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Achieve Wealth Through Value Add Real Estate Investing Podcast

Nov 2, 2019

James: Hi listeners, welcome to Achieve Wealth Podcast. This is James Kandasamy and Achieve Wealth Podcast focuses on Commercial Real Estate Operators who are killing it in all kind of commercial real estate asset classes. Today, I have Kyle Mitchell. Kyle is from California who has bought his first deal of 42 units in the market of Tucson, Arizona and he's going to be sharing his experience on coming to that first deal. Kyle is also a co-host of his weekly real estate podcast, which is Passive Income True Multifamily Real Estate. 

Hey, Kyle, welcome to the show.

Kyle: Hey James, how you doing? I'm happy to be on and thanks for inviting me. 

James: Oh, it's an honor to see someone, you know starting to buy in this market, in this red hot market right now where it's so competitive; even though it's still the best time to buy just because of the climate of buying the deals. The interest rate is really good and there's a lot of capital looking for a place to park their money and make money as well but the biggest problem is finding the right deal. So tell me about your journey. I mean, when did you start looking for deals? I mean, when did you start even thinking about investing in real estate?

Kyle: Yeah. So I've been investing in real estate since 2013 and how I got started was even in high school, I invested a little bit of money in the stock market. I had a couple of thousand dollars invested in the stock market and I lost it in six months and it was nothing that I could do about it. And I just learned quickly that I wanted more control over my investments and I just started looking online and listening to some podcasts, reading some books. Like most people, Rich Dad Poor Dad was one of the books that changed my life and I just knew I want to get into real estate. So I bought my first single-family home in Long Beach, California, southern California and started building up a small portfolio of single-family homes across the United States. And from there, I learned quickly that I couldn't scale as fast as I wanted to single-family homes, and I wanted real estate to be my vehicle to provide myself and my family with financial freedom. And so I started looking at some other asset classes and that's when I found multifamily.

James: I got it. Got it. Got it. You just reminded me of something very interesting in my life when I went into real estate. I mean, the first time I read Robert Kiyosaki's book, maybe like 10 15 years ago when I was busy working and I never understood the book. I'm not sure, I know it changed a lot of people's lives when they read it. I mean, I recently read it again and now, it all makes sense. In the beginning, it didn't make sense. I say, what is this guy talking about? Because we are so busy on a W-2 job and especially me, I can never understand what is it he's trying to talk about? So what was the aha moment when you read that book, I mean, what is that? 

Kyle: Yeah, to be honest. I did read that book and I reread it several times. The one that really changed my thinking was his Cash Flow Quadrant Book if I'm being honest but he really teaches you how to understand how your time works for you, basically. And so, being a business owner and an entrepreneur, you can have other people working for you while you make money. Otherwise, you're trading your time for money, being an independent contractor or a small business owner or W-2 employee. And so that was the biggest mindset shift to me is really purchasing assets not liabilities that cash flow while you sleep and having other people work on them for you.

James: Got it. Got it. Yeah, I mean, I don't know, there may be people who are in W-2 job who have read his book and never get it and I was one of them. Because I think when you're working 9 to 5, W-2 job you're busy and suddenly when you get this knowledge about, hey, you can do business, you can do investment, it's like completely out of your arena right. I read a few pages and I gave up on it because it just doesn't align to me.  So for the people who are in W-2 job just be aware, sometimes it may not align with you because you are busy working in your own job, but I think when you mingle with people in real estate or with the business people you get it but if you are just working in your table to job, you may not get it. Just to be aware, you have to change your network to really make a shift in your life. 

So tell us about how did you choose to be an operator? Because you bought this 42 units recently and I remember talking to you like one year ago when I meet you in California or maybe six months ago when we met up there in Long Beach and you were like, I want to get into the game. I know multifamily is really good and you started your own meetup and everybody's excited. And you said, okay, I want to get started with the capital raising and we had that discussion about being an operator and what's your background.

 Tell me about your background and how did you choose to become an operator? 

