Bill Pysh  4:47  

Well Preston, I am a busy person playing tennis these days.

Preston Pysh  4:54  

So anyway, so if you haven’t figured it out yet, our special guest is my father. Bill Pysh is his name. And he lives down in Florida and he’s retired. But before he moved down to Florida and retired, he lived up in Pittsburgh, Pennsylvania, which is where I was raised. He’s really an accomplished person in the real estate line of business. And he has owned… Dad, how many units did you own at the peak?

Bill Pysh  5:20  

Well Preston, I had over 100 units both multifamily and commercial units that we had.

Preston Pysh  5:28  

Okay, so you guys kind of have a general idea of what he was managing and how much he was responsible for during his peak. And now that he’s retired, he’s not really doing that anymore. But, he has a lot of expertise and a lot of knowledge in this area. It’ll be perfect for Calin to ask these questions. 

So what we’ve done is, Calin has developed a list of questions. He doesn’t have any money in real estate. He hasn’t done anything yet. He has developed a list of questions that he’s going to ask my father, and we’re just going to kind of go through this and Calin’s going to run the show. So Calin, I’m going to hand it over to you. You can go ahead and ask your first question and we’ll just take it from there.

Calin Yablonski  6:02  

Perfect. So first let me say, I’m really excited for this, Bill. I’ve been looking forward to this all week. So I’m super stoked to have access to not only Stig, but also Preston, as well as yourself. So this is really great. So my first question for you, Bill, is, should a first time investor purchase residential or commercial real estate?

Bill Pysh  6:26  

Okay, the way I’m going to break this down for you Calin is there’s really three types. There’s residential, multifamily, and commercial. The way you look at it is residential, is people buying a home and speculating on, like here in Florida, a lot of people speculated on buying, say, a condo and they could get it for X amount of money and they were hoping that the economy would improve so they could then sell out. 

They weren’t really looking at it as a rental unit to make rental income, but as a unit to make profits in the real estate market would it sell. Okay, the other [one] which I was involved in was multifamily, where I looked at buildings that were at least, I would never even look at anything at least if it was 10 units or larger, the purchase. Then the other, which is commercial real estate, and commercial is very broad.

Preston Pysh  7:32  

And so Calin, I’m just gonna piggyback on his comment there. Whenever he first said that the people down in Florida are speculating. The thing that’s important to note is when you’re dealing with a single occupancy house, you’re really dependent on another person coming along and being unwilling to pay a higher price for that one house. That’s how you’re going to basically make a gain on it. But whenever you’re dealing with multiple people, you’re dealing more with an income generating property. I think that’s probably more of why he’s saying that he dealt with units that were 10 units and larger. Is that correct?

Calin Yablonski  8:07  

Okay, that makes sense.

Bill Pysh  8:09  

So back to the residential property, a lot of people do buy homes and they also, in different market areas than Florida, say like where I grew up in Pennsylvania, they’ll buy a single home and rent it out, is a second income. I prefer or I suggest that that is very speculative. Because really, you don’t know how to handle a tenant that would become bad unless you get a good long term tenant.

Calin Yablonski  8:43  

So really, what you’re saying is, commercial sounds like it’s the way to go or a multi unit for the first time investor?

Preston Pysh  8:51  

At the end of the day, you don’t want to get caught with a single occupancy house where the person moves out, and then you’re sitting on the property for 4 months waiting for somebody’s deals to move in to rent it out. Because you’re just eating that cost if you’re assuming you’re not paying for the building outright.

Let’s say you have 30% down and you’re making an interest payment on that property. That person moves out and you can’t find somebody else to fill it, that’s a lot of risk. When you have a building of, let’s say, 10 units. Let’s say you have a person that moves out. Let’s say you have two people that move out per year based on those numbers, you are in a position where you have the other people that are keeping that occupancy rate up so you’re still able to meet your mortgage payment and have a little bit leftover extra to cover things. So that’s why he’s referring to the fact that you’re basically reducing your risk by having a larger property.

Now, I think that something key to highlight here is that if you’re buying a property with 10 people in it, and it’s kind of like run down and probably not the best thing and then you have the potential for somebody else to build a new property next to you that could maybe take some of your business away, well then that might be actually a larger risk. 

However, I think in general terms and real general terms having something with more people in it is going to help alleviate that risk for you. And I’m sure my dad agrees I see him nodding his head.

Calin Yablonski  10:10  

So Bill, what would be a potential entry point then for a multi unit residential property for a first time investor? We are talking $50,000-100,000 to get into one of these investments?

Bill Pysh  10:23  

Well, before we get into the numbers, let me point out a couple things. A lot of people that are first time, they look at duplexes where you have two units. And the way those can work for you, say, if you lived in one and rented out the other, that’s a good start. But say if you rent it out both units, most of the time with those, people sell them at a premium.

What you have to be aware of is that you don’t pay more for those. And those are very hard to resell because most people that are getting in for the first time, they’re not willing to sacrifice living in one unit and renting out the other. They just want it as a complete business opportunity that it doesn’t appreciate in time.

So what I would recommend for a first time person, is to buy at least four units to six units to start with. And what you have to look for is the neighborhood that it’s in, for number one. You don’t want to buy in an area that is depressed. You want to buy in an area that is in good condition. And there are many things that you have to look at. In that market, you look at it as capitalization rate. That’s how you determine the value.

What you have to do is you take a percentage, you say, “Well, it’s going to cost me so much to manage it. I’m going to have so much percentage of vacancy.” You take the income minus the expenses and you look around the building well. Okay, I’m buying a fixed unit that has a bad roof. Well, the roof’s going to need to be replaced within a time period. So you have to evaluate that on the initial purchase price. 

So, say, how much money that you need down versus what the income and expenses are is determined by the capitalization rate. And I would always say that you need at least 15% down. The throw of another caveat into it depends on the age of the person purchasing it. Okay, let’s take two scenarios: You’re a 30 year old versus a 55 year old. The time frame is much different from owning that building.

