[0:00:58.9] MF: Hey everyone, it's Mark Ferguson with InvestFourMore. Welcome to another episode of the InvestFourMore Real Estate Podcast. I've got a really cool guest on for today's show, Mark Walker, who's the founder of Luxmana Investments. He's a real estate investor in Colorado, which is cool. Not too far away from me. He mostly focuses on multi-family investments, but has a really interesting story on how he broke out of the corporate world, got into real estate investing part-time, and then moved into it full-time. So I'm really excited to talk to Mark, see how that happened, how he got to where he is today, and what some of his future plans are.
So Mark, thank you for being on the show. How are you?
[00:01:34] MW: I'm doing fantastic, and thanks for having me. I'm thrilled to be here.
[00:01:38] MF: Yeah, thank you. I always like to start out with how people first got started, so if you could, what were you doing when you first got interested in real estate and how did you catch the bug?
[00:01:49] MW: Oh boy, I think my story is similar to a lot of people, at least 80% of the people out there that I talk to. I read that book, Rich Dad, Poor Dad by Robert Kiyosaki. That was back in 2003. That's what gave me the bug, really turned me on to the fact of entrepreneurialism as well as real estate. So in 2004 is when I actually bought my very first rental property. It was a duplex in South Denver and what really was exciting about it is that first deal had a cash on cash return of 35.5% in the first year. That just lit a fire under me. I mean, that got me even 10 times more excited about real estate.
I ended up owning that deal for a year or two, and then I sold it. My original intent was to 1031 that into another deal. For several reasons I never ended up doing that next deal and actually ended up sitting out the next few years. That was probably a blessing in disguise, because we all know what happened around the 2008-2009 time frame. Well, then in 2010 I started to network again and I'd got involved with a general contractor that was doing scrapes. When I say "scrapes", he was buying single family homes, scraping that home off the lot and would rebuild a new structure in it's place.
So we partnered together and we bought a single family home in a really trendy part of Denver known as the West Highlands, and we scraped that house and we raised up a three story duplex in it's place. Then we sold off each side separately that. That, from start to finish, was about a 16-month project from buying that land, to scraping it, to selling both units. Before the first one was even done, there was another lot that came available down the street on the other side of 38 in Denver, which was called the Berkeley side. So we did a second one together.
By this point it was 2011, I had some of the gains coming out of that project and so I knew that I wanted to start buying rental properties again, because my big focus has always been passive income. So I went ahead and started buying properties in the Denver Metro area, and I bought most of them between 2011 and 2014. At that time too, it was a very different market here in Colorado. There was a ton of supply on the market and I was turning my nose up at anything that didn't have a cash on cash return of at least 20% in the first year.
So looking back, there are parts of me that wish I might have been a little more lenient on that because I think about the deals I didn't buy, especially by today's standard. But at the same time, I was glad I stuck to my acquisition criteria. So I'll even say in late 2013 I bought my very first multi-family, or larger multi-family property. It was a 12 unit property and then, like I said, 2014 came and gone and I escaped the rat race or had enough passive to quit my job in January of 2015. That was really exciting.
Well, at the time, my cousin who is a 30-year veteran in multi-family, he said, "Look, if you want to come job shadow me and sit in my office and see how the really big stuff is done, then you're welcome to do that." And so I did and he won't even touch anything less than 100 units. I mean, he's doing the really big stuff.
So I sat in his office for eight or nine months, and just learned and watched how it was done. Then I put a 65 unit property under contract and ended up closing that in December of 2015. So that's really me in a nutshell. Again, it's like playing the game of cashflow, by Robert Kiyosaki. I started doing small deals, and just gradually worked my way up and I'm doing larger deals now.
[00:06:00] MF: That's a very cool story and a lot of people, I think, want to follow that same path but it's not always easy getting started. I'm curious, what was your job? What were you doing when you first started out?
[00:06:11] MW: I was working in high tech. I worked for a high tech company that did storage, hard disc drives for computers and servers and consumer devices. I did that for almost 14 years.
[00:06:22] MF: Okay. Obviously you quit, so it wasn't the most awesome thing in the world. But, there are a lot of people in the corporate world — I mean, my team manager, Justin, worked at Via, a large tech company, for a number of years before he came to work with me. What was the biggest thing that wanted you to get out of that line of work? Schedule? Freedom? Money? Everything?
