Escaping the 9-5 Grind with Just 2 Properties (in 2 Years!)

Ashley:Do you think that you need a dozen properties to break free from your nine to five? Today’s guess proves that you might only need a couple. Just two years ago, Dylan Pettyjohn was still hustling at his W2 job, saving every dollar for his first rental when an off market deal felt right into his lap and changed everything.

Tony:Now Dylan has a 15 unit portfolio that brings in a serious cashflow and has helped him ditch the corporate grind for good. And in this episode, you’ll learn about the power of partnerships, the benefits of having several units under one roof, and how to stay steady for when that next big opportunity comes your way away.

Ashley:This is the Real Estate Rookie podcast. And I’m Ashley Kehr.

Tony:And I’m Tony j Robinson. And let’s give a big warm welcome to Dylan. Dylan, thanks so much for joining us today, brother.

Dylan:Thank you for having me here. I appreciate it.

Ashley:Dylan. Let’s start off with your first deal. So this was an off-market pocket listing. What relationships actually put you in that position to be able to get a pocket listing call from your agent?

Dylan:I think it really helped that I had a relationship with the agent beforehand. This was the agent that has worked with essentially everybody in my family, helping them buy their single family homes and such. So he’s already done a fair bit of transactions with us, so he was willing to do a little bit more footwork to help me on this one, but I also gave him my exact criteria for what I was looking for, whether it was duplex, triplex, or a quadplex. I had a criteria on a cash on cash return metric that I was looking for, and essentially he would send me anything that was roughly that and if it didn’t fit exactly what I was looking for, I would tell him why and then he would continue to send me other properties. And eventually we just had something that popped up in their office that was about to be listed the next day and he said, Hey, if you want to go check this out, this other broker in my office has this and I can show you it beforehand and you could put an offer before it actually lists on market. So it never actually touched the market, it just listed as pending.

Ashley:I’ve gotten a couple of those pocket listing deals and they are so nice because you get that first look at them, that first walkthrough and the two pocket listings I got, I actually ended up being the one to buy them. So I think it’s a huge advantage. What tips do you have for rookie investors to be able to get these pocket listings?

Dylan:I think the agent needs to know that you’re serious because if they’re going to take that to you instead of going to one of the other investor clients they work with, they need to know that you’re actually going to perform on an offer. It just goes back to what I was saying earlier about they need to know that if they put this thing in front of you, you are actually going to execute on it instead of them sending it to you and you just saying no.

Tony:Yeah, Dylan, I think one of the other things you mentioned that’s important in terms of building that trust in the agent is you had a pretty specific buy box and as a rookie investor, what steps should they be taking and what steps did you take to actually come up with that buy box? Because I think going to an agent and saying, I’m looking for a three bedroom, two bath, and this zip code built between this year and this year value add X, Y, Z conveys a lot more confidence than, Hey, if you find any good deals, can you send them to me? So how can a Ricky who’s starting out built that buy box?

Dylan:I think you need to figure out what you want to do. In my case, I wanted to house hack, so I was willing to take less of a return to find the property that fit for me in the area I wanted it to be in and whatever the thing is that you want to do, whether that is a short-term rental, midterm rental or a long-term rental, or you want to do house hacking like I did in this case, you need to have a criteria for the type of return it needs to be and make sure it is good with the area that you’re investing in. You can’t just say that you want a 20% cash on cash return on a long-term rental because we all want that, but if you talk to the other investors in your market, they’ll give you a rough idea of what you should be expecting as far as returns in that area, and property managers can help with that too. So just narrow down what you really want to do and then build the buy box around that. And the best way to build your buy box is honestly, you should just underwrite dozens and dozens of properties. I probably underwrote a hundred or more different properties before I actually got this one.

Ashley:Dylan, with this property, did you go ahead and tore the property or what were the next steps after you got this deal presented in front of you?

Dylan:Oh yeah. As soon as we went to the property, because it was more of a thing where my agent called me and he said, Hey, there’s this property that’s going to list tomorrow. Do you want to see it right now? And I said, yeah, I just got off work. Let’s go right now. So we went and saw the property and once he told me the price after I had toured it and seen the condition of the units, the units were in a good condition, I probably could have rented them. It just wouldn’t have been what I ended up getting on the property. Now that I’ve made it more modern on the inside and completely renovated everything, but he told me it was two 50 for the triplex, and I just said, just give them full asking price, write it up tonight, I’ll sign it and then I’m good to go.