Kyle: Yeah, so my background is being an operator and that's why I'm an operator now, but my background was in the golf business and I was a general manager and a regional manager for a golf management company for about 15 years. So what I did was manage people, manage the business, manage the P&Ls, drive revenues, control expenses, hire/fire, manage people. So my whole entire background is really in operations and Logistics in business. And so at the time when we were talking, I was really struggling because I knew when I first started our company that I wanted to be an operator. However, it's a hot market. It's very tough to find deals and I was kind of like that Facebook frenzy, the fear of missing out, you want to get in the game. And so I was struggling because I was presented with some deals to raise capital on and I knew these people and they were good operators and it was a really good opportunity for me to jump on board.

I decided not to jump on board, not because I didn't believe in the operator or the deal but really because I wanted to stick to my values and who I believe I am and then also my strengths and my strengths are really as an operator. And so we passed on those and just kind of kept grinding and I knew we would eventually get to the point where we did get a property and we can operate it on our own and that's kind of where we are today.

James: So were you able to see someone else whose an operator and you can align with it or how did you know that being an operator is what you want to do?

Kyle: It's because of my background. It's just something that I'm naturally kind of transferring over from the golf business to here. I think a lot of people here, okay, you're in the golf business; that's completely different than real estate and that may be the case. But we're doing the same things in the golf business that we're doing in real estate. We are driving our revenues, we're controlling our expenses, we're making sure that our employees or our third-party property management company are doing the job that they need to do to operate the property.

So it was an easy transition really for me and it's just something I've been doing for so long that I really enjoy it. I'm not a big sales guy. I mean, we do find our own deals and do all that kind of stuff too but as far as raising capital, it wasn't something that I was really in love with doing. And really with an operator, it's the stuff that I love doing; diving into the P&Ls, working out the business plan, working together with the third-party property management company to make sure that we are doing the right things to get to the numbers so our investors make their returns. 

James: Yeah, I mean, with so much Capital nowadays looking for a place to park their money and make money. So sometimes it easier to start with being a capital raiser or being a partner who's bringing a chunk of capital. But for me, it's always the operator whose at the top of the food chain. They make the most money, they control the whole deal, they are the backbone of the business.

This person who's the operator is so important because they know the detail of the business. They know how did they come up with the per forma of rent increase? How did they underwrite the deal? Which comps did they go and shop? And when some things don't go right, the operator has to bring back the plane to the flight path again and they are the one who can control all that.

 Whereas if you're in any other role it's very hard for you to do that. And I think it's important that the investors need to know who are the operators because the operators are the backbone of the deal. I think that's a very key fact. So coming back to the deal that you did, how did you choose to do 42 units and not 10 units or 100 units? 

Kyle: Yeah. So I think in a perfect world, we would have probably started with something a little bit larger, but I think you also have to know your limits as an operator and as a money raiser. And so, let's just say we were going to go after a 10 million-dollar deal, that's 120 units, you can back into the number that you're going to need to be able to close on. So you need 3 million dollars for the down payment, another let's just say million for the capex so you're at 4 million. So does your net worth and liquidity get to what you need to close on the loan? Can you raise 4 million? 

And so all those things we had tracked and we felt that this 42 unit at the price point that it was that we could raise enough money, we have the net worth to put in to take it down and it's a good size property to have our first deal.

James:  So how did you align your team to be ready to take on that 42 units? I'm trying to figure out how did you come up with that 3 million-dollar limit. So you must have either your net worth or someone who acted as a key principle as a KP. 

Kyle: Yeah, so this is an interesting story, actually. Originally, we were going with the Freddie Mac loan and the team was my fiance and I, who is my business partner, and then our parents were going to sign on the loan as KPs to bring on the net worth piece and liquidity. And halfway through we were, I wouldn't say we're struggling with the capital raised but we were not feeling as comfortable as we should have. We had to raise about a million dollars on this deal and about three weeks in, we're about halfway there. And so the plan was to bring in another partner to help with asset management and raise Capital if we were not able to get there and use our extension.

