Oct 22, 2019
James: Hey, audience welcome today to Achieve Wealth Podcast. I'm James Kandasamy. And we're going to be talking to Jason Pero from Pennsylvania. Jason owns almost around 900 units. But the fun part is, he has like over 600 units on his own and a lot of it is duplexes, quads and small multi-families and he recently started syndicating around 300 units. So, hey, Jason, welcome to the show.
Jason: Hey, thanks for having me, James. I'm glad to be here.
James: Awesome. Thanks for coming in to the show. I'm always impressed with people who have build-up that many unit count; 600 units on your own without syndication so you're basically an independent rental owner, that we call it. And I just want to go deeper into that. Can you briefly describe how did you accumulate the 600 units and how many years did it take?
Jason: Sure. So my wife and I started in 2001. You know, even before we were married, a few years out of college and we bought our first duplex and we did it the old fashioned way. We saved, we both work, we saved one person's salary and save that towards our down payments. And we would go with just traditional bank financing, 15-year mortgages, 75% loan to value and we just went really slow and steady early on. So, in 2001, it was a two unit, in 2002 was another two unit and a four unit and then the next year, it was a four unit that actually --
James: Hold on, I need to clarify something. So did you come out from college and start doing this?
Jason: Yes, so I graduated in 1999.
James: Okay.
Jason: And so started working, I didn't know a whole lot about money growing up and started making a little bit of money out of college. And I realized I wanted to, at that time, I just wanted to be build wealth and be millionaire.
James: Wow.
Jason: And all that kind of stuff. In one of my internships, I learned about rental properties and that seems like all the wealthy people had their money in real estate.
James: Okay.
Jason: So I started doing all my research and reading books and try to talk to different people that own real estate. And so we were able to do that in 2001 and just kind of went slow and steady. And so my wife worked as a pharmaceutical sales representative, I did that for a few years as well. And then got into medical device sales. And so each year, we buy a few rental properties and along the way, some sort of like career-changing deal with come along.
2005, we build up to 23 units and then all of a sudden, I met a guy that had 56 units for sale that he was willing to hold the paper on, in owner finance and so that took us from 23 to 79 overnight. And then we just kind of kept the same process; saving our money, buying a property, couple properties a year and then 2008 hit and there was a ton of property that was getting foreclosed on. So I was buying up singles and doubles and triples as fast as I could rehabbing them, refinancing them, getting my money back and repeating the process.
So we did a lot of that from like 2008 through 2012 when I left my day job. So at that time, we had about 290 units and again, we were living like way below our means, reinvesting everything back into the business. So we just put a ton of our own sweat and money into the properties in those early years. And we just kept buying over the last several years so it's been seven years since I left my day job. And when I was working, day job for a living, I'd always said I was a little bit nervous to take on private money or deal with investors. Because maybe I was afraid but I felt like from a mental and emotional standpoint, I wanted to be there for that investor, I didn't want anything to go wrong. And I knew if I was a travelling salesperson and I'm working three hours away, God forbid something goes wrong, I don't want to like I didn't want anything to happen to that investor's money. But once I quit the day job, sort of like on my own in my own portfolio every day, started networking with and meeting private lenders, private investors and did a bunch of that over a period of years.
So more properties that were owner finance, more of these, like hard money loans from loan sharks and the guys that want to charge you 10%, 12%, 18%. But we're able to get into more and more properties like that. And all the while we kind of heard about syndication, knew what it was, didn't really have the confidence, I think or just was missing like one piece of the puzzle. And honestly, when you and I met at Rod Cleaves’ house little over a year and a half ago, something in that weekend just click and said no, I know how to do this, this is easy.
James: Easier than buying --
Jason: Yes, yes. And then from that point on, like the first syndication we did, found a great deal that we're bringing investors in on, then found another that and now we have another thing in the pipeline. So just everything kind of builds on itself, you know, have this natural progression. So sorry, that was a really long answer.
James: No, I mean, I really enjoyed but I want to go a bit back to the beginning when you started because a lot of fresh out of school or a lot of graduates or anybody coming up from school, I'm just trying to see how they can get the similar mindset. How can they walk that steps that you took? Because you said you graduate in 1999 and 2001, you started buying and you said your hunch for real estate, you got it during your internship. But was there like any mentor to tell you to buy or you think that okay, I can do this? And what was that ah-ah moment that pushed you out of your comfort zone to buy your first house?
Jason: So I'll back up; so when I was in college, I did a number of internships with financial planning companies. My original career, I thought I was going to be a financial planner.
James: Okay.
