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Aug 20, 2018

About Josh:

Josh Sterling would tell his 17-year-old self to skip school and get directly into real estate. Instead, he pursued a career as a commercial airline pilot, eventually rising to captain. Today, Josh pursues real estate full-time, growing his portfolio to over 260 units and built out his own property management business to boot. On this episode, he walks us through his first deals in the single-family space, how he bought these properties on his credit card, and how that struggle inspired him to multifamily. He also talks about building relationships with a few good brokers, describing how he scaled his multifamily business. He explains his approach to multifamily syndication, sharing how multifamily allowed him to quit his job, go to work on his own terms, and spend time with his family. He even allows us to look inside at his creative finance methods!

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Automated Transcripts:

Hey Josh, welcome to the show.

Thanks for having me here. I appreciate the time here.

Please give us a brief introduction about your background and how you got started.

All right. I'll give you the cliff notes version here. Grow about Lake Tahoe. California. Went to a school to be an airline pilot, basically 17- 18 years old. Graduated high school, went through four years of school and did the airline pilot career thing for about five years. During that time, the economy was also in the midst of a big recession and ended up realizing about halfway through that period that I wasn't making any money and I had no job stability and I had no control. So we started getting into real estate, my wife and I, with a single family house in southeast Michigan and grew that into what's today about 265 units in the portfolio and still growing on.

That's nice. Definitely, I want to dig into a little bit more about that. So maybe you can tell me now, what was your primary motivation? I mean obviously, as a pilot you get a lot of attention. I would imagine you get pretty decent money as the lives of all those people in those big tubes to flying through the sky.

You know, the thing for me that the initial motivation going back to the '09 time from when we got into this was the pilot career. It seems great on paper and it is if everything goes well, but what nobody tells you about that, that industry specifically, but there's a lot of other really any job if you really boil it down, is that you don't have control. You don't have stability. So somebody else can make a decision. Someone that you don't even know or have never met or seen and that can greatly impact your life. In my case, it worked out to, we got a 50 percent pay cut with about three weeks notice and that was my big kick to, to do something different, you know, but it could be anything. Companies go out of business, you could, you know, you could be downsized, you can be fired altogether. So just to have no control. I realized that I didn't want to continue the rest of my life that way.

That seems to be the case with pretty much how people are brainwashed into, into doing that same sort of thing in the job. Right?

Right, I never realized that there was another choice until that real low point when I didn't have much else to do. So, you know, my whole life I was taught to go to college, get a good job, buy your own house to live in and retire when you're 65.

Now you mentioned some single families, how you got started and they can tell us about your first deal.

Yeah, sure. So my first ever single family was somewhat of a.. it was a huge learning curve. I had no clue how much I didn't know, but I jumped in and did it. Anyways. We ended up buying a property and a little suburb. We're south of Detroit. I always clarify that we're not in Detroit, clearly can be in some areas a war zone. There's also some really thriving areas now, but we're about 20 minutes south of there in a suburb type area. Your typical house nowadays is going for 120-130. So in that at that time I found a property for a $40,000. That was. I looked at several that weren't fixed up and I'd found one that was looked, looked to be fixed-up, meaning it had new paint, new carpet kind of lipstick on a pig type of type of remodel. And so we had scraped all the money that I could gather with a little tax return money, a little bit of savings, and we were using these zero percent credit cards with balance transfers so you could get the money.

It worked out with a fee, like a three percent interest rate over a year and then you had to pay it off. So it was extremely risky, but we scraped up this, 40 grand or a little bit more than that to close this deal and thought we had basically a turnkey rental, which in theory we kind of did because we moved someone in right away. And the irony in the whole thing was there was a capital was obviously my biggest problem at the time and there was a sign in the window that was like four feet by four feet that said for sale on land contract. And I told my wife, I go, that land contract, that sounds like a scam. I don't think we want to do that. So we use all of our cash to buy this and had to start over with the same zero percent credit cards on the next deal going forward. But either way, you know, the funny thing is about that is, is it worked and it got us into it and then we realized that we could buy houses a little bit cheaper, do the remodels ourselves, which I was physically doing them myself at first for the first few and we could add that value on our own by doing that remodel and basically flipping the house to ourselves.

