Building Wealth With Real Estate

Mike Hambright: Welcome to the FlipNerd.com podcast. This is your host Mike Hambright and I’ll introduce you to VIP’s in the real estate investing industry as well as other interesting entrepreneurs whose stories and experiences can help you take your business to the next level. We have three new shows each week which are available in the iTunes stores or by visiting FlipNerd.com. Without further, adieu, let’s get started.

Hey, it’s Mike Hambright from FlipNerd.com. Welcome back for another exciting FlipNerd VIP interview show. Today I’m joined by Marck de Lautour who is a Kansas City real estate investor and he owns SBD Housing solutions which is a turnkey rental provider among other things. He’s going to share with us how to build wealth through real estate. We’re going to talk about turnkey rental investing and what that means for you and how you can build wealth. Before we get started though, let’s take a moment to recognize our featured sponsors.

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Hey, Marck. Welcome to the show.

Marck de Lautour: Hey, thanks for having me, Mike.

Mike Hambright: Yeah, yeah, glad you’re on. For those that don’t know you or are not familiar with your company, why don’t you give us a little bit of background on how you got started in this business and kind of where you came from. I can tell by your accent that you’re not from around these parts. Maybe share…

Marck de Lautour: That’s right. I’m a Kiwi so I’m a native New Zealander. I came over to America originally on an athletic scholarship to play collegiate tennis. I studied at UMKC, University of Missouri here in Kansas City. I got my MBA in international business management not really knowing which way my career path would go. I always had that entrepreneurial flair, kind of wanted to do my own thing. Wasn’t really just going to go into the corporate world, that was never my bag. I read Rich Dad, Poor Dad in about 1999 and that really focused my interest in real estate and realized that that probably was where I was going to go. Obviously that was the first book of many that I’ve read since that time. As you know, you start delving into all these different books to learn more and more and more. That was kind of the thing that kick started me. I did one flip while I was still working at an advertising company and made some pretty good money accidentally. I didn’t know what the hell I was doing back then. Now, fast forward to 15 years later and we’ve done hundreds and hundreds of deals in the Kansas City market. We’re the predominant supplier of that pre-forclosure, court house steps option houses that we buy.

Mike Hambright. OK. Before we talk a little bit more about turnkey rental operations and why that makes sense and where that’s going, talk a little bit about buying on the court house steps. I don’t personally do it. I know some folks that have done it really well. My impression is that that’s an opportunity that kind of comes and goes. What’s the status of that right now? My understanding in some parts of the country, is that there are less foreclosures going on because banks have found other ways to liquidate those houses whether its through short sales or selling to hedge funds or things like that. Kind of talk about just generally speaking the court house steps opportunity as it is today.

Marck de Lautour: It’s certainly very competitive as most of your viewers that have been to a court house steps auction, they know that there is a lot of people there. What we’ve specialized in is really kind of taking advantage of what is a very insufficient way for banks to distribute their assets. Keep in mind that you have 50% of the states are non-judicial and then 50% of the states have a judicial proceeding. Missouri is one of those power of sales states or non- judicial proceedings. We actually don’t even operate in Kansas. Even though we’re in Kansas City, we’re on the Missouri side of the state line and operating in Eastern Jackson County. The misconception is that when banks are selling to hedge funds, that that means there is going to be less action on the court house steps. In Missouri, every house that gets taken back by bank must cross the court house steps first. When we have those opportunities, the volume certainly has not slowed down for us at all. For a while there, I would say probably in 2002 through 2005, we were really having to chase hard just to get the full debt type, people that owed less than what their home was worth. Then, once 2008, 2009 starting hitting, the banks just started drastically discounting the opening bids.
You might have a home that was worth $150,000.00 in today’s market and they were owed $150,000.00. There’s no equity but the gab that we were able to pick up in the equity spread came in the fact that the banks were discounting the note, or the opening bid down to say $30,000.00, $40,000.00 on the court house steps. That’s when we’d jump in and bid up to what we would deem still a profitable margin. The discounting of the houses on the court house steps was a way that the banks were purging real estate and are continuing to do so.

Mike Hambright: OK. This could be different by state as well, too, I’m not sure. Is that the same for FHA loans? It’s been my understanding that FHA loans had to open at what the pay off for the loan was. They couldn’t discount it down but maybe I’m wrong on that.

