Daniel is a San Francisco Bay Area investor living off the cash flow from his properties. Most people believe that you would need to work for 40-45 years in order to save up enough money for retirement. To avoid needing to work for a long time, Daniel chose to get into real estate. What most people don’t know is that you don’t have to have $5M invested in properties to make $200,000 a year in passive income.
In this episode, Daniel will tell us how he got into real estate investing in order to be lazy and not work. From buying his first condominium to hotel development, he strategically snowballed one successful deal to the next. Daniel’s strategy in investing has since evolved from his first purchase of a loft to buying 4-unit, multi-home properties, and finally to the 1031 exchange in Cincinnati, Ohio.
Daniel was inspired by what a friend’s mom did when she was buying condominiums. She moves into a unit, saves enough money to buy a second unit, moves into that unit, and rents out the first one. She follows this sequence using her income from her job and rentals to keep buying more properties. Now, she is retired living off the income from multiple condominiums she was able to pay off even though she never had a high-paying job.
The first property Daniel bought was a 5 bedroom, 3 bathroom house in Mountain View. He lived there with his then-fiancee and tenants. He was able to make this purchase with help from his parents who told him he could use the money to start a business or invest. After four years, he did a cash-out refinance and bought a loft in Emeryville.
Later on, he sold his loft after being convinced by a friend that a condominium is the worst investment he can make. His friend had a condominium during the recession. The rising foreclosures resulted in higher homeowners association (HOA) fees which killed the rent.
With a little more extra money and not having a lot of bills to pay, Daniel bought a 4-plex building in San Jose after selling the Emeryville property. He got it for $1.315M and was able to recycle the tenants and remodel everything. This was before the Just Cause Eviction law took effect, so he only had to give a 60-day notice to the previous tenants. With new tenants at the market rate, Daniel would get cash flows of $1,500 a month.
His original goal was to have four 4-plexes, pay them all off, and live off $35,000-40,000 a month in passive income for his retirement. But because of strict rent control, he started looking for out-of-state properties.
A college roommate told him that his brother was buying properties in Cincinnati. Daniel saw it as a recommendation since he knew the brother as someone who has a “snare drum tightness” with money. Looking through Redfin, he picked out a couple of 4-unit, 5-unit and 8-unit buildings and got in touch with a listing agent.
Daniel was dead set on buying multiple properties and going to the next level. He met Nate Barger and Mike Ealy of Nassau Investments, and they introduced the idea of purchasing a 28-unit complex.
The money he made from selling the condominium and the 4-plex allowed Daniel to go into Cincinnati with a sizable amount. He purchased the 28-unit complex for $1.25M. This was less than the amount he paid for the 4-plex in San Jose.
A bank loan came out with a larger amount than what Daniel requested. Because of that, he wasn’t able to use up his 1031 tax-deferred exchange and had to buy a couple of 4-unit buildings. This is probably the only time someone worried about getting too much money from a deal.
To close out his 1031, Daniel used an intermediary, Xchange Solutions. To tax defer the gains from selling a property, a 1031 exchange requires a like-kind investment with an equal or higher value and at least the same amount of debt.
Daniel did three more deals with Nate and Mike including one in Over-The-Rhine. They’re all under the remodeling phase and are not yet generating income. But with the Cincinnati properties, Daniel is already living the life.
Hotel development is now the next step Daniel is taking with Nate and Mike. They’re going at it using the BRRRR (Buy, Rehab, Rent, Refinance, Repeat) strategy they’ve used in their multi-family real estate portfolio.
Going into hotels has its benefits. One is scalability. Compared to hotels, a multi-family home requires too much time and energy to scale. After buying their first Courtyard by Marriot, they realized that they don’t want to go back to buying multi-family properties.
Their hotel is managed by a nationwide hotel operator, Commonwealth Hotels, LLC. Having an operator means that their kids can benefit from the income and won’t necessarily have to manage the portfolio. This allows them to provide generational wealth for their families.
Hotels also have higher efficiency in terms of square-footage income. Their Courtyard by Marriot has the same square footage as their 28-unit building, but it pulls in $90,000-100,000 a month. Compare this with the $25,000-26,000 a month they get from the 28-unit.
When Daniel and his partners do syndication, investors get only 30% of the deal. Typical syndication gives 70% to investors because they provide the funding. But they are picky with the deals they take, so they can give a much higher required rate of return (RRR).
In Columbus, Ohio, Daniel and his partners closed on another hotel for $12.3M. From this, they only had to put down $1.7 as a downpayment with $2M provided by a Property Assessed Clean Energy (PACE) loan, and the rest from a first position lender. PACE loans cover energy-efficient remodels and acts as a lien on the property.
Most investors would say that they’re over-leveraged, but Daniel believes that you should not look at just one criterion in a deal.
Investors see the hospitality industry as a different beast from multi-family homes. Educating them has been necessary to get them interested. For Daniel, the key to investing in real estate is to purchase a property, make it better, and rent it out for more or do a cash-out refinance. Also, it’s important to increase the net operating income (NOI) of a property by making it more efficient in terms of expenses.
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