Now you're using all kinds of different creative financing methodologies at this point in your career.

You know, so we still buy a single family as well. We'll buy whatever works. I have a strong preference for multi, but you know, the benefits of single family, it creates these big capital events for us, meaning that we can buy several houses, you know, over a few month period, four, five, six, or sometimes as many as 15 and package them together on, we call it a portfolio blanket loan. It's just a commercial loan that the bank will hold on its own books. If you look up a portfolio lender, they're all over the place. Any small bank, um, we. And we flip blows to ourselves in a way, so we keep those houses, pull out the equity that we've added by doing a nice remodel at a cost below market and everybody will refinance, refinance those properties at market rates, at what has up until recently been appealing interest rates. And then use that capital to reinvest. You really don't need much creative financing. Once you get a few going, you can essentially recycle the same even in this market, four to $500,000. You, that's all you really need. You can recycle that time and time again if you buy the right deals.

Interesting. So basically then when you, after you purchased it in this package, you then pull the money out of one of these, these portfolio companies.

Yeah. So I'll give you a quick, probably the simplest way would have to discuss that is a, let's say that we buy a house for $80,000. The key is you have to do, let's say at least three to four at a time. So we'll say four. So you buy a house for 80,000, we're going to put 20,000 into it. Let's say we're into it for 100 k for rough numbers. That house is going to appraise at, let's say 130 k, just like if you were flipping it right, you will be able to turn around and sell that house for 130. Now you're going to do that four times over. They don't, you don't have to buy four houses on the same day or anything like that. But you're going to do that within a couple month period ideally, right? So all you're going to be all entities for 400,000. If they all roughly appraise it, let's say 1:30, they're going to appraise at 520,000.

And if you do an 80 percent loan, I'm doing the math right now on it. You get 4,16. So you end up getting a little bit more than what you put into it back. I've done somewhere I've gotten a hundred grand more than I had into them. Um, I've done somewhere I've come close to breaking even. But the key is to not tie up too much of your capital and obviously they still need to cash flow, what the banks call it, debt service coverage ratio at a metric that allows you to have a cushion there because you pulled that value out.


Exactly. We're, typically shooting now. We typically shoot for 1.5 or better just to have a little bit more margin, but the banks usually require 1.25.

Wow. Interesting. Now as far as shifting to multifamily, it sounds like you're still playing in both fields, but when, when did you make that shift and he's still doing. Is he still doing it today?

Yeah, we do both. We even do new construction right now today, so we do a little bit of everything, whatever really works and, for me it's all about keeping capital, moving, finding opportunities and not just being locked into one particular asset class. You know, like I said earlier, if I could do all multifamily 150 unit deals all day long, I would just do that. But as everyone listening to this knows, the market's a little bit tight right now and so we are making the most logical choices we can with what's available and only buying what makes sense. So for us, that shift though, it happened a couple of years into the single-family side of things. We came across a 24 unit deal that was in trouble. It was initially about 60 percent occupancy range and we'd wanted to grow, I'd seen the light that multifamily was much more scalable.

So we're say 24, 25 single families in and we found this 24 unit deal. We were essentially going to double with the purchase here. It didn't work out. There was a lot of back and forth. The seller decided he wanted to keep it after we got into negotiations and was trying to turn it around and it actually fell apart for about another year, maybe year and a half. And then as a lot of these will do, we left the door open and that deal came back to us. And when it came back to us, it was in a lot worse shape. It was down to the day we closed, it was 42 percent occupancy, so they had lost more occupancy. They were three years behind on taxes, which meant they were about to lose it for taxes. So they were in dire need to sell this property. And so we bought it before I probably even knew what the definition of a value-add play was, but it was a textbook value-add play. We bought it on land contract. We did that because no bank is going to finance, at least no bank that I know of. Maybe you got some for me no bank that I know of is going to finance a deal at 42 percent occupancy with a ton of deferred maintenance.