[00:06:42] MW: I'm so glad you asked, because I think about that a lot. Even towards the end when I was still working there, I was looking at my own business, my real estate business that I had going on the side and I was looking at how quickly I was able to make decisions and how I was able to make decisions with the help of the people that I worked with, my partners, my lender, my insurance agent, my property manager. Then I compared that to life in the corporate world where it seemed like everyone had a say in everything. Nobody had the power to say yes, but everyone had the power to say no and things just move a lot slower in a large corporate environment.
I'm not ripping on corporations or working in corporate. I mean there are lots of great things about working in corporate in a corporate environment as well. But when I was comparing it to my own business and seeing how quickly my own business was growing and how it was bearing fruit based on how much I wanted to water it and feed it. It was just so much more appealing to me and I'll tell you what, I don't think I could ever go back. I think I'm ruined for the rest of my life. I just love my freedom now.
[00:07:51] MF: No, it's funny because Justin had high blood pressure and as soon as he quit, it went down to normal right away.
[00:07:57] MW: Yeah, I have no doubt. I have absolutely no doubt. I can relate to that. I'll tell you what too, when I did leave the did, even though I had a plan and I knew that I had more than enough passive income to pay my bills, for the prior 14 years, my mind had been getting trained to see this money magically appear in my bank account every two weeks. So it was a little bit of an adjustment for me, even six to 12 months after I had quit my job, I was still adjusting. I'll admit, that was a mental battle for me.
[00:08:28] MF: I can imagine that's a really different mindset because I've never been in the corporate world my whole life. It's always been as an agent or as an investor, you get some really up and down months. There's nothing steady. So it takes a while to get used to that and learn to plan and save and see into the future a few months. You can't just rely on stuff to just magically appear, that's for sure.
[00:08:50] MW: Yeah, I can definitely relate to that now. But all in all, I love it. I love the freedom to do what I want and be in control of my own destiny. Absolutely love that.
[00:09:01] MF: Oh yeah.
[00:09:02] MW: Plus, I'm passionate about real estate.
[00:09:03] MF: Yeah, same here for sure. When you were buying your properties, 2011 to 2014 seemed like the sweet spot for you, which was really similar to me as well. Lots of foreclosures in Colorado, prices were really low, cash on cash was awesome. I had the same cash on cash goal too, I wanted 20% on every deal I did. But when that started to change, did you see yourself stretching the limits a little bit or was that when you went into multi-family and said, "I've just got to find something different because it's not working"?
[00:09:30] MW: Yeah, I've always been a conservative investor, I guess I'd classify myself as. In fact, I think a lot about the deals that I passed on because literally, markets are so crazy. If I say had a short sale offer in and the bank came back and said, "Yeah, we'll approve it, but at this amount instead." Or I remember one time they said, "We're going to keep the appliances." And when I factored in the cost to replace the appliances, the cash on cash return projection dropped to about 19.5% and I stuck my nose at that and I said, "Terminate."
Shoot man, I should have done that deal. But I had my acquisition criteria and I stuck to it and I was never one to lever up. Again, hindsight's 20/20 but I've never been one to go off and lever up and use that cash to go buy more properties. But what it came down to for me is that when things started to get crazy here in Colorado, this is around mid-2015, I was able to go off and get better cap rates and better returns in Texas. Now at the same time, I had the benefit of my cousin who is very active in Texas and he owns his own property management company.
So I was able to leverage that relationship and his network and his systems to go off and make that 64-unit acquisition in Texas. Plus, it was just kind of a natural progression for me. When you get into multi-family or if you even have any desire to get into multi-family, there are really three building blocks that you need to think about. It's your net worth; lenders typically want to see your net worth be equal to or greater than the loan amount that they're giving you.
The second thing is they want you to have experience with properties, successfully repositioning properties and stabilizing them and being profitable, having a solid track record of success. I swear up and down, this isn't scientific, but I think that's probably 50% of the decision about you. And then the third thing is your liquidity. They want you to have enough liquidity after closing that you could make 12 mortgage payments, assuming the income of the property is $0.
