Jerome Maldonado (02:09):

I struggled for about three years. I traveled all over this country. And at the time, I found a means to survive through the means of network marketing when leasing offices. We used to build our direct sales company out of training centers, and I used to lease offices in different cities across the United States, and I used to rent desk space to people out of my offices. And so, when I finally started doing well in the later 1990s and I got into construction and real estate development in 1998, the FTC shut down our network marketing company in 1997.

Jerome Maldonado (02:42):

They were doing a big clean-out of different network marketing companies for compliance and trade issues. There was a lot of them including the Amway, and branches have gotten shut down. We were one of them. And so, we were left at the time making $20,000 in a month to zero. So, I was scrambling. I landed up moving back home to finish up the one year that I had left of college back to New Mexico and Albuquerque. When I did that, my brother-in-law was in construction and he was trying to get his contractor’s license. So, I went to support him, and I went and got mine. He didn’t show up on the day to take the test, and I did. I passed the exam.

Jerome Maldonado (03:18):

I had a few workers that wanted work. I didn’t know anything about construction. I’ve never really done it. I’ve done little labor stuff with my brother-in-law. I knew about marketing from the direct sales days, so I landed up selling jobs. The company did $1.7 million our first year in business. It was extremely successful. I had no idea that there was that much revenue that could be made in construction. And so, from what I learned in direct sales about leasing guest space, I started taking some of the profits that I had made in construction, and I simply started buying rental homes.

Jerome Maldonado (03:49):

And then, from rental homes, I needed a place to park equipment and I bought a little building. But I didn’t want to pay for the building. I used the same concept that I did when I was in direct sales where I never paid for office rent, I would just charge the desk space, charge rent to other distributors. They would pay me $500 a month for a full desk or 250 for half a desk, and I would pay my rent on the building based on their rent that they pay to me.

Jerome Maldonado (04:12):

I took that same concept and I started doing that with small retail centers so that I didn’t have to pay rental space for my construction company where I could store my equipment. That one building was so successful, I did a second one, then a third one then we started building them in the early 2000s. And from now, these just kind of snowballed and played and we diversified into single-family home residential developments. We still do that today. We do a lot of redevelopment, repositioning of assets from industrial warehouses, hotels, making them into multifamily and we still do land and residential home developments throughout the southwest and we even have one up in the northwest going on right now in Washington State.

Jerome Maldonado (04:47):

So, that’s kind of in a nutshell how things evolve. There’s a lot of history and story in all of that combined, ups and downs and lots of different trials and tribulations and stuff but we’re here today and we’ve done extremely well, and it’s been a really great run, Robert.

Robert Leonard (05:00):

Can you explain to us a little bit more about what network marketing is? I’ve actually heard of it quite a few times. I’ve never actually known what it is, so I’m wondering if there are people in the audience that probably feel the same way. I just really don’t know what exactly network marketing is.

Jerome Maldonado (05:14):

Network marketing is you take a company. So, the big guys are like Amway, Herbalife, Melaleuca where you take a product and you go consumer direct. You cut out the middleman. So, you have a manufacturer and then you have a consumer. And so, the whole concept between network marketing is you get it from the manufacturer to the consumer direct. You’re the middleman, so you cut out all the distribution and the middleman markup and you profit from those middlemen markup, but you build a distributorship. And so, it’s like a corporate hierarchy just like a corporation where you’re here and then you get two or three distributors, and then they get two or three distributors and it’s built-in a corporate hierarchy. Everything that they do for multiple layers deep, you get percentages of revenue that come back up to you in the form of commissions.

Jerome Maldonado (05:55):

Typically, network marketing has some of the better products that are on the market. They have great manufacturers. You get companies like Nu Skin Pharmanex, great products; Amway, great distribution; Melaleuca is not only their own manufacturer now, but they also distribute. And so, there are some great companies. Both Mark and I support and advocate the network marketing industry because it was very good to me in my fundamentals and my infantry years of getting started in business. But that’s essentially what network marketing is, going consumer direct with a product through distribution of direct sales, reps underneath you that you get paid on as you build out a corporate hierarchy of sales reps.

Robert Leonard (06:31):

Is network marketing often confused with pyramid schemes? And if so, how are the two different?

Jerome Maldonado (06:38):

Yes, and that’s what they were doing in the 1990s when they shut us down. So, back in the 90s with network marketing companies, what we used to do is we used to front-load people with products. We didn’t know there was anything wrong. The FTC put regulations on it where we would sell them on a business opportunity and basically, we tell the inventory if you’re going to have a business, right? So, as opposed to going to the grocery store, when you go to the grocery store, you buy what you need. You don’t buy $5,000 worth of soaps, laundry detergent, nutrition products, and groceries. You buy $200, $300 worth of groceries and you take them home with what you need.

Jerome Maldonado (07:10):

And so, in the 90s we were doing things a little different where we would say, okay … Great products. I still use them today. I still use the liquid mineral complexes today. I’m friends with the manufacturers. I still use the water filtration systems that we were selling back in the 90s when there was no bottled water on the shelves. So, superior products, right? But we were front loading. We tell people, “Okay, buy seven water filtration systems of this type, seven more of this type, and buy another $3,000 worth of nutritional supplements and put them in a locker in your office and sell them when people come in so you have inventory for them to try.” Well, the FTC said it doesn’t work that way. You can only sell what you utilize. So, we didn’t have a large enough consumer base, and so pyramid schemes are kind of like that because you’re buying a ton of products, and if they stop buying that large quantity of products your commission base stops.

Jerome Maldonado (07:59):

But the healthy way to build a network marketing company is actually, just like the grocery stores do it, you get people on standing orders where they’re buying $100, $200 a month of stuff they need and use; toothpaste, nutrition bars, soap, laundry detergent. Whatever it is. Whatever products that they’re fulfilling that they would buy at the grocery store, you replace that with the use through the means of direct sales. You have to have like, 70% of your business has to come in through regular consumer use and our percentages didn’t quite work out. We couldn’t restructure quick enough and the FTC went in and cleaned the house.