That's true. Wow. And you still have that deal today? Right?

We still do. In fact, I've refiled it twice since then. So I don't have the numbers right in front of me now. But we bought it. I know for 5,49 day one. That was back in 2013, October 13.

We refiled it 14 months later we had it, I wouldn't say all the deferred maintenance was done, all the cap ex, but, but a good portion of it was and we most importantly headed full 100 percent occupancy and um, and we had raised rent somewhat and so we were able to refinance that, pay off that land contract, ended up being a total of 14 months, which was, much better than planned and pull out essentially all of our capital or then some, I think we refinanced it, it appraised somewhere in the $900,000 range and then we took a 75 or 80 percent loan to value loan on that one.


And then most recently, three months ago, I've been doing a lot of restructuring to an agency type financing, which I'll be happy to cover with you, but uh, but we're able to refinance that with an appraisal. Yeah, $1.3 million in Plata loan amount for 1 million even on it.

Wow. Very nice. Very nice. So would you say that was probably your first indication deal then? Or were you doing before that?

Oh, that wasn't even a syndication. That was literally our own capital into it and the way I got that capital for that initial down payment was through those single family blanket loan refinances that I was doing. So I have an equity tied up in single families and I'd pull it out with a portfolio refinance note and then I use that capital to put the $125,000 down I needed or whatever that down payment was on that land contract.

Yes. In that case, yeah. You get to keep all the returns,

right. Yeah. To this day, that's still my mindset. I know I'll syndicate if it makes sense, but uh, if I have the capital sitting there, yeah, of course. I'd rather keep it. Equity is expensive. If you give away all your equity, you're giving away a lot of the deal. So we'll go, we'll go. Either way. My most recent deal that I bought a smaller 30 unit deal. I didn't syndicate that at all, but the one before that we syndicated. So it just depends on what we have available and also how strong the deal is. It needs to be really strong to syndicate.

Wow. Awesome. Awesome. Well, now that you've had time, obviously dedicated to the business and you've done it in a very big way, what are, what are you doing to continue building your career and as a real estate investor or are you following like some sort of formula? Are you following a certain mantra or.

I would say it's a specific formula by any means, but now that it's full time, it's obviously much, much easier to look at deals, to analyze deals. I mean this is our this is, this is what we do everyday. I also run a manage a property management company, so we manage our portfolio which is right now about 265 units, a single and multi, probably about 60 percent multi. And then we also manage another, about 190, almost 200 units on top of that. So that operation now pretty much runs itself with the leadership team we have in place. But that took a lot of work to get that up and off the ground. So my, my main focus is typically finding new deals, sometimes finding new money in the last few months we were doing a lot of the agency type, refinancing and even refinancing some of the single family portfolio to try to take advantage of what I think might be the last of some low rates for a while. But that's also our day to day.

Nice. Now want to take a step back because you just remind me of something and now you're working on this full time. When did you make that shift to turning up this

business as your primary Gig? How, how, how did you make that transition from being a pilot to doing this and what was, how did it feel to finally break free of the chains? Have an airline pilot?

Ironically, had I just quit being a pilot, right? When I of buying real estate, I probably would have had an easier time getting into full-time real estate, but when I made that decision to start buying single families at the time and moving down this path, I also switched careers and took a job as an air traffic controller that same year we started buying our first couple of properties. So that was a much better paying job. So I did that actually all the way up until May of 2016, which was way, way, way too long. I probably should've quit like in 2014. I easily could have with a lifestyle we lived in the income we were making off the real estate portfolio at the time, but I was scared to give up such a good paying job. It was like a golden handcuff. So it just, it took me way too long to make that move.

