In today’s episode, Charles Dobens joins us to discuss how to successfully invest in multi-family properties. Charles has been involved in over $500M in real estate transactions, and owns and operates more than $20M worth of properties. There are some awesome lessons in today’s show…don’t miss it!
Mike: Hey, it’s Mike Hambright from FlipNerd.com. Welcome back for another exciting Expert Interview, where I interview awesome guests from across the real estate investing industry to help you learn and hopefully inspire you at least a little bit.
Before we get started, just a quick reminder of the upcoming REI Power Summit. It’s going to be the largest real estate investing event ever, certainly online. It’s 100% virtual so you can watch it from wherever you’re at. Even though it’s a nine day event, you’re actually going to have access to it for a year. So if you miss somebody or you’re not available on one of those dates, you’ll have access to it for 12 months. We have over 50 committed speakers so far, including the one and only Charles Dobens, who is actually our guest on our show today. So go check out REIPowerSummit.com.
For today’s show, again, Charles Dobens is joining us, he’s a real estate attorney and he’s a multi-family real estate investor that owns and operates over $20 million worth of properties. Charles has been involved in more than a half billion dollars worth of transactions in one way or another. And today, he’s going to talk to us about how to be successful in multi-family real estate investing. It’s going to be an exciting show and I’m glad that Charles is with us. Before we get started though, let’s take a moment to recognize our featured sponsors.
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Hey Charles, welcome to the show.
Charles: Hey Mike, how are you?
Mike: Good, good. Glad to see you, it’s been a little while but we’re happy you’re here today.
Charles: I know, I heard I’m 248th on the list now. You’re really cranking.
Mike: No, no, hey we get better with time, so there you go. We have more premium guests, no offense to any of our other guests.
Charles: I’m just happy I got asked back. That’s a good sign right there.
Mike: Yeah, excited to have you.
Mike: Man, you’ve got an incredible track record and level of experience so, very excited to talk a while today. For those that don’t know you or didn’t know how awesome you were, why don’t you tell us your background a little bit and how you got to where you are today?
Charles: Sure, well I got started right out of college or actually when I was in college, that’s really where I say that I started my apartment building career. I was a doorman at a luxury apartment building in Brookline, Massachusetts when I was in college and best college job you could have.
But I watched the owner drive in once a month and park his white Rolls Royce Corniche convertible right up front. He’d walk in the office, he’d spend the whole day counting his money and paying his bills, he’d get back in the car and drive away and you wouldn’t see him for another month. I thought to myself, “I can do that job. I know I can do that job.”
Charles: But then I ended up, took the easy way out, which was the family business of insurance and did that for about 20 years and said, “You know what? I’m miserable. I hate what I do. I don’t want to do this for the rest of my life,” if any kid of yours as a young person says, “I want to be in the insurance business,” there’s something wrong with that young man, let me tell you, there’s something wrong with him.
Finally, I told my wife, “I can’t do this anymore.” She says, “What do you want to do?” I said, “I’ve always wanted to own apartments” and she says, “Let’s do it.”
I sold my insurance business, I was a lawyer at the time. I decided to go out and buy apartment buildings, apartment complexes. And what I found through my acquisition and through the whole entire process was, I worked with great attorneys and they knew how to close escrow, they knew how to draft contracts. But they didn’t know what made a good deal. They didn’t know whether the property that was being acquired was actually a good property or whether the negotiations were done in the right way.
And so I decided that I’m going to put up my shingle and represent new investors looking to acquire apartment complexes and protect them throughout the entire acquisition process. So that’s what I’ve done over the last 10 years is work with new investors and make sure that they don’t get themselves into trouble.
I have to say this, from a protection standpoint, I have scores and scores of clients throughout the country that I represent as a consultant. I’m only licensed in the Commonwealth of Massachusetts to practice law and so I can’t represent people outside of Massachusetts as their attorney. But I work with them as their consultant and I work with their attorneys throughout the process to make sure that they’re protected.