Calin Yablonski  12:53  

So sounds like there are a lot of different qualitative factors that come into the decision as well when looking at the building–the condition of the building in addition to how much you’re actually going to be paying for it. Now, you mentioned something really interesting there. I’m talking about the cap rate bill. 

One of the fundamental components of investing in stocks is knowing your key ratios and being able to use those two to value the company. In real estate investing, what are some of the key ratios, or some of the most important key ratios that you use when analyzing and purchasing real estate?

Bill Pysh  13:29  

Great question Calin. There’s actually three approaches that you can go by. The first one is the cost approach. Say if you had to rebuild that unit, say we’re looking at a six unit, we’ll keep it simple. We’re not going to talk about a 30 or 50 unit structure. So what would it cost to rebuild that six-unit facility in today’s dollar? That is the cost approach. The next approach, say in the area you’re looking at right up the street is another six-unit, okay? And that is called the *inaudible*, and they have it for sale. That’s the sales approach. So you’re comparing your unit that you’re looking at versus one off the street.

Preston Pysh  14:16  

Yeah, you see, realtors do that a lot where you go and buy a house or like, Oh, well, the same size house up the road, it sells for $250,000. So that’s why yours is worth $250,000. So it’s a parametric valuation approach.

Bill Pysh  14:28  

Right? That’s how most residential real estate is. So then the third approach is the cap rate approach, which is the income approach. The income approach is the one I recommend because that’s the one that’s not going to get you in trouble. Okay, because that is the key ratio. And once again, we just went over how you get to that. And each area of the country, say, Canada versus United States per city, they have different cap rates of different areas.

Preston Pysh  15:03  

So I want to bring something up here because a lot of people might not understand the term cap rate. And so what a cap rate is, is all that is, is it’s a discount rate. And so, whenever we talk about stocks and you’re figuring out what the free cash flow of a stock is, and then you use a discount rate, to take up all the future cash flows, and you discount them back to today’s present value, the cap rate and the discount rate or the exact same thing. That’s what people need to really kind of take away from this. 

Whenever he says a cap rate of 10%, what he’s doing is he’s taking the future cash flows that the Brit the business will bring in over the next, however many years you want to use, and then you’re taking all those future cash flows. You’re discounting them back at a 10% return rate, so that you can put a valuation on the building. 

So when you do that, you might come up with the valuation of a six-unit building to call it 500,000 to a million dollars or whatever it is. If you buy it at that price point, okay, and all those future cash flows come to fruition based on that price that you would have paid, you’ll get a 10% annual return. That’s the cap rate. So that’s what he’s describing there.

Bill Pysh  16:08  

And Preston’s exactly right. Areas have different cap rates. It’s like what Warren Buffett says about intrinsic value, there is no real set way to say. With the capitalization rate, this is what it is. But what you can do is you can go on different sites that do sell commercial properties in four different areas. And you can look at their capitalization rate for those areas. I can share some information I pulled up before the show on that.

Stig Brodersen  16:43  

Yeah. Bill, I have a general question because I’m used to looking at the stock market. It’s really convenient for me to be looking at the earnings yield of, say, S&P 500 for instance because that’s like the overall temperature for me to evaluate if it’s overvalued or undervalued. And the earnings yield, that’s just the opposite of the price to earnings. So, if anyone was confused about that. 

But I was just thinking, just like I can see the earnings yield of S&P, right now, it’s probably around 5% or something like that, do we have a similar metric for the real estate market. I mean, you probably won’t talk about all 50 states at one time. You might only be talking about Florida or part of Florida. But do we have a single metric that just evaluates the overall temperature of the market?

Preston Pysh  17:33  

Yeah, that’s exactly the cap rate, Stig. So, he was just saying there’s a site. Dad, what’s the name of that site that you have?

Bill Pysh  17:42  

It is C-D-R-E, okay? And what they do, they’re a commercial realtor. There’s other sites. I’m not promoting their site. It’s just a site that works for me to look at what properties in all areas of the United States. You can narrow that down to an area that you’re interested in. And also, a market of commercial real estate. It varies from large complexes of hospital buildings to office buildings.

Preston Pysh  18:21  

Let me describe what the site’s a little bit more about. So, when you pull up this site, you’re able to pull up different regions. So let’s say Calin wants to pull up there in the Calgary region. He wants to see what the capitalization rates are up there. So you pull that up, and the capitalization rate might be 7%. 

Okay, so whenever you see that 7% cap rate, same thing as a discount rate, and if you were comparing it to, like what you were saying Stig, with the stock market being around a 5% or 6% return, if your cap rate’s at 7%, that’s pretty much what your return is. It’s that cap rate.

Bill Pysh  18:52  

And something I want to talk about or say about a cap rate, the lower the cap rate, the more the value of the property is. The higher the cap rate, it’s the opposite off.

Preston Pysh  19:05  

Well, that’s a matter of perspective. So, as a seller, you want the cap rate to be as low as possible. So, if you were getting ready to sell some property, you’d want the cap rate to be like below 5%, or wherever the current market. S&P 500 is that. You’d want it to try to be below that. Good luck trying to pull that off, but that’s what you would want as a seller. Now, as a buyer, you’d want that cap rate to be as high as possible because like for for Calin, if you were going to buy some property, you’d want the cap rate to be 20%, if you could get it there because that means if you could buy it at that price point, you get a 20% annual return on your money. Whenever you’re looking at the fact that your interest rates are really low right now and that the cap rate is low as well, that’s really advantageous for a seller because they’re going to get a higher price, because the cap rates low. 

Bill Pysh  19:53  

He can negotiate.