Jason: I never did that but I did a few internships and during one of them, the financial planners had me going through clients files and setting up appointments to meet with them. And one of the things, I was sitting there learning and I'm like, oh my gosh, how does like a dual-income family, like a doctor and a lawyer only has a network of you know, they're making a half-million dollars a year, but their net worth is like $50,000. And then I'd see another file that these two school teachers may be making a combined income of 75,000 or 80,000 a year, had a net worth of like 5 million.
James: Wow.
Jason: And as well, they want a bunch of rental properties and I'm like, what's that? And so somebody kind of gave me, you know, hey, this is how, you know, well, a lot of wealthy people have money in real estate. So I got thinking and I really wanted to go down that path like becoming a millionaire. And how do I do that, I read 'Rich Dad Poor Dad', read the 'Millionaire Next Door'. So it was the 'Millionaire Next Door' talks about living below your means and that most millionaires don't drive Lamborghinis but they drive a nice used Honda or Toyota and things like that.
So it was reading and learning some of these mindset things. And the first job out of college, I was a kind of entry-level sales job. But there was a guy there that had a few rental properties. And I'm like, man, this seems really interesting, what do you do, how do you do? And I started asking him questions and he was telling me to read the same books that I just read. And kind of the pieces was coming together and like, well, if I want to be a millionaire, I have to make my money work for me. And so I was putting money in my 401k and starting IRAs, but I also saved every available penny I could. So then, I was talking around family friends, and just maybe kind of not real mentors, but people that were maybe my parents' age that I knew that they knew, and I said, hey, does anybody know about rental property? And turns out that one of their friends or people they were acquainted with, owned rental property. And they said, hey, we might have a property for sale. Hey, come take a look at it. And it was like a $32,000 duplex.
And I mean, not a lot to speak of, but I'd saved up about $5,000. And there was enough for like at the time to have like, first-time homebuyer loan program. So I had enough money for a down payment, got a decent loan on it. So I only had to put like, 10% down in closing costs, and all that kind of stuff. But got into it and the rents at that time were like for 2 bedroom apartments, they were $375 a month and I raise the rents to 500.
James: Got it.
Jason: And all of a sudden, I'm making money and I said, wow! It paid my student loans. I need to buy another one so I can pay for my car payment, and I just sort of thinking about it that those terms. And so like, they were a mentor in a sense, the guys that sold me my first series of properties, because I mean, they were typical, like they had a W2 job, you know, retired from that after 40 years and gold watch kind of thing, but at their peak, they maybe had 25 or 30 rental units and they never saw real estate as a full time endeavor. But they saw it's a great way to build extra wealth for retirement. And so I kind of remember it vividly, I bought several properties from these guys. And I met this guy, the first formal mentor I had in the business in 2005. And I was doing my walkthrough of this property with the guys that sold me a few handfuls of my first units. We were on top of a roof, you know, looking at this roof on the property I was looking to buy. And I asked him, hey, I met this really interesting guy by the name of Richard and he has 130 rentals. It's all he does. What do you think about like real estate as a full time thing? And he said, man, I don't know, I don't know how anybody can do this full time. And he just really pooh-poohed the idea.
But then I met and went with this guy, Richard, he goes by the name Dick. But I met with Dick and I was like, really impressed with this guy. He shows me all of his rental properties and says, hey, you give me 10% down and I'll hold the paper. And he seemed like he got a really good job at General Electric. You know, nice enough guy but he had this little empire of like properties. I thought that was the coolest thing in the world. And he was making it at the time, what I thought was a lot of money and he was doing a lot of good things. And he had enough money to get back to charity and he seems to travel and do, like, live life that he wanted to live. And he worked hard, but he didn't have to work for the man, he was doing his own thing. And so, after we close on that 56 unit deal, he really became that mentor to me. And it always stuck with me that even though we've sort of grown apart and we don't see each other nearly as much as I'd like to these days, I've sort of taken what he's done for me and I tried to do that with a lot of younger investors.
And I just was telling somebody this a week or two ago that I feel like our industry is, I mean, certainly there are people that don't want to help but I would say more often than not, there are people more than willing to show others the path and say, hey, look, I think I can help you out. I mean, don't want anybody to take too much of your time and make it a full-time job to mentor somebody but I think, as a group, most of us real estate entrepreneurs [inaudible12:47] And just like to, it kind of, you know, as some people showed you the way of coming into it, you can help these younger guys and gals out too.
So, I think, for your younger audience members, like, the key is maybe just to try and meet people that have been doing it, become friends with them, ask them questions and their knowledge, we all like to talk about our successes and our failures and all that stuff. And that's it, you know, you buy a coffee or a beer or lunch or something like that and you can soak it up.