Well at that point, our mortgage broker said, hey, Kyle, it's too late to bring on a GP. We've already submitted your loan application to Freddie Mac. We're not adding any more GPS. So then, we were stuck between a rock and a hard place, to be honest, because it was either continue to raise what we're doing the 506B, so it's not like we can meet new people; our network is our network at that time. And so we would really have to grind it out and convince some of the people that weren't on board to come onboard or come up with our own capital or switch over and try to find another lender. And the reason why we were in that position is I fully believe that you need to raise a hundred percent of your capital or else you just can't execute on your business plan.

 If your business plan is to raise a million dollars and you only raise 700,000, you're $300,000 short on executing on your business plan. And that's very crucial and we are not the type of investors that utilize the cash flow from our properties to put back into the capex. We feel like that could really hurt you. If the revenues go down or for some reason you have a big expense, you don't have cash flow that month, now all of a sudden you can't put money back into the property and your business plan suffers. So we always raise the capital upfront for the capital improvements so that we can execute them, whether our incomes are up or down.

So we decide to switch; 29 days left to close after our extension, we switch from Freddy to Fanny and a new lender and it was a pretty stressful time. But so we brought on a KP to sign on it and that KP we had known for about 10 months. We've been building a relationship with them and wanted to do other deals. We looked at several other deals together and we met through our meet up. And there was one other partner that came on board that helped with asset management and we raised about 900,000 ourselves and this other person came in and raised 100,000 to close. And we literally record about an hour before we were supposed to close.

James: Got it. Got it. That's very interesting. So how did you align passive investors before your first deal? 

Kyle: Yeah, so we had been building our investor list for over a year before we got this deal. And so it was something that we had planned all along. And the reason why we really hadn't done a deal up until that point, we wanted to make sure that we felt comfortable with the amount of money that we could raise so we did several things. We obviously went to networking events. We started our own meetup and we also told all our friends and family what we were doing and through that, through our monthly newsletter, we had an email drip campaign setup or it's 20 months of emails just educating them on who we are, what we do, why we do it and it's really about adding value to other people and educating them about what you do and making them comfortable with what you do. So after about a year, we built up that list and it's several hundred people up at this point and we felt comfortable to where we could raise the money. 

James: So which channel was the most effective? I think you did some kind of drip campaign through your emails and you did a meet-up and you also tell everybody and is there anything that I missed out of and can you explain which one was the most effective in getting the passive investors because you are new. I mean you're completely new. 

Kyle: Yeah, I would say it was 50/50 between friends and family who have known us for a while. And then the meetup. I would definitely say the meetup group was the strongest one. Because at the meetup, on a monthly basis, we had been doing it for 12 months at that time, you're seeing people face-to-face for 12 months and you're becoming friends with these people and very close to them and getting to know them on a personal level. I mean really building that strong relationship with them. So I think that was the strongest for sure.  We do have a podcast as well, but that didn't start until March of this year so that was not something where it was kind of on board quite yet. 

James: Okay. So today, let's say, you found the deal you underwrite it, it works well; so how did you communicate that to the people in your list? And so how did you convince them to invest with you? 

Kyle: Yeah, so it started with an email but it also took a ton of phone calls. I mean, I think it's all on the follow-up when you're raising money and you can't just call someone, after seeing him, six months later and say hey, I've got a deal, do you want to put in 50,000 on this deal? It's really about building that relationship. So, every month I try and reach out to our investors and whether it's through email or text or phone call, I try and touch them in some way on top of our monthly communication with them, through our drip campaign and database emails. But it was really about talking to them, meeting them in person for coffee one by one and telling about the opportunity that we have.

James: So apart from the 50% of investors, which came from your friends and family. I mean, they're friends and family and they don't mind giving you some money. So the people who are complete strangers and you have build up that relationship, so what do you think is the biggest factor that they trust you with their money?