Marck de Lautour: No, there are pretty much opportunities on all facets. It depends on who the end bank is and obviously with FHA that bank, the guaranteed ones, that get brought back. A lot of the FHA stuff doesn’t. There’s a lot of product out there that is getting discounted down from the Chase’s, Well’s, Liten loans, Aurora’s, all the big banks that are out there needing to quit taking back all this real estate. It’s still a very viable source. We’ve gone from buying 30, 40, 50 houses a year to where we’re buying 100, 120 houses a year. There’s huge volume out there even though the perception is that they volume is getting shorter.

Mike Hambright: Right, right. Just to kind of stay on buying at the auction, in my world as an investor, we look at every house. We kind of analyze it to the detail of what we think the repairs are going to be and we’re able to do a pretty good job because we can usually get inside. When you’re buying at the auction, it’s usually most of the stuff is site unseen at least from the interior. Talk a little bit about how you get comfortable with making estimations on something you can’t see.

Marck de Lautour: You bet. That’s a really good point. That’s essentially the only risk that you have when you’re buying on the court house steps that’s outside of what your normal risk would be. We get full title reports, so title is never a risk issue for us. That’s your big barrier to entry for people that are novices. I would challenge you and say that pretty much every house we go into is going to have a full interior remodel which is going to be in that 17 to 20 grand. It’s going the carpet, pain, appliances, bathrooms, little bit of granite in the kitchen, travertine tile and you’re done. The big budget busters are your exterior items that you can see. It’s the windows, the roof, the siding, the foundation, those are the things that you can see from the outside. We basically factor on worst case scenario for the interior and are pleasantly surprised sometimes rather than hoping to get lucky and then being disappointed. You just plan for it and if you get lucky, then great. Again, a lot of times you’re finding properties that probably 30% of the time, they are vacant that have already been winterized by the banks. To be frank, the banks not totally creative in the lock box combinations they use. They use the same three every time. If a property is vacant and they got a lock box combo already on there because the banks got it, as licensed real estate agents we’ll get inside the home, take a look around and try and get just like you do normally. When you kind of get inside the home it’s factoring on worst case scenario and then hopefully getting pleasantly surprised.

Mike Hambright: You guys just run a major ground operation of trying to get around to all the houses that are coming to auction in case it’s something that you end up bidding on. A lot of times, I mean, it’s a numbers game, right? There might be a lot of houses that you believe are coming to the auction and somehow the issue gets resolved before the auction happens so you’re looking at a lot of houses…

Marck de Lautour: Lot of houses.

Mike Hambright: …to bid on a few, right?

Marck de Lautour: Yeah, you got it. One of the things that I did, and again through a book I read called, by Timothy Farris called The Four Hour Work Week. I’ve actually got to VA’s that work in MDF for me and those have been essential components of our operation because there’s just copious amounts of foreclosure data that comes streaming through. You need a full time agent to just be able to pour through that data. I’ve got two guys that work for me over there that are just pouring through this data all the time updating form the 10 or 12 different foreclosure attorneys compiling that data with the research from MLS, doing comparable analysis. We are very much behind a computer for 80% of the time and only go out to the property when you’re doing your final analysis. We know pretty much that we’re going to buy the house before we even go to the house. You know the numbers are going to be somewhere around a $20,000.00 remodel, $25,000.00 maybe. If the numbers work, they work. It’s very seldom that we’ll go out to a house and waste my acquisition manager’s time without knowing a lot about it. That’s the cool thing about investing right now. We’re in a world of Google docs and Google maps and VA’s and comparable analysis right from your desktop. You shouldn’t have to do much traveling. With Google Street View you can see every house in the world right from your desktop. It’s a different way of real estate investing right now.

Mike Hambright: No doubt about it. I’m actually having to be leaving tomorrow to go on vacation for a couple weeks and I’m closing on a couple deals this week and I know exactly how it’s going to happen. I know when the closings are. We’re going to be going down the interstate at 80 mph and I’m signing closing docs on my iPad.

Marck de Lautour: There you go.

Mike Hambright: Either wiring money or receiving money that I can do from my Chase app on my phone. It’s crazy.

Marck de Lautour: Yeah, wonderful.

Mike Hambright: Talk a little bit about how you went from the opportunity in your mind, like you saw an opportunity to be a real estate investor and somewhere that moved into being a turn key provider for other people. Talk about kind of that transformation or realizing that if I get other people involved I can do more volume and make more money.