James: Absolutely. Yes, yes. Yes, I mean, that's just a very impressive build-up of your rental portfolio. And I'm just trying to get that the time where you will push over the cliff. So I mean, push out the cliff to be successful. I mean, you can correct me, you had a lot of desire to become a millionaire, right after school and you saw that you have a lot of desire and you went and seek out a lot of information from different people. I think it's some mindset that you really want to do it, has pushed you towards buying all this rental, taking all that information, and really taking action, which I think is very impressive.
And a lot of college dropout, not college graduates, or any graduate, high school graduate, anybody who have finished their studies, they can do exactly what you're doing. But they have to have that desire to come to your level, to be a millionaire. Go and seek that information, take the risk, right? I think that is what you have done very well up to now. And you're right, usually, real estate entrepreneurs usually share a lot of information, and it's just whether whoever receiving the information is going to go and take action or not; that's very important. So, that's very, very interesting.
And the 900 units that you have, a lot of it is duplexes, quad and out of the 600 units that you own on your own, I think 300 is syndicated so how many are duplexes, quads? And how many units are like small multifamily? Do you have that number?
Jason: Yes. So out of that 600, there's about 120 that I've ended up, well, I still technically own but I'm holding the paper, I've sold them on land contract. And so yes, so about 120 to 150, that smaller, single-family duplex quad. And I've tried to hold on to the things that say 8 units or above and --
James: Got it. And I think for every big deal we do, I sort of have this internal, like a mental rule that trying to evolve the portfolio. And so, with a lot of that smaller stuff it's starting to spin off the smaller properties, whether it's selling it to and holding the financing to up and coming real estate investor or just selling on the open market and divesting of it. I think every time you pick up a 205 unit, or 100 units that becomes your focus. And then, you don't want to think the quality of service or the quality of that duplex or quad to suffering, you just you kind of graduate and move on into newer things. And so, at some point, in all of our careers a 10 unit, or 20 unit, and it seemed to be the biggest thing in the world. But ultimately, when you close bigger projects, that becomes, you know, --
James: So small, right?
Jason: Yes. So I think it's important to evolve the portfolio. And so we have been in the process of trying to spin off the smaller properties, but in a control, smart way. So you don't want to give them away, but at the same time, I don't want to be managing those same things 10 or 20 years from now either.
James: Yes, yes. So right now you have moved from duplexes, quad to smaller multi-families, you know, 50 something units and you said you hold a note for 100 something and now you've moved to like 200 units syndication, 100 units syndication, right? So why did you move from owning on your own to a syndication model?
Jason: So it was interesting. I knew at some point, if real estate is all that I did, I'd run out of my own available money. We have to have money to live on and reinvest into the business. But in order to take down, say, a 4 million or 10 million dollars project, it took me a while to wrap my head around that. I used to think that, okay, I'll refinance my portfolio and use that money to buy into a larger property. But as you see, with a lot of these larger properties, that the types that people's raise money for syndication, is the timeline, is a heck of a lot faster than what you can do a refinance.
So realizing if you want to lock up 100 unit property, you know, 60 days, 90 days, I mean, these processes move fairly quickly. So, that was one thing. The other part was I became friends, with a gentleman that was my [inaudible18:03] on units we syndicated. And we really said, hey, we should buy real estate together, we could create some sort of offering and I just wasn't thinking big enough. And then, when this 86 unit came along, I said, this is perfect, the light bulb went off and said, hey, we need to raise a million and a half dollars and we'll go out and get agency financing and it just went really easy. And you can still end up having the control.
So for me a little bit of it was controlled, a little bit of it was, I mean, not just from an ego standpoint, but I think we do a really great job of running and managing the property. You know, I like the idea of being the majority owner of the property. So I felt like, oh, yes, maybe I only own 15% of the deal but I'm the majority owner as a 15% owner of the deal. And then you can get at the higher-quality property; property that appreciates as the economy goes, you know, we can be much more manipulated by cap rates, and just has a much higher upside. And I guess what I like to say predictability.
So the problem I found with the duplexes, and the quads was that, sure, I can make the same amount of money every year, but it was a heck of a lot of work. And it can be really unpredictable, you could have, you know, both units in a duplex become vacant in a month and then you're 100% vacant and it's wildly unpredictable as you scale. And so I found with like the larger properties, if you run it tight, and you have good management and you pay attention to the details, you can predict what your income is going to be every month. And I just got to a point in my life where I'm like, I just want a steady paycheck out of this business. I don't want to have that level of unpredictability. And so, from a syndication standpoint, you get a distribution every quarter. As the GP, we have that piece, and it becomes something where you're within a few percentage points of what you've budgeted plan out every year. And I found that that was another ah-ha moment.
