Real estate is all about adding value. In some markets, one big untapped value is adding on square footage to the house. If you’re in a market where the cost to add sqft is significantly less than the dollar per sqft retail prices, it’s simply an arbitrage opportunity. That said, there’s some art and science as to how to do it right…and successful real estate investor Matt Aitchison tells us all about it during this FlipNerd.com Flip Show interview. The market has changed and it’s critical that you consider any and all ways to generate more revenue, sometimes that requires a little creativity. Don’t miss this awesome episode!
Mike: Welcome to the FlipNerd.com podcast. This is your host Mike Hambright, and on this show I will introduce you to VIPs 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 Store, or by visiting FlipNerd.com. So without further ado, let’s get started.
Hey, it’s Mike Hambright with FlipNerd.com. Welcome back for another exciting VIP interview where I interview some of the most successful real estate investing experts and entrepreneurs in our industry to help you learn and grow.
Today I am joined by Matt Aitchison who is a California real estate investor, a CEO of Vault Investment Properties. He actually has several businesses, one of which is a construction company which has enabled him to create new opportunities by adding on square footage to houses that he buys, so it’s an interesting strategy to create value in your deals, and maybe allow you to do deals that you couldn’t do otherwise, especially if you’re in a higher-priced market.
It’s not a topic we’ve talked about before, but it’s something that’s very interesting and I’m looking forward to diving in here with Matt.
But before we started with Matt though, let’s take a moment to recognize our featured sponsors.
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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 Matt, welcome to the show.
Matt: Hey, how you doing?
Mike: Good, good. Hey, thanks for being on here. And before we get started talking about the topic today, I first want to say congratulations on the new baby. I know you’re a new dad.
Matt: I appreciate it, man, yeah. I’m surprised I even have my eyes open right now.
Mike: Yeah, I remember those days. My son is seven now, but I definitely remember those days. Both my wife and I each have two siblings, so there are three of us, and we’re like how did our parents do more than one. One is hard.
Matt: We were literally saying the same thing. We want more than one, and we were talking about it. We were like, we might need to revisit that idea [inaudible 00:03:02].
Matt: I don’t know how I can have a two-year-old and a newborn at the same time. That just hasn’t registered with me yet, but I appreciate it. We’re extremely blessed and excited, and never had a better reason to be more exhausted, so it’s great.
Mike: That’s awesome. What’s exciting to talk about some of the topics today is that you’re a young guy. I think you’re 26, is that right?
Matt: That’s right.
Mike: Yeah, so you’ve done a bunch of deals, have a bunch of businesses that are thriving, which is fantastic. Why don’t you tell us a little bit about yourself and how you got into real estate investing?
Matt: Sure, yeah, 26, and I got into real estate investing, but let me back up a little bit for you. I was 14 when I went to my first flipping seminar before HGTV had a million shows on it. And my Mom was actually taking me to these. My Mom’s a successful business woman who worked her way up to corporate America. And she was looking for other ways to increase passive income, or income buckets I guess you could say.
Matt: And she was taking me to some of these flipping seminars, $5,000 or $10,000 per weekend or week or whatever it may be.
Mike: And you were the free guest.
Matt: Yes I was, man. I was the lucky guest. And as most people do when going to those seminars, they pay all the money, they buy all the extra add-ons and get all the content they need to go out and be successful. And when they get home they lose the energy, and they put it right back on the shelf and they go back to their day job and their comfort zone.
Matt: And as she was doing that, at 14, 15, 16 and on I was going into her office and I was reading all the content. So I had that early, I guess, entrepreneurial bug of, man, real estate investing could be a great opportunity with no ceiling on what I can achieve in it. And I went off to college at UC Santa Barbara. I worked at an investment firm down there and started getting more acquainted with numbers.