Tony:Dylan, you offered on this property right after walking the property? There was. Okay, so let’s pause there for a second because I think that a lot of rookies can maybe do the legwork of finding the deal, but when it comes time to actually submit the offer, and understandably so their first time doing this, there’s a lot of hesitation around actually getting that offer out. So what was it about either your preparation or the deal that made you so confident to say, Hey, let’s get the offer out right now in this exact moment?

Dylan:I think for me it was a combination of I had been waiting for a really long time to do a deal and this property just hit my buy box in multiple different ways. So not only was I it for two 50 and I was assuming at the time that the rents could do 3000, but it was also in a really good area in town. Some of the other properties I had looked at were not in my favorite areas. It’s not that it was a bad area, but this area is right downtown within walking distance of downtown. So I knew that I had to get this one specifically.

Tony:So it sounds like Dylan, the preparation of you said you analyzed 100 deals before that. You do that enough times, it starts to become super apparent to you what a good deal looks like and what a good deal doesn’t look like. And what you’re saying is all of those deals you would analyze made it super clear to you in that moment that, hey, this is actually a really good deal.

Dylan:Exactly. And I think you’re always going to feel nervous submitting offers. I feel really nervous sometimes submitting offers on some of the things that we’re offering to buy, but at the same time, I’ve done my underwriting, I understand what my expectation is, and then I also have a buffer on the expectation so that if it doesn’t go exactly how I planned, it should still work roughly at the rents that it is now.

Ashley:Dylan, after you executed on this offer, what were some of the risks that you were taking by putting an offer on this first deal?

Dylan:So essentially spending all of the money I had between the down payment and renovating the property, and I had never done anything like that before. So not only was I buying the property and doing all the renovations, but I was doing all the renovations myself. I had never laid LVP flooring. I had maybe painted a house for somebody like help paint some rooms, but I had never done electrical outlets, never leveled floors or anything like that. And luckily I just had enough people step in that are around me that are in different fields in construction that were able to show me different things and YouTube is a really big help for figuring things out. If you’re wondering how to replace an electrical outlet, you can go on YouTube.

Ashley:We’re going to take a quick break, but when we come back, we’re going to go over your rehab budget and how it ballooned per unit and what changed your entire buy box. So let’s go there right after a quick word from our show sponsor. Okay. So Dylan, you’ve got the deal now the real education really starts once the walls come down. So take us into the day when you were looking at this rehab and realized that your budget was way off.

Dylan:Yeah, it was about halfway through when I had realized that I spent all of the money that I had actually allocated to rehab a specific unit. I was doing them one at a time. I was rehabbing one and living in it, and then I was going to continue the next one and so on. I didn’t have all of the flooring orders done and I was already over the 8,000 I expected to spend on it because I assumed, oh, I just got to paint and I got to lay flooring. So that’s going to be the cost of flooring per square foot times 900 square feet, and then the paint is going to be $500. And I didn’t account for rollers or redoing all the outlets or anything like that. I did account for appliances, but something I learned on this one, I way overspent on appliances compared to what I spend now when I’m buying appliances for the apartments. It’s just something I didn’t know what I didn’t know. But yeah, about halfway through, yeah, I had some of the flooring there and I was like, okay, this is not nearly enough. I have to do another flooring order because there is waste and the fact that I’ve never done this before, there’s a ton of waste.

Ashley:I can totally relate to that. When I did my first LVP job, I was yelled at multiple times for not measuring correctly or not cutting correctly right on the line. So I had a lot of voice to my first couple projects.

Tony:But Dylan, I think you hit on something that a lot of Ricky investors will struggle with is how do you come up with a proper scope as someone who’s never created a scope of work before as someone who’s never handled a rehab before. So how has your process on creating your initial rehab scope of work, like the line items you’re going to hit in your rehab, how has that changed compared to that first property to what you’re doing today?