Kyle: The value that we've added to them. If they want to hop on a phone call with me and just ask me for advice on where they're going with their real estate career, we would do free calls. I think also the meetup, the podcast, monthly emails; it's just everything that we provide for them. We also have a free online passive Investors Guide that they can read that's about 30 40 pages that help to educate them. And I think the other thing was they just saw the passion in us. 

I mean, Lita - who's my wife now, fiance back then - we would drive to Tucson at 2:00 in the morning because we both had full-time jobs at that time and I've since left but she still had one and she only gets one day off a week. So on her day off, we would leave at 2 in the morning, 2:30 in the morning, get to Tucson around 9:00 or 10:00 a.m, tour properties, meet with investors, brokers for about 8 hours and then drive back and get back the next day at like 1:00 or 2:00 a.m. So just telling the story about what we're doing and how hard we're working, I think people saw it in us that this was something we were very serious about, we didn't take lightly and we operate our company as a business, you know, this is a serious business and we're an investment firm and we take it seriously. We don't do this part-time and we don't do this kind of on the side, which you can certainly do and I know several successful investors who do that, but they also take it very seriously like a business and I think that's a very important thing.

Kyle: Yeah, certainly but I would say that I don't think you can learn everything from a mentor until you actually go through it. I think mentorship is needed and you definitely should have one so you can limit your mistakes, but you just don't know what you don't know and really until you go through that process, kind of like what I went through with the lending experience. It's really difficult to get that through a mentorship program, sometimes, at a certain point, you just gotta jump in there and do it. 

James: Yeah. Yeah. I know some people go for boot camp after boot camp, mentor after mentor and never get started. So sometimes you just have to bite the bullet and take a chance on a deal that at least makes sense. So other than the financing issues that you mentioned in the beginning, throughout the closing process, was there any big aha moment that you see throughout the process with the first deal? 

Kyle: Yeah, I think we would have just lined up our partners beforehand instead of trying to do it all on our own. We could have gotten it done on our own but it was just a very stressful thing and it could have really put our investors' money at risk, which is something that you just don't want to do.

So I think lining up your team upfront. But I think from like an operations standpoint, I think where my experience helped is that - and during the close, you still need to make sure the property is operating on a positive note. If it starts to go back, your proceeds from the lenders are going to get cut and a lot of other things; your returns are not going to look as good. 

So you need to stay on the property management company that's currently managing it, whether you're going to switch over or not. You're going to have to manage the broker to make sure they're doing everything they can to make sure that they're renting up, they're still putting renovations in there and they're managing it at the level that you want it to be managed when you take over.

James: Yeah, absolutely. So that's what you want to make sure that everybody does that. And what about any issues in the money race, were there any surprises at the end? 

Kyle: No, actually there wasn't. I mean, we raised all the funds prior to close, which was fantastic. I would say that raising money, you really get a peek behind the curtains of people's lives; whether they're closing on a house and need to show liquidity and can invest or they're out of town for a while or they're having a baby so they can invest. So all I would say is that if you plan on raising a million dollars, you should probably have 2 million dollars of commitments. Just because someone says, "Yes, I'll invest" doesn't mean they will. And something can be going on in their life where, yeah, they want to commit and invest but it's just not the right timing. So raising money, it's a huge timing thing.  You're raising money for 30 to 45 days and so, it's not a big window and there are things going on in other people's lives that may stop them from being able to commit to that one deal. 

James: Got it. Got it. So Kyle, I mean you are a new person, bought your first deal. What was your strategy to find that first deal? Brokers, off-market or what did you do?

Kyle: Yeah, it was really networking and leveraging the brokers as much as I can but it was driving out to the markets and it's something that we still do to this day. We're in the market every single week because we believe in those strong relationships and meeting people face-to-face and showing them that we're serious. I think a lot of out-of-state investors call brokers on a regular basis, but hardly ever see them face to face. I found it very beneficial to have lunches and dinners and coffees and touring the properties with the brokers and having face-to-face because you get to learn who they are and even outside of the business aspect, you get to know them as a person, as an individual, so that's been really beneficial to us. So the way we found the 42 unit; we were in town, in Tucson and one of the brokers called me and said, hey Kyle, we just got the keys to this property. Would you like to walk it with us? I haven't seen in any of the units and so we walked it and so we were the first ones to see it and it was three weeks before it was on market. And by the time they brought it to market, we had done all of our due diligence. We had a head start on everyone and we were able to take it down. 

