like spreadsheets. And they were looking for another partner for this joint venture deal to come in and take on a role. And they needed some money too. And because I had developed a really good relationship with her and I had known some of the other partners, you know, I ended up going into the deal and it was just like, it was a great fit all around.

Seyla (10:46):

So you mentioned about the underwriting and you market it yourself for that. So how did you develop your underwriting skills over time?

John (10:56):

Just practice. I mean, going on LoopNet Craxi and like, that’s how I started going on LoopNet and Craxi and just pulling the listings, looking over a trailing 12 and a rent roll and just kind of like trying to pick up trends in those statements. And you know, when you’re going into like some new market or in my case, these were random markets that I wasn’t looking to really buy in. It’s hard to underwrite because you don’t have a team there, you know, you can’t reach out to like a property manager or a contractor and say like, hey, how much, how much will this property operate for? If we stabilize it, what can we get the rents for? But you kind of go through the motions when you’re building out your proforma. So I would go in like apartments.com or you could go in local Facebook groups, use tools like rent, rent a meter and say, okay, you know, if we do like this level of renovations, we can get the rents up to here.

John (11:50):

And if I look at some pictures on apartments.com, I kind of like come up with some very basic estimates of how much the rehab is going to cost and you just start practicing and practicing and, you know, sharpening that tool. And then eventually we decided there were a few markets we wanted to go into. And the first one we did was Columbus, Ohio. So as we went into that market, we started building out, our team, met a few property. Managers met some local investors. And as we got deals sent to us from Columbus, we would go much deeper into the underwriting. Like every single line item was something that we would scrutinize. We would really hone in on the rents for like every single unit make unit size, square footage. We would look into all of that and the expenses too. And like a huge one would be like the property taxes, something I always do now, especially when I’m in a new area is we’ll ask the broker for a tax appeals attorney, cause you can call them up and like, they’ll tell you exactly how the taxes work in that local jurisdiction.

John (12:56):

And you’ll hear some crazy stuff. Like I was looking at one deal in Mississippi and I called the attorney and he told me how the taxes are calculated, but he’s like, but to be honest with you, property taxes here are like 50% below market value because there’s one taxes, there’s one tax appraiser in the entire County for all commercial properties and he’s just old lazy and he doesn’t care and he’s underpaid. So he’s like, yeah, if you’re going to underwrite the full tax increase, you’re going to be like, you know, let’s say a hundred thousand dollars, but in reality it’s probably going to be 50. So if you want to be conservative, go 75,000 and you just start building out your team and your network in these markets and you rely on those people to give you the answers and the inputs for whatever underwriting model that you’re using and just continue to practice.

Aileen (13:49):

That’s really great. You’re able to leverage a lot of the knowledge from the networks that you’re creating and stuff like that in order to create more efficiencies in your underwriting. And so can you talk a little bit more about the joint venture that you participated in after? So did that deal launch after COVID what happened after that?

John (14:13):

Yeah. So one of my partners, her name is Emma Powell. She put this thing under contract in March, or maybe before March COVID hits all of her investors leave because they’re scared, understandably. And she, you know, it fell out a contract. She kept in touch with the seller and she ended up putting it back under contract, put a, put a new team together. One of my partners at my company, Kronos investment partners, he decided to jump in on that. His name is Ryan. And they, they pulled a few other partners together. And then I ended up joining that deal too. So that was just a joint venture where all of us pulled our money together and we are not raising like outside capital through a syndication. So what Emma did because of COVID, it was really hard to get financing. She put it under contract through a master lease option where we’re basically making payments, like we’re making the seller’s payments to his on his mortgage, but we have our own amortization schedule and we’re, we’re putting like our own money and like some promissory notes up as the renovation money plan is to go in here, renovate the units, bump the rents, which we’re doing like pretty substantially right now. And then just either refi out or sell the property in six to 12 months.

Seyla (15:41):

And then you mentioned that you market yourself as a number person. So will you be able to share some of the most effective ways that you were able to network and build your relationships?