Preston Pysh  19:54  

Well yeah, but this is my point. So let’s say that you are interested in selling the building five years from now, let’s say that there’s a lot of inflation and interest rates are high and then the cap rates going to be really high, you could potentially get hosed on the resale price if it’s in a five year timeframe, okay? But if you are buying it to own it forever, and that you’re going to pay it off, then you’re golden. Okay, where you could get hammered is on the resale. 

Okay, if you don’t hold it through, it’s like a bond. If you hold it just for a little bit because interest rates are low and you try to resell it whenever interest rates go up, you’re going to get hosed. But if you hold it through the duration and you’re collecting all that income during that time, you’re fine.

Bill Pysh  20:38  

And typically a cap rate will vary between 7% and 12% and give you a window of where most of them are. And believe it or not, interest rates really dictate the cap rate. If interest was very high at this time, the cap rate would be up being an interest rate. If rates are low at this time, the cap rates are down. So people can get more value for the properties that they’re selling because buyers are willing to pay that because the opportunity is there to borrow, if a bank will lend you money. 

And now, in this environment, banks are very stingy on giving commercial loans. You have to be established. And that’s the hard time for first time investors to get money. I got very fortunate in my life. When I was in my 30s was when I was really knocking it dead because I knew I had the window of opportunity because I had time on my side and I got with a bank that was willing to take the risk with me, the risk reward with me to buy more and more and I had to then say to myself, sometimes you can’t handle that much at once. So, you can get in trouble by getting with a bank that gives you too much versus nothing at all.

Preston Pysh  22:04  

So I want to throw something out there because I think that this is a really important highlight. And this is something that’s really important to me. So he was in the position, whenever I was a kid growing up, that he could have taken on a whole lot more. And this is how much respect I got from my dad, he didn’t do that. And the reason he didn’t do that is because he wanted to spend more time with me as I was growing up. And I think that for people out there, whenever they’re trying to invest, and really try to break through and have their breakthrough, it’s really important to keep that in mind. Like, there’s nothing more important than your family. And that’s something that my dad has taught me. And that’s something that I try to really think about a lot as I’m trying to create new assets and do things in my own life that I always put my family first. That’s something that he has always done for me. And it’s something I want to highlight on the show.

Bill Pysh  22:51  

I paid him to say that guys.

Preston Pysh  22:54  

Check’s in the mail, dad.

Calin Yablonski  22:57  

So I think this is probably a good point for my next question which is, can you give me a typical day in a life of being a landlord for these multi unit buildings?

Bill Pysh  23:10  

Absolutely. So to say that you can do it alone is not true. You have to become a lawyer in a sense. You have to know repairs and who to repair, who to hire, who not to hire. And the biggest thing that I could give a person is a lease. A lease is so important–to understand every part of the lease. To know just not the benefit of the person renting to you, but for you to understand how to handle people in a kind and mannerly way because sometimes, some renters, you sign a lease and then they forget what’s in the lease. 

You have to point that back out to them what is in the lease at times in an appropriate manner. I was very fortunate, I had fabulous tenants throughout my whole career of doing this. It’s because I was very picky on who I ran it to. 

At the end of my career, I was actually charging two deposits by law, it was a Pennsylvania law that I could do that, it really improved. That’s one of the tips I’m going to say. That improved my tenants’ lifestyle in my apartments that I actually asked for more money that I held throughout their point of renting. And then I have commercial customers too, that I was very fortunate to always have wonderful tenants on that, and they had nice businesses.

Preston Pysh  24:48  

So you’re able to filter out your tenants a little bit more by having two deposits and you’re also accomplishing the fact that if somebody would leave you high and dry, which happened, I was down there as a young kid helping my dad clean out apartment buildings because people just up and left. Like that’s not something that is very fun. And that’s something that I think a lot of people that are interested in this line of business has to be prepared for. 

But the point is by charging two deposits, he was able to kind of filter and get a higher quality tenant. And then also he was able to cover his own interests that if a person would leave them high and dry, he had funds to try to recuperate at least some of that cost of cleaning the place out, finding a new person, having the apartment vacant for a month, and it’s just it kind of was a win-win for him to be able to do that. 

And then, if the person panned out to be perfect and they move on, they get their deposits back, and it’s no big loss on either side of the table. So, that was something that I think you learned in your last 10 years, dad. That was really something that you probably wish you would have been able to implement from the beginning. That really kind of helped you out a lot.

Bill Pysh  25:53  

Preston’s probably right about the time frame. It was probably for 10 or 15 years that I did that. You just get smarter as a landlord to manage. And another thing that I can pass on that I thought was very good for me, I standardized each one of my buildings with the same paint color. I changed that carpet colors and all the faucets, all the keys, everything you try to standardize to make it easy for maintenance. And we’re talking a lot of units, it takes time. But that’s another thing that you can do to really increase your income level.

Preston Pysh  26:33  

I’m sorry, Calin. I got one point I want to throw out there for you as far as the valuation piece. So a lot of people, whenever they’re looking at property like this, they’re really quick to look at the top line because they’re optimists. Everyone out there wants to see the biggest return they can get. 

And so, they look at the top line and they look at some of the expenses but they neglect to really identify a lot of the capital expenditures expenses that may become, every five years, every 10 years, like a new roof on the building, or I got to repaint the whole outside of the building, which isn’t something you’re going to do every year. 

And those costs and those expenses might not be something that the person who’s selling it to you might happily identify for you. And so, I think that people that are really getting interested in doing something like this, they need to be really honest with themselves and overestimate whatever their expenses are going to be. That way they can kind of come to a proper valuation of the free cash flow. 

So I just want to throw that out there while he was talking about standardizing the paint, and standardizing the carpets and things like that. Those are all cost savings and it’s also a maintenance time saving thing that he had learned along the way that reduced that capital expenditure that he had on the buildings.