Dylan:Well, one thing that I did on that first one is I just walked through the property and very briefly, I was only there for 30 minutes for the tour and I just started adding things to a Home Depot cart just to roughly get a good idea of what I’m expecting it to be. And then I added a few thousand dollars to that. So that’s how I was at five, and then I had three. There we are 8,000. That should be good. Now you can use tools like chat, GPTI found that’s wonderful to just figure out what’s the cost of painting in this area, what’s the cost of somebody laying flooring in this area? And that can give you a better approximation than I was doing on my initial rehabs. But the way I do it now is generally I’ll just have my contractor walk it and he’ll bid everything at once and then I’ll get another bid for it, and then I’ll compare the bids. Generally you’d want to get three. I really like the guy I work with, so I trust him to actually do a pretty decent bid and he just does all of the work for us. Now

Tony:Obviously getting a GC I think is the best absolute way to get confidence in your numbers, but it’s also sometimes equal, right? Maybe the GCs are busy and maybe they’re not always able to go walk the property for you in the time that we need them to. And I think my best recommendation for Ricky’s and Ash, I’ll kick this to you afterwards because I’m curious what your approach is here, and I actually picked this up from Tar Yer and James both do some version of this, but basically walk through the entire house exterior first, just go all the way around the exterior, take a bunch of photos, then take a video of the entire exterior, then do the same thing in the interior of the photos from every single corner video walkthrough so you can capture everything. And then even if you only have 30 minutes inside the house, that’s fine because you don’t need to do everything.

Tony:Then when you go back home, you can take the photos, the videos, the measurements that you got, and use that to build out a more detailed scope of work while you have your comps, the properties you’re trying to comp against. You can see their photos, their videos and what they’ve done and say, oh wow, I actually didn’t notice that they had whatever in the bathroom and I didn’t notice that when I walked it initially. And you can build it out in a little more with a little bit more detail. But Ash, I guess, how does that compare to if you were walking a property and maybe in a new market, what would it look like for you?

Ashley:Yeah, I definitely take the same advice from TaRL, the photos walking through, but I do all the photos, things like that. But then I also do a walkthrough pen and paper where I have a notebook, I’m writing a bedroom one, but I’m usually starting in when you walk in the house and I go room from room closet needs paint closet needs a new rack, even if I don’t know what the fix is to something, I mention it, this needs to be repaired even if I have no idea what would actually go into that. So I make a written list too. And then I sit down at my computer and I go through each photo and I go through my list that I actually wrote out of different things. Then I’m sending it to my contractor. My contractor walks the property and goes through it, and then usually he calls me and he says, okay, I understand this, but I think you should do this here and settle, make the layout better.

Ashley:One example is we did a pocket door one time for a bathroom and it just was the best decision I would’ve made the bathroom seem so cramped and tiny if we would’ve done a regular door again in there. So he goes through and makes his recommendations or I could save money on this, and then I kind of finalize it as he’s telling me changes we should put into it and then send it back to him. And he comes up with the estimate and breaks it down. Sometimes we’ve done it room by room as to kitchen remodel, 7,500 and it includes the cabinet, all countertops, whatever that may be. Sometimes it’s a material and labor. A lot of the times it’s just the labor cost and then it’s up to me to do the materials based upon what I want. And that too, we do have to go over together.

Ashley:The tile I’m picking out is it going to be more labor because of the tile design that I want, which would increase his actual bid on it. So there’s a lot of little nuances like that that we have to make sure we’re on the same page about too. But that’s pretty much the process. And then for apartment turnovers, I don’t even go to the properties at all. I just have Daryl go there and he has a whole spreadsheet that he’s created that is every material that we’ve ever used in an apartment turnover. And then he just picks what he would need, how much of each, and he builds out the materials cost and then he adds in his labor to that. So for those ones, I don’t even walk the property or go to them.

Tony:So moral of the story, everyone needs a Daryl basically, so they can just do the work for you.

Ashley:Hey, I helped start the spreadsheet of like, okay, this is how you link and then go ahead and pick everything I put in there. But I think that spreadsheet, and I’m pretty sure it’s in the biggerpockets.com/resources or the.com/rookie resources, we’ve put a template up there of his creation that he’s made. So rookies can use it too. And then you can just plug in if you don’t like the LVP color, they’re picked for the apartments, you can just change it with something else in there.

Tony:Well, Dylan, I know the property that you purchased, not only were you doing these kind of interior renovations, but the property itself was a conversion, meaning it wasn’t built initially as a triplex, it was built as a single family home and at some point it was converted into three separate units. And sometimes conversions can be great because if you’ve got a really big single family home, you’re able to generate more revenue by turning it into three separate units. Other times maybe a conversion can cause more issues if it was maybe forced on a single family floor plan that wasn’t ideal or if the execution wasn’t that great. Which one of those two did you fall into with this property? Was it a great conversion that really supported the triplex or was it maybe a conversion that was forced?