Now, notice that I never said anything about W2 income, or any income at all. When you get into larger multi-family transactions they don't ask you what your income is every single month. They only care about your balance sheet really. So they care a lot about your experience. So everything up until that point really brought me to that. Even quitting my job. When you get into multi-family, it's just so different than doing smaller transactions that I'm not sure that I could have made that transition if I was still focused full-time on a day job. Now that's me. I'm not saying that someone couldn't do it, but for me, that's a very true statement. So it was a natural progression, I had a fantastic mentor in my cousin, and that's kind of what led me to Texas.
[00:12:33] MF: That's cool to hear that. I personally have been looking at Florida a little bit for rentals, then now I've started to look at commercial properties in Colorado. It's difficult when the market goes crazy. It makes it tough.
[00:12:42] MW: Yes, it really does.
[00:12:43] MF: I'm curious, you mentioned experience being so important when getting these large multi-family loans, you had some experience with the smaller properties, were you able to leverage your relationship with your cousin and his experience to help you move forward?
[00:12:58] MW: You know, I was able to leverage his network. But actually, when I did the 64-unit I actually brought in two equity partners. One of them happens to be my property manager here in Colorado, and he owns a larger multi-family property. So he came along and by being involved in the deal I was able to leverage his experience as well as my own. The 12-unit that I owned, what ended up happening with that one is bought it in December 2013 and then a little over a year later, someone came along and gave me and off-market offer to buy that property for within spitting distance of where I expected to sell it after holding it for 10 years.
So that's just another example of what's gone on here in Colorado. But I decided, you know what? Bird in hand, I'm going to take that offer. I usually hold my properties. I don't sell. I don't sell much, but that one I just felt, bird in hand, let's take that and go do something else. That was, I actually 1031'd into the 64-unit. I did a tick so I was able to facilitate that 1031 exchange and then brought in two other equity partners on the other side of the tick. When it comes to getting these larger multi-family loans, the terms are really attractive. In fact, you can get non-recourse debt on stuff like this, if you have the track record and you can meet all the other requirements.
But it's definitely a journey. The way Fannie Mae typically looks at it when they go to make a decision about you is they will, again, they'll look at your experience, your net worth, and your post-close liquidity. But when it comes to making the debt service payment, they're looking to the property to meet that underwriting requirement. They're not going to look to your W2 income or anything like that. But they also, when they make a decision about you and your experience, they break it up into three buckets. The first bucket is a person that has owned and been seasoned in owning five units to 50 units. That's Tier I.
Tier II is 51 units to 100 units, and Tier III is 101 units or greater. Once you're in Tier III and you're securely there, you could buy a property that's 1,000 units and it's all the same in terms of experience to them. But by owning that 12-unit and owning it for a year to a year and a half, that got me seasoned in Tier I. Now I'm in Tier II because I own the 64-unit property. After about a year, really preferably two years, they look at you and they say, "Okay, you're now seasoned in Tier II," and they'll let you jump one tier at a time, once you've demonstrated that you can be successful in your current tier. So that's often times how those decisions are made.
[00:15:40] MF: With your 64-unit property, are you planning to hold that one for a significant time? Do you have an exit strategy for it?
[00:15:47] MW: Well, when I modeled it, my exit strategy was a five-year hold. But I'll tell you what, one thing that I love about this property, now that we're about at the year mark, now I've owned it for a little over a year, there are options. My pro forma for year one was to get the rents from 91 cents a square foot per month, which is where they were when I acquired it, to about $1 a square foot. Now, what actually ended up happening is I'm now sitting at about $1.10 a square foot one year in. So that's fantastic. Rents have gone up 19 cents per square foot since acquiring it. I blew pro forma away, basically.
So it's cash flowing extremely well right now. It might just be that I hold it. But at the same time, I could do a supplemental loan or I could sell it. The Market down in Texas has gotten really strong, but it's great to have the options. I wouldn't mind holding that property for five years but if there's an opportunity to sell it and 1031 into something bigger, I would do that too.
[00:16:50] MF: Right. And with your investors there, are they in it for five years? Or were you planning to refinance it and pay them back? What's their position?