Calin Yablonski  27:51  

Yeah. It also just seemed interesting, Bill. In some of the things that you had mentioned, around building a team, having professionals that you can work with and rely on, as well as having those processes in place, which is coming from owning my own business, I know how critical they are and how important they are and just managing our day-to-day operations. So, the next question that I had was, what are some of the common traps first-time investors fall into?

Bill Pysh  28:21  

So the common trap is not knowing what you’re doing. I’ll give a great scenario. I have a friend that just bought a foreclosure. It was a property in Pennsylvania that he went to an auction. And so he bid on this building to buy, and it was a former restaurant, a main chain, I’m not going to say what it was. He bought the building and most of the time you have to put up cash for when you do foreclosures at an auction. 

So then, he starts and they announce, but when they say things, it’s so fast and sometimes you don’t hear it. The words they had on the building is it wasn’t allowed to be another restaurant. So, he buys this building for X amount of money, thinking he got a good deal. Then he gets into the fine print and he’s not allowed to put another restaurant for like 20 years. 

So now, the building lies empty because he can’t utilize it. This will probably turn into an office building, which it’s not set up for that. So probably have to bulldoze it over and just sell the property as land. 

Preston Pysh  29:33  

Foreclosures, you’re going to probably be hit or miss with a lot of people with foreclosures. For every good story, you’ll probably have one bad story. And the thing that I think about with foreclosures is the time element. Do you really have the time to invest in order to turn it around the time to identify all the risks? A lot of times, there’s risks that kind of pop up that you maybe didn’t anticipate, so you got to kind of set some more money aside for that. But it does take a lot of time to get it back in there and get all the different people involved in order to reestablish it. 

And then, you got to worry about the branding piece of it because if the building’s been in a small community and a lot of people know that that building was a foreclosure, then you got that stigmatism with it that’s persisting. There’s a lot to it. So I think a lot of the people here in foreclosure automatically think, oh, there’s a huge discount, I’m going to make a lot of money. And they just kind of jump right into it really fast. 

I think that you need to have maybe a little bit more thoughtful approach to it. I’m not saying don’t do it. I’m just saying that you have to really balance out all the risks and the reward before you jump feet first into something like that. Go ahead, dad. I see you have something.

Bill Pysh  30:39  

Also, we mentioned commercial foreclosures. Let’s talk about residential foreclosures. For residentials, let’s look at a single dwelling. The perfect scenario is, if you’re a contractor and you have the resources like what we talked about, Calin, you say, “Hey, I have people in place, that is a great opportunity for you. If you know the marketplace, you have the people to go in, you buy a property that you know what you’re getting into and especially like down here in Florida, there’s *inaudible*. 

And that’s the thing that a normal person wouldn’t know how to look for. But a person that does it every day that’s in that business, he knows exactly where to go. To walk and say, “Hey, this property, I can refurbish, I can put X amount of money back into it. I know the area is booming right now, I can sell it. Here’s an opportunity.” But for the normal person that is not in that business, they’re going to miss those caveats of, “Hey, you have to put more money in that need.”

Preston Pysh  31:47  

Calin, I see you have another question.

Calin Yablonski  31:49  

Yes. For somebody like me, I have to be completely honest. I’m not very handy. I’m not great in the kitchen. I had my dad up here yesterday and we were installing my dishwasher and I swear I was just the person handing him the tools. I was the person holding the flashlight. That was my contribution to the project. So, how did you get into it in the first place? Did you have some of those skills? Or was it something that  you learned as you went along?

Bill Pysh  32:19  

As a young man, I lost both my parents young and I had to figure out a way of what I wanted to do in life. And I realized, I bought a business very young, did very well, made some good money, and sound that business. And then I said, What can I do with this money in a smart way? That’s how I got into the real estate business of buying buildings.

And then I just kept on proceeding. I then realized a great way to go for me is working full time that I can manage both and raise a family. So, through time you learn that you cannot pay for everything to be done in the units. So you like pick and choose what you want to do and what you don’t want to do. Through trial and error, I guess it’s the best approach that I can tell you is how I won

Preston Pysh  33:21  

Calin, I got a lot of time behind a flashlight, I tell you.

Bill Pysh  33:27  

Yes he did. Whenever I had a tenant which happened the *inaudible* now and then, I was very fortunate not many are having problems with something mechanically. I would always take Preston or my daughter with me that I felt was a good lesson to learn. I wouldn’t take them into bad situations, I’d take them into situations that I thought will work for them to become better *inaudible* people when they became older.

Preston Pysh  34:02  

Go ahead, Stig.

Stig Brodersen  34:03  

Yeah. Bill, I don’t know if it’s just me that is really lazy because I’m used to do stock investing. But I’m just thinking, Wow, you need to know a lot of things and you need to be handy. You also said earlier, you need to be somewhat of a lawyer. You need to have a lot of different skills. Now, Bill, I am so having that. I’m actually very pleased that I know you. 

So, I know that you both are good stock investors and you’re good at real estate. So, could you perhaps tell a bit about the different skill sets you need? Is it true that it’s easier just to be a stock investor, or do you think that is just because I have my background in stock investing? I think it looks more easy to me.

Bill Pysh  34:45  

Well, this is my approach that I see in all good businessmen. Take. You have to have what I call the money press. Some way to make your money each day, I call the press. If it’s a business, if it’s real estate, if you’re good in the stock market, you have to have some way to generate income that you know is coming in. What you do with that income is where you get smart. And with that income, I would then take that income from the apartments that I knew that was like the press, and then invest in stocks and bonds. 

When I was 30, I started out investing in stocks not knowing the principles that what you 2 knew. It was more or less by what I would learn slowly, and I’ve truly, being that I’m out of the real estate market, I loved it. In Florida, where I live now, I would never get in it because it’s much too competitive plus time consuming. I love to read in the morning. I’m a value investor. I go by the exact principles that you guys have. I’m happy if I can make between 8% and 12% on my return. 