Dylan:I would say this one was a pretty good conversion. I talked to my partner that owns quite a few single families and he was like, I’ve never bought these conversions because every time I walk into them they’re just terrible. They have, for example, like you may have electrical runs that are for one apartment that go to another apartment, even though the panels are split, so then you have to turn off breakers in different apartments if you’re working on something or some of the water lines are all tied in together or the quality of it in general is just not very good. He did say that this is the best one he has ever seen as far as conversions go, so I’m happy about.

Tony:Well, that’s good news. So I guess were there any issues actually either performing the rehab or managing it once the rehab was done because of their conversion process?

Dylan:On this one, no. I have actually had a really good time with all of the people that live there currently. So one of the residents has lived there for, I think it’s 13 years. And what I did was, you guys know Dion McNeilly’s binder strategy? I’ve used that on literally every property I own. If I get inherited tenants, I’m not opposed to keeping the people that are living in the property because I know if it does end up being any issues that we can just take care of that down the line. But if it’s somebody that’s been there for 13, 14 years, I can trust that they’re going to be fine to continue. The other people I’ve had move in have been people that just knew me through the community and they’ve been great so far too. I will say that with some of the different units you can notice maybe there’s sound that can bleed through into a different unit.

Dylan:Sometimes we don’t have that issue as much because all the people that live there are relatively quiet, they’re not super loud, they don’t have kids running around. So it’s been pretty good to manage for me. But I have seen some that I do not want to buy because I know that they didn’t properly insulate everything. So you have sound constantly bleeding through and tenants complaining about that or there’s an upstairs neighbor and they didn’t plan that out to where you’re going to have the flooring dense enough to cancel out the sound and stuff like that.

Ashley:Tony always loves the story of an apartment I used to manage where the tenant sent me a video and it was a video of her wall, but was the noise was the tenant upstairs slamming her toilet seat down after she went to the bathroom? And that was when I would rip my hair out and cry. I couldn’t handle the tenants anymore and decided to outsource it to property management. But yeah, you think it may not be a big thing, but that to me was the worst part of property management was dealing with tenant issues between tenants and if you’re able to prevent some of those things from happening, it can save you a lot of headaches down the road because who wants to live next to someone that’s making noise and then who wants to live next to somebody who’s complaining if you can? And I think of that with common areas too.

Ashley:When you’re buying small multifamily, if they’re sharing a common area, are you going to have a cleaner come and clean it? Are you going to make them both responsible? Are they going to get upset because one person cleans it, one doesn’t. So there’s a lot of things that I’ve learned along the way to actually think about these people are living together. What are some of the issues that could come up with this property that I want to be proactive about and maybe prevent or possibly not purchase the property because I already know it’s going to be a headache down the road.

Dylan:I was just going to say as of late, I’ve just tried to avoid anything that’s like an over under, unless it’s a purpose-built multifamily property because I don’t want to deal with anything like that where there’s sound bleeding through both ways. Or one neighbor is smoking in the upstairs apartment, not smoking inside, that’ll get you kicked out, but smoking on the porch and outside and it’s going downstairs or vice versa. I just don’t want to deal with that.

Tony:Now on the topic of tenants and managing those tenants, what policies and maybe paperwork have saved you from rookie mistakes when it comes to tenants and deposits? And I guess is there anything that’s maybe burned you that you’d change moving forward?

Dylan:I should not lock people in on one year leases when I first get the property. And that’s something that I learned on the 12 plex because on the triplex property that I bought, I locked the lady in that was living there currently for another 12 months just at what she was at currently. So it didn’t shake anything up. And instead I would start to do those either on a month to month or maybe a six month. So I do have the opportunity to do that bump within that year because now I’ve gotten to the point on that one where I’ve, property taxes have chased up to where I bought it at, but I’ve needed to raise her rent and then I had to do that after I had already gotten billed for the property taxes. Luckily, I did get the other two units up just because I had rehabbed those two. So those are up to market currently, but

Ashley:So with the tenants and the renting, you mentioned doing the binder strategy to slowly increase the rent or make it their decision as DN says. What are some other things and lessons you have learned along the way now that you’ve become a property manager and landlord? Are there certain systems and processes that you’ve put into place?