Charles: That’s how I operate my practice.
Mike: Yep, I feel the show is starting to get filled up with disclaimers, there’s all this concern, but no, I understand. It’s interesting, I want to go back to something you said a minute ago about how you had worked with a lot of real estate attorneys but they didn’t really understand a deal structure.
Mike: That’s so right, certainly with the number of people I’ve interviewed on the show, before I started the show, I thought I was an expert. The reality is, I’m an expert in a very small niche, rehabbing, wholesaling rental properties, setting up your business to operate like a business to be a real estate investor.
Charles: Right, right.
Mike: But I know almost nothing about multi-family, other than the stuff that is fairly intuitive but land, there’s a whole bunch. There’s so many ways to make money in real estate that I think a lot of people assume that somebody is an expert and then they must be an expert or knowledgeable in a lot of areas and that’s just not true.
Charles: Oh, I am very quick to tell someone, they ask me questions about single-family, I have no idea, it scares the daylights out of me. I stay away from it. But I am very, very specific that my specialty is in helping new investors acquire multi-family property. Actually, because I own my own property management company and we own and operate our properties, I help my investors through the transition of ownership and what they need to do to set themselves up correctly for success.
Charles: But you’re absolutely right. I am so… my niche is very narrow when I go to cocktail parties and people find out I’m an attorney and they ask for my business card, I’m like, “Why, are you going to buy an apartment complex?” “No, my son gets picked up for DWI.” Well, believe me, I’m the last guy you want involved. I might be in the cell next to him. But that’s all I do is work on multi-family.
Mike: Yeah. So the point there is if you’re getting started in investing or you’ve been in it for a while, is there’s a lot of different flavors of investors out there, there’s a lot of ways to make money. But you should probably try to learn from people that are successful in that niche that you’re looking to work in.
Charles: I tell you, one of my classes, one of my coaching programs, coaching classes talks about all the different ways to make money in multi-family. And even within the niche of multi-family, there are so many ways that you could make money that some guys would kick away a deal and say, “This things a dog.” No, let’s look at it a different way. You might be able to make some money on this deal.
Mike: Yeah, yeah. Charles, today we’re going to talk about how to be successful and it’s interesting that you said you’re afraid of single family. Clearly most investors focus on the single-family because that’s one of the lowest common denominators in real estate investing, so a lot of people start there. First, maybe talk about… clearly, you would advocate that you don’t need to start in single family to work your way up into multi-family investing, is that right?
Charles: Yeah, absolutely, I didn’t do it. I remember getting started, looking at everyone’s courses and programs and teaching you how to rehab a house and how to rehab, stage a house, all those types of things. It was… I looked at it as being incredibly risky, because there was always a little bit of emotion involved, especially where I live, I live in the Boston area. You can’t buy land around here for less than $350,000. So you make a mistake, you made a big mistake.
But multi-family, multi-family is a business, you can’t look at it as real estate. It is a business and I understood businesses. I own my own business, my wife owns her own business. We can look at a financial statement and we can tell you whether it’s a good business or not. And that’s exactly what multi-family was all about and that’s why it was so easy for me to make that transition into multi-family.
Mike: Yeah, I think you’re right that a lot of… this is something that I’ve talked about and dealt with, been in conversations with, about the emotional side of real estate investing. Especially a lot of newer investors, they want so bad to do a deal that they romanticize it a little bit as to, “Well, if we did this and if I stand on my left leg, if the sun’s aligned just right.” I think that’s probably less likely to happen in multi-family just because it’s a much more… for me, even with single family, it’s all about the numbers. But I think it’s even more cut and dry that it’s about the numbers with multi-family, right?
Charles: Multi-family is a formula. It’s a three variable formula and if you know two of the variables, you can solve for the third. Who would have thought that junior high school algebra would ever come in handy again in your lifetime? But that’s all it is. If the numbers work, you buy it. If the numbers don’t work, you fix it. If you can’t fix it, you move on to the next one. It’s as simple as that. And when you come at it with that approach, you can look at 20 properties in a week and decide which ones you’re going to make offers on or not.
