Welcome to Cleveland real estate investor. On this podcast, you'll hear about every aspect of the real estate investment business. You will talk to your rockstar investors about their businesses, how they built them, where they came from, and where they're going. Who am I? I'm Joe Lieber and I've made millions of dollars from the real estate investment business over the last 20 years. If you're ready to hear the good and bad from a guy who's learned this business from the school of hard knocks and get educated by some bad ass entrepreneurs, then put your helmet on, strap on your chin strap. Let's ride.
(00:36): What is that for everybody? Thank you for tuning in today. I'm going to talk to you today about multifamily housing. I get this question a lot. People are asking me like going, Hey, Joe, man, I want to go big. I want to go commercial. I want to get multifamily. I'm going into the show, baby. I need to get rich. I'm going to be the next Donald Trump. I want a big building. I want buildings, man baller. I know, I know. I know. That's what you're thinking because I did it. I just had thought the same thing for 10 years. I don't single family homes. We get a couple of doubles. And then about my first seven unit apartment building, man, I couldn't wait to tell everybody, like I own a seven sweeter dog. Yeah, it's true. It's true. Didn't work out so well, you know, I will go back to my mentors and people that I was trying to be like, dude, it's not working, man.
(01:33): I mean making any money now. Why, why aren't I making any money? Like you can buy big enough. That's what I was told. Seven units. What do you do with that? It's not big enough. You gotta buy bigger, big or they tell me. So I did. I went out there and I bought a 48 unit apartment building. Yeah, I remember that. Bought that somewhere around Oh eight. I think it was late. Oh eight. I bought that building good time. And the market was down, right? Damn. That's still those two buildings stole 10 years of my life, man home. I guess the shit I went through with those things never did make any money. You know, I'll talk about it. More detail on another show. But also I went to small building today. I want to with a little seven sweeter because everybody calls me and says, that's me, man.
(02:25): I'm going to buy a building. And today the reason why this show is coming is I saw a, a local, another real estate broker who was a very smart dude, man, this dude knows his shit. I never say anything bad about this guy. He was underwriting one on his show today for people that call in, they're like, Hey man, should I buy this? I'm not going to say the guy's name. That can I disrespect anybody? Cause I'm not re underwriting him. Although I am really underwriting him. I'm not trying to insult him. Cause I'm telling you right now that dude knows his stuff. He's no dummy, but he was telling the guy, you should buy this building. And I was just like, why brother? Why, why did he buy this building? I just can't. There's no money. So we're going to go through it today. We're into the exercise.
(03:04): Rest some fun. So if you're on your elliptical or you're jogging to go into the park or wherever you're at sitting your ride, let's talk some numbers today. Yeah. Now some fun. So relax, sit back and let's have a story. All right. So this building is a six unit, all brick building here in an East side suburb of Cleveland maple. Okay. And this is just the example. I'm just going through, you know, his deal kind of. And once again, if you're listening partner, I'm not installing your deal. Okay? I respect you. I think you're intelligent. I'm just talking about it, man. So this is a garden, low rise type of buildings. Three levels. You got your two units on the first floor, which are one bedroom, one bath units. And the second floor, you have your two bedroom, one bath units. And there's two of those.
(03:55): And the same thing on the third floor, two bedrooms, one bath units. The rent currently is five 50 for the bottom floor ones. Because usually if they're a little bit smaller, you know, the bottom floor units, cause you got to like fit the, the boiler or the furnace in there and electrical boxes and not water tanks and laundry facility. So that's why their rents are usually a little bit cheaper on those bottom floors like that. And then as you go up the, a little bit bigger because there's more room and the other units are all bringing in 600 bucks. So this building brings in 35, 50 a month as the gross monthly rev, assuming everybody pays. So 35 50 a month, 12 months is $42,600. Assuming you get 12 months of rent, everybody pays on time or whatever within the given month. Alright, so top line 42 grand and row.
(04:47): Now it's time to hit the negative button on the old calculator, the minus button. Cause those expenses, Holy smokes are those expenses big. They are because once again I lived it, man. I own one of these things for 10 years, man. 10 years. Alright, ready? Taxes. Six grand a year. Very fair number to write on, you know, insurance, 2,500 bucks a year. Very similar to my building, my seven unit. It's like right there. Yeah. You might be able to have a couple of bucks if you shop the heck out of it, but then you have coverage issues. If you do have a claim. So very fair. It's right in line. The water bill. No, this is a great wildcard. Okay. Because water bill, like everyone's everyone. When they wait, do performance on buildings, it's always a load water number bill. And that Waterville is not low.