Dylan:So as far as late fees, I used to be more of a stickler on this kind of thing and just saying, Hey, if you pay late, you are late. And that’s that what I’ve started to do more because it doesn’t happen often, but people have situations where they do need somebody to work with them and actually care. And that’s something that I’ve tried to do with all of the people that do live in the properties is understand the situations, but then also whenever any issues come up, that’s the number one complaint I get from residents that live at my property that have lived at other private landlord’s properties is they just don’t care and they don’t fix stuff quickly. So a month might go by before something silly gets fixed like their stove isn’t working. I’ve had to replace two of those in the past week just because the property I bought, they’re getting relatively old.

Dylan:But yeah, just actually care and take care of people quickly and I feel like they’ve all really appreciated that and I think that’s reflective in the fact that everybody always pays rents on time. And if they’re not going to, they actually will let me know ahead of time like, Hey, I’m switching jobs, so I might be a few days late and I’ll say, okay, I just went and talked to the other guy that owns the property. I got the late fees waived for that. Just pay it when you can. Provided that it’s that day that they’re telling me they can pay by.

Ashley:Yeah, I think and not only moving fast on the maintenance, but just communicating. If you can’t get a contractor out there right away, but you are constantly communicating as to thank you, I’ve received your maintenance, I’m going to contact the vendor. I contacted the vendor, they said they could be there Tuesday, does this work for you? Just a reminder, today’s Tuesday the contractor is coming in following up, the contractor didn’t have the part. I am so sorry we’re doing everything that we can for him to get the part or whatever. And I think that goes a long way instead of just you, they submit a maintenance request, they don’t hear anything, and then randomly they get a call a couple of days later, a contractor is coming on their way to the property to check it, the contractor leaves. They don’t really know that much, the contractor doesn’t communicate what’s happening.

Ashley:So I think a lot of that follow up and communication, and there’s a lot of property management software that has, you can add notes, you can indicate every step of the way of this maintenance request from it being submitted to completion as to what happened. And that’s not only nice for your tenants to know what the process is and where it’s at and what’s happening, but also if there are any issues down the road. I just went to court to small claims court and having these logs and logs of records of being extremely efficient with maintenance on the properties, it saved me to show that I definitely was taking care of things when this tenant didn’t try to pay rent. So not only just communicating with the tenants, but also for your own protection too,

Tony:And Dylan, yourself managing all of your units.

Dylan:I will not pay a property manager because it may be 10% of gross, but if you actually do the math, a lot of the times it seemed like it’s 40 to 50% of net if I’m paying a property manager.

Tony:Yeah, that’s a very valid point. And actually we talked about this on a previous episode, but a lot of times too, PMs will have their own maintenance company and maybe they’re charging a little bit more than what going rates are. And you start to realize, man, that’s really eating into the bottom line here. So interesting. Well up next, Dylan, you jump into a 12 unit and strangely it feels easier than the triplex and created four times the equity. So we’re going to unpack the financing, the partnership, and why commercial maybe isn’t as scary as a lot of rookies think it is. But first we’re going to take a quick break to hear word from today’s show sponsors. Alright guys, we’re back here with Dylan. Dylan, I just want to jump in. Why did the 12 unit that you purchased feel easier than the triplex?

Dylan:Because less of the attention to detail was on me. If you’ve gone through well, you’ve definitely gone through, but going through a residential transaction, everything is focused on you and your ability to pay that for that property. Now they may factor in if there’s leases 70, I think it’s 75% of the gross rent for the lease with the commercial property, they’re looking at the deal specifically and if it’s something that they want to be part of, they look at the debt service coverage ratio of the property to make sure it’s something that’s going to be safe for them to give you the money for.

Tony:And when you say they, Dylan, who are you referring to?

Dylan:The bank. So do you want me to clarify that?

Tony:No, yeah, how you said it was fine, but yeah, you can continue.

Dylan:Oh no, no, no. I was just going to say that the bank looks at the debt service coverage ratio, so it makes it a lot easier. As somebody that definitely did not qualify for that property, I was able to bring in somebody else that could sign on the debt with me. And yes, we both had to sign personal guarantees, but we were able to get the deal done and we’ve created quite a bit of equity from that deal too.