So it depends on how greedy you want to be of what you’re doing at a certain time and depends on your age. Because when you’re 30, you can take more risks and have more reward. But when you’re 60, you have to then really look at things and say, hey, what can work and have fun with it and still have fun in life? If you work all your life and don’t have any fun, what’s the sense of living?

Preston Pysh  36:39  

So Stig, I got a point to piggyback off of what he’s talking about here. So whenever you’re dealing with commercial real estate, kind of knowing his business and the kind of the inner workings of it, and you’re comparing that to stock investing, he was getting a better return owning this commercial real estate than what you would get in a typical stock market scenario where you’re making. If you’re doing really well in the stock market, you’re doing 10% annually. He was doing better than that and that’s because he’s dealing with a small business.When I say he’s doing better than that, that’s based on the purchase price he paid versus the the returns he was getting in. He was doing better then. Once you agree, dad, probably better than 10%.

Bill Pysh  37:19  

Oh absolutely.

Preston Pysh  37:20  

So the thing is, you’re investing a lot of time. That’s what you’re not accounting for in that return versus the stock market where it’s completely passive. You’re not just investing it. So you’re getting a higher return, but you’re also putting a lot of man hours, a lot of good will, all the content. Yeah, a lot of sweat equity into it. And so that’s the thing that you got to really balance out. Do you have the time available to do it? Is this something that interests you? I mean, all these different variables. But I wanted to highlight that so people do understand that, when you’re dealing with a small business and something like this, you’re probably going to get a better return than the stock market. Go ahead, Stig.

Stig Brodersen  37:57  

Yeah. And then, Bill, I really liked what you said about taking the proceeds that you had from real estate and applying that in the stock market. Because I think, if you had $12,000, $514, you can pretty much take the whole thing into the stock market, exactly. But you don’t have that opportunity in real estate. I mean, if a unit is 20,000, or 200,000, whatever it is, it is not as liquid–it’s not as easy to park your money real estate, I guess, as it is in stock market. And you also need to do more due diligence. For instance, on real estate than on say, the S&P 500.

Bill Pysh  38:36  

Also with real estate, Stig, if you just run that cash cow until the cow’s out of milk, that’s where people get in trouble with real estate. You have to take a percentage of that earnings and put it back into those buildings every year to improve to get better tenants because you have a nicer property. Then everybody around you keep the price at the right price point. So, that way, you’re competitive. Those are the key things that I always did as I always did improvement and all my buildings every year. That’s the part that gets people also with investing in equities. You have to be patient and you have to do the right thing over and over and over again.

Preston Pysh  39:30  

I’m going to sort of highlight something. I think that one of his greatest strengths with managing the properties was that he would constantly take a lot of the retained earnings from the business and he would put it back into the business. He keeps the buildings looking clean. He puts shrubbery up. He’d put a new roof on. And he would do that stuff, consistently. 

He wouldn’t wait until there is a hole in the roof before he replaces the roof. And you see that with a lot of landlords that just really have bad business sense and aren’t there to take care of their customers or their tenants. 

They’re more into, “How much money can I make and how much can I sock away,” as opposed to, “How can I make this environment that they’re living in a better place?” And because he had that approach, I really think that that was one of the main reasons to his success in that industry. 

It’s because he was taking care of the people that were putting food on our table every night. So just a real important highlight, very important highlight for anybody that’s interested in getting into this. That I would say is one of the most important things you can do.

Calin Yablonski  40:29  

Okay, Bill, the next question that I had is, what are some of the best resources available for learning to become a real estate investor? And I do just want to say, it sounds like at the end of this show, Preston, Stig, and Bill, you guys should be creating billsbooks.com because it is going to be awesome. So, go ahead, Bill.

Bill Pysh  40:50  

I don’t want to toot my horn, but I’ve helped one of my… I’m very proud of one of my friends. He came to me years and years ago and he says, Bill, how are you doing it? And I played platform tennis with him up in Pennsylvania. We knew each other for years and years in his company. He’s in a family business and *inaudible*. Him and his brother wanted to get into the business that we’re talking about. So I gave him my formulas that I do. And now he’s over 200 units strong, doing just fine.

A couple of the things that you mentioned, the best resources, there’s renters clubs that you can join, like in Calgary, if you look it up, there’s a renters club, probably, in your area that you could join. That’s the first approach. That way, you get a feel of what people in your area are doing. There’s always people buying and selling. That’s one way.

The next way is, there’s a website called loop.commercialrealestate. You can go there and see what units are selling. Now, it’s a website. They’ll let you look for a few times, then you have to join it. 

The next one is the CBRE. But the best advice that I can give you on how to do this; this is a little trick that I’m telling to whoever’s listening to this podcast. What you do, wherever area that you love, that you want to own a building in one’s end, you know what, you knock on the owner’s door. You find out who the owner of the building is. I don’t care if it’s a 6-unit to a 200-unit. You find out who the owner is. 

You knock on their door, and you say, “I’m an investor. I love your property. When are you going to sell it? I’m interested.” It may take you 5 years. I’ve waited 5 years for properties to come up. Because you know what, I kept on knocking at the door and I just say, “I love it. I love what you do. I would like to own it someday.” 

I’ve had in two occasions, they actually financed it for me because they knew that I had the potential of running what they did and not losing it. And the advantage of it is, for a seller to do that, is the capital gain. Because they’re going to have to pay capital gain on that unit and you convince them from you paying them through the years. That reduces their tax structure. It’s almost like setting up an annuity for them. That is the best advice that I can give any person.