Jerome Maldonado (08:32):

And so, yeah, they can be mistaken for illegal pyramid schemes and they “have statutes” that the FTC has that you have to comply with. That, at the time, was what the FTC was actually putting together and putting regulations on to separate what’s an illegal pyramid scheme, what’s a legal business in distribution through network marketing. There are tons of great companies out there, but then there were companies like ours that we just couldn’t restructure quick enough. Nonetheless, we landed up having to rebuilt and actually shut down.

Robert Leonard (09:02):

I want to go back to some of the stuff you’re doing with real estate. We talk a lot here on the show about a concept called house hacking. If you’re not familiar with it, it’s just buying a residential property that you live in and renting out the extra space. What I found interesting, I had a friend of mine whose dad owned a construction company and they did exactly what you did. They needed somewhere for their construction company to go but their company was new. It didn’t really make a lot of money, so they bought a big commercial property with a bunch of units. They basically put their construction company in one of the units, rented out all the other units, and now the construction company had no overhead. They were able to have office space, they had a yard, they were able to keep all their equipment, so they had no rental costs. They did exactly what you did. When you told me that, I was like, wow that’s commercial house hacking.

Robert Leonard (09:47):

And then, you were saying you did the same thing. And what’s even more interesting is you did it with desk space. I mean, you’re almost like house hacking with desk space. So, that’s really cool to see, that you can do this house hacking strategy in the commercial space and in really a bunch of different ways.

Jerome Maldonado (10:00):

Yeah, you can. We’re doing it even with the warehouse and distribution right now where we take the big massive warehouses. Some of them we were able to partition and lease out different units and then there’s some that have big open space. We’re sectioning those and doing something very similar in the industrial warehouse space, so pretty neat.

Robert Leonard (10:17):

It’s just so powerful that you can own an asset and use it without having to pay anything for it, or really cheap. I mean, when you’re living in a residential building, reducing your living costs, which is typically somebody’s biggest expense, down to zero or close to it, I mean, this is so powerful.

Jerome Maldonado (10:34):

It is. And for a lot of young investors, and even not just young investors. I got a buddy who owns a cleaning company in Florida, and he does that. He does a lot of short-term rentals out of his properties and he subleases out the downstairs of multi-floor properties that he has there in Florida, and he’s making a killing with them. I think he said one of them makes him close to $40,000 a month on one property on the ocean there in Florida that he does short-term rentals on even through the pandemic. He was bringing in that type of revenue. And what’s cool is it’s just him and his wife. His kids are grown and gone.

Jerome Maldonado (11:04):

They don’t need a lot of space. He has multiple properties like this. He has a beautiful home upstairs with decks, lofts, and overlooking the ocean and the whole downstairs, he just made it short-term rentals. And so, he does a lot of that home hacking and does short-term rentals with that whole lower floor, and he’s getting over $1500 a day, a night for just that bottom section of the house, if not more. I don’t know his exact rates, but I know he said he was making about $40,000 a month just on one property.

Jerome Maldonado (11:28):

He has another one down the road that he makes about $15,000 a month on and he’s killing it. He’s rent-free, mortgage-free, and this is all upside for him. He goes, “I almost feel guilty.” He goes, “You know, I ran my cleaning company for over 25 years. We net out really strong six figures.” But he goes, “I have several Airbnb properties for short-term rentals” that he leases along the coast, and he’s making almost as much with the short-term rentals as his 25-year-old business has done working aggressively full-time for 25 years. So, he said it’s just a great concept. He loves the short-term rental strategy as far as house hacking and stuff like that.

Jerome Maldonado (12:05):

Huge supporter. I love it. I love the opportunities that real estate gets paid off on its own and we’re able to capitalize on assets long term by other people paying for our assets essentially.

Robert Leonard (12:15):

Yeah, there are so many cool things you can do with house hacking. You could do it in business, you could do it with a regular rental, you can do it with short-term rentals like your friend does. There are so many different things you can do.

Robert Leonard (12:25):

A hotly debated topic in the real estate world is how leveraged you should or shouldn’t be with your portfolio. There are people like Dave Ramsey that believe debt is bad. Period, even on cash-flowing real estate. And then there are other people like Robert Kiyosaki that think debt is great as long as somebody else is paying for it. I personally tend to fall on the side of debt is okay as long as it’s a good asset that pays for itself and is cash flowing, but I believe that you like to approach real estate a little bit more without debt. Why have you mostly chosen to go debt-free with your real estate portfolio?

Jerome Maldonado (13:01):

I section it based on good debt and bad debt. I’m debt-free personally. The house I sit in is paid off. People argue that’s dumb. I have a sense of security when I say, “Okay, I own my real estate. My personal stuff paid off because of the way I purchased it. I didn’t come in here because I’m in construction. The way we do things, we do things methodically. My cars and automobiles are bad debt. They depreciate in value. The place I live in depreciates in value. I can’t make money off of it. I have a family living here, right? So, I hate having debt on personal assets that are not income-producing. I consider that bad debt. And so, I’m a debt-free individual. I love being debt-free. I keep just enough debt so that I have credit and have the means of being able to finance things. But outside of that, I really keep things debt-free.

Jerome Maldonado (13:41):

Now, on the contrary, I carry debt on assets that are income-producing similar to Robert Kiyosaki. You know, stuff that pays for itself. I’m very methodical on how I acquire that debt because I want to make sure that I have an exit strategy just in case something happens. So, one of the things that I do is I make sure that, one, I have an asset class that I know is going to be supported by the tenants that I have in there long term. I do market research to do that. I always encourage people to do market research. And so, a lot of stuff is done with math, not just emotion or hope that things stabilize the way they are. I looked at things methodically. I’m not an analytical person, but I become an analytical being in the business for so long. It saved me. 2008 was a big deal for us. We got through it, but it was, I’ll tell you, it was temperature taking for sure. And so, that was a pivotal point, Robert.

Jerome Maldonado (14:27):

So, when you asked that, you say, okay at that point in time, I believed in mass debt. I was pressing out debt like you can bleed through real estate contracts, through institutional debt. I was definitely over-leveraged. I was trying to put minimal amounts of down payments and get as much debt as I could to expand my portfolio.

Jerome Maldonado (14:44):

Now, that worked, though. I tell you, it worked. It helped grow our asset base and it has established a solid foundation for us, but in doing so, we got caught in the recession and it took us about five years to really clean house and really get back at what I was calling trash can money. I was servicing debt on things that weren’t fully income-producing and paying for themselves, and so, I was having to service the excess debt. We were lucky and fortunate enough that we had strong businesses that were able to service that debt on multi-millions of dollars of loans.