[00:16:57] MW: They're in it for five years. They've committed to that, but at the same time, what we agreed to was that now that we're approaching stabilization — I call it stabilization because we will have turned, by February/March time frame we will have turned every single lease at least once. Insurance and property tax, Escrow's reset, all of that stuff. We'll need to season the financials for at least six to 12 months. And then after doing that we could consider doing supplemental loan, getting some cash back to the investors. We're open-minded to that. Like I said, we have options.
Probably around the middle of 2017, late 2017, I'll go out to get a debt quote on that and see what that scenario might look like. I'll also look at what could the sale yield in terms return and results. We'll probably take a vote on it. But again, what's great is that these two investors I have involved, they're not the type that need the money. We'll decide when the time comes and if we just decide to hold it, we'll all enjoy the cash flow.
[00:17:57] MF: That's not the worst thing in the world.
[00:17:59] MW: That's right.
[00:18:01] MF: What do you think the hardest part about buying that property, was it finding it? Was it figuring out the best plan to turn the leases? What was the most difficult part about it?
[00:18:09] MW: Definitely finding the deal, and that continues to be the biggest challenge, for me, is finding good deals. And that's the thing is I've always been that conservative investor. So I'm not just looking for a deal, I'm looking for thee deal. So that has always, and continues to be, the biggest challenge, is just finding the right deal. I think we all know what our strengths and weaknesses are. We all have our special sauce for how we unlock the value of a property. Finding the right deal that you know matches your criteria and your unique sauce and what you can do with the property. That's been a challenge in this market.
[00:18:51] MF: Oh, I bet. And even in Texas I know their market's doing a little better now. But have you — are you starting to look at other markets? Or are you just kind of trying to stay in Texas? Have you thought about expanding even more?
[00:19:01] MW: I've tinkered a little bit. I've looked at another market or two, but as long as I can continue to leverage my existing systems in Texas, then I would prefer to play in Texas or Denver. But yeah, it's getting to the point where I've looked at other markets and would be open-minded to maybe adding one more market. I think if I were to go beyond that I'd have to clone myself. But yeah, being a systems guy, I would really prefer to find something in Texas.
[00:19:29] MF: Right, and speaking of the systems and switching over full-time to real estate, how much time do you think you spend finding this property and then working on getting the leases turned to really get that process to where you're at now?
[00:19:41] MW: You know, I'd say that the process of finding it and stabilizing that property and getting through the renovation, turning the leases and stuff like that. That's probably a 20-hour a week type task for a property like that. Just focusing on solely that. But once it's stabilized like where it is right now, I mean it's about a two-hour per week thing. It's on autopilot at this point.
[00:20:06] MF: No, I totally get that. Since you are on autopilot with that one now, are you really actively looking for another one? Or what is your future goal?
[00:20:15] MW: Yeah, my future goal is, as soon as we get into the new year, 2017, I'm going to be very dedicated to finding the next deal. But for right now, I'm enjoying the holidays. Nut yeah, that's definitely my goal is to find the next one at this point, and I do want to go bigger too. So my journey's been like that came "Cashflow", right? Small deals to big deals. One thing that my mentor told me early on is that the bigger the deal, the easier it is. And that never really resonated with me before. But now that I've owned the 64-unit and done that, the reality is that I'm going to spend the same amount of time and effort renovating and repositioning a 64-unit as I would a 150-unit property, or a 200-unit property.
But the big difference is is that the budgets are bigger with the larger property, and the pot of gold is bigger at the end of that rainbow. So I do want to continue to move up, get myself securely into that Tier III lending category and just continue doing larger, and larger deals.
[00:21:17] MF: That sounds pretty good to me. I'm curious, one question I wanted to ask too, in Colorado you've bought in Colorado, you've bought in Texas, every state has different laws, regulations, markets. What were some of the biggest differences that you had to get to or problems that arose because of the different rules and law.
[00:21:35] MW: You know, I'd say one of the best examples — I mean, both Colorado and Texas I would say are landlord states, in terms of the tenancy laws and stuff like that. If someone doesn't pay their rent, you can deal with that in less than a month. You can re-gain possession of your property in less than a month in both states. So I think that's' great. But one of the big differences that I've noticed about Texas that was definitely a learning for me, is that here in Colorado, typically a property gets a certificate of occupancy when it's built. And then as long as that property doesn't burn to the ground or have some other environmental issue, or whatever, you're not going to need to get a CO again.