Mike: Yeah. How about… because I know even in multi-family, there’s some folks that just want to buy distressed properties that have upside potential, they have way too high a vacancy, they’re going to separately meter the utilities, there truly is opportunity to change the way the numbers lay. And then there are some people that, I don’t want to do anything, I just want it to be operating perfectly and I’m willing to buy it based on a certain multiple. So talk about those different categories.
Charles: Sure. When you own multi-family property, it changes your life. Period. I don’t care what type you buy but it changes your life. It adds another element of work onto what you do. The whole point is, hopefully that work is going to give you a great reward at some point.
Now if you buy an A-class property, if you’re a doctor who is just looking to park his money somewhere and you’re looking for something safe, you’re not looking for a C-class, rehab type of opportunity. That will eat you alive, that will take up all of your time and a lot of your money. You’re looking for an A-class property, you’re looking for something that’s going to run smoothly, you’re not going to worry about it and it’s going to be easy to operate. That’s the high end of the spectrum, the A-class properties. Easy, safe, secure, tenants don’t give you problems, it’s a great place to park your money.
Then you start going down the spectrum. I like B-class properties because it’s like buying a used car. You pay retail for a car where it drives off the lot and then depreciates immediately as soon as you’re out of the showroom. A B-class property has already gone through that depreciation. It’s a nice property, the tenants are still good, the bones of the property are fun to operate and it’s a good business to own.
When you start getting into C and even D-class properties, D is a non-performing asset, when you start getting into that level, let me tell you something, you better be able to wear a tool belt and you better own a tool belt and you better have a very thick skin because you’re going to be knocking on those doors on the fifth of every month to get your rents in the door. I don’t care what people tell you, oh, it’s a C and B or a B and an A, I’ve heard that story too many times, especially from new investors that don’t know what they’re looking for.
When you own property, it changes your life, you’ve got to understand what your limitations are and exactly what you’re looking to. As I always say, if you buy the first property wrong, you will never buy another property. If you buy the first property the right way, you will forever stay in this business. That’s my job as a consultant, is to make sure that you buy the property the right way.
Mike: Yeah, yeah. Talk about, let’s dive into how to be successful. You’ve seen a lot of people do a lot of deals, you’ve done a lot of deals yourself.
Mike: What separates somebody who’s going to be successful from somebody that’s not?
Charles: Patience. That is it. I’ve seen people rush into this business, “I’ve got to own a property, I’ve got to buy something right away.” And it ends up biting them in the fanny because they’re so quick to get into their… they put on rose-colored glasses, they’re not realistic about the numbers and they get themselves into trouble. My best clients are the ones that look at a lot of deals and they pass. It’s not right for them. When they finally find that deal that is right for them, man, they hit a home run every single time.
Charles: That’s the one thing that I’ve noticed that makes people successful, it’s just be patient. You’ve got a lot of time. We hope God is giving you a lot of time. But you just don’t rush into it because you’ll be setting yourself back if you do it incorrectly.
Mike: Yeah, you see that in single-family too, like I said, people are so eager to make a deal work that they start to say, “Well, if I could get the vacancy down this much,” to some unrealistic number and you start to try to find ways to talk yourself into it, right?
Charles: You don’t want to buy someone else’s problem. A lot of these times, these landlords have a problem and they want you to take it over for them. You just don’t want to be that person.
Mike: Right. Talk a little bit about how to do your own due diligence, because one other thing that could happen is maybe you are being conservative. But I’m sure it’s happened before where the seller has provided information that is not quite accurate.
Charles: Oh yeah. I actually teach a weekend course in due diligence. It is a law school classroom session on how to not get screwed, because the whole thing is the guy’s trying to screw you and you just have to figure out how he’s trying to screw you and protect yourself. That’s the due diligence.