And the second thing is, we’re saying, ‘Well, I don’t have a lot of money, how can I get into this business?’ Well, here’s another tip. You ever see where they have these rows of condos that you can purchase one at a time? Now, that’s a little offset that you can… you might pay a little bit more than if you get a unit that you can buy at a reasonable price, and maybe a little bit rundown that you can throw some paint and carpet in it, you can buy one those, say they’re structured into 10 units in one complex. Buy one at a time until you own all 10, then you own the whole building. That’s another way for first-time people. If you want to do a one z, one z, one z approach that you can do. But that takes a lot of deal diligence and time.

Preston Pysh  44:21  

So, calling out, I’ll tell you something. So I think a lot of these people that own the larger buildings, their biggest concern is whenever I sell this, what is going to be the most advantageous way for me to sell it so that I get the right price and I don’t have a lot of frictional costs dealing with a realtor and whatnot? So, if you go and you approach, say, a person owns a building that you’re interested in, and maybe they’re not in the market to try to sell it for another 10 years. You’ve just made an impression with them by your interaction. And they’re going to take your name and they’re going to remember you. Because you know how many people are out there doing that? I would argue not that many. Yeah, people don’t. So what’s nice though, is whenever you do this… so they’re going to remember you, they’re going to take your contact information. And I think the most important thing that you can do is talk in terms of their interests, something that you learn by reading, ‘How To Win Friends and Influence People’. 

So you would maybe start the conversation with, Hey, so whenever you’re going to sell these buildings, they’re beautiful property, but you’re going to want to sell them someday and your biggest concern is probably going to be capital gains tax. I’m a person that has a successful business on the side. 

I have a lot of collateral that I could offer up, and you and I could maybe come to an agreement with no realtor. We could put the realtor aside so they’re not taking their 7% cut on, say, a million-dollar building which is 70K, right there. 

So, you throw that out there where you do not want to deal with a realtor and dad, you could get into the specifics of going down and signing the legal paperwork at under $1,000 for the entire transaction. 

But if you throw that on the table for the person, you also throw that on the table that you have an interest in maintaining the property, keeping it accountable, all those things. And that you would come to an agreement on the price as you kind of look at what the cost would be. You throw that on the table for them. 

I think that you’re probably going to make a good impression. You’re going to open yourself up to a future opportunity. And I think if you just go around and do this to a couple different properties, you’re going to find somebody that’s in the market that try to sell their building within a five-year timeframe. And hopefully, the conditions are in a good position for you and them and it’s a win-win.

Bill Pysh  46:34  

To do that, you’d have to have that money down and realize that you’re going to have a lot of sweat equity invested in time, but it’s well worth it if you’re willing to sacrifice that. But first, teach yourself how to be a good manager, how to also approach people in a kind and loving way. That all takes precedence when you’re in that business but that’s a couple of things that I could pass on to share. 

Preston Pysh  47:06  

If you care about your tenant, you’re going to be successful. If you don’t care about your tenants, you’re going to probably have a rough time with it. Go ahead, Stig.

Stig Brodersen  47:14  

So, Bill, I think this real estate thing is really, really interesting to discuss. And I actually want to continue on the *inaudible* to have in the very beginning and how much money would it take for me, for instance, as an investor to enter the market? And then know that, it really depends on which type of asset you are buying, but could you just give us something on the ballpark?

Bill Pysh  47:37  

Well, you can’t give specific numbers, you have to give percentages. You need at least 15%. Before you come up with a number, you do the cap rate to see what it’s worth with expenses versus the income. What matters is, what it’s worth and what you can come up with. You have to then realize if it’s in a great market area, which mine were. I never have vacancies. Noq commercial’s a little bit different. 

Commercial, you’re getting into a business movement. And so, you really have to have a vacancy of a 3-month window for a business to actually come in. You may have to remodel to fit their structure and then charge them more rent because a lot of these business owners, they come in and they’re short on cash, too. 

But you need them to come in because you can make it up on the other end by charging them more for the unit. When you charge more for the unit, guess what happens to your building? It goes up in value. So raising rents is very important, every year. 

Be kind to the tenant. Be kind to yourself because when you raise rents that makes your capitalization then go up, which makes your building worth more. So, whenever you are ready to get out of it, all of a sudden your building’s worth much more, and that is very important to know the marketplace of rents.

Preston Pysh  49:05  

So, whenever he said that, there were alarm bells going off in my head. So whenever you’re trying to value the property, I’m talking in terms of a buyer, whenever you’re getting ready to buy a property, don’t think for one second that that previous owner might have, maybe, pulled a little bit of that trick on you by raising their rents, maybe, the year prior before they’re getting ready to sell it or two years prior, that they raise their rents in order to, maybe, elevate the price of the property. 

So, the thing that you want to do is you want to look at the 10-year history of how have these buildings been. My dad’s saying five. He’s holding up his hand for five, but five to 10 years, however much history you can get to see the trend line of the prices of the buildings, and what they’re charging for rent. 

Because let’s say, that the person just changed the rent in the last three months, you might have a lot of people that are shuffling their stuff around in order to get out. Next thing you know, you’ve got a building that’s 70% occupancy and you were calculating the value with a 100% occupancy because they had a previous rent structure. 

So, some risks the highlight, and it just goes to highlight our point that you have to do your homework. You can’t just dive jump straight into this because you see some numbers that really make your eyeballs go kaching, and you get all excited because you might find yourself in a horrible situation because you didn’t do your homework.

Bill Pysh  50:29  

So Stig, I know that’s a roundabout way to answer your question. You know, everybody wants a number. Yeah, really, you don’t need a number. What you need is what works for you. 

Preston Pysh  50:41  

Here’s the other thing, Stig. So if you’re going to San Diego and you’re comparing the prices for a room, for a unit there, your rent might be well over the thousand dollar mark. Whereas, if you go into another part of the USA or wherever, you might be at the $600 range per unit. And so, whenever you have that, I mean, you’re literally going to double the price of the entire building going from a 1200 route unit to a $600 unit. And that’s just why it’s really kind of hard to put a price on it. But I think we can safely say that if you’re looking to buy something with over four units, you’re probably talking a couple hundred thousand dollars here. 