Jerome Maldonado (15:15):

And so, at that point in time, I did. I started paying off a ton of my retail buildings, I started paying off a lot of my commercial properties and just making big lump payments and paying them off because I felt like, okay, let me have it leased a couple $100,000 a year in residual income, where I have no debt on it so that way, no matter what happens, I got $200, $300,000 a year just coming in and passive income where properties are paid off, I’m not servicing debt on. It was just my nest egg.

Jerome Maldonado (15:42):

Some people that are in real estate think that’s not smart. At that time in my life, it felt smart. I had my first baby. My son was only one year old when the recession hit. This gave me a sense of security going, “Okay, my family’s protected. If all else fails, my family’s protected with at least the income that I have coming in from my buildings.” And then, once we got to that, I said, “Okay, now we need to scale again.” But we need to do this different, Robert. We need to do this in a fashion where we take down asset classes that just make sense. They’re going to pay themselves off, we’re not over-leveraging stuff, we go in with a 70% debt to income ratio on about 99% of the projects that we do and enhance where they’re able to produce cash flow. Even if there is a pandemic or something happens, it hits a sideways that we’re blindsided with, we’re still in a position where things take care of themselves and they service their own debt.

Robert Leonard (16:29):

What does your portfolio look like today? Is it mostly commercial stuff? Do you have a lot of residential? What does that look like?

Jerome Maldonado (16:36):

It’s about 90% commercial. I’m not a big residential person. I do residential land development and we do build out single-family homes, but we don’t hold any of them. I don’t rent any single-family homes at all. I only own the home I sit in right now. I did during the recession where we’re picking up a lot of single-family homes in the Phoenix area because we were picking them up for so inexpensive at that time.

Jerome Maldonado (16:55):

We may acquire some single-family homes now once the forbearances expire and we start seeing an influx of foreclosures in the residential sector. It’s a great way to increase your asset base. I don’t discriminate against any asset class. The only asset classes I discriminate against are the ones that don’t produce me money. But if there’s an asset class that can produce me capital, I’m in it and be in it, and I’ll pivot to it to take advantage of any capital that I see is available in my exposure and at my fingertips.

Jerome Maldonado (17:20):

But as of right now, 90% of my portfolio still is small retail. I still own a lot of small retail. I have almost no vacancies at all. I tell people retail is dying, but small retail is still strong. We got rid of bad tenants, filled some of the spots with new, better tenants during the pandemic so it was actually a little house cleaning deal for us. And then we own multifamily. I own two apartment complexes. We own industrial warehouse space. I own four industrial warehouse properties, my own office buildings, and then we still have our subdivisions going as well. And we just picked up four luxury properties up in Puerto Rico because the wealthy don’t get hit by it and the tax law support what we’re doing out there. And so, we’re taking advantage of some of what’s going on in Puerto Rico, the growth, the expansion, and the appreciation that’s happening out there. So, we’re kind of multi-diverse in that t type of sense.

Robert Leonard (18:06):

How do you define commercial real estate? And the reason I asked that is because you mentioned multifamily properties in there and a lot of people probably hear that and say, well he said he doesn’t do residential but now he’s doing multifamily so how can that be commercial? I know that the definition is anything above five units is technically commercial real estate even if it’s a place where somebody lives, and that might be the disconnect. But is that how you define it as a lender would?

Jerome Maldonado (18:30):

Yep, I do. I go off of lending laws. So, anything over four units is commercial in my eyes. If you’re going in, you’re going for zoning parameters. Just like municipalities, they don’t look at, multifamily real estate is always in a commercial zone sector. It’s a different zoning for multifamily usage but if you look at it, when you look at the way zoning works, typically street-front zoning is commercial zoning, and then behind it is typically the residential zoning. And so, if you look at apartment complexes, they typically don’t sit off at the main thorough ways of roadways, they simply sit on the front throughway. So, it was commercial zoning that’s been rezoned for multifamily housing, and anything over four units is classified as “commercial real estate.”

Jerome Maldonado (19:07):

So, the brokers, they’re commercial real estate brokers. They’re not residential single-family brokers, which was what I consider residential. So, anything over five units, that to me is still commercial real estate.

Robert Leonard (19:18):

For those of you listening, it’s not about the use case, it’s more about the size of the property. You could have a four-unit little apartment building and then have a five-unit apartment building doing the same thing with actual tenants that live there. One is residential, one is commercial. So, there’s just the line there between four and five units, and that’s mostly because of how lenders look at it. Typically, if it’s five units and up, you’re going to go to their commercial lending department and deal with them. Your financing is typically going to be commercial. Whereas, if it’s less than five units, you can get traditional residential Fannie Freddie agency debt on it.

Jerome Maldonado (19:50):

Yeah, you can do owner occupancy. The whole point being is you get to occupy one of the four units, lease the other three which is what a lot of people do, a lot of investors do, to offset their own expenses and then have an asset pay for itself, similar to what we’re talking about with house hacking earlier with fourplexes. That’s a great little asset class especially when you’re getting started and there are people that make a full career out of that. They love the lending laws with it.

Jerome Maldonado (20:12):

We’re doing a big project over in Kirkland down in Washington state where we’re tearing houses down and we’re putting up four units per lot. But because we’re doing multiple of them, it’s still commercial development, but it’s really neat. We’re working with the lenders and stuff to build out this project. We had to figure out whether we wanted to do each one individually or we wanted to do as one mass project. We decided to do as one mass project for accounting purposes and legal purposes, but we were actually considering doing each four-unit deal as a residential deal because of the lending laws [inaudible 00:20:41] that we would save by doing so, but this long term made sense to do it the way we were doing it. So yeah, a lot of different aspects that you can take, a lot of different directions that you can pick and choose if you learn the lending laws in real estate.

Robert Leonard (20:56):

That’s the biggest thing, the financing. I mean, if you’re owning a five-, six-, seven-, eight-unit building, it’s really not that much different than if you own a four-unit operationally. It’s relatively similar. But when you go to get financing, that’s where it’s a lot of different terminologies, a lot of different financial products. I mean, you’re not going to see a five one arm with a balloon payment on a 20-year amortization schedule on a three- or four-unit, whereas on a five and up, I mean, that’s pretty standard. So, when you make that transition from under four units to over five units, it’s not operationally majorly different until you get there like big, big numbers, but financing is a little bit different there.

