Michael Blank  01:18

Hey, Robert. Great to be here!

Robert Leonard  01:19

Let’s start by talking about your story and how you got into real estate investing. Then, we’ll dive into a tactical conversation to help us learn how to achieve financial freedom through real estate investing.

Michael Blank  01:30

I grew up without being surrounded by entrepreneurs, so I kind of did the normal track, which is, get good grades. I did get a good job. I got into computer science and used to be a programmer. After several jobs, I was in the right place at the right time in the late 90s. I was working for a company called Web Methods and we went public in March of 2000, and that put a bunch of money in my pocket, which is great.

I was the man, Robert. I was the man, and then in 2004, I read Rich Dad, Poor Dad, which subsequently ruined my life because when I read that book, I was so confused because I thought I was pretty smart. Maybe I am, but when I read that book, I felt like I was such an idiot. I couldn’t believe it, and I was so misguided about finances and what I was striving for.

After some significant hemming and hawing, I decided to pursue financial freedom. Because I had a bunch of money, I decided to quit my job and pursue everything at once. I took all these classes. I took a house-flipping class, apartment boot camp, trading stocks, and options. That was all fascinating to me. I really love learning, but my big idea was in restaurants. The reason is that I knew a bunch of restaurant franchisees and a burger business, and they were explaining that you hire a guy, they run everything, and you just sit back and count the passive income.

That’s exactly what I wanted, so I went all-in. I put everything in there, and I hired a guy, a super experienced multi-unit restaurant operator. It was great for a period of two to three years. I was in a state of semi-retirement, I built restaurants. I bought some and improved them, and that was fantastic until the recession hit. That changed things quite a bit. I’ll make a long story very short. I subsequently lost my IPO millions in the restaurant business. I barely got out of it. Not only did I exhaust my cash, but I added a couple of hundred thousand dollars of lines of credit that I got in the heyday. I exhausted that, maxed out my credit cards, and almost lost my house. I was thinking, “What am I going to do?” I had flipped a couple of houses up until that point, and I would look at all the things that I’ve done. I decided that to really flip some houses. I need to get myself out with real estate.

Now, all my money at this point wasn’t lost yet. It was deployed in the restaurants as they were losing money, so I hadn’t completely lost that. I sort of had it, but I didn’t have any money to invest. So, I asked people if they were willing to loan me money for a house flip. My brother-in-law agreed with a 12% interest, and so I started raising all this money and buying two houses a month and it was making good money. There was this giant leak in the boat on one end, and I was shoveling money on the other end to the kind of keep it at net zero.

Then, I also got into an apartment building. It was a 12-unit in Washington, DC that one of my wholesalers brought to me. I told him that I did this boot camp a little while ago back in 2006, and I did actually spend nine months looking for deals in Texas at the time, but then I got into restaurants and I had to put it all on hold so, so I dusted it off, and I got into the apartment building and then it was a complete nightmare. Finally, it stabilized and I’m flipping house flipping houses, and after a while, I realized I felt like I created a job for myself because if I wasn’t buying, fixing of selling, I’m not making money, and then the money stops. That’s not really what I wanted. It’s not really financial freedom. I can’t take a month or two off, which I do now.

Meanwhile, this boring apartment building just kept sending me mailbox money, so I said, “I have to do more of that, and less of this.” That’s kind of how it started. I started blogging about it. How do you raise money? How do you syndicate? No one used that word at the time. People were just interested in that, and one thing led to another, and so, today we have all these resources to help people syndicate apartment buildings. That’s how I got started in real estate. I was kind of misguided, like so many people who just always start with single-family houses. That’s how I got started.

Robert Leonard  04:59

It sounds like that first deal is important. I’ve heard you talk about this law of the first deal idea, and it’s a concept that I actually talk about a bit as well. But for those who haven’t heard of this law before, please explain what it is and also why you think it holds true.

Michael Blank  05:14

That’s interesting. First of all, in my opinion, investing in apartments is the most direct route to financial freedom of all the stuff I’ve ever done. It’s the most direct, most replicable, and most learnable for the average person in the world regardless of their background experience, money, or the lack thereof. What I observed is that the first deal is this pivotal point where, up to that first deal, the first deal is always the smallest, and takes the longest. It’s the hardest, and it’s kind of a struggle to do, but once a person closes that deal, they’re literally year or less away from quitting their job, and it’s because the second and third follow in rapid, almost automatic succession. You’d have to expend more energy to not do the second deal. In fact, Some people have tried and failed. It just comes to you. It’s like there’s a switch in the universe that flips on, where, all of a sudden, you become a deal and a money magnet.

Now, the reason why I think this is because brokers typically they try to deal with a lot of tire-kickers, so when someone new calls and they try to get you off the phone, and if you sound like a newbie, they’ll ask you for proof of funds so you go away. Sometimes some people don’t take you seriously also. Potential investors might say, “You know what? I’m not so sure. You’re kind of a newbie. I’m just going to wait till you get some track record.” Now, once you get that track record going, an amazing thing happens. All these investors that were on the fence missed out on the first deal, which obviously worked well, and they’re like, “Oh, I better get myself a second deal because he’s going to be subscribed.” And all of a sudden brokers that never returned your phone call are, all of a sudden, they’re calling you for some off-market or semi-off-market deal, and it’s amazing. It’s amazing.

And people, really, while I talk about it a lot, they can’t really understand it until it happens to them. What happens when I have podcast guests on my show is I ask them, and they reply “My gosh. I know you talk about it, but I didn’t actually believe it until it happened to me.” And I think that’s it. The reason this is important is that it simplifies the problem of financial freedom. There’s just one thing. Like from Gary Keller’s book, The ONE Thing, just get one deal done.

The beautiful thing about it is there’s no correlation to the size of the deal either. Even people who have done a duplex literally quit their job in a year because it’s a progression. It’s normally, says, you start with a duplex. You normally go from 2 to 10 to 25+, at that point. If you started at 25, it goes 50, and then plus. 