So with my some of my smaller and even medium-sized multifamily properties, the 25 units and the 50 unit type of thing that I had, is that I went back and I had a 26 unit I brought in 2008. And I ran the numbers every year from 2008 and I've never made more or less than a few thousand dollars, like, for instance, the property makes $115,000 a year on average, it's never been below 112 and never been above 118.
James: Okay.
Jason: Yes, that's a clue. And I'll look at my other properties like that, yes, they're all within a few thousand of each other. And I said, well, this is a lot better than then chasing a single-family home, that becomes vacant and sits vacant for four months because you've got to pull out the trash and your carpet and exterminate and do all those things. So it's one of those things that sort of self-realized as we went along, is you have these larger properties, if you run them well, just create that level of predictability that you want as an owner. But I would say that it's really easy to sell to somebody looking to invest passively in your deal that, okay, if we modeled this this deal correctly, then you're going to get this return on your investment, every quarter, every year that you're involved in the deal.
James: So the predictability has become very key, I guess. And the scalability because you have a lot more units and you would have budgeted for occupancy loss and having vacancies and expenses and all that in the bigger one. And you have a lot more room for error in terms of occupancy, I would say compared to a single-family and duplexes.
Jason: Right.
James: Right. Interesting. So was the experience that you gain from quads and duplexes, did it help you out when you come to syndication and run this bigger, larger properties?
Jason: 100%, I mean, I think a couple of things. And I think having my own money, into the business and building it with my wife's and my own hard-earned money, you know, the wins are all yours, and the mistakes are all yours, too. And so, you know, we started out painting our own units, cutting our own grass, leasing the units ourselves. And then even for building, you know, our own employees, I mean, you know, it was us, kind of managing those employees a lot early on, and dealing with tenants, I mean, dealing with tough situations.
So, if it comes down to me managing a property manager, I've got that track. Not that I know it all, I mean, I still feel like I'm learning every day but I have that, some level of experience to say, here's how we should handle the situation. Because, you know, we've seen this is or this is the type of scenario that we've dealt with. And I think, when it came down to raising money for these last couple of deals, having a track record and saying, you know what, not only have I learned how to finance properties, not only I learned how to manage properties, you know, dealing with private money, we dealt with tenants, we sort of work at all aspects of the business.
I think that's just that, earning your doctorate in this business or earning your degree in this business. And I think it helps to start out small. Now, I would just say that that's not for everybody. I see some people that are wildly successful jumping into really large syndications. And I certainly would never talk down people's hopes and dreams and goals to go big. But I think that to weather the storms and deal with difficult scenarios and difficult situations, it's always good to have some level of something that you've done on your own, whether it's small and syndication don't become the only, it's not the only way to make money in this business.
You know, a lot of us that syndicate, do a lot of other things. So, [inaudible24:08], people may flip, they may be a realtor that be involved in different things. So I just think that having that background and experience, you know, with smaller properties, building a team, those are all things that come in really handy, you know, as it relates to the larger --
James: Larger one, yes. Yes, I'm a strong believer of coming, growing from small [inaudible24:38] from single-family quads, duplexes, and then growing. I mean, I know people go direct to let's start with hundred units plus a lot of gurus teaches that, because, there's so much money out there, and they said you can syndicate. But I think the problem is you mentioned right when the storm comes in, right, I mean, you may not know what happens when the vacancy drops, you may not understand the tenant profile, why certain tenant leaving rights, especially if you're giving to third party management.
So you are basically a pure syndicator; you're just a guy who raises money, finds the deal and trying to run a business plan on a booming market, right? I mean, we know a lot of people have been successful, but all this, lot of people has been successful in the past nine to 10 years of expansion. So we do not know whether they are good, or the market was good so we will know once the market turns. So how much people know, what the signs of real estate? I mean, there's so much of things in real estate like contract management, understanding tenant demographics. When people move in, walking, how's the leasing experiences so much of science behind it, you wouldn't understand it if you're in a strong market, right? You'll think, oh, it's going up to 95% occupied, oh, I'm making money all capitals, compressing it, nothing on your effort. But when the cap rate is decompressed that's when they the tenants leave, or when your market starts doing very well, I mean, you have to have those skills to manage that budget, to manage that shift. And I think I think it's important to start from small, that's what I feel, I mean.