(05:35): Okay. And it's ever changing because the tenants are ever changing people ever changing. I mean, I have literally had people in my buildings that literally take two showers a day. Then I have people have take two showers a week. Then I have people who take 10 minutes shower. She will take two hour showers. I mean literally what a book can change on your demographic, your tenant base. You just never know. Now when this building is being today, I thought the water bill was really low. They were budgeting like 40 bucks a month per unit. It's not, that is crazy low. I think a fair number and sort of this gentlemen, think $75 is a fair number per month. So right there, it's 5,400 bucks a year. And I'm going through these numbers might be a little delay or I'm talking to you because I'm actually typing these numbers into my calculator as we go right now.
(06:19): So I budgeted the water sewer bill, $5,500 a year. All right. Then you got a management fee, right? I mean, you have to build that number in now, if you self-manage great. You're going to save 10%, which is about four grand a year and you pay it to yourself, but someone's gotta get paid. So you can't fake that number because you got to put the number in there because if you were ever to sell the building, that number is needs to be in there. Dude. This doesn't make sense. You're faking the numbers. If you don't put that in there. So $4,000 management fee gone by, here's a fun number. Okay. Well here, before I get to the fund number electric, common area, electric man, those damn bill was always so much money for me just to light the hallways in my building. I just don't know why it's about 800 bucks a year to do that.
(07:04): And yes, I did change the light bulbs to those fancy ones that supposedly don't burn any lights or they'll burn up much electricity or whatever. Yeah, I did all of that. The damn bill is still 800 bucks a year. Okay. And that was an exact number they have for this building as well. Oh and expensive cost to his trash removal. Holy cow, man, I need to get past four units. You have to have commercial trash removal. It's expensive, dude. I mean rum key or whatever. I had rump key in my building, but all of them are 1800 bucks a year for one small collection container. That's the number? So 1800 bucks. Oh. And then don't forget, someone's got to cut the grass and you know, maintain a little bit of landscaping and snow powder removal. No, here in old sea town, we get snow. And a lot of these guys like to work on contracts and they all want to send a contract with you, which I did not do.
(07:53): Just so you know, I would always pay for pay by push because like the last five years, I swear, we haven't gotten that much snow here. And I found it was better just to pay for the push, but whatever, where they sign a contract or not 1500 bucks a year, we'll take care of that grass and snow removal. Okay. Let's go back to the fund number. The fun one. I was like, I'm out of color here. Here's a fun number here. It is maintenance. Good old maintenance. Everybody underestimates us when they're buying the building. I think they do that because they're so excited. They just want it.
(08:23): Oh, it doesn't cost nothing, dude. I guess it's a little bit. Oh, it's replaced.
(08:31): Yeah. Right. Okay. It's triple. All right. Personal experience. When you say the word commercial, for some reason, the price triples. I'll give you an example. When I owned my building, my front door and my building one door for all the units, it was going dude like, ah, I'll say it was like getting rusted and the door shock was going. And
(08:50): Cause this has not been, what do you do? You just put a door up. What's the big deal, you know? And I have a
(08:56): Guy call up ah, one of these window and door companies. They come out to give me a coat for like $4,800, like 4,000 bucks. Well what the hell? No. Like, have you lost your mind with the Sony things at home people for $500. I wanted my handyman put it on for 200 and I'm cool. They're like no, it doesn't work like that. And that's what I said to the guy go, what do you mean? Doesn't work like that? Educate me. I'm just a young boy. Educate me. I was 28 years old is to listen to it. It's your house that you live in that door swings open about 10 to 15 times a day for a family of four. And you can go to home Depot and you can buy a door. And one of those cheesy ass hinges and you won't have any problems.
(09:36): That'll last few years, but this door here, there's six units to this one door. Okay. This door swings open a hundred to 150 times a day. It can't withstand. It cannot withstand what to have steel grade door steel hinges, fancy this and fancy that I didn't realize that. Right. And it was damn near five times, six times the cost of what a residential front door costs. That was one of my biggest lessons in commercial real estate. The prices at least triple I'll. Never forget that. That was a huge, huge wake up call for me. Not realizing that. Just to go on another story. When I replaced the gutters on my building, I thought, Hey, they're gutters, right? Let's go. Well, we have all of us here have four inch gutters on our homes, on our residential homes on these apartment buildings that look close. Next time.
(10:30): Next time you're out by a small building. There's six inch commercial grade gutters. I didn't know that the prices, once again, triple I'm like, Oh my God. So when you're doing these numbers and you're budgeting for maintenance, you better budget higher. Cause you're going to spend it. I think the number is at least 15% of the gross revenue. So in this situation, it's about $6,300 a year. And that's the number we're going to use for this demonstration to get through this. So I put the number is 6,300. So I add up all these operating expenses. Okay. And they total $28,400 in operating expenses. So start plugging through it. You ready? $42,000 top line gross rev minus $28,400 in expenses. That gives me an annual N O net operating income of 13,600 bucks. There it is. So I'm going to buy this bill for digging. You ready?