In Texas, you have to get a certificate of occupancy every single time the property trades hands. So what that means is that the city comes in, the fire marshall comes in, does a fire inspection and all that stuff, and that's great. I think that's fantastic. You want your property to be safe and paired for that kind of stuff. But the bigger thing was, there's a guy that comes in from the city and he can force you to invest money, cutbacks and things that you may not have planned on investing in. Take for example the pool at my 64-unit property. It had been inspected during my due diligence period.
Everything was fine and it looked like it was in decent condition, still had some useful life in it. The city came in and said, "You have to re-plaster that pool, and if you don't do it right now then we're going to fine you." And we ended up re-plastering the pool. Once you start peeling back an onion, I'm sure you can relate to this Mark as a very successful fix and flipper.
[00:23:11] MF: Yes.
[00:23:11] MW: Once you peel back the onion, things can get a lot more expensive. I ended up dropping about $15,000 dollars on the pool that I wasn't planning on investing in. That was fine. I always plan for some unexpected things. One of my biggest rules is "never go in under capitalized". So that was fine. We stayed upright during that time, but that was $15,000 I was not planning on investing in the CapEx budget. So that's been a learning from doing business in Texas versus Colorado.
[00:23:43] MF: Yes, and I've learned so much just from doing the blog and talking to different investors about different rules. Texas title insurance is completely different. They have it set up where you have to pay a certain amount, and other states you get transfer taxes and New York is just — I don't even want to talk about New York. I talked to an attorney from Chicago who said he's looking at six months to evict people who are behind on rent. It's crazy what you deal with in some areas. So no, I always try and delve into what it's really like in different states.
Speaking of the market in Chicago, Colorado, and Texas, I'm curious, you live in Colorado and have seen the crazy prices. I mean, they just keep going up. Do you have any predictions or any feelings on what's going to happen with the future market here?
[00:24:23] MW: I was going to ask you that, Mark. I was hoping you would know. It's tough to say. I think in Colorado, what's going on here is we definitely have a shortage of affordable housing. I think there's a number of things going on. You look at the millennials, and man, boy do I feel bad for the millennials. They're coming out of college with record amounts of student loan debt, so when they go to get their job, they've got this burden of their student loan debt.
At the same time, rent's have been going up like crazy, the banks are tighter, they've got to save more for a down payment. It's difficult for them to do that when they're burdened by the student loan debt. On top of that, the millennials are getting married later in life and usually a general rule of thumb is people more out of the city and into the burbs when they get married and have kids. Then when they do finally decide to buy a house, there's very little supply on the market and anything new that's getting built is, I'd say, a starting price to $350,000 to $400,000.
So there's a real shortage of affordable housing here. And another reason for that is because of the construction defect laws. The last 10 or 15 years there are attorneys here in Colorado who have just made a sport out of suing developers for construction defects. So all these developers are gun shy. They don't want to build condos and town homes. Well those are the types of products that are for first-time homebuyers that are affordable for that segment that I'm talking about. There are just a lot of things going on in Colorado that I think that Colorado's going to continue to be strong.
Now whether or not we continue seeing rents go up as much as they have every year, or maybe it slows down, maybe it levels off. But unless some of these things change, some of these dynamics change, I'm not sure that I see things radically changing or having a downturn. There are new construction defect legislation and stuff like that that's happening. But I don't think a lot of developers are willing to be the guinea pig to test out that new legislation.
[00:26:26] MF: Yeah. I agree with that too. There's just not enough low, entry-point inventory and lending and cities upping their fees for everything, it just has caused prices to go up. Yeah, I went to the IMN Conference in Arizona a couple of weeks ago and they had someone from the Federal Bank in Atlanta talking and he was kind of saying the same thing where there's just not enough low — not low income, but just starter point inventory for houses across the country almost. Unless you go into the midwest, but in most markets there's just not enough there and some of the other people on the panel said, "Well, millennials don't want to buy and everybody wants to be in town." It's not that they don't want to buy, it's that they can't.
[00:27:05] MW: Exactly.
[00:27:06] MF: But yeah, I think the only real way to change it is to build more. But like you said, nobody wants to take those risks because so many builders got burned in the last housing crisis and banks. So it's kind of like, "Well, what happens when people can't afford it but there are still no houses to buy." So, it's hard to say.