John (15:53):

Yeah. I think the best way is to leverage Facebook groups. If you go inside some of these Facebook groups, I mean, some of them are tens of thousands of people just go inside of them. And like when people are asking questions, just answer them if you know the answer and even if you’re not an expert or you don’t, you haven’t done any deals, just like throwing your 2 cents or say something like, you know this from my experience, this is what I believe. You’re not like establishing yourself as an expert. Who’s got 3000 units under your belt? You’re just coming off as like credible and honest. And as you start to do that, people will start to begin to know you in these communities and you’ll develop relationships with them. And then you’ll either meet them at live events. When we start to have those again, or you can get on a phone call with them and you just continue to, to develop that relationship or develop those relationships. And once that happens, like you just kind of start to, to be in the know when people are under contract for deals. Like you kind of know about that or, well that’s yeah. When they’re under contract for deals or when they need certain things, you’ll know that. And you’ll start to be able to come up with ways that you can actually provide value to them and maybe get in on your deal or on a deal too.

Seyla (17:09):

So in your experience do you have anybody who actually from the networking communities on Facebook group or something like that, actually reaching out to you to see if you are able to help a second look at their underwriting process or something like that along the way?

John (17:29):

I mean, I’ve had like some friends reach out to me and asked me to take a look at their underwriting. It just depends how busy I am, to be honest with my own properties. Normally I would try to, but like if I have to deal with stuff with my own properties that that takes precedence. Yeah.

Seyla (17:48):

So, but what’s biggest challenge that you face as you were trying to get into the first multi-family deal,

John (17:55):

Finding the deal, finding the deal is really hard. You know, I look at a lot of them, they just like, at least from my perspective, they don’t make sense. So finding one that actually pencilled out was you know, I’ve looked at hundreds of them.

Seyla (18:11):

So what would you say about his statistics and stay in terms of Andrew? I need a deal. You, you look at hundreds of them. So what is the percentage that you can see that it’s actually work and pencil

John (18:24):

Less than one for me? I mean, I’ve done, I’ve done one deal and I’ve, I’ve definitely underwrote over a hundred. I mean, I would say hundreds so less than 1%, but if you’re a very experienced operator who also has very good broker relationships, you’re probably getting better deal flow than I am. But yeah, you’re going to have to look at a lot. And that’s why I think it’s so important to develop relationships with other operators and figuring out how you can add value to them. Because if you’re not experienced, they’re more likely to find better deals than you are. And it’s going to be much easier for you to insert yourself into their deal than it is for you to go out and find your own deal.

Seyla (19:07):

John just want to ask when you receive the deal, do you actually underwrite them all? It’s like is there an initial underwriting if they pass your initial pass and then you go to the next level, is there a need, like a different type of levels that you actually do in the,

John (19:23):

Yeah, so my partner, Fritz, he’ll usually, you know, he’s the one who reaches out to the brokers. He’ll usually do that. He’ll do some initial, like we call it a sniff test. And if there’s an OEM, he’ll take the assumptions from the OEM, which are usually much more aggressive than like what I would actually underwrite and he’ll put them in there. And if it still doesn’t make sense, like he’ll, he’ll screen out what we look for when we do our initial sniff test is with those assumptions. We just want to see an 8% gross profit margin, which would mean, like, let’s say we’re all into the deal for a hundred thousand dollars. We want to have a net sales price of a hundred, $8,000. So an 8% gross profit, which is not a lot, like usually most deals won’t even work with that level or with that low of a spread. But what I have seen is in some higher cap, like tertiary markets, because the interest rates are so low, you can make deals work with that type of spread, especially if they’re cash flowing right away. And they’re like, you know, light value add deals. Or if you can get very creative with the financing like we did with a master lease option, you can make those deals work too. But normally you’re going to need a much higher spread than 8%.

Seyla (20:45):

So just want to add about the COVID situation and how have your underwriting process changed during this times in terms of con conservativeness and

John (21:00):

Yeah, it’s really hard to underwrite deals right now in COVID because no one knows what’s going on. Like in our deal, we have the, we’re dealing with an eviction moratorium right now. And so our plan was to go in here, like our property was completely mismanaged. The previous owner put anyone into this, into this property who had a pulse. And we’re like, we’re just going to go in here and evict everyone. And under cares act under the cares act, there was an eviction moratorium that said, you know, if you had a federally backed mortgage, you can’t file for eviction. Well, that didn’t apply to us. But then the CDC just passed a new law that said, you know, there’s no, there’s no evictions period. So that like our bad debt. Yeah. It’s way up because we can’t evict these people. And I don’t know how to underwrite the deals right now, because I don’t know like what collections are going to be like.