Now, the due diligence can happen early on when you start looking at the properties and I look at these offering memorandums. I actually have a video tutorial on how to evaluate a broker’s property package, because here they are trying to sell you, trying to put lipstick on a pig and you can look right through it and say, “This is just not going to work.”
I teach you how to protect yourself in the due diligence process and even before the whole thing starts so that you know what you’re looking for, you know exactly what type of deal it is that you’re getting yourself into. And also just saves you a lot of time. You’ve got a limited amount of time. You can’t waste it and you’ve got to make sure you get out there and find the right deals.
Yeah, listen, the seller is a guy who bought a property 10, 20 years ago and he’s put his life into this thing and now it’s time for him to cash out. You are the guy who’s going to either maximize his return or you’re going to minimize and you’re going to make him cry at end of the day. He’s going to try to get you to pay him as much money as he possibly can because he’s only got one chance. Once that one chance is over, that’s as much money as he made and he’s done. So he’s going to tell you everything you want to hear, your itching ears want to hear to make that deal go through.
Listen, I have heard some beauties and brokers are notorious for giving you some lines. So you’ve just got to be careful and I don’t believe a word anybody tells me anymore. Except for you, Mike.
Mike: Yeah, I am honest. I am honest.
Charles: I appreciate that.
Mike: Honest as they come. I like to believe I’m honest. I said that with sarcasm, like, “I am honest, don’t really believe me,” but I think I’m a pretty honest guy.
Charles: Listen, I am too.
Mike: I’m not trying to sell you anything, Charles.
Charles: I’m telling you that if I get into trouble, I’m going to be called before the Bar Council, I have to protect my license. I had one client that I kept telling… when you come to my classes, I keep saying, “Don’t trust anything anybody tells you,” and the guy said, “Let me see if I can get this straight. Are you trying to tell me that I’m not supposed to trust anything you say?” I said, “Listen, I didn’t say there was an exception to that rule. Don’t trust anybody. I’m going to tell you the truth but I don’t want you to trust me. Verify. Verify everything.”
Mike: Talk about some common structures for doing deals, there’s a lot of JVs, especially in multi-family and for anybody who’s listening to this that’s thinking, “Hey, I want to get into multi-family investing, I’ve always wanted to do that,” there’s obviously a lot of fear to doing it alone. That’s why a lot of folks have different deal structures. You want to talk about some of the common structures that make sense, that really ultimately give you a little more confidence, that I’ve got some different people here that know what they’re talking about in different capacities?
Charles: Yeah, the thing is that what you’re looking for here is you’re probably coming to the deal with no money. That’s typically how the sponsor of the deal approaches it, especially if you’re a new person. You’re showing up at the table and you’ve got no money.
Mike: Say that again, that’s what you refer to as a “sponsor,” somebody who’s actually finding the deal?
Charles: Yes, typically my clients are the sponsors of the deal, they’re the ones that have gone out and found the deal, they’ve negotiated the contracts, they’ve got it under contract. They’ve gone out to do the due diligence, they’ve made the determination that it’s a good deal and now they’re proceeding forward into the financing process of the contract. During this period, they need to raise the down payment. Typically, they don’t have the money, so they need to go out there and find investors to invest in their deal.
The first thing you need to do is figure out, well, how much of the deal can you sell off in order to raise that money? How much of the deal do you have to give away in order to make the deal happen? Now, I use Doug Rutherford’s Cash Flow Analyzer software, all of my clients get that software. It’s phenomenal software and it also helps you evaluate the deal in determining how much money you need to raise and how much money you need to give away. That’s part of the analysis.
Once you determine how much money you’re going to need to raise, then you need to figure out in what form am I going to give it away? In other words, what is my entity structure going to look like? Now, all the properties that I have put together are all in a limited liability company, an LLC. I think those are absolutely the easiest entity in order to put together, in order to create structures, create classes of people and that’s how I’ve done it.
You’re the sponsor, you’ve put your blood, sweat and tears into this and you’re looking to build a multi-family business or multi-family portfolio and here’s your first deal. You don’t want to give up control of that deal. You want to be able to make the decisions on that deal and not have to worry about some guy who gave you $50,000, he’s going to control your investment.