Yeah, I think that's one of those jobs that once you quit, you can't go back in,

That's it. Once you quit, you're done. And it's a, it can be almost a $200,000 a year job. So I know there are people out here listening that have that golden handcuff, you know, feeling and it's true. It's really hard to make that jump. So we started tracking personal expenses real closely for a while. I mean I've debated this move for a good year and a half, two years before I did it. Track personal expenses. I knew exactly what we need each month and we even went for about the last year that I worked and put every penny that I or my wife received a paycheck into a separate account. We might use it to invest or whatever, but we specifically lived off a draw from the business for a good year and made sure that that was what gave me the confidence finally, that it was okay to do it. I said, all right, I've been living off the business for a good year now. It should be fine.

Basically took all your paychecks and almost like a did a mock scenario

for whatever reason, even though I can see it on paper, clear as day. That was what gave me the confidence to say, well, we've been doing it now, so there's really no reason.

Yes, yes, yes. Excellent. That's great. That's great. I love hearing those stories, but I think part of that, maybe this is somewhat new, is the property management business. I know you've touched on that earlier. How is it different from other ones? Like how, what, what makes you guys better than all the other property management companies that are out there?

So we started in our business called epic property management. We started epic Property Management Back in sometime in 2013 and it was just managing our own portfolio. We probably started about 50 units with, with the actual management company and the way it started was because I realized that a, I had grown it to big that I couldn't handle certainly with a full-time job and B, I didn't want to self-manage everything because it was just another full-time job that a vacation was out of the question. So, you know, and once I've made that realization, my first instinct was to hand the portfolio over to another management company, which would be really nice. Um, what I found in my research was I didn't think anybody that I'd come across, at least in our market could run things as well as what I thought we were doing or even efficiently enough to make it worthwhile.

So we made the decision that we're going to start and build a management company on our own. And it started with literally one employee and myself, I think it was even a part-time employee and it grew. Now we're at 13 people in the office. We have a bunch of a fleet of company vehicles that we have a full-time operation going and now we're about 450 units. Some of the things that made me want to launch that management company is I kept seeing these buildings and houses, but specifically, in multifamily, I'd see these buildings and they would be run into the ground. Kind of like that first deal I talked about. My second deal was one that was higher occupancy but had three or $400,000 in deferred maintenance and cap x. um, and I'd see these buildings run this way and I'm thinking if I just buy this building and handed over to property management, there's good potential that I won't improve the building at all because there's something that needs to change.

So one of the common things, for example, is especially in a small to midsize multifamily property, I'll say 30 to 60 units, you can support onsite management. I think most people listening might not know that it's, the building's not big enough to have a leasing agent or an office person's sitting there all day and certainly not big enough to have a full-time maintenance. So what typically happens is you have a handyman that lives in one of the units and you have a resident manager who lives in one of the units. And, uh, I know I'm being stereotypical here, but those resident managers, typically an old lady smoking a cigarette and her bathrobe and she's the one representing your multimillion dollar asset, showing it to new tenants and telling you what needs to be repaired and upkept and whatnot. And I couldn't see running our model that way.

So what we do is, um, everything is a mobile type operation and it works well for single families and for these small to midsize multis. And we have a leasing agent in a company car and that goes out for all showings, individual showings. We have maintenance staff and company trucks that go out for all maintenance repairs, everyone's uniformed. We have project managers on staff, so if there are bigger issues, they can look at those issues and make a decision instead of just subcontract it, like you see a lot of companies do. They have a leadership team, which is. I have a director of operations and an office manager which run the day to day. And then we do things little things like we're open seven days a week. We're open every day until 7:00 PM. So really, really good hours after our live operators on the phone, there's all these things that they're small little details, but in the end I believe it, we provide the nicest possible property, we have the most professional management and we do it at a fair market rent and you eliminate the biggest expense in real estate, which is turnover. charge a premium and it just doesn't deliver

the same way that it sounds like the way you do it, which is great. But it sounds like you're only focused on Michigan at this point,