Fast forward, I graduated and came back to the Sacramento region where I started my first real estate team with my partner, Rachel Adams. And we started building the team, and I started my career out with one flipper. I started seeing a lot of the deals that he was picking up, and I was doing the project management. I was doing the listing side of it, the marketing side of it, and I started seeing how much he was making on those net sheets. And I said, all right, I can do this.
So I started self-educating myself a little bit more, and that’s when my first endeavor venture of real estate investing took place, when I was 23.
Mike: Yeah, that’s fantastic. And so talk a little bit about that process of working with somebody, because a lot of people have that same experience. They work with somebody; they see how much money they’re making. Often I think they see how money they think they’re making, because a lot of times employees don’t see the risk side, or the bad months.
Matt: Oh yeah.
Mike: But just talk about that experience and if you have any regrets there, because I think there are some people that I know that feel like they regret; some people appreciate the experience, because it allowed them to move on. Some people think that they should have been making that money when they worked for that person. It would be interesting to hear your experience.
Matt: I’m a big believer in personal growth and education, and mind you, when I was in school I hated it.
Matt: I couldn’t wait to get out of it. But when it was something I was passionate about, I really wanted to soak up every aspect of it. Even though it was kind of like that carrot that was constantly being dangled in front of me, and my approach to it was this is an opportunity for me to learn every single thing that this guy is doing and how he’s making this money, and I can go put my own spin on it. And so there was a price tag tacked onto every single opportunity, whether that was a conversation or a contract that I saw, or how he negotiated a specific deal, or how his contractors came in and did this, but didn’t do that. And really I was kind of learning the science behind it.
Matt: Mind you, I wasn’t making a ton of money at the time. It was literally no money and these are smaller price points, discounted listing prices, and that kind of stuff. But looking back on it that was probably the cheapest educational piece I had ever received in my life and it’s paid me more in dividends over time. So it was a great experience, and I think a lot of people necessarily want that quick, easy fix, that solution to making fast money. And you have to be committed to the process. I’ve heard that so many times from different people, just stay committed to the process and learn. And looking back on it, it’s been one of the biggest game changers for me here to date.
Mike: Yeah, that’s fantastic. What’s interesting with our topic today is I primarily operate in Texas, north Texas.
Matt: Is it true that everything’s bigger in Texas?
Mike: Say that again.
Matt: Is it true that everything’s bigger in Texas?
Mike: Maybe, yeah.
Mike: We love it here. It’s great. I’m not from here, but I do love it here. But it’s a great investing market, no doubt about it. There is a lot of growth in Texas, a lot of population growth and things. But one of the things that’s interesting about here is prices, a lot of times, those pockets of really nice neighborhoods where this isn’t true, but is not too far from the build price. And so it’s hard to kind of arbitrage adding square footage and creating value there, which is very different from the coasts, for California, even the East Coast and a lot of areas where you might be able to add on square footage and create value.
When we typically look at houses we’re looking at it as it sits, the square footage that it is, and trying to figure out what the ARV is, and then figuring out how much you could pay on it based on needing to make a certain amount of profit and how many repairs it needs and things like that.
But it’s very different when you start to say, well I know that I can build for a certain price, whatever it might be, $100 a foot; and houses are going for $200 a foot. So I can add on 1,000 sq. ft. and create $100,000 in value if I did that math right there. I think I did.
That definitely creates a lot of new opportunities for real estate investors, so I’m excited to talk about that.
Matt: Awesome, yeah, it’s been something that especially in shifting markets, you know, if you’re not in a heavily appreciating market where you buy a deal and by the time you get through the rehab, a month or two, however large the project is, three months later you gain three, five, or six, or however fast your market is moving. Last year in the Sacramento market we literally saw a 16% appreciation in a 12-month time frame. So you could buy a deal and not even work on it and still make some money if you wanted to.
Matt: As the market shifts, though, and getting a little bit more creative on how you keep those spreads and margins to the levels that you as an investor have in your criteria, adding on square footage and that side of the design process becomes a little bit more important, especially if you have the tools and resources to go out and implement or execute on it.