Jerome Maldonado (21:32):

Yeah, it is. I’ll tell you, once you get over 65 units, I usually say 80 units is like the key, then it becomes fun because you don’t have to be in the game, like managing the property. You have the affordability through the rental income to be able to offset your maintenance and your management fees and all that stuff that pays for itself and you just write it off as an expense in doing business. You can be hands-off on a property and get good property management companies to take and facilitate that stuff for you, so it’s a good real place to be in the multifamily space.

Robert Leonard (22:03):

When you think about commercial real estate and new investors, do you think new investors should go rate for these big properties, these big commercial properties, or do you think they should get some experience? And if so, when do they make the transition? Is the transition right for everybody? How do you think about that for new investors?

Jerome Maldonado (22:21):

There’s a small percentage of people that have, one, the confidence and the knowledge base to be able to learn how to do this stuff. It’s scary getting that big stuff, and most institutions won’t even lend it to you, anyways, if you don’t have experience. They want to see your resume. And so, my recommendation is not to go into the big stuff.

Jerome Maldonado (22:37):

Now, there is people that do go into these big ones. I have a buddy named Kyle Mitchell. These guys went straight into the big stuff. Very analytical guys, very smart, they did a lot of homework but then they were movers too. So, they took action, right? But there is a very small percentage of the people that can go into that stuff and successfully do it with, one, the confidence and, two, the ability. Because there are some management skills that need to be set in place and you have to have a support system that knows what they’re doing. If you’re not that support system that knows what you’re doing, you got to have it set in place because you’re dealing with other people’s money if you’re going into this big stuff right away.

Jerome Maldonado (23:11):

And so, my recommendation is to start with small stuff. I mean, I get small stuff and made millions and millions of dollars for many, many years on small stuff. Little tiny things where I was just taking single lots, dividing them in half; little four-acre plots, dividing in half; going and doing redevelopment projects or new development projects that were small, 12,000 square foot buildings, and repositioning the assets, building them out. They were profitable, every single one of them, until we got to the recession. Even those were profitable. They were just stressful because of the way we had it. It was service debt and we lost tenants and just unforeseen circumstances. But even at the end of the day, we didn’t lose. We just took some time. We had to burn off some capital to service some dead in the interim time of stabilizing stuff. And then, by that time, those properties sometimes felt so stressful we just sold them off and said, “Okay, I just want this property gone.” Even though we didn’t lose on them, we felt better for them to be gone and then just bring in new stuff to your portfolio.

Jerome Maldonado (24:00):

But I think people should get started with small stuff, learn it or become a part of a big deal by being a part of a syndication so that that way they learn the processes of how things are being managed and how things are being done. I always encourage you and my students, people that I work with, I tell them, “Look, if it’s something that scares you, you shouldn’t be involved in it.” You need to be slightly uncomfortable in any deal you get into because it’s motivating, so much so that it hinders your ability to progress, right? If you’re so scared that it hinders the project, then that’s bad. And so, you want to be in a position where you’re in some place in between, just a little bit of discomfort but also a little bit of comfort so you can keep a good solid mental state. Just take down small deals. Have small levels of success and build up to it and then get involved in the larger deals. And then once you’ve been a part of it, then you can escalate to that stuff.

Robert Leonard (24:44):

Yeah, I completely agree with that. And that’s where I think a lot of gurus steer new investors wrong, is that they say they should go right for big deals, and I don’t personally believe that’s the best way. I think starting small is the best way. Get a couple of small wins under your belt. Start with low risk and then build the confidence to go bigger. I mean, if you start with a big deal, not even a syndication, but even if you just do an 8-, 9-, 10-unit building that’s $750, $800,000, say you have 150 grand to buy that deal, if you lose that, that’s still a big hole that you’re digging yourself out of even if it’s your own money. I don’t personally think that’s a great way to get started.

Jerome Maldonado (25:19):

Yeah. Your first deals the most important deal. That first win is a big deal. And I always tell people even if you make almost nothing on your first deal, it’s a win. Because if you get into it and you learn, people will come in and they’ll say, “Yeah, I didn’t make nothing on my first deal. I only made like 10 grand,” or “I didn’t make anything on it.” I said, “Did you learn anything?” And they said, “Well, yeah.” And I said, “What did you learn? Explain to me what you learned. What would you not do again that you did on this deal?” They can easily tell you what they wouldn’t do again. And so, I just listen to them. And then I tell them, “Okay, what did you learn from that?” Where else in America can you go and, in a year, buy a piece of real estate and learn what you would never do again and not really lose any money or anything?

Jerome Maldonado (25:55):

You invested time, right? People go to college, spend four, five, six years in college and they’re in debt. They don’t even have an ROI on that. They have [inaudible 00:26:03] get a $50, $60,000 a year job. Now, you have the wisdom and knowledge of what you can do and what not to do. You maybe make $10,000 with that, that’s a win in my book because I sit back and go with the wisdom that you’ve got, the confidence that you gain, the information that you now have that most people don’t is priceless. Now, you can take that. You take what you wouldn’t do again, and you fix it, and you take everything that you did right and utilize it. And now, in your second deal, you go in and you profit from it immensely. It’s a win-win situation.

Jerome Maldonado (26:32):

I sit back and say, “You know what, even if you don’t make a ton of money on your first deal, your first deal is a win if you learn something that’s going to help you generate profits long term.” So, I’m a huge advocate for big wins on your first deal. I call that a big win, so I have to explain that to people because most people don’t understand that that’s a big win. They interpret win based on a dollar amount. I sit back and I determine a win based on what I’ve learned and the time I spent doing it. Yeah, monetarily it is a dollar amount, but what you learn is going to turn into dollars later. And so, I always tell people, the win is when you’re successful and you don’t lose money, you don’t lose yourself, you don’t go into bankruptcy, you figure something out and ultimately learn something that’s going to help you benefit and profit long term. So, I think the first is the most important one.