James: Yeah, it's interesting. I mean usually brokers, especially on a much larger deal, they are very, very skeptical or they do not want to deal with a lot of new people. Because there's a lot of people looking at the much larger deal and you went to 40 something unit, which a lot of big guys don't look at it, which I think is absolutely a good strategy for a person to start. I know a lot of people out there telling just go and buy above 100 units because there's so much capital you can syndicate but it's also harder to get started because there are a lot of people looking at above 100 units. So I started with 45 units and I really learned a lot. So do you think you are learning a lot and how many months already right now?

Kyle: It's been two months since we've closed and yeah, absolutely, I am learning a lot on the whole process from A to Z. Now we're in my comfort zone, where I'm operating the property, managing the property manager. So I'm still learning on how the property management company kind of does things but I really do feel like I'm in my comfort zone right now.

James: Awesome. Yeah, I mean you really learn a lot when you buy deals on your own and you buy smaller properties because you're going to be learning everything. But the thing is, the knowledge that I got from 45 units and the knowledge that you're getting in the 42 units is going to take you to above 1000 units pretty easily because you are doing it yourself. So sometimes when you buy a too big of a deal, there are too many GPs in the GP shape and you give it to a third party, you're not there, you're not being an active asset manager you may skip a lot of knowledge.

          So do you have a property manager right now for 42 units or how is that being worked out?

Kyle: We do and I think we got lucky on this. We have a property management company that is the biggest Property Management Company in Phoenix, and they also have a lot of properties in Tucson. It just so happens that most of their owners have sold their properties in Tucson so now they're trying to build back their portfolio, so I caught them on a really good time. They know I want to scale in those two markets and so they typically do not manage properties under 100 units and we were able to convince them to manage this property. So we don't have full-time staff, but we have a part-time leasing agent and a part-time maintenance person, but we're able to piggyback off of another property so that they're both full-time employees.

 And so that's worked out really good and having a third party property management company that's as large as they are were able to leverage. They have an in-house GC team. We can leverage all their relationships. They have an in-house marketing team. So there's not a lot of 42 units that have their own Facebook page, their own website and all that kind of stuff and this third party property management company does that for us.

James: Awesome. That's very interesting because I know 42 units are going to be hard to have. I think you probably can have like one person but you are managing with the leasing agent and part-time maintenance so that's awesome. And they are sharing it with other properties, which is really good. And so why did you choose Tucson?  

Kyle: You know, first we were looking into Phoenix and Phoenix is a really hot market right now and we love everything about it. It's just very competitive. So a lot of the brokers that we were talking to said Kyle what you're looking for value-add, B to C class assets take a look at Tucson. And at that point, this was a year and a half ago or just over a year ago, we weren't really sold on it because we didn't know much about it. So what we did is we started going out there every week and start learning the market; the rent growth, the population growth. All those metrics are very good in Tucson and they follow the Phoenix market. So the more time we spend out there, the more we started to like it.

          Now, I would say about Tucson is you have to be careful where you buy. It's definitely a pocketed area, but it's got job diversity just like Phoenix does and that's why we like both of those markets. The proximity of them is another good point for us. I'm out in the markets every week and so I can either drive or fly but be there pretty quickly. Whereas if I was investing in Florida, it would be difficult for me to make it out there on a weekly basis and dealing with the time changes and things like that. 

James: Got it. And what is the value-add that you see in this deal?