Matt: Not a lot of other people, your competition gets a little bit thinner in those areas as well. So that’s something that my team and I have explored in the last year as our market has shifted. I think it’s something that really can apply in any market if you just know the places to look and you build up the resources around it.
Mike: yeah. And of course you have an advantage by the fact that you have a construction company, so you don’t have a middle man there.
Matt: That helps.
Mike: Yeah. Let’s talk a little bit about how you identify. Let’s talk a little about why you do it. There are some real estate investors that just don’t want to tackle add-on projects and all the additional permits and all the additional things that might come with that. But talk a little bit about why. Obviously you do it to create value to make more money. But talk a little bit about specifically why you do it and how you fell into that.
Matt: Sure, yeah. Ideally we do it because as a 50-flip year shifts into a new market and you’re not necessarily granted the same opportunities that you were in a previous market, you have to get a little bit more creative on how you go about hitting your goals and making your projects work.
Why we do it is it allows us to operate in a sphere that, like you said, not a lot of investors want to play in that arena. If you don’t have the processes and systems built up around it, it can be very intimidating.
Matt: And let me be the first to say I’ve fallen flat on my face and failed a few times, but I learned so many things around how to do it differently the next time and not make those same mistakes. And now it kind of puts you into just playing in a different sandbox that say some investors just don’t even want to go build a sand castle in. That’s one arena where it allows us to kind of separate ourselves from other investors.
Obviously it allows you to create spreads that necessarily wouldn’t be there if you were to just do a traditional rehab on that house.
Matt: And the other side that I really like about it is it generates revenue for my construction company. It keeps my guys busy in longer terms. And it allows us to continue to build up new resources and new opportunities around those projects, depending on how long the site. We’ve pulled other deals just off of the add-on projects that we’ve done that have turned into additional revenue for the company. So there are a couple of different reasons why we do it.
Matt: But mainly it initially spawned from we don’t have the same luxuries that we had in previous in and out cosmetic type flips, so what can we continue to do to keep the level of properties coming through the funnel, but also how can we find ways to increase our margins. And that was one key way, at least in our market, that allowed us to do that.
Mike: Yeah, that’s an interesting . . . We don’t have a lot of time to talk about it today, but I definitely have a lot of guests on the show lately where we talk about it, and I feel it, too. This is a very different market now. It’s harder to buy, and when you get deals some people are either sticking to their principles; and when you get a deal it’s more profitable than in the past, which is great. Some people have designed their model now around paying more than historically they would, and they’re doing thinner deals.
Mike: Irregardless of what you decide to do, I think it’s critical that you always think about how to pivot and shift your business as markets change, because they are going to change. They are all going to change.
Matt: That’s the one thing that one of my mentors always taught me was that the only constant in life is change.
Matt: And if you’re not willing to adapt, you’re just going to either get burned or you’re going to get left behind.
Matt: We’re always trying to stay ahead of the curve and just hear what other people are doing and other markets that are similar to ours. I mean, flipping is always going to be around. But the cool thing is that because we have such an awesome opportunity to get in and get out, we can time the market accordingly and base our valuations off of that. On the bigger projects, that can be intimidating to some people if you don’t have the know-how or just the team built up around that.
Matt: That’s kind of where we’ve looked at it, from a different perspective of they don’t want to do it, but I need to revisit that and see why they don’t want to do it.
Matt: And if it’s something that we have the ability to go and tackle. It’s been, like I was telling you earlier, it’s been pretty much that our biggest margins in ROIs this year have come off of those kinds of projects.
Mike: Yeah. So talk a little bit about how you identify an opportunity to add on, because you don’t want to just go into any neighborhood and double the size of the square footage. I mean, you’re going to have no indication that people are willing to pay you for that, and of course then ultimately you run into issues with appraisals and all that stuff if a lender is willing to do a house that is significantly larger than other houses.
