How to be Successful in REI by Leveraging Others

Mike: Welcome to the FlipNerd.com podcast. This is your host, Mike Hambright, and on this show I introduce you to expert real estate investors, awesome entrepreneurs and super cool vendors that serve our industry. We publish new shows each week and have hundreds of previous shows and tip videos available to you, all of which you can access by visiting us at FlipNerd.com or visiting us in the iTunes store.
By the way, FlipNerd.com is the most robust social platform in existence for real estate investors where you can find off market wholesale deals in your market, find great local vendors to help you in your business in your market and socialize, learn and grow with others in our industry. There’s truly nothing like it. If you’re not already a member, please visit us at FlipNerd.com today, where you can setup a free account in about 30 seconds. Everybody is doing it, the cool kids and even the nerdy ones, so get on over to FlipNerd.com. Now let’s get started with today’s show.
Hey, it’s Mike Hambright with FlipNerd.com. Welcome back for another exciting VIP interview where I interview successful real estate investing experts and entrepreneurs in our industry to help you learn and grow. Today I’m joined by Blake McCreight. He’s the COO of Midwest Equity Partner, a turnkey rental property provider with a team that has actually done thousands of deals. Blake has a ton of experience especially on the operation side, and today he’s going to share his knowledge with us.
Specifically we’re going to discuss how to be successful in real estate investing by leveraging other people’s systems, knowledge and resources. It’s something that doesn’t get talked about enough because that’s really not the sexy side of the business but at the end of the day, if you want this to be a business and not a hobby you have to learn how to use leverage, and it’s not just financial leverage. So before we get started though, let’s take a moment to recognize our featured sponsors.
Advertisement: RealtyMogul.com is an online market place for real estate investing, connecting borrowers and capital from accredited and institutional investors. Get a rehab loan fast and close in as little as 10 days. Rates start as low as 9%.
We’d also like to thank National Real Estate Insurance Group, the nation’s leading provider of insurance to the residential real estate investor market. From individual properties to large scale investors, National Real Estate Insurance Group is ready to serve you.
Please note, the views and opinions expressed by the individuals in this program do not necessarily reflect those of FlipNerd.com or any of its partners, advertisers or affiliates. Please consult professionals before making any investment or tax decisions as real estate investing can be risky.
Hey, Blake, welcome to the show.
Blake: Hey, Mike, how are you?
Mike: Good. Glad to have you here. Just to share with the people watching today, we’re actually from the same kind of general hometown in western Illinois. So it’s good to meet a hometown friend.
Blake: Absolutely. Well, thanks for having me on.
Mike: Yeah, glad you’re here. So before we get started, I’m excited to talk about this stuff because there are so many people in real estate that talk about the so called sexy side of the business, which is holding the check that you just left the title company with, which personally I never go to title company. I don’t know who actually does that but what’s really important is that a lot of people . . . and I talk about this a lot. We talk about this a lot on the show is how to treat real real estate investing like a business and not a hobby. So I’m excited to kind of talk about using leverage and using other people’s knowledge and resources and all those things because they don’t get talked about enough, quite frankly.
Blake: No, you’re absolutely right, they really don’t. I haven’t had a check in hand for a while. It’s nice to see that wire come in.
Mike: Yeah.
Blake: But, there is a sexy side but there’s a lot more to it. I think a lot of investors miss side on that part of it. You hear the sizzle about what’s . . . what’s the word . . .
Mike: How do you rinse and repeat that? Hey, before we get started, why don’t you take a couple of minutes and introduce yourself and tell us about your background?
Blake: Absolutely. I grew up here in the Midwest. As you said, we’re from the quad city area. So grew up in a really small town, went to college in Rock Island, Augustana College, and I was the first of all my family to get a four-year degree. So it’s kind of whole . . . we all hear, “Go to school get good grades, get a great job and move on.” So, after college I moved up to Chicago, started working for Wells Fargo in the corporate world. What I felt was pretty successful, making decent money but just kind of realized that as I continued moving up to corporate chain, a little bit more money but less and less time.