There’s always a step up because your confidence goes up. Your track record is higher and that attracts bigger deals, and your comfort zone expands. All those things contribute to progressively larger deals. In single-family houses, even if your comfort zone expands, you can only ever do one house, so the effect of that is not that great. Yes, you can flip more houses, but the effect is limited by the sheer fact that’s just a single house. You don’t have that issue in the apartments.

Robert Leonard  07:58

Let’s talk about how apartment buildings are actually accessible by new investors with no prior experience and no cash of their own. Because I think a lot of people when they get started, start with single-family or small multifamily for various reasons, some of which include intimidation, lack of knowledge, experience, and cash. So how can they buy apartment buildings without any of those things?

Michael Blank  08:19

It’s a great question because when I talk about cash flow and retirement, people respond, “Oh, yeah, that’s awesome, Michael! Great! But here’s the thing: I don’t have the experience for that, and I don’t have the cash for it, so I’m just going to invest in single-family houses for the next 5 or 10 years, and get the experience from that. When I make money, I will then roll it into apartments.”

It’s not a bad plan. It’s better than 99.9% of the other parts of the population. But it’s unnecessary. In fact, it’s a distraction. I thought it was a stepping stone, and I found that it was exactly the opposite of that. It didn’t get me any closer at all. In fact, it brought me away from that which I really wanted, which was financial freedom. I never got it from single-family houses, but the objections are real, at least in people’s minds. “I don’t have the experience”, “I don’t have the money”, and they’re kind of stuck because they throw up their hands.

The truth of the matter is you can overcome both of them incredibly quickly and easily. Let’s talk about overcoming a lack of experience. Typically, for most things in life, you need some kind of experience to get something. If you want a job, you better have experienced something leading up to that job. Otherwise, why the heck would I hire you?

In multifamily, it’s not the case, and the reason it’s not is that the one major difference in multifamily versus single-family and a lot of other things in life, it that it’s a team sport. It’s a team effort. There’s always this idea of a team there’s no “I”. People who go at it alone are eventually successful, but it takes a long time and the deals are much smaller versus people who get it with a team assembled.

The benefits of that are multiple. Number one, if you don’t have a track record, but you attract an advisor, an SEC attorney, and a property manager. Then, you’ll have these people around you who believe in you, and they love your enthusiasm, your ambition, or whatever the case may be. When you talk to people, without your own track record, you can talk to them in terms of your team and the collective track record of your team.

If you have a property manager who manages 3,000 units in Atlanta, and you talk to a broker, they probably already know that property manager. “Oh! Frankie’s a great guy. We’ve done a bunch of deals together.” And all of a sudden, you’re talking about Frank, and not about you. That works on this idea of leveraging other people’s experiences. And so, it’s just a matter of attracting those people. It could take 30 days or 60 days, but it doesn’t take 10 years to do that, right? It just takes some amount of time. That’s how you overcome the issue of experience.

Now, yes, education is important. You have to use the right language like in anything. If you start golfing, and you don’t use the jargon, or you step over the line, and you break some unwritten etiquette rule, you’re frown upon, right? It’s the same thing with anything you do. So, in multi-families, you also have to use the right words. You have to educate yourself, but that’s something you can do by attending a seminar or doing a course. So, educate your social using the right language. That doesn’t take years either. So that’s the experience part. We can talk about the money thing, as well.

Robert Leonard  10:57

How do you find those people to join your team? How do you actually get those people to accept to join your team, and to help you?

Michael Blank  11:04

Well, you can be very intentional about these things. You can do a lot of things over the phone. I love word of mouth myself. So, let’s say you’re talking to a broker. You can always ask for referrals. If you’re talking to an attorney, you can ask for a referral. So, you’re always getting referrals to other team members. The more referrals you get to the same person, the higher the quality that a person is. You can do a lot of work remotely on the phone, and then when you’ve actually established a shortlist of people you want to work with, at that point, you might want to try to meet them in person and build that rapport up. Really, that’s how you do it.

You can also meet them at events. Even though having said, that there are specific team members you want on your team, and you don’t want to go to an event and blindly network. It’s got to be a very targeted thing. You want a proper manager, number one. You want to lender, number two. You need both of those.

Number one for credibility, but also for underwriting deals because your property manager is going to help you analyze a deal, especially when you’re doing it remotely. How do you know the rent’s $100 under-market? Well, you can ask your property manager because he knows this kind of stuff as they live there and manage a property there. So, if I told you, “Robert, you’re projecting rents are $100 under-market.” And you reply, “How did you know? I did a rental meter analysis.” I’d say, “Mmyyeah, I don’t think it’s going to work. Have you talked to a qualified property manager? What did they tell you?” And If you say, “I haven’t done that yet.” I would end with, “Well, okay, then, you know, you don’t have a deal right now, as far as I’m concerned.” And so, you need a property manager on your team, and that’s a very targeted outbound thing, so you’re not going to events or meetups to see who you might meet. You’re looking for specific people on your team.

Robert Leonard  12:30

Who do you contact to get those referrals if you’re brand new to real estate? You don’t have any contacts. How do you find that right property manager? Do you just call whoever shows up on Google? We have the technology now, so you can find all these different people, you can read reviews. Do you call some of the highest-rated ones, interview them, if you will, get some info from them, and then go that way?

Michael Blank  12:47

You’ve got to be creative, right? How do you find anybody? It used to be the white pages and yellow pages, but now you have the internet. You have apartment associations that list professionals that are members, and they typically always list property managers. As I said, my preference is always by word of mouth, and you can get this in a variety of different ways. For example, as I said, you can talk to a broker, get a referral from that. They know a lot of people in town. Also, if you’re driving in an area, and there’s an apartment you really like, then go in and acquire who’s managing that. A lot of times, there’s a sign up front. If you search in Google an apartment building, there’s a number on their website, and you can see who the property management company is. You can find a property manager in a variety of ways.