Mike: So obviously there are ways to kind of identify where that will be accepted, so talk a little bit about that.
Matt: Yeah, most of these are older neighborhoods that have the opportunity to add on, whether that’s a larger lot size with a smaller house on it. And as older neighborhoods start to turn over, you’ll see people in certain areas either tear houses down and build a new one, or start adding on over time. And the normal build and the time it was originated starts to get a little bit bigger due to just people living there and having expansion opportunities.
We’re not going to go into a neighborhood that is newer and try and add on when it’s really not going to make sense.
Matt: We’re not going to go into a neighborhood that is a bunch of small houses, and nobody has expanded into a larger house. I’ve seen a couple of people make mistakes where they’ve gone into neighborhoods that have the opportunity; on paper it looks like it makes sense, but they add on and the price per square foot is going to equal this.
But one gentleman called me and was asking me for some advice. And he had built on one of the largest lots in this neighborhood. He had built a house twice as big as any house in that neighborhood, the largest house. And when he went to go sell it, yeah, it was the nicest house in the neighborhood. It was by far the most expensive house in the neighborhood, and it just didn’t fit the feel of the neighborhood. So he overdeveloped.
You have to find those opportunities that allow you to create value that is still going to fit the charm and the criteria of the neighborhood that your end consumer is going to be looking for.
Matt: So we identify those neighborhoods. We identify potential houses that have unpermitted additions and weird kind of add-ons that may not necessarily even hold any value to an appraiser that we can repurpose, or permit and get added on or redesign with an architect that’s on our team. Or we’ll go into houses that are completely dilapidated and take them down to one wall and do a full remodel. Or we’ve done it this year where we’ve leveled houses.
Mike: Yeah, I think it’s important for people listening too to think about not just what somebody might be willing to pay for it. It’s that they’re willing to pay for it and they can get it financed.
Mike: The lenders are looking at it the same way. They don’t really want to finance at 97.5% or 96.5% of the largest house in the neighborhood that’s selling for 50% more than everything else either. That’s a risky venture.
Matt: That’s a big red flag for them, absolutely.
Matt: They’re looking at risk versus reward, and if that looks like something that’s nonconforming to the general consensus of the neighborhood, then you’re not going to find too many people that are going to raise their hand and jump on that opportunity with you.
Matt: And that’s the thing; a lot of people, I see a lot of investors make mistakes and I’ll be the first to raise my hand. I’ve made a handful of mistakes starting out as well. Things can look great on paper, but there are a lot of intangible aspects to an exit strategy that you really have to take into consideration.
Mike: Absolutely, yeah.
Matt: If you don’t do that homework, you’re going to get, I always say, you get caught with your pants down, you know.
Matt: You don’t want to be that person, especially when you’re dealing with other people’s money or your own money. That’s where a lot of investors are one and done. They think they look great; they go in and they make the mistake, like, oh, this isn’t for me. And it’s unfortunate, because I see so many people that have a lot of great potential and opportunity to make themselves some wealth through real estate investing, and they have one bad experience because they didn’t do their homework. And it turns out poor, and they never go back.
Mike: Yeah, I always encourage people, you know, one of the things that is more common where we’re at here versus northern California is garage conversions. Personally I don’t like them; they tend to be pretty common on lower-end houses here. We had a house that I ended up wholesaling last month that was about a probably $400,000 ARV house, and it had a converted garage. And it really wasn’t done that well. But what we were looking at is, the thing is, that wasn’t typical in that neighborhood to have a converted garage. So we’re looking at things like adding another garage to offset that. I always advise people. I have a very conservative nature in real estate investing, and it sounds like you do, too. But I don’t ever want to be a trend setter; I want to be a trend follower.
Mike: And I think whether you’re looking at adding on square footage or converting garages, or adding a second level or any of those things, you don’t really ever want to be the first person to do that in the neighborhood.