Mike: And a predetermined chain for the most part, right?
Blake: Yeah, you knew what was going to happen. So wasn’t super exciting and I just happened to be doing loans for investors here in the Chicago area, and saw an opportunity. I’m like, “I need to own real estate.” So I made a decision to start buying back in the quad cities, buying rental properties. So I kind of did the whole corporate gig for about eight years.
Mike. Yeah, it’s interesting how similar our backgrounds are because I went to Illinois State but we grew up in the same town. I went to fairly local college, moved to Chicago. I actually worked for a large bank, I worked for Northern Trust actually, and you just kind of just made with working for the man almost immediately as like . . . even going to college and having a finance undergrad, they talk about things that were very academic, banking, investments, very broad tracks. Then you get in and you’re like, “Wait a minute. I’m an auditor here in a cube somewhere that I have no control over anything, including my own destiny?” Interesting, yeah.
Blake: I learned real fast. It was just probably long term. I’m not afraid to get in and work, right? So you just start working for somebody else and it’s like working 50, 60 hours but then I want a vacation and you’ve got to beg for it.
Mike: Right.
Blake: So it’s one thing to be in your own control.
Mike: Yeah, absolutely.
Blake: [Inaudible 00:06:46] Mike: Yeah. So talk about the transition of going from buying a few rental properties to kind of where you are today, being part of the team that does huge volume and provides rental properties for other folks.
Blake: Yeah, absolutely. I mean, 2006 when I was still working for Wells, I bought probably 12, 14 units in about 90 days and I actually bought it all with bank financing because that was the time if you could breathe, you could get a loan. So I took advantage of that but I kind of got nervous, I didn’t know if I really knew what I was doing. The market crashed but luckily, there were cash flowing deals. So I kind took a two-year break . . . market crashed and then I got . . . with become really successful in real estate, I sat down with them and kind of learned how to . . . I started learning how to whole sale.
So I started going out, building a buyers list like they teach you by going out and find properties for them. After I did probably four or five, six deals, I figured out there’s a deal that was like . . . the kitchen was completely done, remodeled for a flip and really only needed about an extra $20,000 in work. I asked the lady, “Why are you selling this at a such a wholesale price?” She had paid two contractors way more money than she should have.
It was at that point I had partnered with her. I’ve made some decent money from wholesaling. I’m like, “Why don’t I put the cash to finish out the rehab and then we’ll split the profit? Then I’ll pay you what you want in 90 days or 120 days when we sell it.” So we did it and it was at that point I kind of realized you can leverage other people, their money and time. I didn’t have to come up with as much cash in that particular deal. So I told her I needed to save my money.
She’s like, “Why won’t you just buy the house today from me?” I’m like, “Well, I could keep my money in the bank and maybe use it for something else.” The truth was I didn’t even have the cash. I just had the $20,000 or $30,000 to actually finish up the rehab. So at that point I realized, wow, I can partner with somebody else and leverage their money and I still made a nice . . . it was probably $12,000 or $15,000 off that particular deal.
Mike: Yeah.
Blake: So, from there, the guy that . . . Nate Armstrong, who I partnered with, and he kind of started mentoring me. He started seeing me doing a bunch of deals and so we kind of put together our program here in Chicago where I was finding the acquisitions, managing the rehabs and then we had a high school friend that lived out in California. He was on the commercial business and so he started bringing money to the table. He started bringing investors to the table. We buy them, rehab them, put tenants in and then we’d sell them to our California buyers because their money, for $400,000 or $500,000 out there, they could buy a whole lot more here in the Midwest.
Mike: Absolutely.