Jason: I'll give an example I had since we self manage, I mean, I'm not the one out showing units and advertising units, but I was between property managers had one guy phasing out, and he actually bought several properties for me. And so he kind of graduated into being a full-time investor and had a new guy coming on and we were about a month in between. And the first deal I syndicated it's an 86 unit property, it had 16 vacancies. And I'm like, you know, not only am I investor on the general side, I put my money in this is limited; I can't live with 16 vacancies. So I went out and I showed the units myself. I got things rented and did the hard work, none my time should be spent doing that, I don't love that. But I know how to do it from years and years of doing it early on.
So I went out and I got like a dozen units rented in a month and got that down to four out of 86. And then when our new property manager started, he was able to just kind of hit the ground running. But so I think that that's like an example of why it's good to be able to have that experience. And like you mentioned contractor management. I mean, you just recently, I know you've seen how to disaster one of your properties. And if you don't know how to deal with contractors negotiate the best price and make sure they're showing up to work every day and keep things on a schedule, you know, things can go really wrong when things go sideways in business, you have to have that sort of that people management side of it from dealing with tenants to contractors and banks and all that kind of stuff.
James: Yes, absolutely. I mean, I just came back. I mean, before this podcast, I was sitting like, almost two hours in one of my property which we are recovering, with my property manager, regional and planning out the make ready plan. And how do we do this because sometimes you can't expect them to do the whole plan, right? I mean, sometimes we have a lot more planning skills and I have to tell them from day one to do this, how many of units, have to give them each plan. So they recover very quickly. And you can't do that if you don't have the real in a single-family, or quads or duplexes construction experience, right.
You can't do that, because you're going to be taking the words from the property manager or your regional right. So yeah, I think it's important that you really learn the science of real estate, especially now when the markets are good. It's hard to learn when the market is bad because things are really going wrong at that time. So that's very interesting. So how is the Pennsylvania market? Can you describe it? I mean, I never interviewed anybody from Pennsylvania and I like to understand the market and how do you underwrite the deals over there? So high level, you did all your deals in Pennsylvania, because you live there, I guess is your backyard.
Jason: By default when I started out buying singles and doubles then, we're doing it ourselves. I didn't know any other way. I'm like, why would I buy something in Cleveland, I gotta drive an hour and a half every day to Cleveland. So you know, Pennsylvania is a funny state. So we have Philadelphia on one side of the state, Pittsburgh on the other side of the state and in between, and no offence to anybody else in Pennsylvania, but it's like, it's Kentucky. I mean, it's just farms and everything else and there's not a whole lot of population but there are areas like Harrisburg, Scranton, Erie, where I live. And so there are these tertiary markets.
And so, Philadelphia and Pittsburgh are like any other bigger market where cap rates are compressed and they have a ton of population, there's a ton of employment. But I'm a big fan of the tertiary markets and places like you're in Erie, Pennsylvania or York, Pennsylvania or even like Dayton, Ohio, I consider a tertiary market. Canton, Ohio, Akron, Ohio, like, you know, Rochester, New York is a secondary market, but maybe a smaller town around that, for instance. So, and my reason being that when you have areas like Denver in Nashville or Austin, Texas, that over a period of time had, you know, that population growth of a million people or more over a 10 year period, when 2008 happened, or after 911.
And now there was a huge pullback in the economy and people losing jobs and unemployment goes up to 8% or 9%. Those are areas where people are losing jobs, those are areas where the rents kind of pulled back, because you all of a sudden, there's these in multifamily, you do value add after value add and rents reach it's peak, at some point when the economy turns those rents out to pull back. So the flip side is where there's a lot of time growth, like in Erie, Pennsylvania, it is slow and steady. So, in 2008, home sales, slow down, but nothing, that the values never went the other way.
And we still live in an area where we have several universities, we have several hospitals, we have to the nation's largest medical school, in Erie, Pennsylvania, and so there's a lot of students, there are manufacturing jobs, there's other like medical and some technical type jobs, but just a smaller geographic area, smaller economy. Now, the downside is we never have this wild booming prices and you can't really ever bank on a lot of appreciation. But at the same token, when the economy pulls back, our rental base really isn't going to be affected. So, for instance, if I have $700 or $800 a month apartment and 20 tenants lose their jobs, well, they'll still be able to afford the rent on unemployment. Now, it maybe tough for them but it's not as though they're paying 1500 dollars a month rent.