Marck de Lautour: Sure. When I first got started in 2000, flipped one house, 2001 I did three house then slowly grew. I was fortunate, where my wife was working at the time and so was really able to support us. Obviously in real estate you just get paid in chunks. That helped a lot. You start off very, very small and just do one, two, three. You know, just a little mom and pop operation, try to do a little bit of work myself. Then you hire out what you can’t do when you get the second house or the third house. Then I was approached by an individual who is extremely wealthy and said, “Hey, you’re getting these phenomenal deals, why don’t you scout the operation?” That lead into a partnership that was good for about six years. Then the old Dave Ramsey quote, “The only ship that never sails is a partnership.” We sailed for about six years and then sunk. It was just an instance where it was an unfortunate circumstance that kind of led to the down turn in that business partnership. If anyone out there has had a business partnership that went bad it never, it ends in divorce. I was the operational guy, he was the money guy. At that time, we had grown. We had a large pool of rental property that were cash flowing and those got put on the shelf. I was still out of a job basically. I’d been buying for this entity the whole time. I had a great method of buying and acquiring properties that would stand the test of time. I simply, at that point, because I was not at the point of being financially independent where I could go and buy as much as I could for myself, I sat back and looked model and thought, I have a lot of people that always approach me and say, “Hey, if you ever see a deal that you maybe can’t pull the trigger on financially wise, let me know about it.”
Up until that point, we had had unlimited financial resources and I’d never had to go there. Finally, I had all these people that would say if you ever had the opportunity. I did. I went there and said look, here’s my model. If you’ve been buying on the MLS at $100,000.00, these assets that you’ve been buying, if I could bring them to you at $70,000.00, you could pay me a fee to do so. You take the house, you take the asset, it’s all in your name to give you the comfort. Would you be interested in doing so? Slowly, that morphed into the very sophisticated business model that it is today of buying for other people. Obviously, the contracts and everything that gets put into place. It simply just started going to those associates and friends and family that had said, “Hey, I’m looking to build a rental portfolio and I value your expertise.” and kind of leaning on them to get me started.

Mike Hambright: Talk in a little more detail about, for those that aren’t terribly familiar with the concept of a turn key rental, and I have had other turn key rental providers on the show in different parts of the country. There’s several very different business models whether they stay involved as the property manager or not, whether they ever take ownership or not. There’s a lot of different ways. Just talk about, I guess, a little bit more detail about how your model works and then just a little bit more about how that works for the customer that you’re serving. Why that makes sense for them? And kind of mix in some of what we’ve talked about before we started recording about how people are kind of dismayed with the stock market and there’s this movement towards real estate becoming a true main street investment product.

Marck de Lautour: You got it. First, I’ll start of by saying that part of the inspiration, I guess, or the vision of my company was that I felt that the real estate industry for the longest time has done a very poor job of catering to an individual who wants to invest in real estate. If someone who has a couple thousand dollars or a paid off home or a line of credit or just some cash they’ve been saving up, they’re sitting down with a financial planner. The financial services industry has done a phenomenal job of marketing to these people. You’ve got the UBS, Edward Jones, Paine Webber’s of the world that are out there aggressively pursuing this capital to go invest. The real estate industry does not do that. My model is simply trying cater to those people to say, “Hey, look, in the same way that you can give a half million dollars to your financial adviser and know that it’s going to be professional managed and well taken care of and buying quality assets. The same can be said of real estate.” That’s where we’ve found our niche is buying directly in their name, which we’ll get back to, but is a very different than most turnkey providers. We find them an asset, we rehab it for them, we get it rented out and then property manage it for them.
Most of our investors are international. It’s only recently that we’ve started to grow out domestic clientele. In 2007, right when everyone in America was screaming I’m worried about this real estate market. Everyone in the international were saying, “Hey, we’ve got a weak US dollar and a weak US housing market. Let’s go in and double dip.” That’s where I found my initial niche was getting investors from Brazil and China and Hong Kong, UK, South Africa, Australia, New Zealand that were wanting to put in some cash into the US market and just giving them a source to do so.

Mike Hambright: America was on sale for many years and people here were scared of it but everybody else realized there was an opportunity there, right?