Robert Leonard  13:25

Yeah, I like to rely on my real estate agent because I invest a lot in long-distance, in Texas. I’m here in the greater Boston area, and I rely on my real estate agent. He’s also an investor, so he knows not just property managers, but for everybody that I need on my team. He’s able to give me those contacts when I was first getting started in that area. He’s been able to give me that information and provide those referrals.

So, let’s talk about the money portion of it. How can somebody get started with having no cash of their own?

Michael Blank  13:51

This is a limiting belief that I had, as well, as I always thought that I need to rely on myself to do certain things for anything, really, but when I had to raise money for house flips, and some people agreed to lend me money, this light bulb went off. I was in disbelief. “Let me get this straight. I can buy houses without having any of my own money, and I make money in the process.” That was crazy for me. And so, really, a lot of this limiting belief came off, and with that, other limiting beliefs, as well. “First of all, I don’t know anyone with money.” Well, okay, that may be true right now, but there are people who know people, and you don’t know everybody in the world.

If you go to a meetup or a real estate association meeting and look at the people in the room if you were to do a poll, and I’ve done this before, and say, “Hey, raise your hand if you’ve got at least $25,000 to invest in some kind of liquid asset or IRA,” and a whole bunch of hands go up. “You have that money? Okay. Keep your hand up if you have $50,000 or more.” Some hands go down. Some stay up. “$100,000 or more?” Some hands go down. If you add up all the money in the room, there are millions of dollars of money in the room of people who are already thinking of real estate in some way. Okay? You either have passive investors in the room or you have joint venture partners in a room. So, all of a sudden, you’ve met all these people who have money and have real estate on their minds. It’s just a matter of getting yourself out there.

With that, basically, what you’re doing is you’re not so much raising money, but actually just sharing your enthusiasm with people. So you’re saying, “Hey, I’m so excited getting this apartment building, and my investors are getting a 10-15% return, and $50,000 minimum. I’m just really excited about it. Do you know anyone who might be interested in a quick phone call?” They might respond, “I might be interested” or “Oh, my brother’s interested. He’s got a rental house.”

And so, you get a series of referrals to people by sharing your enthusiasm. Instead of talking about the weather, politics, or sports, you’re a little bit more intentional in your conversations. You say, “Hey, this is what’s new with me. I’m getting into real estate apartments. It’s really cool. Let me tell you about it…” And you just kind of take the conversation where it goes. That’s really the art of raising money, and getting people to believe in you.

Robert Leonard  15:52

You also just never know who actually has money. That’s one of the biggest things that I’ve learned. I actually worked at a local bank here for three years when I was in college, and also now that I’m in real estate. I see people come into the bank. You’d think they have all the money in the world as they dress very nicely, drive a nice car, have all the nice watches and phones and things like that, but then they actually don’t, and vice versa. People that didn’t look like they had money would actually have a lot of money. The same goes for real estate. As soon as I started putting myself out there as a real estate investor, all of these friends and family members started reaching out to me, “Oh, I’m interested in real estate. I’m interested. How can we work together?” And I had no idea. These are people that I’ve never talked to about money in my life. I never had any clue that they were interested in these types of things. So, you just never know, really, where people could come from.

Michael Blank  16:33

You never really know. A lot of people also say, “Oh, I don’t want to take money from friends and family. I don’t want to lose their money.” Well, okay, you shouldn’t lose anyone’s money. I don’t know what difference it makes. Whether you use the money of someone you met at a meetup, or your friends’, or your family’s, you shouldn’t lose any money at all. Ever. Right?

The other way to look at it is you’re really actually serving people. People with money have problems that maybe are not the same as yours and mine, but they have certain problems, too. For example, they can’t get a reliable consistent return on their money in the stock market. This really irritates people because a lot of people barely remember the last recession while they’re certainly going through this particular one. They might say, “I can’t do any financial planning. I’m stocking away my hard-earned money, so I can retire when I’m 65 or 60. But now I can’t. I’m screwed. I don’t know what to do.” And so, they have this problem because the uncertainty of the stock market prevents them from predicting their financial future, and that irritates them. Also, there’s no way to get cash flow from that, and they pay taxes on top of that. 

And so, these people have problems, and you can help them. “Hey, how’s the stock market treating you? Oh! That’s a good one. Well, yeah, that’s good, too. I have an alternative to stock that you might like.” “You do? Is it legal? Does it involve drugs or something else?” And so, now you have an in where you can share with them about this alternative to the stock market, and this educates them. “Like, I didn’t know that.” And so now, you’re actually helping them. And so, you withholding this thing from your friends and family is actually doing them a disservice. You’re actually being selfish.

Robert Leonard  17:59

You also mentioned when you were doing that poll at the REA meeting that you could get funds from an IRA. Talk to us a little bit about how people can raise money from people through their retirement accounts.

Michael Blank  18:12

This one calls for a story with Greg, one of my neighbors. I know him from the Boy Scouts. I have warm chatter with people about what I do. “Yeah, I’d like to learn more about those. Let’s do lunch. I think that’s great.” I described the whole thing, and after 40 minutes mention, “Yeah, minimum investment’s $50,000” and blah, blah, blah. And he goes, “I don’t have that much to invest. I got like, $5,000.” I said, “Oh, really, Greg? Crap. Maybe I should have mentioned that before.” He replied, “Well, you know, whatever.” I said, “Okay. Well, do you have an IRA?” He went, “Yeah, I got about half a million in the IRA.” Excited, I’m exclaimed, “Oh, my gosh! You’re kidding me!” And he’s not the only one. A lot of people, through their employer, have been stocking away money in their IRA for years. The problem is they don’t know that they can use it for investing in anything but the stock market. 

