231: California Teacher Builds $7 Million Real Estate Portfolio in 7 Years

SHOW NOTES FOR EPISODE 231: CALIFORNIA TEACHER BUILDS $7 MILLION REAL ESTATE PORTFOLIO IN 7 YEARS

Is it possible to invest in real estate if you are over 50 years old, live in a really pricey city in America, and earn a teacher’s salary of $52,000 a year?  According to today’s podcast guest, San Diego teacher and real estate investor Mike “Swanny” Swan, it’s not just possible: but it can be phenomenally lucrative, creating life altering financial freedom!!!

What You Will Learn

• Why buying for cash flow is always the best real estate investing strategy
• Even though properties may be cheap, learn to buy cheaper (short sales, foreclosures, bank-owned properties, etc.) so you can have instant equity
• The value of partnering for maximum purchase power
• Using the leveraging power of the 1031 exchange to rapidly build an impressive real estate portfolio TAX FREE!
• How to spot commercial brokers who take advantage of newbie investors
• Why you should be cautious when inheriting multifamily properties with multiple units occupied by people in the same family
• How to target properties by owner characteristics
• Why focusing on increasing your NOI over capital improvements can accelerate you portfolio growth
• A little secret to maximize your vacancy listings’ response on Craigslist
• Why it’s more important to talk with fellow investors over brokers to better understand a market

About Our Guest

Mike “Swanny” Swan

Michael Swan AKA Swanny, who earns a modest parochial school teacher income, is 53 years of age old, is a P.E. teacher who lives in San Diego and has used the valuable real estate concept known as “trading up,” through the power of the 1031 Exchange, to accumulate approximately $7 Million dollars in assets and rising in real estate.  Presently, he earns $160,000 in passive rental income and soon to be $200,000, primarily tax deferred cash flow per year!!  All of this has been accomplished in 7 short years!!!  If a lowly paid parochial school teacher can do this, so can you!!

More About Mike

• Started in real estate at 46 years of age
• Bought first rental property in 2011 – a rental condo
• Parochial teacher at Catholic school – teaches P.E. and reading
• Also taught at Miramar College – reading and study skills – $6,000 per summer but stopped for 3 summers
• Catholic school was going to cutting $5,500 from salary because they were building a new gym
• He saw his dependence on the wrong things (Catholic diocese and the state of California). His wife is a special education aide (only 5 hours/day)
• Was told he may lose his job
• He could buy little condos in Santee and Lakeside, near San Diego, 2 bed/2 bath condos, for $93,000, 3 bed/2 baths for $125,000-150,000
• His parents were on fixed incomes and wanted to increase their monthly income, so they decided to combine their money to put down payments on condos
• He took out home equity loans, cashed in 401Ks and IRAs (taking the penalties and tax consequences)
• He hoped to get $1 million in his 40k and IRA by the age of retirement (67 years old) but when financial planners said, “You can pull about $40K in annual income a year until you die.” But, living in San Diego, paying mortgages and trying to survive, he would be living on less that he earned as a teacher, which was already barely surviving
• He decided real estate was a better way to go than the 401K/IRA investment accounts route
• Bought 10 condos between 2011-2012 (all short sales, foreclosures, bank-owned properties)
• He was working 60 hours per week, plus self-managing all the properties, advertising to get good tenants (discovered some good tricks along the way), doing tenant screening
• Condos were cash flowing $300-600 per month – around $50K a year in income
• They grew in equity
• Learned about 1031 exchanges
• He developed a plan to sell/exchange the condos for apartment complexes in northeast Ohio
• He would only sell/exchange if he already had a property under contract or agreement
• Today has 8 apartment complexes, 122 units, $160K in cash flow, and is repositioning the properties with value plans and increasing value exponentially – you can only do this with multifamily

First Apartment Purchase

• There was another teacher at the Catholic School who was from Northeast Ohio and her mom and stepdad owned and managed properties
• In 2013-2014, they were buying single family homes, duplexes for $60,000 and get $1,500 a month
• He asked for her agent and started to buy properties 2014-2015 and have her friend’s mom manage the properties
• Got 8 doors that were cash flowing $3,400 per month
• But he had a lot of equity in his San Diego properties and was concerned he would lose it if there was another crash, so he wanted to buy bigger apartment properties in Ohio
• Started reaching out to commercial brokers but they were like “used car salesman” and would present loser deals to him because they saw him as just another California investor
• He bought his first two apartments from a broker he trusted
• He took $100,000 equity out of one of his San Diego condos that was cash flowing around $500 per month to buy a 10 unit apartment that cash flowed at $1,000 per month – he wanted a “yield deal” that would immediately cash flow
• Bought 10-unit for $420,000, put $100,000 down
• One family rented 5 of the 10 units. As soon as he bought the property, 2 of the family units stopped paying rent.  Had to evict
• The other remaining family units went ballistic and would influence potential new tenants
• He had “physical occupancy” not “economic occupancy”
• When you aren’t an apartment owner vet, you get the good broker deals. As a newbie, you get the garbage
• He also had bad loans with steep penalties for early pay-off  
• The broker was selling the neighborhoods as C class neighborhoods when they were really D+
• He found it difficult to make it a value play and increase the NOI (Net Operating Income)
• Put $75,000 into property over 2 ½ years to boost NOI
• Then he bought another property from the same broker in September of 2015!
• In a nicer area but it had “logistic issues”
• In the first 3 months of ownership, the roof blew off
• More mysterious vacancies
• He thought it was a yield play but failed to produce
• Put in $125,000 deposit on a 1031 Exchange from sold condo
• Also, put $75,000 into property over 2 year period
• Because they were commercial loans, the lender, every year, wanted to see tax returns, operating statements, wanted to see the debt-to-service-coverage-ratio is above 1.2% – it wasn’t with either property
• The lender said, “Why don’t you just pay off these loans, $100K each, and recast your loans so you can cash flow.”
• Mike asked if he could just sell the properties but the bank said, he would incur the penalties for each loan. He was able to negotiate the penalty down to 1% of the loan balance
• The property that he bought for $500K, sold for $420K and the other that he bought for $420K, sold for $320K, plus the penalties. He lost money, plus the $75K he spent on each property’s  improvements