So what you do is you create a class of membership in that LLC that you’re the only member of and you have all the voting rights. You have the management rights and you control how that deal works. And that guy who gave you $50,000? He gets a percentage of the company but he doesn’t get any voting rights. He can’t tell you how to put the deal together.
Mike: What is that typically called? A managing member or what does that refer to?
Charles: Yeah, you could have a managing member that you would be the managing member and the other people would be just members, Class A members, Class B members, Class C. It really depends upon how we set up the structure.
Now there’s another thing and this is what I’ve been amazed at when I teach this in my classes. You always want to get seller financing. You always want to get the seller to kick in a little bit towards the down payment, that makes your job a lot easier. Typically in the past, what those have looked like are second mortgages where the seller’s going to take back the second. Well in the multi-family world, you really can’t do that. The banks don’t allow you to do that.
So what do you do when you ask the seller for special financing, for seller financing and he agrees to it, then how do you get him into the deal but you don’t burden the property with a second mortgage?
Charles: The answer is, you create a special class within the LLC that looks, acts and feels like a second mortgage and the only person, the only member of that class is the seller. So you get very, very creative, and that’s the beauty of the limited liability company, you can really set up some incredibly unique structures to solve whatever problem you come up with.
Mike: Sure, yeah, interesting, interesting.
Mike: You work with a lot of new investors. Talk about what the typical background, I know you’re going to probably say, “Anything,” but if somebody that gets into multi-family investing, do they typically… you already said that it’s typical that they would come with no money, they’re really finding the deals. But is there a specific background in terms of what it takes to be successful that we’re talking about here? Is there a specific background or type of background that you’ve seen that people tend to be more successful with? Like if they had a financial background, if they had a real estate background at all, do any of those things help or hinder you in terms of your level of success?
Charles: Yeah. First up, as an attorney, my answer is never going to be, “Anything.” My answer will always be, “It depends.”
Charles: That’s what they train us, we learn that first day in law school. The correct answer is the people that I have seen who are the most successful in this business are those people who come from a sales background. You might be thinking to yourself, “Well, that doesn’t make any sense.” No, it really makes a ton of sense, because what you need to understand is that this is not real estate, this is not property management, this is not operations. This business, including the single-family side, it’s a marketing business.
Charles: It’s a sales and marketing business. Ninety percent of what we do is sales and marketing. You’ve got to get out there and prospect to find the client, find the customer and the customer when you’re first getting started is the property. You’ve got to spend all your time trying to find that product that you’re going to sell to other customers which become your investors.
So it’s really the person that understands the sales and marketing standpoint are the ones that are going to get this business up and running faster. I have one client, I love him to death, he’s become a very, very good friend of mine. When he started working with me, he had no multi-family property and he now has 1,400 units and it’s taken him about seven years. I knew this guy was going to be a success because he was a manufacturer’s rep, he was a sales guy for 30 years. He knew what needed to happen. That is really the background that I think is the most successful in this business.
Mike: Yeah. That’s great. I would say, on the single family-
Charles: Remember, just so I say it, those are also the guys you’ve got to rein in a couple of times. It can get out of hand.
Mike: Right. I would say, in my experience, when people ask me who do you see that’s most successful, I believe you with the sales background, I would agree with that. The other thing I would say is those that have been in business before, not necessarily owned a business but have run a business to the point where they understand that you have to spend money on advertising or lead generation or you understand the importance of that.
I think some people just say, well, I just made the decision to get into it and therefore I’m going to be successful and leads are going to fall in my lap. But as you know, I’m sure it’s the same with multi-family, finding the deals is the hardest part. So you’ve got to be willing to do what it takes, whether it’s marketing or advertising or just hustle to go generate those leads.
Charles: Hustle. Hustle is it. A lot of people just think they’re going to sit back and wait for that great deal to fall in their lap and guess what? For the most part, nobody knows you’re out there looking.