(11:32): This is a good deal. Now let's consider that good deal. I could get any cheaper dude. And that's what building a cell phone. We're in Cleveland. I'm I'll tell you the number. So what they sell for this is what it is 230,000. It's a fair price for this building for an all brick six sweeter suburb. It's a good deal. It's fair. I don't care what the fricking cap rate is. We'll get to that in a minute. It's not going to sell for less than that. This is what it is. And if you do buy it last, you're going to put 50,000 into it to bring it up to snuff. Anyways, you're going to be in for two 30. So 230 K bringing you 13, six a year. That's a six cap, six, 6.3 cap, whatever it's low, right? You're thinking, geez, Oh man, that's what it is.
(12:13): This is real. These are the real numbers. This is what they're not going to tell you. I can show you a performance at 10 and I will show you a pro forma 10, so to speak, right? It's not going to get that. The closest is going to get to a 10 cap is what the paper says. It's not going to happen. It's not going to happen, bro. So Dan, you want to put up $230,000 to make 1360 a year. Sounds crazy. Doesn't it? Nobody does. So let's finance. It makes logical sense. Do you use the bank's money? Sue's the bank's money, right? Well, the bank wants a down payment. So $230,000 purchase price. We'll just say 20% down. It's probably more like 25% down, but we'll just say 20% on. I don't know what commercial findings it looks like right now. I'm in done a commercial loan and hell.
(12:59): I don't know. Never. I don't think so. We'll say 20% down. We're also going to assume they'll give a 30 year mortgage, which I think mostly it's not just 25 years, but for the demonstration of this, we're going to say 30 years. I'm trying to make it better. Right? I'm trying to make it like a longer term. Cause I'm trying to figure out how you're going to cash flow. So what I'm doing right now, you'll see here. So we're going to say 30 year term. We're going to say only 20% down. Keep it look change in your pocket. And I'm going to ballpark the rate at a 5%. It seems pretty fair for commercial real estate deal. So here we go. Ready? Two 30, 20% down $184,000 loans. 30 year term, 5%
(13:36): Monthly payments and nine 87 a month,
(13:39): Nine 87 for 12 months is 11,008 50. Call it 12 grand. Let's make it easy. Alright, 12 grand. Now we made 13, six as our net income minus $12,000 in debt service, 1600 bucks. Hey, you put down $46,000. He took all this risk and you're making 1600 bucks a year. Cool wants to buy it, right? It doesn't make sense to me. All right. It doesn't, it's a real number. Now I'm going to say this. So to be very fair and full disclosure at a cash flow basis, it does not make sense to me. Doesn't now people invest in real estate for other reasons. And then just cash flow. We'll go through them real quick. They invest for depreciation. They invest for amortization, right? And 30 years of building's paid off. They invest for appreciation. They invest for right. Maybe this building's worth 300 grand and 20 years they invest for 10 30, one tax exchange purposes.
(14:49): Maybe you sold three single family homes and you don't want to pay the taxes. And you want to place money in place a quick, not only maybe you do it for that reason. So it's not just a cash flow play, but it is a cashflow play. Right? I wouldn't do this deal. This is a bad deal to me. I wouldn't do a deal like this. So just want to talk to you about it today. So when you guys call me and you say to me, Hey man, I'm going to the show, man, I'm buying a big building. I'm buying a suit unit. Okay dude. Good luck. This is what you're going to expect. These are the real numbers. Thank you to the real estate broker out there today that did a show on this earlier because I think he's great. I really do. I think he's smart.
(15:27): And I think he's right on and it, let me talk about it on my show today. I hope you can really relate to this. So before you go out there and do this, I do not recommend by the way, I am not a multifamily guy. I do not recommend it for me. I know people would be pissed me saying that I get it, but it's just not for me. I don't think it's a bad space and maybe I'm just too damn dumb to understand it. I can handle that. Tell me that I found to dumbed into to handle it. I'm okay. Maybe there's things I'm missing here that I don't know. I can just tell you that I did live. This is, these are my experiences. I was not happy. I ran around half scared because of a bigger cap. X item came in. Where's it coming from?
(16:04): Think about that for one second. Cause this happened to me. What happens when the boiler goes down and you gotta replace the damn thing and it's not $3,000 for a new furnace. Okay. My boiler is $13,000. True story. Wale McLean for you guys that know boilers was a whale McClain boiler. And guess what it is, right? Yeah. Whale McLean 13. Geez. Where'd I get the money for that. When the operating account doesn't have any money in it, where do you get the money? You get it from somewhere else or what are you going to do? Go dig a deeper ditch and raise the money. You don't want to know that. I didn't want to tell you I'm too embarrassed to even tell you the things that I had to go through to make that building work. I guess you'd say work. Keep my ass out of foreclosure. More like for 10 years. Well cool. Hey, I hope you enjoyed the show today. Hope you learn something. Hit me up. Send me an email. Laugh at me. Love you guys. Thank you.
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