Change of Strategy

• Started focusing on finding properties in better areas, owned by older, burnt-out owners
• After be bought two, the good brokers came out of the woodwork and started offering him great off-market deals
• He’s now buying properties that are $8,000 under market per unit without requiring a lot of rehab
• He’s more focused on boosting NOI
• When you increase NOI $100 per unit it exponentially increases the value of the property and cash flow by $1,000
• Now he has 8 apartment complexes that are true value plays
• $7 million in properties, $3 million in equity, after 7 years of investing

Recap

• May 2015, bought 10-units for $420,000 – sold at a loss for $320K 2 years later
• Sept 2015, bought 8-unit for $500K – sold at a loss for $420K 2 years later
• Next deal – First real re-positioning deal.
  • In 2015, bought 15-unit apartment for $592,000, $144K down payment ( from condo 1031 exchange), $39,000 per door, Put $60K in improvements (basic make readies)
  • Seller 88 years old. Husband passed away.  She lived in the apartment complex and hated it
  • Not managed well – high water volume usage toilets, no tapper-proof aerators on faucets, no savings for landlord
    • He replaced shower heads and other water wasting items with Niagra water-saving fixtures
  • Increased NOI $20,000, increasing value $200,000. Now valued around $800,000
  • $24,000 annual cash flow
• He now focuses less on capital expenditures (windows, flooring, etc.) but more on ways to boost NOI because for every $1 he saves, it adds $10 to the value of the property
• New deals are averaging around $31,000 per door, in the same community, because they are getting better at it
• Deals are taking 4-5 months, from LOI to contracts
• All of the new properties are located in a part of Ohio, near Lake Erie, near Euclid, within a six mile arduous of each other, in an area where population is increasing (one of the only cities in that area that is increasing)
• Has an offer on a 24-unit, at $34,000 per door

Property Management

• Started with a little single family property manager and have been working with him over the years to train him into what they need
• But now that he has 122 doors, the property managers for the bigger complexes, that have repositioned products since the 90s, are looking at Mike and his properties
• They will be transferring 50 plus units to one of the bigger property management companies (they usually want 80-100 units minimum), plus any new acquisitions

Advertising Secrets to Get Good Tenants

• Advertise on Craigslist
• Has 8 different ads per unit – rotates in different ads (with catchy headlines) every two hours for the same vacancy
• This trick keeps your ads at the top of inquiries

Biggest Mistake

• Going from single family to multifamily, not being aware of the commercial brokers who target out-of-state investors, to unload bad properties
• In hindsight, he thinks he should have worked with a more experienced investor who had done more deals and was aware of broker/sharks

Biggest Success

• Buying the 10 condos in 2011 “for cash flow” that allowed him to make the purchases he makes today
• Not listening to the “old guard” who said to buy one little property at a time
• To turn $50K per year in cash flow into $160K a year today
• Being persistent, sticking with it and not giving up
• Learning from his mistakes
• Learned how to re-position value plays

Advice to Old Dawgs Looking to Invest in Real Estate

• Don’t talk to brokers, talk with investors who are already investing in the area you are interested in, who have a team on the ground
• Brokers who say a property is “In the path of progress” means it’s a bad area, D class
• If you think you have a good deal, Google Earth the address, look at the commercial/industrial areas nearby (2-6 blocks away), look for graffiti, broken windows, boarded up buildings, unsavory characters, no trendy stuff, that is not an area you want

Where he Wants to Be in the Future

• Next 10 years
  • $750K cash flow
  • $30-40 million in property
  • $12-15 in equity
• Short Term
  • Buying smaller – 24-unit properties in same area where he knows the market

Rap-It-Up

• Favorite real estate book: Multifamily Millions by David Lindahl Pages 47-130
• Favorite business book: Think and Grow Rich by Napolean Hill and Rich Dad Poor Dad by Robert Kiyosaki and 7 Habits of Highly Successful People by David Covey
• Most valuable web site for success (other than your own): BiggerPockets.com
• Favorite app: CraigsList (free) and FaceBook Marketplace online (free)
• Favorite quote: “Whatever the mind can conceive and believe, it will achieve” Napolean Hill and “If you change the way you look at things, the things you look at change right before your eyes” by Wayne Dyer
• If you had to start all over, knowing what you know, and you only had $1,000, what would you do to launch your real estate investing business? Find a good job and maybe get 2 or 3 jobs a week to qualify for good bank loan to purchase a little rental property “the right way” based on cash flow. Keep the $1,000 in savings. Build up a reserve account and keep saving to purchase more real estate.

How to Reach Swanny

• Phone: 858-722-7377
• Facebook: Swanny Spikes Multifamily Wealth

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