Listen to the Podcast Here: What is a real estate investor supposed to do when their first apartment complex purchase turns out to be rife with drug dealers, prostitutes, and other problematic tenants? Today’s guest had to figure that out for himself, and did so quickly. On today’s episode of The Real Estate Nerds Podcast, Bill Manassero joins our host and real estate attorney Scott Smith to tell us about both a best and worst deal, one of our only hybrid Bad Beats/Best Deals episodes. Tune in to hear how Bill kept his first apartment complex purchase from becoming a total bad beat through creative problem solving, strong networking, and clever solutions like connections with the local community and even leveraging Airbnb. This is one you’ll have to just listen to to really believe. Description Useful Resources References Bill Manassero’s Apartment Complex Rollercoaster Deal: Bright Beginnings Bill joins Scott and shares a bit about his background and the circumstances that led up to his Best Deal. [1:00] Bill started his real estate career later in life. He began considering this option while he was ending the end of a 12-year stint as a missionary in Port-au-Prince, Haiti. He was at a turning point, but not quite ready to retire. He began eyeballing and studying emerging markets, then initially purchased a set of duplexes and single family homes in these markets. [2:10] Bill quickly learned a lesson: “I paid about the same for the duplexes as I did for single family homes, but everything was sort of better.” Vacancies were never 100%, taxes were cheaper, and he was able to collect double the rent. This made it clear multi-units were best for him. So he began checking out apartment complexes in the three markets he was already in: Memphis, Atlanta, and Indianapolis. Because this ambition was huge, he continued educating himself about this new-to-him asset class. [3:30] Bill experienced some initial “analysis paralysis” when working the figures for his potential new investments: “The numbers definitely are different for multi-units.” But he pressed on, eventually finding a 22-unit property in Indianapolis in an emerging part of the city, sandwiched between trending and developing parts of town. By the time he got the courage to make an offer, someone else had bought the property. Bill learned the value of moving quickly in a hot market. [5:00] Bill decided to take one last shot, and let the broker know he was still interested if anything happened to cause the deal to fall through. 3 months later, Bill learned the deal did fall through. The deal falling through actually put Bill in a better position to ask for lower than asking price, and now the seller was more motivated to get the property off his hands. Bill completed his due diligence, and when the inspector came through Bill was able to save even more. He ended up buying the property at 25% below asking price, and way below the market value. [7:00] While this was Bill’s first apartment complex deal, he shares with Scott how his experience with the financing end of real estate helped him negotiate the funding dilemma around the property. [8:30] When Scott asks how Bill handled the jump from single- and multi-family to complexes psychologically. Bill was anxious but soon learned that “It wasn’t all that different on doing a transaction on a single family or a duplex.” Bill now believes dragging his feet actually hurt him. [9:45] Bill points out the first big thing he did right with this deal: “A lot of us when we’re after a property and it goes under contract, we immediately go away. But going back to the broker and saying “I’m still interested, don’t forget me” got me that winning call.” [10:00] Bill was thrilled with the beginnings of the deal, but not everything about this property was a win. He was unprepared for the surprises that came up with this property. He was looking for ways to boost the rent and cut expenses, and discovered that he was paying for heating and would have had to pay high costs to replace its boilers. He ended up having to replace all the gas-powered appliances with electric, and transfer the costs to the tenants (who paid their own electric bills). He describes the rehab measures and other improvements he took to increase rent values 16-20% increase per unit over time. The Challenges of a C-Class Complex & Bill’s Creative Solutions The two investors discuss Bill’s many challenges around the property in more depth. Whether it was the police activity, property management complication, or tenants selling drugs, something seemed to always pop up with this property. But Bill didn’t give up. He tells Scott about the broad range of clever strategies he used to address these many issues successfully. [13:30] Another early challenge Bill faced was handling property management: “A 22-unit doesn’t really warrant an on-site property manager. I had a property manager in place, but they weren’t able to be there all the time.” So, there wasn’t always someone there to handle issues as they came up. [14:00] Bill shares a hilarious anecdote about the police running a sting operation out of his apartment, which he now knows was an enormous red flag. But he did make some great contacts with the police department, and even offered to let them use the place again–if only to have their cars in his parking lot! [15:00] Bill also describes the challenges with his occupants: “We had some real tough tenants. Some guys we thought were dealing, others we thought were pimps.” Scott asks why Bill bothered trying to bring up such a rough area. Bill decided to invest time and money into this because of the value and demographics of the surrounding areas, which were blue collar workers and millennial students/young professionals. [16:20] The owner before Bill was indiscriminate with tenants: “He just kind of let anybody in. They were allowing folks in that weren’t screened very well.” Bill’s response was creative: “We had to move into a mode I call Stealth Tenant Marketing. We started targeting major employers in the area and going to their HR departments. We gave them flyers offering any of their employees who signed up for our apartments a month free and other incentives to get good working folks into the building.” [16:44] This move