Right. So we're in the process of working on a satellite office now that. The nice thing about our model is it works really well within a 45-minute radius beyond 45 minutes. We just can't do an efficient job mainly because we can't get that leasing agent out there or we can't get a company in-house maintenance, which we can operate much cheaper than subcontracted maintenance. So if we get outside of that radius, we can't do a good job for our portfolio or for our owners, but the model is very scalable. So right now we're working with a satellite office in that will expand our radius, that will probably be sometime later this year and then in the meantime, a lot of our marketing, a lot of deal flow that we're getting is all over the midwest and this model would scale right into a larger 100 plus unit deal that would support onsite management. You know, our strategy would be to send our leadership team down, train the onsite leasing and office staff, train the maintenance staff to our procedures, to our software. Everything w,e do basically train our operations manual and then check up every couple of weeks then maybe that can get to every month, but that we, I believe that's how we have the best chance of growing the portfolio potentially nationwide, but certainly throughout the Midwest.

Excellent. Well, I think it also gives you a leg up in the local market as well as a property manager. You have access to the property owners, you have access to brokers that may want to do business. Kind of like, it also extends your ability to acquire more assets.

Yeah, absolutely. There's, a little bit of deal flow we've seen out of it, not as much on the multifamily side as I would like, but I do know that we have the potential to turnaround a play that's more of a value-add type property. So I think it gives us more of a market to go into in any market that we have a base in. Wow.

Right. So now switching gears, talking about the multifamily business, how do you model your acquisitions? So like, do you rely on certain pieces of data, do you look at a closeup demographics? What do you do?

So, my general model, is I like to buy off of existing current financials, meaning that, I like to go in first thing I'd like to get as an actual current rent role as recent as possible, and then I'll, I'll model off and I think this is different than, than some other guys do it, but I will model my acquisition criteria off of prevailing cap rate for that area, but off of existing financials. So for example, in our market right now, southeast Michigan market, a lot of the suburb cities we're in, I'm looking for deals that are an eight cap or better off of current actuals if I can find that that deal has some potential possibly. Um, so that, that's really my initial criteria to get me in the door. I know a lot of guys will model off an IRR I'm not a fan of that because an IRR if you run those numbers, will typically spike in years two or three, which will usually be lead you to want to sell the property.

And our model is a buy and hold forever with a refinance strategy on there, uh, for both our, the purchases that we wholly own and for our syndications. So for me, it's more of a biopic existing financials at least the market cap rate, if not a little bit better. That's got to produce a return. If we're going to syndicate it for our investors, that's going to be typically an eight percent cash on cash, quarterly distributions, principal paydown, we're usually getting financing that'll give us five to six percent on that portion of it, and then the value-add, you know, it's such a wildcard, but we're usually looking for at least one to one and a half percent a year that we can conservatively add value. Getting that overall investor return to that 16 to 18 percent range if we do syndicate that deal out.

Nice. Excellent. What resources do you use when you're targeting and other podcasts are just talking at your regular groups, what resources do you use to make people just stop and pick up a pen and start writing stuff down?

Uh, you know, I can't say I have any specific resources or tricks. I run numbers based off of a couple of analyzers I use, but a lot of times I'll, I'll, I'll run numbers just off of rent roll and the expense ratio, you know, ultimately I think that's something that maybe gets surpassed a little bit here, a little bit of coaching as well. Um, and when, when we do that, you often will come across a deal that you see somebody running it at 35 percent expenses and what maybe they are. I'm not here to say that someone can't run a deal like that, but I know from my experience that I'm going to run a deal at 50 percent expenses. I mean I'm literally within a percent or two of that. It's everything we've ever done has track towards those numbers. So I'll go in and apply those multipliers to an existing net income and it's pretty easy to analyze a deal if you know what the prevailing market cap rate is. Yes, absolutely.

That's good stuff. All right, well now how do you see the rest of multifamily real estate in general? I think you already touched on it, you know, you're with Keppra is getting compressed here and potential of interest rates going up. I mean, aside from that, what, what all do you see?