Blake: So it just kind of evolved from there. One of the things that I kind of realized too was having a system in place. The same type of rehab every single time, having a good team, good contractors, a good attorney. Basically the investors from California, all they have to do was make a phone call. We had the insurance setup for our team, the insurance company and the title company, everything involved for them so they don’t really have to do anything other than wire the money.
Mike: Yeah, was interesting is things are so critical. It’s funny that we’re talking about it, so obvious to you and me, right? Whenever we buy a house, we kick off a task list, we use a specific task management tool and we have these pre-made lists that we rename it for 123 Main Street and it’s like “Boom,” 70 tasks to go do and they’re pretty much the same 70 as the last house. What a lot of people see, I think, when they’re new in real estate is kind of the sexy side. But the operational side, if done right, this business is not sexy at all. Right? It’s like, that’s not fun but you got to do it if you want to do it again and again and again, right?
Blake: Right.
Mike: Yeah.
Blake: Yeah, we have a four-set program of acquiring, renovating, leasing and then obviously managing the properties. Just for acquiring, I mean, there are several steps to go into that, that one portion of it that make it kind of . . . for the new investor getting into it, we make it really easy for them.
Mike: Yeah. So for newer investors, I think they tend to kind of fall in one or two camps. One is they don’t see the operational side, how important it is to be kind of buttoned up, business side of it really. Therefore, they think they can do it on their own, which a lot of people do it themselves, don’t get me wrong, but to be able to do it consistently and do it over and over again, you need to have some operations and some efficiency there, right?
Or there are the people that partner with somebody but that’s mainly a partner to help alleviate some of the fear. It’s like I’ll jump if we hold hands without necessarily defining who is going to do what and kind of truly leveraging each other. They’re both doing the same things and trying to learn together without saying, “Let’s divide and conquer.” I mean, you probably see the same thing.
Blake: Yeah, that’s kind of how I started. I mean, if you look at our company, Midwest Equity Partner, Matt and I, we grew up together and we started doing deals together. Then Matt met Nate, who’s from Minneapolis, and they started doing some deals together and then I got to know Nate and his wife fairly well. Then the three of us started doing deals together off and on. Nate would have a buyer or somebody with cash and we would sell them the house or Nate would have some extra private money that he needed capital put to work.
So we buy a property and use the private money that way. So we realized though that through that, we’re better off as the three of us joining forces full time. We still do some of our own things but for the most part, in 2014 and going into this year, we’ve really streamlined our teams and operations to work cohesively together to allow us to do the number of deals that we do.
Mike: Yeah, maybe from your lessons I’ve learned of kind of coming together, maybe you could kind of share some lessons to people how to find partners that kind of complement their skill set or fill the void in terms of resources they would need so that they’re not just . . . because sometimes what I see is people that are pretty much carbon copies of each other. It’s like, “Wait, so you’re both really bad at that part?” You might meet great people that’s like sit in a bar and have a drink with but, business wise, you guys are both good at the same things and you’re both bad at the same things. How’s that going to work?
Blake: Sure, no. Yeah, exactly. I mean, whether it’s by luck or by chance, Matt’s really a systems guy. He’s really good at creating systems. He enjoys that part of the business. I think from my standpoint, I’m good at managing contractors and putting the people in the right place and overseeing those processes. Nate’s strength is he’s really good at raising capital. I think in the common ground between the three of us, not one of us is greedy and I think we’re always humble. That’s really important in partnerships, right? A lot of times people . . . I get questions like, “Well, how do you have a partner? Aren’t you afraid they’re going to steal money from you?” And it’s crazy because there’s not one night I go to bed wondering if money’s going to be taken from me or one of my partners is trying to get . . . I don’t know. There must be something in real estate where that stuff happens.
Mike: You guys are also Midwestern guys. It’s a little bit different if you’re . . . I mean, that’s the truth actually.
Blake: I wasn’t going to say that, but since you brought it up . . .
Mike: Well, you could say because I’m from there, too. I don’t live there anymore but I’m very humble and trustworthy.