Tony:So I definitely want to break this deal down. But you said that you couldn’t have afforded it by yourself. What was the purchase price on this? Because you said the triplex was 300 or two 50, somewhere in that ballpark. What was the purchase price on the 12 unit?

Dylan:So the triplex was two 50 and then we got the 12 plex under contract for 7 75. Initially we started at nine 50 and then we just negotiated it down based on our rates being higher. This was last year, so rates were still in the sevens is what we were looking at. We ended up getting a rate a little bit lower than that, but still we were using that as a point to leverage against the price to get the price lowered.

Tony:So just quick math, right, you said you picked it up at 7 75, that’s about 65 KA unit compared to, what is that, 75 KA unit? Maybe almost 80 KA unit on the threeplex. So significantly cheaper on a per unit basis. And in terms of actually getting approved, you said that it wasn’t just you but you brought in a partner. I want to drill into that a little bit because I think it’s an approach that a lot of Ricks like the idea of like, Hey, I want to take down this bigger deal, but I don’t necessarily have the ability to do it by myself. Ash and I wrote a book for BiggerPockets called Real Estate Partnership. So we believe in the power of partnerships, but I think the million dollar question, Dylan from everyone is where do I go and find this person who’s going to help me buy these properties that I can’t afford? So how did you find this person?

Dylan:So I had pre-negotiated the deal with the seller of the property and we had gone back and forth, figured out a price that they were approximately before. I was willing to go out there and start talking to other investors to see who would be willing to do it. Luckily at the company I was working at, there was another guy that’s been buying real estate for quite a while. He’s been buying since 2019. I just started when I bought that triplex in 2023. So I showed him the financials and I said, is this something you’d want to be part of? Because I didn’t think this guy was going to want to sell this this year. I was thinking the conversation I was having with him was maybe in two years, three years, five years, I could buy your 12 plex from you. But he was like, no, I want to sell it right now. So I talked to this other guy and he luckily had the money for it because he’s been investing for a lot longer than me and he’s just let the cash stack up on the sidelines. So he was able to be a large portion of the down payment and I came in with a smaller portion of the down payment just to get the deal done, but it’s been great thus far.

Ashley:Now with the commercial side of lending, you mentioned that you have a personal guarantee on this loan. Can you explain what the difference between doing the commercial loan, getting the personal guarantee is, and then the residential loan? You talked a little bit about the debt service coverage as to what it looks for. What are some of the other key differences? Because as a rookie investor, you don’t have to do the residential, even if you’re not buying a 12 unit, it’s just a single family or a duplex, you can still get the commercial side of lending. Can you give a little more insight about the differences between the two and maybe why a rookie investor would want to choose that option?

Dylan:Commercial is going to be really good if you’re trying to qualify a property just from an income perspective, instead of just buying a property that’s going to need rehab beforehand, we had proof that this property was already able to cover the debt, so it was something the bank was willing to lend us the money on. Now, there may be some projects where you can give the bank a estimation of what you think everything is going to be like after a few months. I’ve talked to them about doing deals like that, but it’s just going to be significantly easier to get financing this way. And also it keeps the debt off of your personal credit statement. So when I pull up Credit Karma, this debt doesn’t pop up like my other mortgage does because it’s under an LLC. So it’s our company that owes the debt.

Dylan:I signed the personal guarantee though personally guaranteeing the fact that me and my partner will cover this debt over time. Another key difference between commercial and residential financing is on the residential financing side, you’re blessed to have 30 year fixed rate debt. We just don’t have that on the commercial side. There are some DSCR products that you can find, but for the most part, in my situation, working with a community bank and that’s who I try to work with because I like to build the relationships with the banks around us. You’re going to be looking at 20 to 25 year debt and it’s going to adjust after a period of five to seven years. In our case, after five years, we have to go get a new interest rate with the bank. Now I’m hoping that’s going to be in the fours or fives in five years and not the sixes, but we’ll see.

Tony:So there’s a lot of flexibility. And you talk about building the relationships with the local banks. And that was actually my next question, Dylan, was how did you find this bank? You just did a Google search, did you know someone who was already using them? Where can Ricky’s go to find these small local community banks to lend on their deals?