Robert Leonard (27:13):

I completely agree. And I always say that your first deal will never make you rich, but it’ll get you on the path to becoming rich. I remember somebody, I think it was Brandon Turner from BiggerPockets who said this, but I remember hearing almost nobody does just one deal in real estate ever. You’ve either done zero or you’ve done a bunch. And a bunch could be three, four, five, whatever, but almost never do just one. If you do one, you either learn from it, you make a mistake, you learn from it and you’re like, “All right, I can do this now. I’ve learned from it. Let’s do it again,” or, it goes well and you’re like, “All right, I got the confidence. Let’s keep going.” And so, that first deal, just don’t dig yourself a hole. Just get that small win. It doesn’t matter about the money at all. Get on the path to building a real estate success.

Robert Leonard (27:55):

I can speak to it because that’s exactly what happened for me. I went super, super small. I didn’t care if I made any money from it. It ended up being a pretty successful deal. Small but successful nonetheless, and it just really helped build my confidence as I continue to grow as an investor.

Jerome Maldonado (28:08):

Absolutely. I did the same thing. I remember my dad going to my first building. My dad’s a pessimist, but he’s an amazing person. Just super honest, very straight, narrow, very conservative and I’m the opposite. I’m like night and day. I’m the black sheep of the family who’s always taken that crazy path. But my dad shows up to my first building and I’m excited. I’m like, “God, Dad, I bought this retail center.” I was like, “Check this thing out.” He’s like, “Well, what’s your plan?” I said, “I’m going to lease it. I’m fixing it up. I’m gonna lease this thing.” We spent about an hour walking around and at the end of it he looks, and he goes, “So, what happens if it doesn’t lease?” I just sit back, and I go, “That was never really an option, dad. I never really thought about that because that wasn’t an option in my brain.” And so, I started thinking about it for a split second. I said I’m just going to go back to work. Lo and behold, in a few months, the whole thing was leased. It was a successful win.

Jerome Maldonado (28:52):

I never thought. I never turned back. I never looked back at it. It was that one when that I sat back and said, “Okay, let’s do this again. This worked out so well. Let’s [inaudible 00:28:59] folks,” and I still own that building today. That building, in rental income, has brought me in close to $2 million in rental income over the last 20 years. Just that one little tiny building, that one $250,000 building that I bought back in 2000. One little asset.

Robert Leonard (29:13):

That is too funny because the same thing happened with my dad, not on a retail location, but with my first long distance rental. I told him I bought a rental property, but I didn’t mention where it was. A couple months later, it came up that it was 2000 miles away and I’ve never seen it and so on. I wouldn’t say he’s necessarily pessimist, but relatively pessimistic and having never made an investment like this, he was like, “Oh my God, that property is so far away. You’ve never seen it. You got to go look at it. What if it doesn’t rent?,” this, that. You know, all these other scenarios that could go wrong. It had been a few months, so it had been successful already, so I told him that, but I was like, “Dad, none of those were an option. We’re going to figure it out no matter what.” It’s funny that my dad did the same thing for me.

Jerome Maldonado (29:50):

That’s awesome. After the brutal beating that I took in network marketing trying to figure a business out, retail leasing space was simple. It had some intangibility to get to somebody where they can store their business. I’m like, “I can make this work.” I can make that work. So, water filters in the day when there was no bottled water on the shelves, I can lease a space. That was my framework of mental thinking at the time, and I was like, “Okay, let’s roll with this.” And it worked.

Jerome Maldonado (30:11):

Here we sit today, hundreds and hundreds, if not thousands upon thousands of units later. It’s been great run and I encourage people to get started in real estate because it’s life changing. You can go into tech, you can go into a lot of things that can make you a lot of money, right? But I’ve never really been a techie. And so, for me, real estate made sense. It’s something that anybody in any asset class, any industry, any profession can get into an investment capital. If they just run simple math, they can succeed at it. When I say succeed at it, just to be able to have passive income. I’m a residual passive income person because I come from the network marketing days where everything’s built on residual income, the income that you generate in spite of your own efforts that just comes in month after month.

Jerome Maldonado (30:53):

The great nature of real estate is when you get asset producing real estate where tenants are paying you every single month. You don’t have to work for that income. Is there maintenance that goes into those properties? Yeah, there’s some phone calls, there’s some maintenance and stuff but, essentially, you have residual income that works for you for the rest of your life. It’s a good place to be. Anybody can benefit from it, and so I think it’s an asset class that people need to get involved in. I think it’s an area of diversification on your portfolio that you need to own some. Even if it’s a small bit of some, everybody needs to invest in real estate. I think it’s one of the best asset classes that you can invest in regard to your portfolio and long-term wealth.

Robert Leonard (31:31):

I want to go back to your commercial holdings. You mentioned you had some retail space. Obviously, we’re in the middle of a global pandemic right now. With so much of your portfolio positioned in commercial real estate and specifically retail, how are you positioning yourself for potential changes in the market due to the pandemic?

Jerome Maldonado (31:50):

I changed my market sector back in 2008. Between 2008, 2012 that’s all I did, is changed it. I only kept the stuff that was leasing and it’s the same stuff I own today. We stopped acquiring retail. I stopped really pursuing retail in about 2010, 2012 but I did acquire some stuff in like 2015 because I just couldn’t say no to it because we picked up. They’re cheap that we picked it up, cleaned it up and we rented it as a retail strip mall again, and it’s been very successful.

Jerome Maldonado (32:17):

And so, what we’ve done is you got to focus on service-oriented industries. And so, I tell my office, I said, “Look, people will tend to do, is they just indirectly discriminate out certain sectors of business, and I tell them don’t do that. Debt them through the system, right? We have a system that we have set in place. It’s a leasing system that we see back and say, “Okay, we let a tenant choose whether the space works for them or not. We don’t sell them off. We go in. We know we have a good space because of the way we do things. We always have a good viable space, a good retail frontage. The locations that we own are strong, centrally located, desirable pieces of retail but they’re not big spaces.

Jerome Maldonado (32:53):

We’re talking 3000 square foot units and smaller typically. So, small business owners like barbershops, beauty salons. Cannabis has been a big [inaudible 00:33:02]. We have multiple cannabis places in ours that are doing distribution. That’s been great for us. We’ve had catering places. We have a place that does a lot of catering. One of them got affected during the pandemic, but then another one came in and they’re doing lone of those kitchens. And so, that’s big now in the restaurant space, which is one of our big restaurant spaces and now it’s considered to be a ghost kitchen.