Charles: You’ve got to get out there and tell people and that takes work. Once you get out there and have done a lot of work, then it’s going to look easy because things are going to start dropping in your lap. I have a client that’s about to close on her first multi-family deal, taken about two years to do this. It’s a seven million dollar property, it is beautiful, it’s a great property. And I’ll tell you, she’s already got two other deals lined up right behind it because once you get that first deal done, it gets easier after that point.
Mike: Yeah. I assume it’ll be the same in multi-family as single-family, where I’m from, but a lot of your success depends on your confidence because once you feel comfortable and you get confident, then things just start to come to you.
Charles: That’s actually one of the things that I teach my students is that listen, you have nothing to be worried about anymore, I’ve got your back. Let’s get out there and find the deals, if you’re afraid to speak to the broker, let’s get on a conference call, the three of us will talk together and we’ll talk to the guy and we’ll take you through the process. Yeah, that’s one of the biggest things that I offer my clients, is confidence. Yeah, absolutely.
Mike: Charles, we have a couple minutes left here, maybe give us a minute or two on your best advice that you would give people that are new and they want to get started in this and they want to be successful. Or people that have been in it for a while and just not quite seeing the success that they want.
Charles: It really boils down to marketing and when I say that, I scare a lot of people away. But if you want to be that guy who owns a thousand apartment units someday, because so many… it amazes me when I go to my classes and one of the first questions I ask is, “Tell me what your goals are, where do you see yourself in five years?” So many people say, “I want to own a thousand apartment units.”
Okay, great, how do you do that? The answer is you’ve got to get out there and market yourself every single day. People are like, “No, I just want to go out and make offers.” No, no, you’re not going to find those deals that way, you’ve got to get out there and hustle.
That’s how those guys made it. The thing is, you make one good deal and things are going to start dropping in your lap, I guarantee it. Absolutely.
Mike: Yeah. In terms of raising money and finding investors, of course that gets dramatically easier, too, once you have some track record, right?
Charles: I’ve got this client who is doing her first deal, she had to raise, I think, about two and a half million dollars. Pretty scary, huh?
Charles: Believe me, she was scared to death and she finally got through it. She raised the money and now these other two deals that she’s got lined up? She’s already got the financing in place.
Charles: That’s how it operates. But you’ve just got to keep failing forward and falling on your face and getting it done. That’s all it takes, perseverance.
Mike: Yeah. Awesome, Charles, well, hey, thanks for being with us today.
Mike: If folks want to learn more about what you’ve got going on, I know you have some different training programs and boot camps and things like that, where should they go to learn more about what you’ve got going on?
Charles: The thing they can do is go to MultiFamilyInvestingAcademy.com, that’s my educational website and from there you can get to my other websites and from those websites, you’ll get those pop-up boxes where you could put in your email and I’ve got educational courses that you can download and listen to.
But it’s all about, watch my videos, get to know me and I’m very accessible, that’s one of the big differences. I always want to make sure that people know how to get a hold of me and don’t make mistakes because you didn’t call me. The worst thing I ever hear, Mike, is when somebody says, “Oh jeez, I wish I knew you back when
” Aw, please don’t tell me that. I wish I knew me back when, too.
Mike: Yeah, yeah. Awesome, Charles, well, hey, great to see you, thanks for being with us today, I appreciate it.
Charles: My pleasure, always good to see you. You’ve got a great organization there, too, I like working with your people.
Mike: Thank you, thank you, and for those that are listening, thanks for joining us today. Go check out our shows. I never say this, I need to be saying this more often, I probably should say it at the beginning of the show instead of the end, but please go on iTunes and rate us. We actually broke apart our tip show and our interview show and we have a couple new shows coming even. But ratings are really important in the iTunes world for us, so please go rate us and subscribe if you haven’t.
Charles, thanks again for being with us today, appreciate you, my friend.
Charles: Thank you. My pleasure.
Mike: We’ll talk to you soon.
Charles: Okay, you, too.
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