So that’s just something that, if you’re not in that ballpark or have that money set aside in order to put a down payment on it, then you probably need to, maybe, start looking somewhere else or a different medium of investing like stocks or bonds or something like that. But just for a starter, I think if you have 100k, you can maybe start looking into this type of stuff and getting more interest in it. 

I’m sorry, one more thing. Just because you don’t have that downpayment right now, it doesn’t mean you can’t go and start doing the cold calling or the knocking on doors to set yourself up for whenever you do have the money. If you’re doing a projection say, hey, I want to be at this point where I have a quarter of a million dollars in my pocket and five years from now, start knocking on those doors today. That way, you have the opportunity.

Bill Pysh  52:03  

Preston has a great point. So you knock in the door and you get the guy and say, yeah, I’m interested. I’m probably going to be three years out. Right down at that time, man, you should, put your heels and say, hey, let’s start evaluating what you have right now. So that way when 3 years comes along, you know exactly what you need for that down payment. You have your bank structure in place for when that day happens. 

When he says, I’m ready, you’re ready. Because what he’s going to do is if 3 years goes by, and then you start saying, “Oh, I’m not sure that I want to do this.” Then, what do you think he’s going to do? He’s going to put you aside and go elsewhere.

Preston Pysh  52:47  

Plus, I think, it puts a goal out there for you. If you have this preconceived notion that you’re going to be buying the buildings in three or four years or whatever the case would be. You’re going to start saving and you’re going to start putting yourself in a position where you’re going to be able to action that.

Bill Pysh  53:02  

One of the points that I wanted to point out is, sometimes smaller isn’t always better. I found by buying larger units, say 15 to 30 units, they were actually easier to manage. And the reason why is, you have them under one roof, you have one property, you have them contained. And that is something to keep in mind. 

But it also takes you more to get in. So, it isn’t harder to take care of large buildings. I feel it’s harder to take care of multiple units. And when you’re developing this to start out at six, sell that six-unit and buy a larger one with those assets to step up to larger buildings.

Preston Pysh  53:53  

So, I have one final highlight and then we’re going to go to our question from the audience. A lot of people whenever they are trying to apply that, they want to get as many units as they possibly can. And they sometimes put them in a position where they are over-leveraging themselves with the loan, and they don’t have much of a wiggle room on their free cash flow to reinvest back into the building. 

That’s where you’re going to get yourself in trouble. So, when we were talking earlier about how my father had always put more money back into the building, kept them looking nice and all those things, it’s because he never leveraged himself into a position where he didn’t have the money to do it. 

And I think that that’s where it might not be by choice that people aren’t investing back in their building. It’s simply because they over-leveraged themselves. So, I would tell you to take it slow, take it in steps for what you can afford and that you’re putting that money aside, to put it back into the building so you can take care of your people. When you do that, you’re going to have long-term success. 

Okay, so let’s go ahead and go to our question from a person in the audience. And today, our question comes from from *inaudible* and he has a fantastic question for us about share buybacks.

Bill Pysh  55:06  

Hey guys, I have a question for you. There are many companies which say that they are returning money to the shareholder in a form of share buyback. Their company say that they use almost all their free cash flow to buy back their share. 

But when I see the number of shares outstanding for the last few years, I don’t see that it’s being reduced at all. So, where is all the free cash flow going? Does it mean that the company is giving a lot of stock options to their employee and all free cash flow is used to just buy back the same amount of stock from them in the market? In that case, the shareholder will not get anything out of the free cash flow. It will be great if you can share your thoughts on this. Thank you.

Preston Pysh  55:58  

*inaudible* so, I love this question because it’s really getting into the nuts and bolts of accounting. So that’s probably why I get all excited whenever I hear questions like this. And I know, I sound like a total geek when I say that, but it’s true. 

The first thing I want to do is I want to describe accounting to people when we’re talking about share buybacks just so everyone can kind of understand a top level view of this. So whenever you’re doing a share buyback, let’s say that you have 100 shares that are out on the market and the company actually has the ability to buy back those shares off of the market so that there’s not as many shares out and owned by different owners. 

Let’s say that the company has enough free cash flow to buy back 10 of those hundred shares back on to their company books. So, that means, there would only be 90 shares out on the market. So those 90 shares now become more valuable because there’s less of them. If you just thought of the ability to continue to decrease the number of shares out there, let’s just say you decrease that down to 10 shares, those 10 shares became a lot more valuable because there’s not 100 of them out there. 

That’s what he’s referring to in this question. And what he’s saying is, when a company is taking all their free cash flow and they’re buying all these shares back, you should see the stock price become more valuable. But what he’s saying is he’s seeing a lot of companies that that’s not necessarily happening. So, let’s discuss this in more detail, what’s happening. 

When a company buys back their shares, their shares come back and they actually sit on the equity line of the balance sheet, and it’s called a treasury account. And the company has two choices that they can employ whenever they buy the shares back. They can either leave the shares on the company books as still being listed but owned by the company, or the company can actually retire those shares so that they can never be reissued ever again. 

Now, what most companies do is they buy back the shares and they keep them on the company books, and then they issue them to employees as incentives. And they use this to help retain the talent within the company. So, whenever the company has those shares and they issued them out to their employees, what they’d often do is they treat them as stock options. 

And let’s say, that the stock is trading for $60, they might actually give the person the option to exercise it at $40 or $50. So, that person is not only being able to acquire the share itself, but they’re actually making a gain on the fact that they were able to exercise it at a cheaper price. So, this really gets very complicated. It’s very hard for a person in accounting to account for all this stuff. 