Jerome Maldonado (33:21):

And so, we just look at it. And if I like an asset class, I like a business that’s coming in, I tell the people in my office, the girls and gentlemen in my office, to lease to them. Let’s figure out a way we can make this work. Even if we have to give them a couple months’ worth, a few months’ worth of free rent as long as they’re credit worthy and they’re a good tenant in regard to their paperwork. We don’t know if they’re a good person until you get into business with them, but you can get them through a system and if your system works, I mean, our system works, then we let people get involved in our buildings, right? I’m allowing them to be a part of it. And so, those asset classes work.

Jerome Maldonado (33:53):

We do smaller office. We don’t do big office anymore. Small office still works. There’s a need for insurance companies. There’s a need for law firms and places like that, that we do a lot of leasing to small law firms, insurance companies, accounting firms. We have a home health care place. They run their office facility out of one of our office buildings, and we even have a small telemarketing firm in one of our buildings in Arizona that has done extremely well through the pandemic. And so, if found, there’s a need. You just have to find your little market niche and drive with it. Even though that’s not our main focus anymore, it still has a lot of our asset holdings.

Jerome Maldonado (34:27):

Our main focus now has been industrial warehouse space and supporting data centers, leasing of data centers in ours, making sure that the air conditioners and the cooling systems in our facilities are up to date because these data centers have been big leases for us. And then the roll-off. We have a lot of industrial stuff. We got a big outfit that works with Ford Motor Corp. They do all the retrofitting for a lot of the commercial vehicles. They take a ton of space from us in one of our buildings up in DeKalb, Illinois.

Jerome Maldonado (34:56):

Anyways, we just find market sectors that work in the industrial warehouse space because of mass distribution that’s working really well. We’re going into market sectors, but we’re following the big guys like Amazon, Facebook, and a lot of these big guys. We’re just positioning ourselves right behind them or right in the same neighborhood so we can benefit from what I call the trickle effect. All the small businesses and industries that need to support those big ones, you can’t just bring in a million square foot facility and a ton of employees and not have infrastructure to support that one facility. So, I take advantage of supporting that infrastructure. That’s what I’ve always done, is being the little guy around the big guys that benefits from it. Even the small guys make millions of dollars if you position yourself correctly.

Robert Leonard (35:35):

Yeah, it’s almost like selling picks to gold miners back in the gold rush. Rather than going for the gold yourself, you’re selling the picks and access to the gold miners. I mean, I don’t know a ton about the warehouse space, but I’ve heard that data centers are huge right now, hugely popular. I mean, just intuitively thinking, obviously, data centers probably aren’t impacted right now by COVID and they’re probably honestly doing better because everything’s going online, so I can see how your transition to that focus has probably been successful.

Jerome Maldonado (36:04):

I’ve been talking about this for a little over two years when nobody was, and I knew It was going to move in this direction. I mean, I had a little bit of cheating. One of my business partners is Tai Lopez. He’s a big e-commerce person and mostly his ideas, he said, “Look, Jerome, we’re going to need distribution centers. We need to get into warehouse space. No one’s talking about it.” I said, “You know what, you’re right. I hadn’t even thought about that.” And we started positioning ourselves over two years ago to do this.

Jerome Maldonado (36:23):

And now, lo and behold, it’s one of the asset classes that the institutions are liking the most. When I say institutions, the banks. They’re having a big percentage of their portfolios of lending go into industrial warehouse, which means that the big guys, all the big developers, all the big investors, and the red reefs, they’re moving their portfolios into that direction as well, and we’ve already been focusing in it for the last two years. So, we’ve already done market studies. We already know what’s good, what’s bad, what to touch, what not to touch and we already have ownership of several buildings. And so, we’re a little bit ahead of the game.

Jerome Maldonado (36:52):

But it’s never too late. I always tell people that the 12,000 square foot, four-unit industrial warehouse is a great business model sitting on two acres because now you can build out the other acre of development and increase your square footage. And so, there’s a lot of little internal secrets in that business model that works. For those of you guys that are listening, it’s a great little market sector to invest in.

Robert Leonard (37:11):

Is there a way to get involved in warehouse, or specifically data centers on a small scale without having to go with this massive facility? Like, say somebody relatively new. They maybe have a little bit of real estate experience or they’re pretty new and they just want to get started on that asset class. Is that something that’s a little bit more complex and you have to be pretty big or could you go smaller?

Jerome Maldonado (37:32):

You can go small. Our first one, we’re doing market testing, we bought a little Krispy Kreme building that was 8000 square feet. That building is awesome. And I have another one that I lease to Frito-Lay that I bought from Swanson foods. That one was like 10,000 square foot building, and I bought both of those for well under half a million dollars each. The little Krispy Kreme building, that thing nets us about $50,000 a year, and we paid like $250,000 for that thing. Yeah, about 350 … Let me see, what does that thing make us about … $50, $55,000 a year in residual income and it’s on a triple net lease where you don’t have a lot of overhead, you don’t have a lot of expenses, the tenant takes care of most everything. That’s why I love industrial warehouse space.

Jerome Maldonado (38:11):

And yeah, you can get it started. That 12,000 square foot that they’re about to model is great because you can pick that stuff pretty inexpensive acquisition price. You can do four units in there, 3000 square foot units, give or take. Two acres. You really only need to put that. If you can fit all of that on a one-acre lot so you have another acre that you can build out so you can double your square footage, it’s a great little business model that you can duplicate and then just run the numbers you understand what the rents are, what the market is supporting in those areas.

Robert Leonard (38:38):

How do you find tenants in a space like this?

Jerome Maldonado (38:41):

I pre-lease. You know, what I do is as I go in, I don’t take down an asset unless I know there’s a market for it. So, what I do is I do a lease, a minimum of 90-day due diligence. One of my requirements in my LOI is that I get the approval from the owner to pre-market the property at my expense. I get approval to pre-market that. If I pre-market it at my expense, I don’t get no traction. I don’t have anybody looking at the property and advertising it. I won’t buy it. I’ll withdraw during my due diligence period, so I don’t lose any money.