And so I look at it from a practical standpoint, that while I should be able to maintain my occupancy levels and fight through an economic downturn. And so the nice thing with the area that I kind of proved itself out in this last syndication. We had several people from out of state come in and really liked the idea that there's this level of predictability that, okay, when the market turns, we're not going to lose if you know, 100,000 jobs a year, because there are 100,000 people that live in the city of Erie, there's another 250,000 that live in the surrounding county. So our greater metro area is about 300, 000 to 350,000 people, that's still sort of a small area, and, you know, the largest employer might employed, you know, 5000 people, and there are several larger small employers like that.
So the economy is set, sort of stable, you know, you go to Gary, Indiana, or places like that same thing. And so the other thing that would protect somebody on the downside is just making sure you have optimal financing locked in, though for the most recent deal, we locked into 12 years fixed as opposed to 10 years fixed. Even though the prepayment, our maintenance is up is nine and a half years, you know, we have a little bit of flexibility. So if we are in an economic downturn, you know, I saw it in 2008, saw a lot of people lose their investment. I think, locking into something that gives you that flexibility to weather a national or international economic downturn, least for a few years, not that you can totally time the market, but you have enough flexibility to when you want to exit the property.
But such as Pennsylvania, these other smaller markets, I mean, I think if you're in it for the long haul, that's your strategy is like, long term cash flow, I think you can't really go wrong with these smaller areas. You know, there, there's just there are jobs, you know, I mean, and they're not the highest paying jobs throughout the growing areas, but it's a different sort of business model. We told our investors in these deals, hey, this is a 10-year hold and we may hold longer if you want to stay longer. And I think that people like that idea, as opposed to like, doing like a three-year payback or a five year refinance, like, we're just holding into a longer and I think that's it's a different strategy. But it feels to me for investors that want sort of that long term stability and predictability.
James: Yes, I mean, real estate, in general, is a long term play, right? So is Pennsylvania landlord friendly state? I'm not sure you know what it means because you only buy that, you didn't compare to the taxes or anybody else.
Jason: But you know we have friends, --
James: Okay.
Jason: Probably the same friends around the country. And what I will say is, it's not like California, it's not like New York.
James: Okay.
Jason: So hear these horror stories where it takes months and months to evict somebody. Pennsylvania is fair, there's actually some legislation to make it even better. But you know, speaking from a practical standpoint, if you have to evict somebody, and you follow the letter of the law, to the day, it's about 40 days.
James: Okay, it's not too bad.
Jason: And so it's not too bad.
James: Yes.
Jason: Well, it's fairly easy, especially if you're looking to terminate a lease for behavioural issues or whatever, it's not you can't get them out in 10 days, but you're not waiting three or four months to get rid of somebody. And people have if tenants appeal not to get too far in the weeds, but if they appeal an eviction, they have to put their money into an escrow file, they just don't let the tenants like dictate the policy. There are actual things in place that make sure that it's so overall, I'd say it's more landlord friendly than most.
James: Yes, I think it's almost similar to what we have in Texas, I'm sure there are more details there. But in terms of eviction, and putting money in escrow when they get evictions and all that is similar to what we have in Texas. So what about underwriting? So when you underwrite deals, multifamily deals in Pennsylvania, do our taxes go up as per the purchase price and how much percentage it grew up? How do you underwrite?
Jason: So on smaller properties, they don't. I think if you're more distressed, but let's just say places where opportunities would be occurring, those types of like C and D class neighborhoods, they wouldn't, because the city or the municipality wants people to continue to invest there. But we budget for a tax increase based on there's a common level ratio that, you know, based on the purchase price, the value of the property, we should budget for X amount of, you know X amount of dollars.
James: But how many per cent do you go up to purchase price? Is like 100% of purchase price times flat rate or is it 80, 90, 70?
Jason: Well, yes, is about 80% of the purchase price.
James: Okay, got it.
Jason: But what I would say is that you know, we've appealed that before. So, as an example, I bought an eight-unit, wasn't the big property, I paid a premium for that for the deal, I paid a little more than I would have sold for on the open market. But the seller had said, hey, look, I'm going to sell to this price, they held the paper at 25 years fixed rate at 4%, no balloon, no prepayment penalty, and I had to put 5% down, great property, the returns are great, but it was a paid more than it was worth. You know, there are different ways to look at that but that was flagged for a tax increase. And so, you know, we fought that, and have made a very strong argument that, well, look, this is the reason we bought this was because of premium financing.
And I've seen friendly neighbour, one of my properties, they bought a very large complex, and they're fighting a reassessment. Because even though they put a certain amount of money into the property and it's a large complex, like, they're arguing that, hey, you know, it's going to take, we paid a premium, because there's not a lot of property around like this, but it was severely distressed and we're not going to see a return on our investment for X amount of years. And so I think oftentimes, rather than just try and fight the assessment as a fight, sometimes you can go in and negotiate and create a situation where you talk to the board.