[00:27:22] MW: Exactly.
[00:27:23] MF: Very cool. Well, Mark, if you were giving advice to someone who wants to kind of get into the business like you have, do you suggest starting out kind of small, doing a deal here and there? Or do you wish you would have jumped in as big as you could right away?
[00:27:37] MW: Well there are a couple of different paths you could take. If your desire is to do it yourself, then yeah I'd suggest starting smaller and work your way up. Again, keeping those three building blocks in mind, right? You've got to build the financial strength, you've got to have the liquidity, and you've got to have the experience. So you've got to establish those building blocks if you want to do larger multi-family deals. You can fast-track your journey if you team up with a sponsor. If you essentially see someone that's doing these types of deals and you participate in one of their deals you can ride their coattails, per se.
But for the person that wants to do this themselves and has a passion for this and wants to do this full-time, I think you're really going to be best off starting small, working your way up. Get into that five to plus unit category, live there for about a year or two, and then work your way up.
[00:28:36] MF: That sounds like a decent plan. Now, if someone wants to fast-track, I know you have started helping out with that, right?
[00:28:42] MW: Yeah, you know, I'm open-minded to that. Like I said, my biggest issue lately has been finding deals. So if there was someone out there that knows of a deal or can find a deal and bring it, then I would absolutely be open-minded to helping someone out, partnering with them on the deal, and bringing them along, letting them learn along the way. But again, that would help me out tremendously because my biggest challenge is finding the deals.
[00:29:07] MF: Yeah, that could be difficult. I've heard that across the board. Multi-family, well especially in Colorado, it's virtually impossible.
[00:29:13] MW: Yes, exactly. But yeah, the other thing is too that one thing I love to do for the listeners as a way of saying thank you is, and a way to learn more about multi-family is I do offer a free guide. I'd like to give it to your listeners. Anybody that's interested, I've written a guide called 10 Not So Obvious Ways to Boost Your Multi-Family Property NOI. You can get this buy going to www.luxmana.com/investfourmore.
[00:29:41] MF: And I will have a link up on the show notes for that as well, so everyone can get there quickly. Yes, thank you for offering that. Always appreciated. Really, I mean that's the key to multi-family. With single-family a lot of times you can go in there, buy a distressed property, fix it up, really make your money by repairing it and then you can rent it of course and make money. But with multi-family it's all about raising the rents, raising the income to increase the value.
[00:30:06] MW: Yeah, you know, I'm glad you brought that up. It's an important point because you're right, when you buy a single-family home, that home is going to be worth what someone's willing to pay for it. That's an extreme statement. What I mean by that is that when an appraisal is done on a single-family home, it's done by using the sales comparable method. So an appraiser goes out, looks at other properties in the neighborhood that have sold in the last three to six months and looked at what they sold for. They compare the amenities between the property and they come up with a value.
When it comes to a multi-family property or any type of commercial property, it's appraised based on the income method. So they look at what the net operating income of that property is and if you're able to raise the net operating income, then you gain from forced appreciation. So it's a really interesting phenomena and I talk about that in this guide. I describe that a little bit more and what that means and then once you understand that, the objectives are clear. When you own a multi-family property your goal is to increase income and decrease expenses, and I lay out 10 not so obvious ways to go off and accomplish that.
[00:31:10] MF: Nice. All right, well Mark, really appreciate you being on the show. Lots of great information. Cool to hear your story. Nice that you're in Colorado too, to see...
[00:31:18] MW: Absolutely.
[00:31:20] MF: If someone wants to get in touch with you, is going to that Luxmana.com the best way? How can people reach you if they wanted to get some tips from you?
[00:31:26] MW: Yeah, reach out by Luxmana.com for sure. From there there's a link to connect with me on Bigger Pockets, or LinkedIn, and like I said, you can go out and get that free guide as well.
[00:31:38] MF: Awesome. Well cool, Mark. Thank you so much for being on the show. I think we'll keep in touch here, figure out what we can each do in our crazy market if we have to go somewhere else, or not.
[00:31:47] MW: That's right. Thank you so much for the opportunity, Mark. I enjoyed it.
[00:31:50] MF: I appreciate it, and good luck to you. We'll keep in touch for sure.
[00:31:54] MW: Sounds good.