Marck de Lautour: There was a huge transformation of wealth form ’07 to 2010 that a lot of people took advantage of. Then further to that, the difference between us and most turn key providers is that most turn key providers will buy a house, rehab it, get rent it out and then cut out the margin and bring it straight to the investor and say, “Hey, you’re going to make 10%. It’s already rented out and here you go.” The difference is with us, is we go directly to the court house steps, buying it in the investors name. Not using our capital to do so, but at the same time there’s huge equity there for that investor and they get to share. If we get a day when nobody shows up at auction and we were going to bid that property from $30,000.00 up to $50,000.00, where at $50,000.00 it was still a great deal, the extra 20 grand just goes straight into their pocket. That’s a significant difference.
Then, the security that comes with owning it directly, you have massive equity increase as well as guaranteed cash flow on the back end. It’s been a popular model and one that has been able to help build wealth for our clientele. I always say to people that real estate is a crock pot business, not a microwave. You don’t just buy and flip and take a little bit of money and pay taxes. To me, real estate, the way to change your life patter, your family tree, is to buy and hold real estate. I know you’re a big believer in that. You’ve got a lot of rental property yourself as do I. The key there to change your family tree is to buy and hold. It’s the whole delayed gratification is a sign of maturity. I think mature real estate investors are those that aren’t just looking for the quick flip but are those that will buy and hold and invest if for the long term knowing that the power in real estate is having 20, 30, 50, 100 paid off pieces of real estate in 20 or 30 years time. That is massively life changing.

Mike Hambright: Absolutely, yeah. I don’t think there’s a real estate investor in America that has done any level of decent volume that doesn’t look back right now and wish they had kept more houses as rentals.

Marck de Lautour: Yeah.

Mike Hambright: There might be a few but those are usually the people that have some horror stories with rentals associated with it. I haven’t really talked to anybody about this and this could be an entire show. Talk a little bit about the tax implications for international investors. One of the biggest benefits that’s usually associated with rental properties; it’s appreciation, it’s cash flow and there’s some tax benefits associated with depreciation. Talk a little bit about how that’s maybe different for international investors that pay taxes differently based on whether they’re a US citizen or not.

Marck de Lautour: Sure. The interesting thing is that they’re largely actually the same benefits. We set them up with a local Missouri based LLC so the LLC takes ownership to all of these properties. It’s never done in the individuals name. Those LLC’s have the same rights and tax benefits so it’s really a corporation that’s set up here locally that has all those same benefits. Then each individual investor obviously has their intricate. We deal with very high income, high net worth clientele as you can imagine. Everyone paying millions of dollars in cash for real estate. Most of them, a lot of them, have USD as a source of investing and they don’t want to convert that US dollar back to say the South African or the Australian, New Zealand dollar, the British pound. They want to leave it here and that’s kind of their source capital for what they’re doing. They fund their LLC and then they file a US tax return. The great thing with the US is with the tax treaties, there’s pretty much double taxation is gone by the wayside in the 21st century.

Mike Hambright: Talk a little bit about your experience on the appeal of investing in America, they types of returns that people are able to get. Relative to overseas, I know some folks in new Zealand as well. I know there’s a lot of folks there that just can’t understand the types of returns or the types of price points you can buy houses at in a lot of parts of America. They’re just enamored by, the can’t buy cash flowing rental properties in New Zealand relative to here. You can kind of even see that inside of the US. There’s a lot of California investors that buy in the Mid-west and Texas and the South East for the same reasons. I know it’s even many times more exacerbated when you’re comparing to a lot of international markets. Just kind of talk about the appeal that international investors have to invest into the US.