Their first reaction is “Yeah, but I have to pay penalties, and early withdrawal fees.” No, you actually don’t. And so, when you educate them about the idea of investing with IRAs, the first one is surprising because their CPA financial advisor will tell them, “No, they can’t. It’s illegal.” It’s not, so you need to educate them around that, and maybe show them some news articles, or something like that, where they can invest with an IRA, and that there’s a lot of capital in there. Some syndicators focus on the IRA investors, these are not as sophisticated, they don’t expect the highest rate of return, and they’re getting really, really low returns in a high volatility environment. So IRA money, there are trillions of it. I don’t know what the number is, but there’s a lot of it, and it’s all invested in stocks and mutual funds that people don’t even know where they are, so IRA is a massive source of capital.

Robert Leonard  19:36

When we talk about using retirement funds, we’re not talking about logging into your Vanguard account or Fidelity account, and using that same type of account, correct? We’re talking about having to set up a different account, which is called the SDIRA, which is a self-directed IRA. Talk to us a little bit about the difference between that type of an account that you can use for real estate, and what you can’t use for real estate.

Michael Blank  19:56

So you have to open up a separate IRA. It’s with an IRA custodian. You can just search on Google: IRA custodian. The only difference is that you write a form to your Vanguard, so they transfer whatever money to this IRA custodian. Once it’s in the account, you fill out a form that says, hey, I want you to wire X amount of dollars to this particular LLC that I want to invest in, and that’s exactly what they do. Then, your IRA has shares in an apartment building or an LLC, or a nightclub, or whatever, and so, it’s self-directed. You can direct yourself where that money goes.

The law allows a very broad spectrum. Now, there are some laws governing it. For example, you can’t invest your own deal. It’s got to be in an arm’s length transaction where you can’t directly benefit. And of course, you can’t have any of the money coming back in your grubby little hands. It’s got to go back into the IRA. But there’s a problem with the IRA investing, and that is you are subject to attacks, believe it or not, which hit me like 15 years ago when I invested with my IRA in an apartment building. 

A long time ago, before I even got started this myself, all of a sudden, I was notified that I have to pay a tax. It’s the UBIT (unrelated business income tax) in my IRA account. “What are you talking about? this was tax-free?” No, the UBIT is triggered for investments that use leverage or a mortgage like real estate normally does. So, when this guy sold his apartment building, it triggered this tax, so I had to file taxes out of my IRA. I had to get an EI tax ID number. I had to file retroactively the 2007 penalties, interest, and filing fees for not having filed the tax, and it was a god-awful mess.

I was saying, “This can’t be. This cannot be,” so what’s the solution to that, you might ask, and it’s to set up a solo 401-K. My good friend, Damian Lupo talks about this. It’s called the eQRP (Enhanced Qualified Retirement Plan). EQRP is essentially a solo 401-K that bypasses the UBIT entirely. That’s pretty darn good as it saves you, basically, taxes. It’s a little more expensive to set up, but not much more. And you can also sign the documents yourself, which is a major benefit because when you’re investing in a staycation, it moves very quickly. Sometimes, these things are sold out so quickly, but the paperwork process with your custodian can take days, and sometimes even a week. By that point, they’re already subscribed because the process requires a custodian to sign the documents on your behalf, so you’re not signing it directly. The thing is horse manure, but that’s the process. With this solo 401-K, you can sign as you are your own custodian. I’m my own administrator; so, therefore, I can sign subscription agreements and everything else myself, and get it done within an hour or two, so I really love that. We’re directing all of our past investors to the eQRP route for those reasons.

Robert Leonard  22:26

I love this idea as well. I’ve studied it quite a bit, so I know a decent amount about it. I definitely don’t know everything, but I know enough to be dangerous. And obviously, you know quite a bit about it, as well. I think it could be intimidating for a lot of people, though, that hear this conversation. You and I kind of get it, so we can have this conversation, but people listening might not. Those who don’t have the background that we do might be thinking this just sounds too complex. How do you explain this to people when they haven’t done anything like this before? If you’re going to someone, and you want to raise money from them, how do you explain this to them in simple terms that they understand what they’re actually doing, and you could actually get access to their funds?

Michael Blank  23:00

There will be some people who are more ready than others, and some people are going to be resistant to the idea because change is a scary thought. Every person moves on a different timeline. The point is that you’re constantly educating investors, whatever the stage they are at. Eventually, one day, they’ll hop on board. Some do sooner rather than later.

I think the biggest thing from an investor mindset is to have an open mind, and to start really paying attention more to your financial future. Most people don’t. They stock their stuff away automatically. It’s a direct withdrawal from their account into their Vanguard account or a mutual fund-allocated XYZ. They don’t even know how much money they’re putting in. They don’t even know how it’s doing. Or they have a financial advisor if they have a little bit more money, and he’s or she’s doing some stuff, but they don’t really know what the heck’s going on, and this is a problem. None of these people are qualified, frankly, and the vehicle itself is not reliable.

The biggest thing is that when an investor or person wakes up to that, especially recently, realizing needing to start paying attention to stuff like, “Hey, maybe there’s something I could have done had I known it, or had I reacted to it, maybe my allocation could have been different.” Maybe it will rattle us a little bit, and they’re going to be more open to the idea of not only alternatives but to start paying attention a little bit more. That’s the thing. If people just kind of drift through stuff, they’re not going to be your candidate, right? You need someone who’s curious, who’s looking for alternatives, and just pair that up with a little bit of timing. Because you’re right, you have to put a little time, and read a blog post or watch a video or read something, and put a little time do some paperwork to actually move funds around. There’s actually some action required. If someone doesn’t want to do that, It’s not going to be a good fit for them.

Robert Leonard  24:26

And so, would this be considered, in all cases, syndication where you have to have legal filings with the SEC in order to do this type of thing? Or can you do it on smaller deals without having to go through all of that with the SEC?

Michael Blank  24:37

You also have to pay attention to the law. The SEC securities are really there to protect you. The question I always get, is if you’re doing quota syndication, and you’re doing it with friends and family, do you need a private place? Do you need some of the SEC documents that cost $12,000-$15,000? And I say, well, it depends. The regulations are there to protect you, so if you don’t file the proper filings and forms that cost money, and the deal goes south, and your investors start to want to sue you, or figure out how they can get you, they’re going to call the state SEC, and they’re going to look and see if you have the filings. “Oh, you don’t have filings?” And they may launch an investigation on you. Okay? Do you want that? Are your investors inclined to do that?