Blake: There’s something to be said about us Midwesterners. So we kind of fell in the . . . was lucky or whatnot. But I think it was meant to be, just based on figuring out what everyone’s strengths are. I don’t try to overstep, be like, “Oh, I got to be the money raising guy.” I’m good at being the boots on the ground and out in the field on a day-to-day basis, overseeing the crews. We have a field coordinator that manages it on a day-to-day basis when I’m still out, spot-checking how things are going.
Mike: Right. So maybe share a few examples of things that you can leverage. We just talked about how you guys leverage each other’s core competencies to form a team. Your business kind of serves people as a turnkey provider that are leveraging your expertise to help them acquire rental properties. Maybe talk a little bit about that and then just other ways that people can kind of use leverage to be successful as an investor.
Blake: Sure. Yeah, I just said our business is to sell turnkey investments, but we also have investors that maybe don’t want to own rental properties. Maybe it’s just not for them but they have capital that they want to put to use. So we will partner with them and leverage their money to acquire these properties to renovate them. Then once we have them leased out and we sell them off to our passive investors, now we pay them a fairly good return on their cash and they get it back typically within four months is kind of the time frame. Usually, we ask six to nine months window in case something happens and we don’t get it sold. We get held up on an inspection, something like that, right? And then, so there’s that side of business where you can be a lender and leverage their money or . . .
Mike: By the way, they’re leveraging you too, your resources and your knowledge and the systems you have in place to find properties and sell them, right? I mean what we’re talking about here is just different ways to kind of partner with each other or different people to satisfy each other’s needs, right?
Blake: Right, yes. So they’re buying into a system on our end. So we’ve proven to be able to rehab houses really good. We’ve been able to lease them and we’re able to sell the houses, and we always do the right thing. There are plenty of stories behind that. I was talking to . . .
And it’s funny bringing that up because there’s this investor that I’m talking to out of Virginia last week and he’s like, “Wow, you guys.” He found us on our website. He’s like, “Wow, you guys called me back.” I’m like, “Yeah, that’s . . .” “I’ve called four or five providers that they claim to be like you and no one’s called me back yet.” So then we got into a conversation about what we do and the returns.
I’m like, “Well, we typically pay between 8% and 10% on the money that we’re borrowing.” He’s like, “Well, this guy out of Seattle was going to pay me 14% or 15% but he hasn’t called me back.” So I stared laughing and he started laughing too, and he’s like, “Well, there might be a reason why. Maybe he doesn’t do what he says he’s going to do.” And I think that’s the difference and part of our business motto, maybe that’s Midwest in us but we always make things right. I mean rehabs in real estate, rehabs don’t go as planned on timelines. It might take a little bit longer, things happen but we just do the right thing for our investors and that goes a long way.
Mike: Yeah, in your business and in a lot of businesses that are in the real estate space, selling turnkey properties, you would much rather have an embedded base of customers that you can sell more and more properties to instead of having to go find somebody new, convince them to work with you and kind of go through that whole process. I mean, you’d much rather have repeat customers effectively. And with your lenders, you want to be able to pay them back and they’re asking you, “How fast can you use the money again because I want to do it again.”
I mean, that’s part of being a business is being able to kind of do things over and over and over again, and build processes. The first time you screw somebody, they’re done. You’re done with them, they’re done with you and that makes it hard to kind of ever scale your business and really, it makes life not as fun if you have to keep recreating the wheel, right?
Blake: Yeah, absolutely. When you teach people or when you do the right thing by them, it makes raising money that much easier because eventually they suddenly know three or four other people that have a few hundred thousand dollars that they’re willing to share with you.
Mike: Right. Talk a little bit about just the general kind of . . . we’ve had a number of turnkey providers on the show, in fact we’ve had Nate, your partner, a while back. But talk a little bit about kind of the turnkey model and why it makes sense for folks to work with a provider like you to buy rental properties. I’ll kind of throw you a softball by saying that the reality is a lot of people that want to own rental properties, the biggest challenge they have is finding those deals, right?