John (21:54):

And my rent growth rates are definitely lower unless the units are like very below market rent already. I won’t underwrite any rent increases. And then even, you know, next year I might only be underwriting like one or 2% based on whatever that market is. Something I have learned that has helped my underwriting quite a bit is in my LORs, we’ll put something in called a COVID clause, which basically says the seller has to take part of the sales proceeds and put them into escrow. And if collections fall below a certain level, you know, you get to draw those out of escrow that can give you a little bit more clarity, because even if the collections aren’t going so hot, you know what your income’s going to be, but without that, and especially in C class, it’s really, it’s really hard to underwrite them right now. And I think we’re seeing that disconnect in the market.

Seyla (22:50):

That makes sense. And a really good tip. Thank you for that, John. And so what is next for you from here?

John (22:56):

Yeah, well, few things. So I wrote this book called how to analyse apartment buildings and make them feel small. It’s a free eBook. So I’m trying to get that out there and share it with more people. So I think that’s going to help our, our network and just, you know, meet more operators, continuing to look for, for apartment deals. You know, we’re definitely doing that, but a big opportunity I see on the horizon because of COVID is conversion projects for like hotel conversions and commercial properties, retail properties. I think there’s going to be a lot of foreclosures in the next, you know, one or two years for these types of properties. And there could be a huge play to them to apartments or just some other type of asset. So right now I’m learning how to underwrite that. So I can actually recognize a deal and figure out what team members I need to pull that off.

Seyla (23:58):

Yeah, I totally agreed with you in terms of the conversion projects, we do receive numbers of dealers that sends to us in terms of, hey, this was a Marriott hotels, and now is, are you interested in the jam into the devil and convert it into an appointment? And that’s one of the things that yeah, I, I totally agree with you that we’re going to see that coming. So in the next couple of years so how has real estate investing impacted your life so far? John,

John (24:29):

It’s made my life a roller coaster of emotions. You have really high highs and really low lows, but like, for me, sometimes when I’m in my job, I feel like I’m trapped in a cage and like real estate investing has kept my dream alive. I still have that dream of like, I’m going to retire before I’m 30 years old and you know, I’m going to become so insanely wealthy that I can do what I want when I want, where I want. I can help whatever, you know, whoever I want whenever I want. Just that dream of freedom is still very alive and well, and that’s the biggest thing it’s done for me.

Seyla (25:07):

So what is one thing that, you know now about real estate that you wish you knew when you first started?

John (25:13):

Oh, like how tough contractors can be to, to manage and just how much, how big of a headache that can cause you,

Seyla (25:22):

What is one thing that said the successful people applied in the real estate investing business?

John (25:28):

I don’t know. I wouldn’t say I’m like really successful, but perseverance. I mean the little wins and the little bit of success I have, it’s just because I didn’t quit.

Seyla (25:42):

So what tool or techniques have you used to improve the efficiency of your business or personal life?

John (25:49):

What tools or techniques have I you know, I’m not sure I’ve used any tools or techniques to improve my personal life. I know for me, I’m just, I’m very focused on my goals of building a really big real estate company. And what I’ve done is like I’ve designed my life around it. So any like big decisions I make, they have to go around like building a big real estate company and that’s allowed me to invest a lot of time and what money I do have into my business.

Seyla (26:30):

Awesome. Thank you so much, John. And if our listeners wanted to find out more about you where can they go?

John (26:36):

Yeah. Well thank you for that. So we have our own podcast called the millennials and multifamily that’s on iTunes and all of the big Lake podcast services. If you want to get a free copy of how to analyse big apartment buildings and make them feel small, you can get that at bit dot L Y forward slash underwriting eBook. It’s a completely free book and it comes with a free spreadsheet. And if you want to get in touch with me, I’m pretty active on Facebook. So John Stoeber just send me a friend request and shoot me a DM.

Aileen (27:12):

Awesome. Well, we really appreciate you taking the time to meet with us today, John. Thank you so much.

John (27:17):

Thank you guys for having me on this was a blast.