So there's a board of folks that they work for the school district, for instance, you know, the appropriate school districts and say, they flag these properties, then they try and increase your taxes. So as the property owner, you have to go in with a realistic approach to say, hey, look, I know, these taxes are going to go up, but hey, I bought a property and here's why we pay more for it, or here's the story. And here's how long of the time is going to take to increase the taxes and sometimes getting a little bit more personal and we still want to an attorney involved, and you still want to be able to with someone experienced with that type of appeal.
But I think that oftentimes, if you kind of go into it with a positive intention, and are truly enough, you're doing a value-add to the property, things like that, you're able to kind of create some sort of negotiation that those boards will oftentimes, like, at least in smaller areas are typically friendly. I mean, I don't want to jinx myself and get into a situation where your taxes double but I think you can oftentimes negotiate what that actual raise would be. But to answer your question when it comes to underwriting, will typically still budget that common level ratio, which is 80% of the purchase price, say, hey, we're budgeting worst case scenario, here's what the taxes are. And here's what we asked, so here's what we got the budget.
And great if they don't get raised, you know, for five years, and they don't get raised at all, then we lucked out but we live in an area where they don't look at every single transaction. I mean, I've been fortunate in some instances where the taxes have stayed the same, and I paid a lot more than what the previous owner did, but they kept the taxes the same. So they're not as aggressive as other areas. But that being said maybe it's just a matter of time before they really see it. And I just think it's always a matter of when you underwrite, you got to play it for the worst and play it for those increases, but when they come like try to negotiate and try to fight those increase because more often, you can have some level of compromise.
James: Absolutely, yes. Yes, I'm surprised that you can negotiate to that level, which makes sense, right? I mean, these are some county I think they're not very flexible. So what about insurance? I mean, do you get a lot of snowstorm and storms in that, n Pennsylvania? I know it's, I know, it happens but can you tell us how is the insurance costs that you and your underwrite?
Jason: Our winters are terrible, I mean if you like to ski and you like outdoor stuff in the winter, but yes, I guess our insurance does cover for things; like a few winters ago, there was a terrible snowstorm and ended up being the second-highest or third highest snowfall of all time in the US, in the major metros, almost 200 inches of snow that fell back winter, it was disgusting, but there was a lot of roof damage and gutter damage and all sorts of building damage.
So I think insurance companies, they billed that into their underwriting. But yes, you plan for those things. You know, as I built my business, from a practical standpoint, have always tried to hire maintenance guys that can handle like your general things, like, you know. If I call a contractor to repair gutters and [inaudible42:37], he may bill $10,000. But I know that I can have my guys in-house do it for $3,000. So we try to take an approach where if there's a lot of stuff that we can fix, we do it ourselves, but here really the winters and the worst things that can happen. And so, you have to kind of bill that into your plan. But there's a lot of things you can do to mitigate damage in the winter, and it just becomes a different different analysis. I mean, I'm sure people have own properties and like, where you're at Texas, or Arizona, where it gets really, really hot, there are other things that they have to do to plan out for insurance or if you live in a hurricane area, the same thing. So I think that when you underwrite from an insurance perspective, especially on the larger deals, they're going to give you a plan, they're going to tell you, hey, these are the things we need to do.
And so oftentimes, as the owner operator, you got to take care of those issues, whether it's deferred maintenance or just ongoing maintenance. A lot of your listeners might know that the letters going to ask for those repairs so that keeps you from having, you know, it's that routine maintenance and ongoing maintenance that you have to do with your property to ensure that you're not just like waiting for some big insurance claim to happen to put money back in the property. So, in a sense, the lenders forcing you to make sure you keep up with your property.
James: Got it. So you self manage your own property and you started from quads and duplexes, is that right?
Jason: Correct, yes.
James: Right. So what do you think is an advantage to self manage? And what's the disadvantage of self-managing this larger apartment complexes where you're buying a 200 and 100 units right now?
Jason: I mean, I think I'll start with the disadvantages, I think the disadvantage is that you're at some level, you're always involved with managing employees; so you deal with those people, you're dealing with tenants and their problems. And now, you know, at our level, where I've got a number of employees, I don't have to really get involved with the tenant level too much anymore. But that sort of the problem is that you're going to find yourself in the mix and dealing with situations too close to home. And so if you're a passive investor, you're just getting a return on your money. So when you self manages, you're earning that kind of, like, extra return that you get.