paid off for Bill, and helped turn the complex around and changing its dynamics. But he still had to check out questionable tenants, and immediately evict the sketchier tenants if they were late on the rent. That was easier to do than proving illegal activity. [18:00] Bill shares how property management’s goals didn’t align with his own, and how he responded: “I had to really monitor property management closely. They were concerned with getting people in to have a high vacancy rate. I was concerned with getting in the right people.” While Bill had no advisors, he borrowed some of these creative moves from the mentors he’d had over the years. [19:21] Bill describes some of his other clever solutions for improving his complex, including using closed circuit TVs. He also addressed the security concerns of this C building in a smart way: “I brought in a house mom, a tenant who pays lower rent in exchange for the job of monitoring what’s going on, keeping things in line, and reporting tenants who aren’t doing things right.” These measures increased the quality and security of the complex. [20:29] Bill sums up the strategy he employed succinctly: “It’s all management. It’s all about having strong management, strong criteria for tenants, and not just getting bodies in there but getting the right bodies in there.” [21:10] Bill offers some tips to any investors for handling property managers of any type: “You need to document and almost put a manual together for each property manager based on the needs of the property and the area. And if they can’t do it, you’ve got to move on.” He also emphasizes strong communication: “As an out-of-state investor, the property manager is your number one key to success or failure. If you don’t handle them right and get the right people in you’re doomed for failure.” [22:30] Bill believes management is so important because despite all of his research and legwork, he didn’t see the problems. Scott ribs him a little for his naivete: “Sweet innocent Bill…Didn’t even see the prostitutes!” Bill shares how he managed to add capital as well by converting three units into Airbnb units. In addition to being more profitable, Airbnb tenants would report to Bill when tenants attempted to proposition them or sell them drugs, because they weren’t afraid like the local tenants. The Takeaways: Expect the Unexpected & Count on Your Network As usual at The Real Estate Nerds Podcast, we wrap up the show with the greatest lessons learned from our guest’s story. Bill and Scott each share their greatest takeaway from Bill’s rollercoaster ride of an apartment complex deal. [24:40] The lesson Bill took away from this deal was what he calls The Old Dawg’s Principle: “What you don’t suspect to happen probably will happen.” It’s a spin off of Peter’s Law–anything that can go wrong, will. He elaborates a bit: “When you’re in the real estate business you need to be prepared for the things you can’t prepare for.” [25:55] Scott sees Bill’s story as a lesson in the value of a good mentor. Having a network as a resource to tap into when you run into unusual problems is helpful for spying unknowns and developing creative solutions. [27:00] Bill shares how he has used his podcast to create his network. Like The Real Estate Nerds, Bill shares the good, bad, and ugly, and ends up getting lots of free helpful advice. He is also active on BiggerPockets.com and networks with people all over the country. Connect with Bill Manassero Connect with Bill through his website, The Old Dawgs REI Network. While it was started for investors over 50, the advice is helpful for anyone. Bill’s website contains a wealth of information for real estate investors, including a Three-Minute Rental Property Analyzer tool and many free educational resources. You can also tune into Bill’s Podcast, The Old Dawgs REI Network Podcast Show and subscribe to get his latest episodes every week. Everything on Bill’s site is legitimately free. He has nothing to sell, and simply wants to help others. If you want to do the same, you can also learn more about Bill’s philanthropic efforts and learn how you can get involved yourself on his site. Listener Resources Thank you for joining us on today’s episode of the Real Estate Nerds Podcast. For even more free educational resources on real estate investing and the law, check out the Royal Legal Solutions blog. You can also reach our host Scott Smith directly, connect with him on LinkedIn, subscribe to the Royal Legal Solutions YouTube channel, or join our investor community on Facebook. Don’t forget to subscribe to stay up to date and have the most current episodes of the Real Estate Nerds Podcast directly in your listening library. Every subscription helps us create new, custom content for you. What did you think of today’s episode? What would you like to hear more about in the future? Leave your thoughts and questions in the comments section below, or leave us a review in the iTunes store. We love hearing your feedback, so fire away. Join us again next time for a Best Deals episode with real estate investor Jacob Ayers. Thanks for listening and joining us on our journey to become better investors! Hosted by Scott Smith, Lead Attorney and Founder of Royal Legal Solutions. Schedule your personal consultation now. If you have questions about our content or suggestions for future episodes or guests, reach our podcast team at [email protected]. About Bill Manassero Bill Manassero is the host and op dog of The Old Dawg’s REI Network, a blog and weekly podcast for people 50 years and older who are using real estate investing as a means to fund their retirement years and create a legacy for their children and grandchildren. Bill’s goal is to own/control 1,000 units/doors in less than 6 years. Prior to forming the Old Dawg’s REI Network, Bill and his family were missionaries to orphaned, abandoned, and at-risk children living on the streets of Port-au-Prince, Haiti. Prior to Haiti, he was a professional musician and, prior to that spent over 20 years in business on the corporate and entrepreneur side. A few highlights of his storied career include meeting Ronald Reagan, working with Jimmy Stewart, being interviewed by Oprah Winfrey, and having CNN produce a documentary on his work in Haiti.