Now, you can also structure the entities differently, as well. You can a joint venture, for example, whereas, let’s say, it’s you and five other investors. If you structure the LLC that they’re all essentially equal partners, everybody’s got an equal vote even though you’re doing all the work. That does not require SEC registration because everyone’s equal, and it’s just a majority vote. But typically, the reason that the SEC protects the investor is that they are limited. Let’s call them limited partners. They have limited liability, but they also have limited involvement, and because they have limited involvement, they don’t have major say on things. That is why they’re being protected by disclosures, and things of that nature.

If your investors are friends and family, are they really going to sue you? They may not speak to you at Thanksgiving anymore, but are they gonna sue you? Or are they going to call the SEC? I don’t know, it’s up to you, right? Probably not. Okay, so do you want to do it for a small deal? It’s up to you. It’s how you assess the risk of that. If you want to mitigate your risk, then it is probably best to do that.

Robert Leonard  26:14

Yeah, that latter situation that you just mentioned was exactly what I was thinking about. I think there are probably people listening to this that are going to say, “Okay, this might be a good source of funds for me to do a deal. Maybe I could go out and get a 10- or 12-unit property. Do I really need to do the whole syndication for that? Or could I just do a joint venture into LLC?” Can people still invest in the deal that way using their IRA? And then would I still need the paperwork from the SEC?

Michael Blank  26:36

Yeah, again, as I described, if you do an equal partnership, the answer is no. You have to be careful with IRA money though, but yeah, you don’t need that. But again, obviously I’m not an attorney, and you should have your attorney advise you on these things. I’m just giving you a couple of different ways to do it where if you want to save some money on the attorney cost, that’s certainly one way to do it.

Robert Leonard  26:58

In that case of the joint-venture LLC. I’m not an attorney either, but you have your operating agreement, which outlines a lot of what would be covered, I’m guessing, in the SEC documents. But so, can you do that type of joint-venture deal with these IRA funds that we talked about?

Michael Blank  27:12

You certainly can, limitedly. If people are passive limited investors, they can certainly invest with IRAs. If you’re an active person, unless you’re a general partner, there are limitations. You can’t use your IRA, and invest in things that you control, okay? It’s not an arm’s length transaction, so you can’t do that. If you’re the active investor, the best thing to do if you have an IRA, which you probably should, I still have mine from a long, long, long time ago, but if you do, you can invest with other operators and other people’s deals as a limited partner.

Robert Leonard  27:43

What is the definition of being active, in that case? Say, somebody, like myself, wanted to buy a 10-unit apartment, and I wanted to get people to invest in that with their IRA, and we were going to do it through an LLC, is that technically considered an active investing for them?

Michael Blank  27:56

If you structure it like an equal partnership, then yes, they’re all considered active partners. They all have equal decision-making, and so I would be very careful in having them invest in that deal. It would be better if you structure it more like a general partner, limited partner, and then, of course, have SEC regulations apply. Then, you have to decide whether you want to go through the process or not.

Robert Leonard  28:14

You also mentioned leverage, so are people able to still get bank loans when they get funds from people’s IRAs?

Michael Blank  28:21

Yeah, absolutely.

Robert Leonard  28:24

If we don’t have a proof of funds letter, how can investors still get their offer accepted without this?

Michael Blank  28:29

Here’s the truth. If you sound credible and confident, you will not be asked for proof of funds. The reason you’re asked for proof of funds is typically due to you sounding like a newbie. It’s a sure sign that you sound exactly like a newbie, and this is what brokers tell you to go away because he knows that you probably don’t have proof of funds, so you’re going to go away, which is exactly what he wants. But if you approach them from confidence, you’re using the right language.

For example, I used to call up a broker, and say, “Hey, mister broker, I’m the man. I flipped a bunch of houses, and I want to get into apartment buildings. What deals do you have?” And what did he say? “That’s great, the man, and good to hear from you. I’ll tell you what? You send me your proof of funds, and I’ll send you some deals.” And I would panic, “I don’t have proof of funds.” And I would crawl away, back into my hole wondering, “What is wrong here? Why am I not getting any credit there? These guys are not taking me seriously.”

I figured out that I was making a whole bunch of mistakes in how I approached brokers. I used the wrong words. Number one, I didn’t talk about my relevant background. If you approach someone like this: “Hey, my name is Michael. I am expanding into the Atlanta market, and we’re looking at deals in the $2 million to $5 million range. We’re working with property management XYZ, and are looking at things around a 6% to 7% cap rate, value add deals are preferred, but no repositions. Do you have anything in your pipeline that you share?”

Do you think they’re going to ask you for proof of funds? Not likely, maybe a half percent of the time, because you actually sound like you’re a player, and if I ask a player for a proof of funds, I could offend you, and therefore, you would go away, and I can do not the business. They’re not going to risk that. They may require proof of funds down the road, okay, but not at this point. They’re not likely to ask for proof of funds because you sound like a player, okay? So boom. That’s the first thing. If proof of funds is required, I always make a condition on something signed. It could either be a signed LOI or signed purchase agreement because sometimes the seller magically requires it. At the end of the day, it’s kind of a trust issue.

Let’s say they insist on it. Then always make a condition on a signed letter of intent or a signed purchase agreement. Within 72 hours, I will supply a proof of funds letter. It takes that long because getting a proof of funds letter is kind of a pain. You have to find a high net worth individual who’s willing to call their bank or their financial advisor that writes a letter that says this individual has at least $1 million under management here, and it’s signed. That’s your proof of funds. It doesn’t cost him anything. It doesn’t obligate them to invest, and you can play that card every once in a while. People think, “Oh, I’m just going to get this letter. Every time I make an offer, I’m going to call my friend, Joe.” “Oh, it’s been 30 days. Maybe I have to get another letter, so it’s more recent.” Now, don’t do that. You’re wasting everybody’s time in those very rare cases, and make it contingent on a signed document because that indicates that the deal is real. It’s not some pie in the sky thing.