Yeah, you know, I think that is probably the biggest factor. I certainly don't have a crystal ball. If I did, I would have bought a lot more in '09 and 2010 and whatnot, but I see certainly interest rates going up. I mean we're already seeing the effects right now even on some recent transactions we've done. I think interest rate, in fact, I think today the tenure was the highest it's been since 2013 or something like that. So I see interest rates coming up. That means money is going to be more expensive. That means cap rates are going to have to come up the way I see it. And so I think we'll actually see potential of better deal flow and what I'm personally hoping for is that the rates coming up for some people to start selling and maybe trigger a little bit of a, push it more into a buyer's market than what we've been seeing the last two or three years.

Yes. I mean, even some

of the more recent transactions, I'd seen just getting crazy. It's just sheer madness. I, I, we rarely find deals were the last two or three years we've been buying a deal every eight or nine months. I mean, I, I think we're looking at probably two to 300 deals to even get one that we're even looking at it now. It's good.

You're expanding beyond just Michigan.

Yeah, so our deal, you know, our, our, our main source of deal flow is really anywhere midwest, so we'll go as far west as St Louis, Far South as Louisville. If you picture your home base here in Detroit or South of Detroit and then you know, we can't really get into much east coast stuff because you're not going to see the cap rates we need there. But I've looked at some stuff even getting towards eastern Pennsylvania and upstate New York

and those sorts of cases, and I'm not sure if you have this in place already, but management in those cases, that state situation, how do you manage those units from where you're at?

So our strategy here would be, first, the building has to be large enough to support onsite management. So we're not even looking at deals that are 50, 60, 70 units in any of those markets because I don't believe that we'd find somebody that. I know, I'm sure there are property managers out there that would be great and I might be missing that opportunity, but for our model, it needs to be 100 plus units. ideally more like 1:40, 1:50 that will support onsite management. Then we would transition our team down there, get them trained, get that onsite management up and running, and then just do a periodic followup. So we do have the benefit of having an airplane that we use for company business. So makes those trips anywhere in the Midwest, you know, an hour or so, hour and a half, and it's not too big of a deal.

What advice you have for aspiring real estate investors? It sounds like you've been on quite a journey. Sounds like a hell of a journey. What advice would you have for someone that's currently thinking about doing this, but they're just afraid to take that leap, but what would you say

If you're just getting into this and not sure if you're ready to take that leap? First things first, you've got to get educated. You gotta know what you're looking at, what you're talking about. What is a good deal? What's not? There are courses all over the place. There's tons of free information, podcasts, books that you can read on this, so get educated, but don't get too educated. Don't take six, eight, 10 months to get educated. You can do this in a couple months and then start looking at deals. If you know what a good deal is, then it's just a matter of jumping in and doing it. And that's probably the biggest hurdle is I see people all the time that have. I mean, the bar was set pretty low because I had no knowledge when I jumped in, but I see people that have a lot more knowledge than, than what I had done or maybe even the one I have now, that doesn't jump in because of the analysis paralysis. So once you, once you've got a base under you, it's a matter of looking at deals and going for it and at the same time knowing well enough what that good deal is that let's say in this market

comes along. Yeah, totally agree. Totally agree. So, so what's exciting you right now? What do you have a that's a that's on, on the table. It's just that you're just boiling over with excitement.

I'm excited about the growth of our management company, but probably most specifically, well, if you take out airplanes, airplanes are the most exciting thing to me but grow, acquiring those larger deals specifically outside the area. I think once you approve a model, we've, we've really proven this model and in our home markets, with mid-sized properties, we've found ways to add a lot of value with really it comes down to management and I think as soon as we can move that model to a little bit larger properties starting with the Midwest, it could be scalable. Uh, potentially nationwide are certainly any type of cash flow market. It will work well in. So I'm excited for some deals to start coming on the market with these rising interest rates and getting out with being able to take some of those down. Excellent. Excellent. Now, how can people do reach you and your property management company?

Sure, so our management company, we're based in south gate Michigan, our management companies called Epic Property Management, Epic, and anybody can reach me directly at Info at, or you can check out our website,

Excellent. Excellent. Well, thank you very much for being on the show. Really appreciate it, Josh.

Thank you. It was a really nice time.