And they have other problems with managing and things like that but if you have a job or you have a business, unless you can go really spend a lot of time focusing on finding deals, which is a lot of work and a lot of art and skill in learning that. It makes sense what we’re talking about here in terms of the theme of the show, to leverage other people. But just talk about how turnkey rental providers are really kind of hot over the last few years, right? That opportunity, and it’s because people realize that how important leverage is. But just talk a little bit about some of the benefits that people get by working with a provider.
Blake: Absolutely. I mean they’re getting right away local knowledge of the market on where to buy, where not to buy. I think that a lot of mistakes new investors make . . . I just had a good friend called me. He’s pretty successful in the financial world but he’s like any investor man. He’s like, “Hey, this guy presented me a deal.” I’m like, “How many deals has he done?” He hadn’t done any deals.
So we ran through the numbers and it was a negative cash flowing deal. I’m like, “Why is this a good deal?” But the guy was banking on the north side of Chicago and in three years it’s going to be worth a $100,000 more. Speculation, right? So right away, if he would have jumped into that deal, he would have spent on an $800,000 property with 20% down. The guy went in with 20% down. Or you buy in the wrong part of town. I see a lot of new investors that get caught up in what’s a 25% return on paper but it’s . . .
Mike: On paper, yeah.
Blake: You’re going to get shot at and nothing else, and who knows if you can collect the rents in reality. Just on the acquisition side, I think we bring a lot to the table just understanding the neighborhoods and where to buy, and why 25% and why if it sounds good, it may not be the right play. Buy in a better neighborhood at 12-14% and it’s safer. So that’s one reason.
Working with contractors and understanding pricing. What I spend today on my rehabs compared to what I spent three years ago, one just based on the amount of volume that we do. Our contractors know that if they continue to provide a good service and get things done on timelines and that, they don’t have to go out and find another job from someone else. So they’re able to cut their profit margins because they know as soon as they finish one job, they can get another one done. They get another property coming right at them. So our pricing is a lot lower than what most people pay too, probably by, I would say, anywhere from 30-40% a lot of times. And that just comes from knowledge. When you tell someone you can get an 80% furnace for $1200 bucks, $1100, $1200, they’re like, “I just spent five grand.” So there’s a lot to be said for the knowledge of construction.
Mike: Yeah, absolutely.
Blake Then property management, how to lease and how to find a good tenant. When I get started, my dad was my property manager. I say this in front of him but he wasn’t good at screening tenants. He was no better than me, though. If I would have been the one doing it, I wouldn’t have been good either. Why? Why is that? Because that’s not what we do every single day. Good people from the Midwest, if you say you’re going to do something you do it.
Mike: You trust them. Yeah.
Blake: But tenants, you can’t do that, right? That’s a whole another game. So that’s anther advantage we have is owning . . . we used to lease our third party, our property management to other companies but we found the most critical part to our business is not rehabbing it. It’s not buying it, it’s really leasing it and then managing that asset for the next three to five, 10 years four our investors. That’s the most critical part on the communication. So, I think we provide that service with leasing it. The new investors don’t have the knowledge on finding good tenants.
Mike: Yeah. My experience with a lot of folks that manage their own properties, back to this leverage topic that we’re talking about, is there’s no way that if you don’t do this professionally for a living that you could a property around as fast, that you could get it released as fast. But people, for some reason, just don’t think time is money. Everybody knows that when you say it, but it’s like when they say, “Well, it might take me a little longer to do that.” Or even if they don’t say it, it’s going to. It’s like time is money. What is an extra two weeks rent worth to you? You what I mean?
Blake: Right.
Mike: That stuff is critical and a lot of people, they learn the hard way, right? They do on property or two properties and then they learn the hard way.
Blake: Yeah, absolutely. And then they usually come back and ask, “Blake, can I just buy a property from you?”