Kyle: Well, there's a lot of value-adds on it. The previous owner was a very hands-off owner. And the first time we saw the property, it was pretty evident there's just not a lot of money being put back into the property. The sign on the front on the corner had a phone number that was disconnected. They did not have any online presence so I'm actually not even sure how they were leasing up the units so that was an opportunity right there. And we've already been able to get the performer rents prior to any renovation starting just by having a phone number that works, having someone that responds.

You know, the property management company that they had in there was a single-family home provider so any type of service call, they're getting charged 35 40 dollars an hour, even if it's to open the door for someone and so there's a lot of repair and maintenance money in there that is being wasted. But overall, it's just being mismanaged from an income standpoint and an expense standpoint. 

James: Got it. Got it. So, I want to go back for people who are newbies who want to get started in this business, is there any advice that you want to give to newbies that you want to emphasize right now?

Kyle: Yeah, I've said this a lot lately and it's, just get out of your comfort zone. It's something that is very difficult at times but once you start doing it, you really start to get comfortable with being uncomfortable and that's been the biggest thing for us. I would say 15 months ago, I would not be able to speak on this podcast. I could not speak in front of a group of people at a meetup, I was just terrified. And I just decided to jump right in. So we've got two meetups now. I've got a podcast and I quit my job to pursue this full time. We've just closed on our first property and now I'm on other people's podcast so I would just say get out of your comfort zone.

I try and do something three or four times a year now that gets me out of my comfort zone because as you get out of your comfort zone, you grow as a person, you grow as a business owner and you will elevate your game that much faster.

James: Yeah, yeah, absolutely. Absolutely. So why do you want to do this for the rest of your life, why?

Kyle:  It's building generational wealth. Multifamily is not 'get rich quick' by any means but it's definitely getting rich over a long period of time and you can build generational wealth, which is what I'm focused on and really want to provide my family with that opportunity. But at the same time, we're helping other people build generational wealth and that's what I love the most. We can add value into other people's lives and we can help create passive income for other people. A lot of people who we talked to don't know about multifamily or passive investing. They only know the stock market and so we really want to help educate people and say, hey, look, there's another way, there's a better way and there's a better way to diversify your portfolio as well. So we love helping other people build generational wealth while we do the same thing.

James: Awesome. Awesome. I know you have been on a few other podcasts, is there anything that you think that you have not shared in any of the podcast that you want to share to our listeners?

Kyle: Yeah. Actually, aligning your interest with your business partners. So my business partner is my fiance and I think that a lot of people ask us how do you work with your significant other and I don't think it's for everybody but the one thing that has worked really well for us is making sure that we wrote down our goals and aligned our interest before we started anything to make sure that we're on the same page. So even through ups and downs, we always remember and look back to that and say okay, these are our goals. So even if it's not your fiance or significant other, if it's your business partner, you've got to make sure that your goals are aligned before. Otherwise, once you're doing deals, it's just too late to start having those kinds of conversations. So definitely have the conversations upfront. 

And while you're building your team, make sure that you take the time to get on the same page because a lot of people just want to get going now and if you want to get going now and you get the wrong business partner, it's going to come crumbling down in the future. And so, take more time upfront to set up your teams and align yourself with the right people so that you can streamline your business and really be off and going on the right foot.

James: Awesome. Awesome. Where and how our listeners can find you? 

Kyle: Yeah, sure. We've got our podcast that you mention, which is Passive Income Through Multifamily Real Estate. Our website is, and you can shoot me an email at Kmitchell@limitless - 

James: Awesome, Kyle. So thanks for coming over to this podcast. And for the audience, just to announce our launch of our own mentoring program. It's called multifamily A to Z Mentoring Program: Learn how to be an Operator.

 I'm not sure, is there any program out there that teaches any newbies or anybody who want to get started in this business and how to be an operator and we want to cover A to Z because we do A to Z. So Property Management, Asset Management, raising money and how to build a business by itself.

So we have launched that, if you are interested, let me know. Send me a mail I think we are done. Thank you very much, Kyle, for coming on board and you add tons of value to our listeners. Thank you. 

Kyle: Thanks, James. I had a blast.