Dylan:Yeah, so I would honestly just go on Google Maps and search for, you could use chat GPT, that’d probably be faster to be completely honest. But search for local community banks in your area and then just call all of them. That’s what I did to figure out who was going to be willing to give me the money for this.

Tony:And when you say call them, let’s say you call, they pick up the phone, what exactly are you saying to them? Are you saying, Hey, I’ve got a deal, can you give me money? Or how does that dialogue actually flow?

Dylan:Yeah, so just calling the bank, asking them to transfer me to the commercial loan department if they have one. Some banks will just say that, oh, we don’t have that because I was just going down a sheet calling the people that would potentially work with me on that. And then letting them know what you have in mind for the deal beforehand, since it was off market, it wasn’t anything that was urgent. And then generally what they’ll do in this case, what my bank did is they’ll send me a term sheet, which is essentially like my pre-approval letter to say that they will do this deal with me, and then that’s when I can finally get the offer submitted with the seller and then we can start going through the due diligence process, which is quite a bit more expensive than it. If you’ve done a few residential deals paying for some of those commercial things,

Tony:It adds up and we can talk to due diligence. But before we leave the topic of the community banks, how many do you think you called in order to find the right one to fund your deal?

Dylan:Yeah, luckily this is one that’s right up the street in my town, but I called at least 2030 banks just around town to see who was going to have better products. And it just turned out to be that this bank that is local to my town has been here for 200 years, has the best product because they hold the loans on their books.

Tony:And we interviewed my lender, Jeff Wegen on a recent episode, and in that episode, and really in a lot of episodes, we shared that different lending institutions offer different products, and obviously they’re all going to give you a mortgage, but the terms of that mortgage and how much creativity and flexibility they have, it does vary and sometimes significantly from one lending institution to the next, what Chase or Bank of America can offer is probably very different than this small community bank that Dylan went to for this deal. So just a reminder for all of our Ricks to shop, and Dylan said he called 30 different banks, so you got to put in the legwork. One last question from you, Dylan, on the 12 unit here. We talked earlier about you increasing the value walk rookies through what that actually means on commercial real estate because for a traditional single family rental, the value of that home is 99.9% of the time tied to what other comparable homes in that area have sold for. So it doesn’t matter how much revenue the property’s generating as a rental, it’s how much did John doe’s house sell for next door? How was that different on the commercial side and what specifically did you see for this property once you took over ownership?

Dylan:I think this is the beauty of the commercial space and what’s probably going to get people to want to go out and do a commercial deal after this is the fact that commercial properties are valued based on the income and the trading cap rates in the area. And all a cap rate is if you bought a property for a million bucks and it was making $70,000 a year, it’s a 7% cap rate. So if all properties are selling for a 7% cap rate, what if you raise the income from 70,000 to a hundred thousand dollars a year? Well, it’s got to get reassessed back at that 7% cap rate. So you just increase the property and value by whatever that difference is. That could be like 30, 40% in value just on moving the income on the property. And what that looks like for these apartment buildings that we look to buy is we find owners that have a property, they’ve owned it for a really long time, they’ve kind of got stagnant with the rents because they’ve owned it for so long.

Dylan:They may even own this in cash. It really doesn’t matter to them whether they’re charging $700 a month or $800 a month for an apartment. But when we look at how that affects the value of the property on the backend, that’s really where you can take advantage of that as an investor in commercial real estate, unlike the residential side, because we can go add that value to the property simply by increasing the rents that we don’t have to do renovations or anything. Generally we are doing renovations to maximize how much we can get, but if you just simply increase the income on the property, you can add substantial value. And that’s why I am trying to focus most of my portfolio on commercial real estate.

Ashley:Along those lines, what did you do in this deal or maybe you’re doing forward to get more creative with using the commercial lending? Are you incorporating any other type of creative strategies?

Dylan:So something that I always do whenever I’m talking to sellers of a commercial property apartment building or otherwise, is I’ll try to find a way to give them multiple offers. Generally the price that they start out with is substantially higher than makes sense to pay as an investment. A lot of the times, I mean I’ve talked to some of these people, it’s just like, well, my lucky number is a million, so I want a million. And I’m like, okay, but it just doesn’t make the money to support that. We can try to figure out how to make that work. But what I’ll try to do is if they have a number that I can try to get close to by doing creative financing, I’ll try to give them a few different types of offers. One might be a interest only loan for seven years and then it balloons out after that.