Mike: Because you kind of want to do something that other people have done and proven that it works, and then it’s a lot less risky that way.
Matt: Yeah, in my evaluations, and from the sound of it probably pretty similar to yours, is I’m very, very aggressive in my negotiations for obviously always getting the lowest price where it’s still win/win for both sides. And I make sure it’s within integrity and doing it the right way. I’m very, very aggressive in how I bid my construction rehab costs, and I’m very conservative in how I evaluate my after repair value and my exit strategy so I’m always leaving myself along the way a couple of safety lines to ensure that if I’m evaluating a 15% ROI and I still have these buffers in there, sometimes I end up bidding 19% or 20% because I was aggressive on all of those fronts.
Matt: Or sometimes I get caught with my pants down, but I only go down to a 12% because I left those buffers in there. So people that get a little too aggressive and don’t necessarily take that step into consideration, like I said being the trend setter and really they want to do it first, mind you, there are a lot of people who make some good money off of taking that risk. But my model is more a longevity type model.
Matt: I’m not looking for that one homerun. I’m looking more for the long-term wealth built up over a sustained period of time.
Mike: Yeah, I agree with you. You can’t build a sustainable business over planning for the best case scenario to happen every time, because it doesn’t.
Mike: Especially in California it doesn’t.
Matt: Yeah, there are times where we’ve done completely different architectural designs and add-ons in say an $800,000 to a $1 million house, and then there are smaller completely rebuilds that I’ve done on $100,000 house. And that criteria in the low end versus the luxury is you’re appealing to two completely different buyer types, two different consumers. And if you don’t take into consideration some of the different factors that are important to them, then that could also get you in trouble as well.
Mike: Absolutely. Hey, that’s a great segue; talk a little bit about what people should consider and what you look at in terms of the type of space you add on because there are generally some issues with adding on space. You don’t want to have to walk through a bedroom to get to another bedroom obviously. I mean, if you think of adding on space to the back of a house, you usually have very few if any; we’ve had houses we could have added on, but there was just no natural way to add things on without going back and reconfiguring the main house as it is now.
Mike: Of course we see houses sometimes that have add-ons that they just added on 400 or 500 sq. ft., but it was just this huge room that had really no functional or practice use, and that people aren’t willing to pay for. If it was two bedrooms and an additional bath, it would be so much more valuable than just another big game room or something like that, but kind of talk through that.
Matt: Yeah, you see that a lot actually. And I would say as a consumer myself. When I was working in my real estate business and I was showing to buyers and I was working with sellers, one of the biggest things that consumers looked for when they walk into the house is immediately you walk in and get a feel. And a lot of people really talk about, at least when I saw the feedback that I got is, open layouts. The layout of the house is something that you can’t change and they will be, “Oh, man, you know what; that’s just a weird space. Well, what do you do over there?” Or kind of like what you were saying, some of the usability of certain areas in the home.
So when we’re going through a house if there’s an area that I can blow out an entire wall and create a massive great room concept. We just did one in one of the luxury houses that I just put on the market. It was a downstairs that really it could have been used as . . . the way it was laid out a little funky, but it was easy enough for us to completely redesign that to be a downstairs master suite. And we made a few different configurations where you could walk into the bathroom so it became this master suite. And that became a selling point, because people wanted in this luxury house and this neighborhood in-law quarters that was away from say the traditional master.
Matt: And they didn’t have to walk up the stairs. So just by simply taking into account an old office that could be repurposed into a master suite by doing some wall changes and having a little bit of a design change. Those are the kinds of things where we look at the layouts and the spaces to make sure that the functionality and the usability and just the overall layout and feel of the house, if we can make it as open as possible. And make a house feel bigger than maybe what it really is.
Matt: Those are some of the small opportunities. And then there are also the unpermitted additions and add-ons that you don’t really know what to do with. If we can add two bedrooms in it and a Jack and Jill bathroom in there, and that bumps your ARV $40,000 or $50,000 and it only costs us $20,000 to do. Those are the kinds of opportunities we’re always looking for.