Jerome Maldonado (39:10):

But if I get traction and I have people that are interested, I won’t enter into a lease until I take ownership of it, but at least I know I have some market traction and interest from prospective tenants that are credit-worthy and respectful, right? And then, if they are, then I market it on CoStar; we’ll run it on Craigslist; we’ll put it on the commercial listing sites, the local commercial listing sites, and see if we gain traction. If we get no traction, we don’t buy. And if we do get some traction, we have interest and good tenants, then we buy. That’s how we lease.

Robert Leonard (39:37):

You’ve taken multiple businesses to zero to six figures using the Ray Kroc model. Tell us a little bit about who Ray Kroc was and what is the Ray Kroc model?

Jerome Maldonado (39:49):

Ray Kroc is the “founder” of McDonald’s Corporation. Not McDonald’s the hamburger stand, McDonald’s the corporation, which was a land holding company, not a hamburger distribution company.

Jerome Maldonado (39:58):

And so, Ray Kroc, his business model was he found a way. If you ask Ray Kroc what business he was in, he went to Harvard Business School. He asked all the students, he said, “Hey, do you guys know what business I’m in?” Everyone would chuckle and say, “You’re in the hamburger business, you’re in the French Fries business.” He’s like, “Wrong, wrong. I’m in the real estate business. I found a way to be able to pay for my real estate through the means of hamburgers and French fries, but I’m in the real estate business. I own some of the best real estate, corner real estate, prime real estate all over the world.”

Jerome Maldonado (40:23):

What he did is he leased back the land to the franchisees, but he never gave up the land. He had the holding company. McDonald’s Corporation owns more land than the Catholic Church, the Catholic Church being one of the largest landholders in the world. The McDonald’s Corporation owns more land than them. He was the number one land holding company in the world. He just found ways for his franchisees to pay him franchise fees and rent on his land and he became one of the largest wealthiest landholders in the world. And so, most people don’t know that. Most people think that he made his money off the billions and billions served that are on the McDonald sign, but the real wealth came from the land, the real estate that he owned when he let the franchisees buy it on his behalf.

Jerome Maldonado (41:01):

And so, when the recession hit, I did the same thing. I bought a bunch of subway franchises. I was buying real estate. I need to figure out a way to stabilize my assets, and so, I used the Ray Kroc model. I came in and I said, “You know what, let’s just use Subway stores. Let’s get the Subway stores paying rent to my own buildings to stabilize my assets.” And I did that. I started buying a bunch of home. I became one of the largest multi-unit owners in the southwest and I used it to stabilize my real estate. Then, not only that, I built out a business model that I had an infrastructure on before I sold it all off between 2016 and 2018. It was a win-win situation.

Jerome Maldonado (41:35):

I did this with beauty salons. I opened up a chain of beauty salons called Trendz Cuts & Salon when the recession hit, and I was using that Ray Kroc model. I was just finding a business that was going to pay for my asset because my assets weren’t paying for themselves. Tenants weren’t coming in paying for my buildings anymore. I had to figure out a way, so I used the Ray Kroc model. Wisely enough, I’ve read enough books, watched enough video stuff and I said, “You know what, this will work,” and I just implemented it. And so, Ray Kroc model saved my ass in 2008 and it’s been a business model that I’ve implemented, I support, and I just think that the business model is incredible.

Jerome Maldonado (42:07):

So, for those of you guys who are self-employed, have a business, use the Ray Kroc model to be able to support your assets and build wealth through the form of real estate, doing what you’re already doing every single day anyways, instead of giving money to somebody else. Just do it, give it to your corporation or your LLC to pay for an asset that’s going to grow in spite of your business. You have an asset that you have on your books and is a part of your net worth that you’ve developed. That Ray Kroc model is amazing. I love it.

Robert Leonard (42:33):

I actually do this podcast full-time now, just retired from the corporate world about two months ago on my 26th birthday. But before that, I was a corporate finance manager, I worked in finance, and one of the things I liked about working in finance at companies was I get to see all the behind-the-scenes, the details of the business, right? All the financials, even a lot of legal. Once I got to a corporate finance manager role, I was relatively high up in the company, so I get to see some pretty cool back-end stuff that we didn’t see.

Robert Leonard (42:59):

I actually saw that it was a $200 million, $300 million business. Not massive, but good size. It was a family business, but what they did was the exact same thing that you just mentioned, is the owners have their own LLC that rented out the office space that we use at the company. So, they have one entity that owns the real estate, which was theirs, and then the families and then the business just rented or leased that space from the family’s LLC that actually owned it. So, they were doing exactly the Ray Kroc model.

Jerome Maldonado (43:30):

That’s awesome. I love that. And I tell people, if you own a plumbing company, utilize it. If you own beauty salons, utilize that. It doesn’t matter if you own a [inaudible 00:43:38] company. I have a buddy here that owns Lady Boss, a brand in Poland, but they did the same thing. And now, he is repositioning some of his assets based on some of the changes that happened, the pandemic and a lot of the work from home stuff, but he has essentially implemented the exact same thing without even knowing it.

Jerome Maldonado (43:52):

Sometimes people will ask me for advice and basically that’s what I’m telling them to implement, is utilize your business to pay for an asset and figure out a way to pay for the real estate even though you’re in one class of business. Utilize that and take advantage of a different class of business to generate multiple wealth. You’re double-dipping at the same time and you’re creating asset holdings and you’re increasing your net worth all at the exact same time. It’s a win-win situation. It’s an incredible way to do business.

Robert Leonard (44:18):

Do you have to already own a business to do this or could you start a business that you may or may not be interested in just to get the real estate?

Jerome Maldonado (44:27):

No, you don’t have to. The McDonald’s franchises, he created the holding company. And so, one of the big things was he found a way to be able to go in there and create a land holding company that was legal, it’s legitimate. The guys hated him. The McDonald’s brothers hated him for it. The thing is, not that I would sit back and say, okay, what he did was 100% ethical and morally correct, but the way he did it was smart. It was very logical. He put himself in position with the right attorneys, the right business partners to take advantage of it.

Jerome Maldonado (44:55):

And so, even if you have a business, you just take that same model. Watch the movie. Just watch what he did. Try to pay attention. Watch the movie twice, I tell people. And when you do that, you’re going to be amazed with what he had put together and how he actually structured the land holding company. Very methodical. Very smart. And so, if you learn that, you sit back and say, okay, you don’t need a business.