Dylan:Or I might do something where they sell or carry back 40% of the loan. The bank gives us 50% because the bank always has to have more and they need first position on the loan to be willing to lend on it. And then we’d only need to bring 10% if you find a home run deal, even though you’re, what is that 90% leveraged on the property, that could end up putting you in a situation where you turn that 10% you put down into 30, 40, 50% or more. It just depends on how good of a deal you can negotiate.

Tony:The last thing I want to hit with you, Dylan, is the actual partnership itself. So you told us how you found this person, coworker, which is great. You’ve kind of already built that relationship, but how did you guys actually structure the deal?

Dylan:Since I didn’t have all of the money to bring to the deal, I was willing to take a smaller piece of equity in the deal. So in terms of equity, we have a table that’s split 80 20, but in terms of decision making, I have 50 50 with him. So anytime either one of us wants to make a decision on the property, we have to both okay it. And I just had him agree to that if he was willing to do the deal with me, because we both need to participate in the management of the property and just overall, I don’t want to be put in a situation where one of us thinks we should do something on the property and they have all of the rights to just say, yes, we’re doing that because I own 60% of the property and then the person owning 40 is just stuck dealing with it.

Tony:Since you’re taking care of the management, are you also collecting a management fee?

Dylan:Yeah, so I’m charging back for management as well. And we actually have a different way that we’ve negotiated this because I’ve never really liked the idea of just a property management company that charges a fee on gross. So property management companies that charge a fee on gross income aren’t really incentivized to save you as much money as possible. So we have a fee structure where I just charge him a percentage of the net income on the property. And I’ve talked to a few other investors in the area about that and they’re pretty excited about it, but I don’t know if I’d want to roll that out to more people just because I’m trying to keep it inside of our company where I’m managing that stuff. I’ll totally help other people find deals, but I don’t know if I want to manage anything for anybody else. Property management can be a headache.

Tony:Yeah, absolutely. And I think it makes sense on larger properties where that bottom line is bigger, right? 12 units produces significantly more net profit than one unit. So doing it there I think makes a ton of sense. But you’re right, it definitely does incentivize the PM to not just focus on top line revenue, but also like, Hey, are we conserving costs? Are we protecting the asset in that way? I think there’s also something to be said. You said, Hey, I just want to get this deal done, so I’m fine taking 20% ownership because the true value Dylan isn’t even necessarily in the number of units or the equity, but it’s that you’re adding another property to your portfolio, so you’re building your track record, which will make the next deal, I think even easier for you. You’re building a relationship with this partner who maybe you guys can go on to do more deals together. And in general, it’s just making you a better investor. And I think sometimes rookies get so caught up on, I want to own the whole pie, but then they end with the pie that’s so small it doesn’t even do anything, right? So I just kudos to you for having a bigger picture view on the partnership.

Dylan:I had that conversation with him when we were first looking at doing that deal, and he was like, are you really okay with only taking 20% of this? And I said, yes, because 20% of doing a commercial deal is better than not owning a commercial deal. I would rather learn the process now with the money I have, and then we can focus on buying bigger deals later. Did I structure the equity wrong as the person that fined and negotiated the deal? Probably not. I probably should have taken a piece of the deal just for doing that piece, because what I’ve learned since then is that that’s a really valuable skill to have and people value that. I’ve talked to other investors, they’re like, I would’ve probably just given you 20% equity in the deal just for the fact that you found the thing in the first place and negotiated it. But I wouldn’t go back and do it any differently because this gave me the opportunity to learn commercial real estate, and I’m happy to just keep this and continue to do other deals in the future.

Ashley:I couldn’t agree more. Dylan, my very first deal, I gave up a lot. I gave up equity. I paid a mortgage to the money lender, what gave him interest, so he got all pieces of the pie, but I would not change that at all because it got me started in that first deal. So Dylan, thank you so much for joining us today. Can you let everyone know where they can reach out to you and find out more information about what you’re doing?

Dylan:Yeah, of course. You can find me on YouTube under the same name, just Dylan Peton. The easiest way to reach me is on Instagram. If you’re looking at buying properties in the Indianapolis area, I am an agent and specifically work with investors, so feel free to reach out to me. Well,

Ashley:Dylan, thank you so much. I’m Ashley. He’s Tony, and this has been an episode of Real Estate Rookie.