Marck de Lautour: Sure, quick story. One of my investors that I’m working now that I’ve just set up their LLC, they’re funding the account. The way they’re funding the account is they have a couple of paid off pieces of real estate in Auckland, New Zealand. I asked them in the Skype conference call I had with them, have you invested in real estate before. The response is, well we have two rental properties, oh OK. One of them is $2.8 million and one of them is $1.4 million. I’m like, what? How do those things cash flow? They said they don’t. They were going to leverage those and turn around and send the money up here and buy far more property with it. Their play there, is obviously is the speculative Auckland market where Auckland real estate for those that are in the know, is just going through the roof. There’s a massive shortage. It’s a great play for them to hold on to that real estate. But, having said that, completely different market.
Another point of clarification though I should point out is that a lot of people when they think of Kansas City, those maybe $15,000.00 to $20,000.00 houses in the inner city. We do not buy anything in the inner city, no war zones or bad zip codes. We actually specialize in really quality first time home buyers type housing. Although there is some really strong, we have California investors calling up saying, “We want that 20% to 3o% yield.” I’m like, yeah, we don’t do that. That’s not what we deliver because we’re not buying something for five grand, sprucing up the turret and getting it rented out Section 8 for 500 bucks. That’s not what we do. We do a quality real estate. Typically in that $100,000.00 to $180,000.00 range is our niche. In that average purchase price, somewhere in that $50,000.00 to $60,000.00 range, so 50 cents on the dollar. Couple that with a quick, quality remodel done extremely cheap and cost effective the yields that we’re delivering here are double digits. That 10% to 14% yields with significant equity of 20% to 30%. Like you say, that’s just stuff that you can’t get anywhere else. We’re fortunate that in the Mid-west, specifically Kansas City, we’re not land locked in any way what so ever. If a farmer wants to sell to a developer, the developer will go out, will buy some land from a farmer. He’ll put in a swimming pool, some walking trails, a playground for the kids, 500 houses later, he calls it a subdivision and he sold those lots that he bought for $1,000.00 a lot, he’s selling them for $30,000.00. It’s a good model. The city’s growing, north, south, east, west. Tons of expansion. Kansas City is growing extremely well and has really withstood the test of time.
Now appreciation wise, it’s not the greatest play ever. Again, that’s the key to our model is just buying as cheaply as you can buy. If the curve his here and you’re consistently buying under the curve, it doesn’t really matter what the markets doing. You’re consistently buying under. Whereas the Florida and California markets are doing this, Kansas City’s kind of just the slow, little 4% or 5% movement either way. Largely insulated because of our diversified economy here.

Mike Hambright: I think you said that for most of the Mid-west and a lot of Texas is like that, there’s not big ups and downs but just a stable market that you can count on. Just want to talk about one more thing which is where you think turn key is going from here. That’s kind of gotten hot, I think as more and more people know that they can find ways to invest their IRA’s or other monies in real estate and truly be more passive than in the past. The quality of property managers is going up everywhere because of their franchise systems. Technology is allowing people to kind of be there without being there per say. I know that real estate and rentals is becoming much more of a main street product, even an institutional product than ever before. Talk a little bit about where you think that trend is going and how that will change one way or the other over the next five years, let’s say.

Marck de Lautour: Even more long term than that I think it’s extremely positive. I mean our company is based around the fact that I believe what is needed in this market place is a professionalism coming along with. Property managers have always been professional and real estate brokerages are extremely professional. There’s never been that cross over, that company that’s willing to step in and say, “We need a turnkey approach to this that’s something that is all inclusive.” Even the turn key providers really are ones that they’ll go buy an asset, they’ll rehab it and they’ll take their margin and move it onto another investor and wash their hands clean. We stay involved in the property management all the way through the entirety. I think those kind of professional approaches to real estate investing and the turn key will withstand the test of time and will continue to grow and do well. The other thing that I believe strongly is that technology is only helping real estate. The world is getting so small. All my family’s back home in New Zealand and we jump on two flights and we’re there in about 20 hours. You’re flying half way around the world now and the comforts of modern jet liners is such that you can just get there in no time at all. It’s extremely easy. People travel here. They realize that you’re no longer bound by geography. You can invest anywhere in the world and be totally comfortable doing so. The trade walls are falling down and foreign investing is encouraged. For those that are willing to take that chance and find a trusted partner will reap the rewards.

Mike Hambright: Great, great. Marck, for folks that want to learn more about you and SBD, where should they go?

Marck de Lautour: Sure. Our Facebook and our website would be good starts. Facebook.com/SBDhousing and also sbdhousing.com. Strength by design, synergy by design, SBD.

Mike Hambright: All right, all right, awesome. Thanks for sharing your insights and your information today. We definitely wish you all the best.

Marck de Lautour: Thanks, Mike. Enjoyed it.

Mike Hambright: All right, stay in touch. Thanks for joining us today on FlipNerd.com podcast. To listen to more of our shows and hear from incredible guests, please access all of our podcast in the iTunes store. You can also watch the video versions of our shows by visiting us at FlipNerd.com