But the advantage of self-managing, I think, you can control the property better. You have a better handle on what's going on because you're right at the front lines. I think, with a lot of syndicators, at least, well, even people that have smaller portfolios, and if they tried to get a third party manager, that's the hardest part of the business is finding a quality, third party management. And I think if, you know, somebody said it once, and it's not entirely true but somebody said to me once that no one's ever going to manage it, as well as the owner. And I feel like if you have your skin in the game, you know, if you self manage it, you're going to make sure things go right.
Like the idea that I jumped out, try to fill 16 units when I was between property managers were, if that was with a third-party manager, well, right, and I can manage my property manager and say, hey look, you got to be refreshing the ads every day on apartments.com. I need you to track your leads and follow up with people. And you can control the process to make sure that you're at the occupancy level that you want, making sure that your maintenance calls are being followed up on. But that is a little bit of a headache, but at the same point, you know that you learn that. I mean, if you self managed, you're getting typically in a syndication, you're going to have the property management fee, the asset management fee. So yes, it's work, but it's extra income. And if it's something you enjoy doing, you know, leading a team of people to manage the property, it can be a lot of fun and rewarding, too.
James: Yeah, it's very rewarding, because now you're doing the whole pipeline end to end and how are you controlling a deal. So let's go back to a bit more personal stuff, right? What do you think is like the top three things that are your secret sauce to your success?
Jason: Okay. Let's say one would be not giving up, just always maintaining a positive attitude. That sounds so simple, but I mean, there are literally things every day, as you know, in this business that make you question like, why am I doing this? Why am I still, this is driving me nuts. And so I just think, you know, always keeping that positive attitude, because what you focus on expands. And if you're focused on the negative, then all you're going to see is the negative. And so, but it's true in any business, not just apartments, so that's one thing.
Number two, I've had a lot of success with getting off market deals, whether it's been the 205 unit or a duplex when I was starting out. You know, just really see the value of building a relationship with sellers, building relationships with brokers and so it's that relationship building, where just trying to take a genuine interest in other people become friends with them. And you know, hey, someday down the line, we may do business, and it always seems to come back in spades, later on. So that's probably like, the second thing I think I'm pretty good at.
And the third thing is just, knowing what's a good deal and being able to pull the trigger, not overanalyze too much. I know a lot of times you get stuck in the weeds, and it shows the underwriting and things like that, where you just spend too much time dealing with, you know, just analyzing, not pulling the trigger. So that could be a fall at times but I think that's worked in terms of being able to take down properties and just make a decision and move forward. But knowing when to pull back and knowing once you know, when things aren't right.
James: Yes, interesting. And why do you do what you're doing every day?
Jason: Yes, I mean, as I said, earlier, I started out I was 23 years old, I wanted to be a millionaire, that was great early on. Well, at some point, it became the ability to be free of a job and not that for its own sake, but to be around for my family and friends. And so many people slave away on a day job and die young, because they traded their time for money. So evolved into that and really now I feel like creating better properties in our city, helping improve our area, providing valid and quality employment on a scale to people that are looking for work. You know, being able to get to have that freedom to spend with my family and again, being able to live a large and rich life of being able to give back to others and using our platform or the money we make, to make a better world for other people and give back.
James: Very noble means. And is there a proud moment in your whole real estate career that you think I'm really, really proud of a thing that you did and that's something that you can never forget?
Jason: You know, the easy answers probably always, like the most recent deal, you know, dealt. I think that, for me, probably one of the proudest moments, just being able to walk away from the day job. You know that was, I was making a really good income. And there's probably a four or five year period there, where I just kept saying, I'm going to leave my job, I'm going to leave my job. And I just finally got the courage to be able to, like walk away and have that confidence in myself that I can do this and have it be sustainable living. I just, you know, for whatever reason, was probably full of more self-doubt that I needed to so just being able to just kind of like barrel forward and do it, I was really proud of that moment.
James: Yes, that follows you until the end, but it's memories so awesome. And I think that's what we have Jason, why don't you tell our audience on how they can get in touch with you and where's the best place to reach you?
Jason: Sure. If anybody wants to get on my calendar and have a chat, they can find me on LinkedIn, Jason Pero. They can find me on Facebook as well. If you want to have a chance to get my email, Jasonpero@yahoo.com and then my cell phone. I can get that out as well, too.
James: Okay. You don't have to give it out on the podcast.
Jason: Okay.
James: But yeah, it's up to you. Okay, so awesome. Thank you very much for joining us, Jason. I really enjoyed learning about the Pennsylvania market and how did you grow from quads and duplexes to like almost 900 units right now, under management and I did learn a lot and I'm sure my audience will too. Thank you very much.
Jason: Thank you, James.