Mike: Yeah, absolutely. So, Matt, what advice would you give people that are . . . the first thing is you need to be in markets where your build price is generally speaking a fair bit below your typical retail sales price. Right?
Matt: Yeah, I would say so. You definitely need to look for those opportunities. I have a little bit of an edge, so not everyone is going to have this. By owning a construction company, I can keep my costs down on the construction side. I can also keep my costs down on the real estate side with listing our properties for free.
Matt: However, having an architect on your team, I would say has been the biggest game changer for us, because I walk into a house and things that my mind wasn’t trained to see early on, he was catching and he was going, “Oh, well we can do this, this and this.” And just by having him walk through the houses and reconfiguring some plans for a couple of thousand, you’re talking about adding $20,000, $30,000 or $40,000, depending on the house priced [inaudible 00:28:47] you know, $50,000 to $100,000 on some of these properties. And that’s really important to have someone who understands how they can reconfigure some of these spaces.
And then you also need to make sure that your real estate team can get you the idea of I were to do this and add say this bedroom and this amount of square footage, and one more bathroom, how much is that going to get me, and then compare that to your construction costs. And you can kind of backend what your return is going to be on it if you decide to do this.
Mike: Sure, that’s great; good advice. And can you kind of share, and I know this is going to be; say you didn’t own your own construction company, and build prices are dramatically different across the country. I’m sure they’re lower for example in Texas than they are in California. But can you give us some sort of guideline on what people should look at for, and obviously you’re not going to go into a neighborhood where houses are selling for $60 a foot, because no matter where you are in America you’re build price is going to be below that.
Mike: But can you give us some general guideline as to where the arbitrage opportunity or a minimum that people should be looking for?
Matt: Yeah, we’re looking kind of like what you said earlier. We are always looking for those neighborhoods that will get us our…focus on your big rocks. But like you said, I’m not going to go into a neighborhood that if I do this it’s only going to get me a $10,000 or $20,000 kick up by the price per square foot versus my build per square foot. So I’m going to go into the neighborhoods that are going to have higher selling price per square foot that will stay under what my construction costs are going to be.
So I’m usually looking anywhere from $75 to $150 price per square foot difference from my construction costs.
Matt: And that’s just me choosing what my criteria was, sticking to it, and saying if it doesn’t fall into this bucket I’m not going to focus my time or resources on that. I’m going to pass and move on to the next one. And that was just a choice by me [inaudible 00:31:02]. I know other people who being on volume models and having the time and resources and the crews that are able to do it, they’ll focus on say lower opportunities, but they are hitting probably 30 or 40 more homes than me. So it just depends on what the model is of the investor and sticking to your criteria.
Matt: It’s easy to get pulled in so many different directions, and I feel like when you try and do too many things, that’s where people get in trouble.
Mike: Yeah. Well, Matt, thanks for sharing all your insights today. If folks wanted to learn more about your companies and some of the work you’re doing, where would they go?
Matt: You can always connect with me on Twitter at Matt Aitchison1. That’s my Twitter handle. Or you can always contact me on Facebook and it’s Facebook.com/Matty, my last name Aitchison. And we’re big on social media. My real estate partner and I actually teach courses on social media; how to integrate that into business.
Mike: Oh cool.
Matt: And I find a lot of deals actually through social media.
Mike: That’s awesome.
Matt: And I’m always happy to connect with other people, and it’s great learning from shows like yours, and all the great investors that you have on here. So it’s been a pleasure chatting with you today.
Mike: Yeah, thanks for being on. We’ll add links for some of the stuff you just discussed down below the video so if anybody wants to get hold of you, we’ll have links down below here. So, Matt, thanks so much for you time today. I definitely appreciate it. And stay in touch, my friend.
Matt: Thanks, man, I appreciate it.
Mike: All right, we’ll see you.
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