Jerome Maldonado (45:14):

I didn’t own a business when I was stabilizing my buildings in 2008, I created businesses to do it. We hire people. I learned about them just nominally. I found people that were better than me and I implemented them. Those beauty salons saved my buildings in all honesty and then so did the Subway stores. And then I got so far involved in the Subway stores. It wasn’t the Subway stores I wanted, it was the leasing that I wanted. And even in the beauty salons, I landed up selling off the salons to women that worked in the salons, gave them an opportunity to be an entrepreneur and be a business owner and then I just took the lease. That’s all I wanted, was the lease long term. I had to run it for a couple of years, and then I wanted the lease. I got the leases. I got what I wanted.

Jerome Maldonado (45:50):

And then same thing with Subway stores. You got them in, you land up selling them back off, get the leases set in place, and you make a little bit upside maybe on selling the business because you ran them correctly and it’s a win-win situation. You don’t need a business. You can implement the business into them, or you don’t even have to do that. You can just find other people with their businesses to stabilize them and like, what you’re talking about, house hacking and doing the same type of thing with office space. Get other people to pay for them for you.

Robert Leonard (46:14):

When you think back on your life, whether it be personally or business-related, what piece of advice have you received that has really had an impact on you and you continue to use it and think of it to this day?

Jerome Maldonado (46:26):

I was a wild horse of a kid. When I say wild horse of a kid, I always thought outside the box. But when you think outside the box sometimes you get yourself in trouble multiple different ways. One of the things that my dad told me early years that made a lot of sense, it held me true to everything I’ve done, he said, “You know, Jerome, never tell a lie. Do things honestly and you never have anything to explain to anybody.” And I tell this to my kids. I tell them, “Look, you just do things correctly.”

Jerome Maldonado (46:47):

So even as we’ve grown, we’ve been subjected to lawsuits, it happens. As you grow and you become more pronounced, people attack you and people want things for free. It happens. But you know what’s been good, the biggest thing that’s helped me the most, is being able to go to my office staff and they say, “Okay, what do we give the attorney?” I say, “Give him everything. Everything. We have nothing to hide. We did do everything right. You don’t have anything to hide.” It’s been a big part of our success, is just by being able to sit down and run a business correctly, ethically.

Jerome Maldonado (47:13):

I think it’s really important for people to understand that people try to cut corners, do things wrong, and sometimes the long road and the ethical way is the harder road sometimes. But long term, it’s an easier road because it really positions you where you can win from it long term. No matter what you do in your business, you can move forward in a fashion where nothing is going to take you down if you do things correctly and you move in the right direction and you’re doing things consistently, ethically, and morally right.

Jerome Maldonado (47:37):

I see that that’s probably one of the things that’s made our business so successful over the years. Because we’ve been in positions where things could have gotten loose or taken away from us, but because of the way we run things, we’ve been able to run things straight through hard times, good times, great times, bad times. It doesn’t matter. We’ve been able to run through them wholeheartedly and we’re still here today and we’re still standing.

Robert Leonard (47:55):

Matthew McConaughey gives a speech at a college graduation and he talked about the same idea. He says don’t leave any breadcrumbs is how he explains it. Don’t leave any breadcrumbs behind, and I love that idea.

Robert Leonard (48:07):

Jerome, thanks for joining me on the show today. For those listening that are interested in learning more about you and the concepts we talked about and might want to connect with you, where’s the best place for them to go?

Jerome Maldonado (48:17):

I’m really easy to find. For those of you guys, one of the big pushes that we’re doing right now, Robert, is we have all these asset classes that we’ve taken down. One of the things that we found is when people are failing, they’re leaving money on the table [inaudible 00:48:29] project management, the development and redevelopment of real estate. And so, one of the big things is impressing working with a lot of business owners and entrepreneurs and also real estate professionals, they’re leaving breadcrumbs on the table. They’re sitting back, going, “Okay, how do I stabilize these projects correctly?” And so, we’ve been making a big push with that stuff.

Jerome Maldonado (48:46):

And so, if you go to jeromemaldonado.com or the Elite Real Estate Society, you can find us. But if you just Google my name, you can find all of this information. You can Google just or you can just go to Facebook and look for jeromemaldonado.com or look for Jerome Maldonado. I have the same exact profile pictures on LinkedIn, on Facebook, on Instagram. The only difference on Instagram, it’s Jerome Maldonado and the number one. You can find us, follow us. Follow the push that we’re doing. See if what we’re doing, what we’re working on is something that can help and benefit you. And if it can, then we’d love to work with you. If it can’t, then find somebody, somebody that is in the industry, in the asset class that you’re working and work with them. Because there are good people out there and there are bad people out there. If what we’re doing and what we’re pushing towards can benefit and help you, reach out to us, reach out to my team and we’re here to try to help make a difference.

Jerome Maldonado (49:30):

Long term, there’s an ulterior motive. My ulterior motive is to take many people along with us for the ride and invest with us and work with us and learn what we’re doing over the course of time because it helps our company grow and helps you grow individually, and it’s a win-win situation.

Jerome Maldonado (49:43):

I’m really easy to find. My name is right here in the bottom of the screen. Google us or look for us on Facebook, Instagram, LinkedIn, or any social media sites. Follow us on YouTube and find that subscribe button. That’s the easiest way to get a hold of us, Robert. I appreciate you having me on the show and taking the time to make me a part of your network and your podcast, and I thank you for everything that you’re doing, Robert.

Robert Leonard (50:03):

My pleasure, Jerome. Thanks for joining me. I will put a link to all your different resources in the show notes below, so anybody interested can check those out. Jerome, thanks so much.

Jerome Maldonado (50:12):

Appreciate you, Robert. You go out and make it a great day.

Robert Leonard (50:15):

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

Outro (50:21):

Thank you for listening to TIP. Make sure to subscribe to We Study Billionaires by The Investor’s Podcast Network. Every Wednesday, we teach you about Bitcoin, and every Saturday, we study billionaires and the financial markets. To access our show notes, transcripts, or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by The Investors Podcast Network. Written permission must be granted before syndication or rebroadcasting.