Now, when you look at a company like IBM, they’ve been buying back a ton of shares. They’ve been basically using all their free cash flow in order to buy these shares back and put them on their company balance sheet. And you’re actually seeing that the earnings per share on the company go up even though their revenues are decreasing. They’re able to see their earnings per share go up because there’s a number of shares outstanding that are being reduced. So, that’s a scenario where it’s actually paying off for the shareholders. 

Most companies don’t do that. Most companies are issuing the shares back to their employees at a stock option that’s advantageous to the employees and it’s a form of payment. And you’re not seeing that show up on the income statement. And that’s where things get really tricky. 

So, here’s my recommendation to people that are on the board of directors whenever you’re talking about this specific scenario. I think that share buybacks are good only if the chairman of the board and whoever’s representing the shareholders has an agreement with the leadership of the company, that the shares continue to sit on the company’s balance sheet, and that can be reissued for the benefit of the shareholders, so that they don’t have to go through the whole reissuing of shares because that costs a lot of money with the friction as you’re going through banks and other things like that, if you want to issue more shares of your company. 

I think there needs to be some type of memorandum or some type of agreement between shareholders and management that those shares continue to sit on the company’s balance sheet and that they’re only reissued In the event that they need to raise more capital in the future. I know that sounded like a really long response. I might have lost some people there, but this is, like I said, I get really excited whenever I talk about that stuff. I see, Stig, you got something that you want to add and say.

Stig Brodersen  1:00:13  

Yeah. I’m *inaudible* and *inaudible* with Preston here. When I heard about this question, I was just through the roof. And that probably just tells you that I’m just an accounting geek as Preston. 

Preston Pysh  1:00:24  

We are so geeky. 

Stig Brodersen  1:00:26  

Yeah. I should have my my dad on the podcast soon as well.

Preston Pysh  1:00:33  

No offense, dad. No offense.

Stig Brodersen  1:00:35  

No offense. I really like this question. And the reason is that, really, really often you will hear that share buyback is a good thing. The reason why it’s probably that, the management is always telling when they are conducting the share buyback. That is a good thing because they have been returning capital to the shareholder. 

Now, whether or not share buyback is a good thing or bad thing, it all depends. In my opinion, you cannot say that companies buy back shares and you can definitely not say the management is buying back shares. 

In reality, it’s you because you are the owner. So, you are money that is being spent for a share buyback. And logically, the implication for that is, unless you are getting the stock as a good price, that’s not creating value for you, not at all. If the management is buying back shares for your money on your behalf at a really bad price, and perhaps, issuing to their own employees. I mean, that’s a really bad business for you. So, that’s really just a general rule of thought. 

It’s really, really hard to say that the management should just calculate a stock value to be, I don’t know, $80 and then stop buying back shares because that’s just not how it works. But in general terms, if you see a huge share buyback program for a company and you can see why it’s that expensive, it’s probably bad business for you. And then, just a final thing, because I can hear from you *inaudible* that you’re a really smart guy. So, you probably know there’s a lot of tax issues. 

For instance, if you want to have the capital paid as a dividend compared to share buyback, really in short, if it’s a paid-off dividend, you have to pay tax. But if it’s share buyback, you don’t pay tax on that. But in reality, just think about spending your money. Don’t think too much about tax. That’s really just a byproduct. Think about, is it a good price that they’re paying these stocks?

Preston Pysh  1:02:27  

I totally agree with what Stig is saying here. And that’s the big point. Whenever you see a company buying back shares, and let’s just say that we think that there’s a big premium on the stock price, that makes me very upset as a stock investor. Why in the world is this management buying back their own shares at a really high price? When you look at IBM, I think that IBM is undervalued right now. 

Whenever I see them buying back shares, that makes me really excited because that has a compounding impact of the ones that I currently own. So, I think the important thing here is that, in most cases, a share buyback is actually not a good thing for shareholders. And it really comes to Stig’s point, because the management will be buying it back at the wrong time. 

And then, the second thing is, is that management usually buys it back. They don’t have a really good incentive program within their business and they’re just handing out the shares like candy to their leadership or their executive leadership, and it’s not really actually creating long-term value. 

I think that Charles Koch’s book talks about that kind of stuff a lot more in detail. We won’t go there because we’re already really long on this question, you can tell we’re very excited about it. But anyway, we’re going to go ahead and conclude that. I’d like to thank Calin Yablonski for coming on the show. If anybody has a search engine optimization problem that they need solved, his company Inbound Interactive is the place you need to go. We’ll have a link to his company on the bottom of our page. He’s helped us out tremendously. So, I can’t promote his company enough. I’d like to thank my dad for coming on. 

Dad, this couldn’t have been more fun to bring you on the podcast and to talk about all your success in the real estate business. And I know that there’s a lot of people that are listening, who are going to gain a lot of information from this. And a lot of the stuff that my dad was talking about, we’ll have that in the show notes so that you can reference it because I know there was a lot that’s been put out there.

Bill Pysh  1:04:12  

You’re welcome, Preston. I’m very proud of all three of you, young men and what you’re trying to accomplish here; to help people with just understanding good fundamentals. 

Preston Pysh  1:04:24  

Well, thanks, Dad.

Calin Yablonski  1:04:26  

I just want to say thank you so much, Bill. I sincerely appreciate it. Preston and Stig, you too, as well. Thanks a lot for having me on the show again. It’s always a lot of fun.

Stig Brodersen  1:04:34  

Pleasure.

Preston Pysh  1:04:35  

Alright, guys. Well, that’s all we have for you this week. Next week, we’re going to be talking about the book, Influence, and Calin’s actually coming back on the show for that one because he’s the one who literally sent that to me as a Christmas gift and said, “Preston, you need to read this book.” 

So I said, “Perfect. I absolutely loved it.” It’s probably one of my top 5 favorite books of all time. And so, Calin’s coming back on next week to talk about that. You guys are really going to like that episode. Alright, so we’ll see you guys next week. Thanks for listening. 

Outro  1:05:02  

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