Robert Leonard  30:57

Yeah, I’m glad you mentioned that. It can be a little bit of a pain to get that letter. As you were going about your explanation, I was smiling because I almost had that exact same situation. Early last year, I was making an offer on a property, and it was a very low-priced property. It wasn’t a ton of money, and we were offering all cash, and they wanted proof of funds. I mean, we were talking the language, we knew what we were doing. They just still wanted proof of funds. We called our banks because there were two or three of us going in on the deal together. It was just going to be a huge pain. We felt a little offended, so we decided to walk away. We said, “You know what? We’re not dealing with this. Like, we’ll just go buy something else.” So we walked away. They came back to us.

Michael Blank  31:32

That’s right!

Robert Leonard  31:32

Okay? They came back. They didn’t require proof of funds. We ended up actually vetting the property. They said they had seven offers, but we ended up getting it for under-asking even though it was a contested offer, so yeah, it’s exactly what you said. It happens in real practice, and it just happened to me not that long ago.

Michael Blank  31:48

Definitely not a showstopper. That’s another tactic: just walking away. “I’m offended. How dare you.” It’s really a trust issue. Right? The seller or the broker has doubts that you can actually close. That’s really it. So, how else? Proof of funds is one way to address the doubt and trust issues. How else can you do it? 

Well, in our world, there are buyer interviews, right? Buyer interviews are where the broker and the seller actually interview the buyer. You have to fill this long questionnaire, and then they ask you a question. How are you going to do this? What’s your plan for that? Where’s your financing? Who do you know? What are your references? Right? Because the sophisticated seller knows that this is syndication, we don’t have $10 million in the bank, we’re going to raise it. So, what’s the next best thing? It’s relationship building. Let me get to know you a bit more. Right. So another great approach is: “Hey, let’s get together. If after the end of this meal, you don’t think I can close, we’ll, part as friends.”

Robert Leonard  32:33

Yeah, exactly. And for us, it just wasn’t worth it. We had like seven or eight other offers out at the same time, and we were just like, it’s not worth it for us. We’ll get one of the other deals, and it’s okay if we don’t get this one.

So, now I want to talk about analyzing deals because as if acquiring the building itself, and everything that we’ve talked about isn’t intimidating enough, I think the analysis of the deal adds additional complexity and doubt in new investors’ minds. I know you wrote in your book that investors can confidently analyze deals and make offers in as little as 10 minutes, so walk us through that process.

Michael Blank  33:05

I think the main problem is when you put it all together. In totality, what we’re talking about here is people are keeping notes and the page is getting, you know, it’s getting longer and longer. It’s kind of an overwhelming thing. I don’t like that because most people look at it, and go, “Oh, crap, there are 134 steps. That’s for the birds. I’m not even getting started.” But still, you don’t want to really keep it simple. And I always talk about just doing the next three things, whatever the next three things are.

So, when you get into analysis and numbers, that’s like, I don’t know, point #21 down the list of things to do next, but happy to do it. Just keep in mind that it’s not something that the average person getting started should do next. It’s something that will come, and they will master that because it’s actually not nearly as difficult as it sounds. Yes, it involves a spreadsheet of numbers, but it’s not that difficult.

I do remember when I got started with this in 2000. When I was marking for deals in 2007, it did take me four hours to quote a 10-minute offer because, first of all, I didn’t have the techniques and tools we have today. I spent all this time make the offer, and then the broker died laughing at the end of the line, because I completely missed the mark, and therefore, I just wasted four hours of my day. Well, don’t do that. Is there another approach? Yes, it’s a 10-minute offer, and it’s actually really simple. You don’t even need a major spreadsheet for it, but it’s really using the numbers that the broker is used to using, which are price, income, and value.

And so, I really don’t want to get into the math, but the point is, you’re using these parameters that the main principle is that the higher the income, the higher the value, in general. So, when these brokers send you a marketing package, there’s an income and NOI (net operating income). Income – Expenses = Net Operating Income. The valuation of that building is based on a number by this thing called a cap rate, that’s a multiplier. If the income were to go up, the value would go up. If the income were to go down, the value would go down. In most cases, the NOI is overstated, expenses are lower, and the income is magically higher. Therefore, an upper income is higher therefore, to justify their asking price.

If you apply some simple rules of thumb to the income and the expenses, so on the income side you know to use a 10% vacancy factor, meaning that if everybody paid their rent on time every single time, and there was never a vacancy, there would be this amount. Then just take 10% off that. Okay, great.

On the expense side, use 55% of whatever that number is that income number, and those are your expenses, and you essentially ignore everything else that’s in the marketing package. And from that, you can have an adjusted net operating income, and therefore, you apply this cap rate multiplier and get a new value which is almost always lower than asking price.

And so, when you get this, you call the broker, and say, “I looked at a great deal, a great package. I really liked it a lot.” There are so many pretty pictures in it, but you know what their income is a little overstated because you’re only showing like a 3% vacancy. In my experience, it’s more that time you said we’re like 10%. Okay, but in your expenses, there you’re showing about 36% of income is expenses. I really haven’t cracked it open. I’m sure there are some expenses missing somewhere, but in my experience, it’s usually between 50% and 55%. Let’s be generous and call it 50%. And they’ll be going, “Well, if I adjust your income, it’s now blah, and based on the cap rate that you just told me in your marketing package, the valuation is now 1.4, and you’re asking 1.7. Is there any flexibility on behalf of the seller or not?”