Mike: Yeah.
Blake: So yeah, there’s a lot to be said for leveraging your own time and knowledge. So I think it’s basically buying into a system that helps our investors. They do it on their own, it’s a lot more cost effective.
Mike: Talk a little bit about the phenomenon of just the general turnkey model, and that’s a very broad term. I mean, some turnkey providers hate being referred to as a turnkey provider and some don’t. But just this thing that’s really change over the past few years, there’s a lot of technology, a lot of turnkey providers, a lot of more visibility to property managers where you can invest in rental properties. Traditionally, I think a lot of people wanted them to be in where they live, their hometown or whatever. But more and more, especially Californian investors, a lot of other investors are . . . really, quite frankly everybody want . . . Other people are learning how powerful the Midwest is in terms of cash flow right now, right?
Blake: Right.
Mike: So just talk about how that’s changed over the past few years of whether it’s comfort level or technology or whatever it is to where people are kind of agnostic to geography now.
Blake: Yeah, I think . . . So I’m on the ground here in Chicago and then we also invest in Milwaukee, Wisconsin and so I’m on the ground in both places. I think the amount of turnkey I’ve sold . . . I will have sold two properties to a local investor in my entire career as of the end of this month. So all my investors that I’ve sold turnkey properties to in Chicago lived out of state, whether it be California, New York, China, Australia and the same thing in Milwaukee. We just had our first investor buy one property on a local basis.
So I think the main thing, as you said, is technology. Communication is very important, property management software and what I found is some people . . . It really comes down to trust and being able to prove you have your systems in that in place. I can sit down with an investor and say, “We have a 54-step process from the time we acquire rehab, manage and then lease it and then get it managed. We have an entire process in place. We have one person that’s dedicated to acquiring properties. We have a field coordinator in each area that oversees our contractors. I think it’s really being an open book with our investors and being honest.
Like I said earlier, I think everyone wants to sell the, “Hey this is your return.” The big difference, and I do this in every phone call with the new investor, is, “This is the upside to real estate but here’s your downside, and here is your risk. Hey, Bryan, there are real people that live in these houses. They break things. We are in the Midwest. I can’t control 4 feet of snow, an 18-inch frost line deeper than ever.”
Last year we had freezing pipes all the time. It’s so much colder than it has been in 20 years. So we talk about the downside and I think when you do that with people and explain really what they’re getting into, it builds a trust that, “Hey, this guy isn’t just trying to sell a product to me and get my money. He’s being very honest with me and an open book.” So that’s really our business model.
Mike: Yeah, great. Well Blake we’re at the bottom of the time here. If folks want to learn more about you and Midwest Equity Partner, where do they go?
Blake: They go to midwestequitypartner.com
Mike: That was easy.
Blake: Yeah so, midwestequitypartner.com
Mike: Okay. We’ll add a link down below the video here but, hey, thanks for your time today. I definitely appreciate you sharing your knowledge and experience. I think I guess what I would tell a lot of people that are looking to get started or have been trying to get started but haven’t really gotten out of the gate as much as they like is to just find other people they can kind of complement your skill sets or your financial situation or whatever it is. Real estate more than just financing, it is really all about leverage and finding other to work with.
Blake: Absolutely.
Mike: Yeah. So thanks, buddy.
Blake: All right. Thanks, Mike.
Mike: All right. We’ll see you around.
Thanks for joining us for today’s FlipNerd.com podcast. To watch or listen to more great shows, please visit FlipNerd.com or visit us in the iTunes store. To access the most robust social platform in existence for real estate investors, where you can find off market wholesale deals, great vendors literally in your market and to socialize with other like-minded individuals, please visit the one, the only FlipNerd.com. If you’re not yet a member, you can setup a free account in about 30 seconds. It’s pretty much the coolest site that’s ever existed in the real estate investing industry so get on over to FlipNerd.com.