Now, if they say, “No, not at all. You’re way off target. Go away!” You only spent literally 10 minutes making your first offer. But if they say, “Well, it’s not what we’re looking for, but why don’t  you put something in writing?” You are now somewhere in the ballpark of what the seller is actually looking for, and now, when you’re invited to put something in writing, normally, it means that you’re putting a letter of intent in place. Now, you can crack open the syndicated deal analyzer spreadsheet, and go deep on these numbers, and come up with a number, and now you can spend your four hours, but not before, because most cases, they’re looking for a price and you come in 20% or lower, they’re not really interested. That’s really how it works.

Robert Leonard  37:00

You don’t want to waste your time on the deals where you’re not even close. At least get in the same ballpark, and then you can dive into them and see if your numbers make sense. When you’re analyzing a deal, do you have specific benchmarks for returns? Are you looking for a specific IRR? Are you looking at cash on cash? Are you looking at the cap rate? What are you looking at? And what are those benchmarks?

Michael Blank  37:17

The benchmarks you mentioned are correct. The question is what is their amount? What should those amounts be? And that really varies and depends heavily on your investors. For example, if your investors are friends and family, and you give them a 10% average annual return and a 4% cash on cash return every year, they say, “No way! I’m in! Where do I sign?” Because you’re not getting that anywhere in the stock market. If you’re dealing with sophisticated investors who are used to investing in oil and syndications, that kind of stuff, they’re going to expect higher returns higher cash on cash return. So it really depends on who your investors are. But typically, the returns are measured in cash on cash every single year and the average annual return and I would use the word average annual return by the way, even though the correct term is IRR, but the IRR is so complicated to explain to the average investor, and a confused mind says “no”, so don’t ever talk about the IRR unless you’re dealing with a sophisticated investor who says, “Hey, what is the IRR about?” Otherwise, the average annual return is very simple. You put this much money in, and in five years, you get this much money out, and the average annual return is blah.

Robert Leonard  38:17

Yeah, that’s a good point. You want to keep things as simple as you can when you’re talking with the investors. So in these deals, how do you or someone in your spot, when you’re raising money, how do you make money in these deals?

Michael Blank  38:27

A beautiful thing about syndications is that syndications allow you to make money out of nothing, essentially. The reason I love it is it’s great for entrepreneurs. We entrepreneurs love creating stuff out of thin air. As a syndicator you’re bringing different parties together that wouldn’t exist without you. You’re bringing the deal, the money, and someone to manage it all. You’re bringing all these people together, and you’re making something of value.

For that, you get compensated in three ways. One is you get compensated upfront, when you buy the property, with something called an accuracy fee, which is typically 2% to 3% of the price. If you do some simple math, it’s a significant fee. You might wonder, “Why do you deserve such a fee?” It’s because so much work has gone into that one deal. With that one deal, you’ve probably looked at 199 other deals, and if you divide your acquisition fee by the number of hours worked, you’ll find you’re almost working for minimum wage. And so, while it’s the beginning of the deal, a lot of time has transpired that you should get paid for.

There are also development fees. Potentially, if there’s a heavy construction component, that fee could be split up when certain milestones are completed. When the construction is completed, there could be a fee there; when a refinance or principals return, it could be a success fee there; when the property is sold, you can have fees in the beginning and at the end; and you can also have something called asset management fees, which is typically 1% of the rents collected. You’re like a property manager for managing the asset during all this, so you get paid upfront and then not really much interest. And then at the end, so to cover overhead and put a little money in your pocket, there are asset management fees. That’s all if you don’t have any of your own money in the deal, that’s for you putting in the sweat equity. If you invest your own money, you are also invested as a limited partner or a passive investor, and you get compensated separately for that.

Robert Leonard  40:18

You often get equity in the deal, even if you don’t put in your own capital.

Michael Blank  40:22

Yeah, very much so. Typically, it depends if you retain 20% or 30% of the deal. Sometimes, especially when you start a deal small, sometimes you can get even higher. In other words, unless it’s an 80/20 split, the investors putting up all the money gets 80% of the entire deal, and you, as the syndicator, or the general partners, get what’s called retain equity. 20% is what they get for basic sweat equity. Not only do they get paid an acquisition fee and asset management fees for money made, but also out of that particular equity bucket. So, it’s almost like they put in 20% of the money they didn’t, but they’re still getting paid 20% of the actual profit out of that general partner position.

Robert Leonard  41:02

Which of the return benchmarks that we’ve talked about is a deal-breaker for you that if a deal doesn’t meet these specific criteria, you won’t pursue it just regardless of how good other things might be?

Michael Blank  41:12

The biggest crusher is the returns for the investor. That is it. Because at the end of the day, you need to be able to sell this deal to the investors, and that’s the dividing line. You have to decide what is the criteria, what is the lowest return you can present to your investors before they will not want to invest with you. 

Typically, you determine it for cash on cash and average annual return, or let’s say IRR. You might say, “For my pool of investors, I can’t go below a 13% IRR, and I can’t go below a 6% cash on cash return.” Let’s say when you analyze this deal, slice the pie up, and you do a bunch of numbers (price, mortgage fees, *inaudible* at the end), as soon as it drops below a 6% cash on cash and a 30% IRR, you can’t go there, so you have a variety of levers that you can pull. You can adjust the price, of course. You can adjust the mortgage. You can adjust your fees. There are particular levers, but the point is that the return has to be there, and it has to be realistic also.

This is the problem with numbers. I see a lot of syndicators putting out deals, but if you look at their underwriting and their assumptions, they’re just making stuff up. They’re optimistic in many, many different creative ways to make the investor returns. Making it drives me batty because the unsophisticated investor will simply look at the returns. “Well, he’s got a higher return than you do, Michael. Why should I invest with you?” Now I have to explain to you that returns are not created equal. So it’s not just a return, it’s also the assumptions behind those returns that are important.

Robert Leonard  42:34

And also the risk. I mean, everything is a risk, weighted adjusted return, right? I mean, just because somebody can get 10% over here, somebody else could get 10% over here doesn’t mean those 10% returns are equal.

Michael Blank  42:43

Exactly, right!

Robert Leonard  42:44

So far, throughout this whole conversation, we’ve assumed that it’s a good idea for new investors to buy apartment buildings. And of course, you would argue that that is a good idea, but let’s take the other side of the argument for a minute. Why might it not be a good idea to buy an apartment building as a new investor? Who might this strategy not be good for?

Michael Blank  43:02

It’s a good question because it’s very broad. I would almost say that it’s really for anyone who wants to quit their job, have financial freedom, and they have real estate in mind. It’s literally that broad. The thing is we talked a lot about different aspects. You put it all together, and it’s very, very complicated-sounding, and very overwhelming with all the different pieces you have to do. But the beauty about it as I said earlier, is this is a team sport, and because it’s a team sport, we see a lot of joint-ventures and partnerships happening where one person is focusing on their strength in a particular area so that you don’t have to do all the things we just talked about.

For example, some of the easiest and best joint ventures are separated into two. One is the interpersonal person; they’re bubbly outgoing, love to talk to people. If you put a spreadsheet in front of them, they freak out, and they get a heart attack and “die”, okay. The other is the numbers person, a detail-oriented person. You really need both because the interpersonal person is the one who makes relationships with new investors with brokers, and then you need the detail-oriented guy to actually crunch the numbers, call out inconsistencies of the seller, handle due diligence, and operate the asset, right? It’s not very common that one person can do both. And so these partnerships, they really work really, really well.

Now, there are other partnerships and also other components. One is the operation of the asset. An operating person is quite a bit different than someone who raises money and buys and brings in deals. That’s a more of a hunting mentality. The operator is more of an administrator or a manager doing the same thing every single day. They’re managing the property. That could be another person as well. Then there’s a fourth person, and this is the marketing person. And as we scale our businesses, we have to start using online marketing techniques, and that is a totally different hat. There’s a totally different person to put out blog posts and videos. Talking on social media has nothing to do directly with raising money or finding deals.

So, while this is very overwhelming, really what you’re doing is you’re building a business where you have people who already love the thing that you hate to do, and you find yourself the thing they all have in common is the two things I just mentioned. They want financial freedom, and they want to do it through real estate. Therefore, if you have those two things, that’s who it’s for. Now, if you don’t want financial freedom, or you want financial freedom but you want to do something else, then this is not for you. But for people who want financial freedom and have real estate in mind, it is absolutely for you.

Robert Leonard  45:15

What is a common piece of real estate investing advice you hear given that you don’t think is good advice? And how would you make that into good advice?

Michael Blank  45:24

The misguided advice is that real estate investing is your way to freedom. That’s only partially true because when I say real estate investments, it’s usually single-family houses. Now, I know a lot of people listening to this are probably single-family house investing to some degree, and it’s okay. I’m not saying you should throw the baby out with the bathwater, and flip to multifamily right away. In general, the same thing goes for your job, right? You should always continue what’s working right now, build a side gig until you see it working, and then you can pivot if that’s what you want to do. But, this is advice that I was given, and I see it over and over again: “Real estate investing is your way out.” Is it? Hmm, I don’t think so. 

At least, it wasn’t for me, and a lot of other people. When you’re doing single-family house investing, it’s a very active job. Now you can set up a company. Some do that. They do create a passive income stream from the single-family house portfolio, but these guys are doing it at scale, and they almost always have a property management company to manage it all. I didn’t want any of that. I didn’t want that. It wasn’t for me, but if you want to do that, you can build a very passive business from that, as well. But the advice really is given single-family house investing, that is where the misguided approach is, and it’s because no one really talks about it. Most people think that’s a stepping stone to the other thing, so I would turn that advice to yes, real estate is the way out, but not in the way that you think, which is most likely single-family house investing. Might you consider this other form of real estate investing?

Robert Leonard  46:38

All of the information we’ve talked about today, I think has been great, but learning about it is only one part of the equation. The other big piece of the equation is actually going out, and taking action on what we’ve learned. So, what is the first thing someone should do when they’re done with this episode to start working toward their real estate goals?

Michael Blank  46:54

The first step is to have an open mind because a lot of people listening to this are probably thinking, “I’m not sure. I think I’m going to stick around my rentals.” Most people are struggling with a lack of experience or lack of capital, but if you have an open mind, the next best thing is to educate yourself about this. Your podcast is doing a great job with that. When we do this stuff, and we get all excited about this new thing about real estate investing, our friends and family don’t do that. They look at us as a black sheep or probably crazier, and worse, they try to talk us out of it. They may even start talking to us because they think we’re crazy, and so you think you’re crazy. But then, when you come to these live events, for example, or these online communities with other crazy people like you, you’re like, “Huh. Maybe I’m not so crazy.” And so, finding a community of peers that are doing what you’re doing, and want to do what you want to do is really, really critical.

Robert Leonard  46:55

And if you’re looking for that type of community, definitely check out some of the stuff that Michael’s doing. We also have our Facebook group. It’s a growing community with a ton of people that are very like-minded to everything that we’ve talked about today, so feel free to check that out, as well.

But Michael, for those listening to that, really want to dive into your resources further and connect with you, where can they go to find you?

Michael Blank  47:59

themichaelblank.com. There’s a “the” in front of it because there’s only one Michael Blank. Well, as it turns out, there’s more than one. But so, themichaelblank.com, or you can just Google search: apartment building investing. We have a podcast YouTube channel, and a yellow book, Financial Freedom with Real Estate Investing, and that’s how people can find us.

Robert Leonard  48:19

Awesome. I’ll be sure to put links to that in the show notes. I’ll also put links to everything else that we’ve talked about throughout the show, so everybody can go pick up those resources there.

Michael, thanks so much for joining me.

Michael Blank  48:29

Robert, this was fantastic! Thanks for having me on.

Robert Leonard  48:32

Alright, guys! That’s all I had for this week’s episode of Real Estate Investing. I’ll see you again next week!

Outro  48:39

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