Internationally-recognized real estate educator and best-selling author Lance Edwards recently appeared on the Win the Race of Life radio show with Nadine Lajoie.
During their interview, Lance discussed how he got his start in real estate, including investing in small apartments and multi-family properties, and how would-be entrepreneurs can jump in without fear.
Listen to the full interview here:
Nadine Lajoie: Lance, how did you start and what brought you into real estate?
Lance Edwards: I got started looking at real estate years ago because I was in a corporate company like many people, and I wasn’t happy with the way things were going there, and I wanted a back-up plan—a Plan B—for me and my young family. I discovered real estate, and my first training was on houses.
But, I was very fortunate my very first trainer on houses told me, ‘Lance, I made a lot of money in real estate doing houses, but I realized in order to meet my financial goals I needed to shift to multi-family. Multi-family provides bigger numbers in a shorter time period.’ And that made all the sense in the world to me, Nadine, so when I came on my very first training on houses, I actually came out to get started in small apartments.
My very first real estate deal of any kind was a four-plex, a small apartment, I did it with none of my own cash, none of my own credit. That was my first deal to get me started, and that’s the most critical deal in our real estate journey is our first deal. From there, I just started ramping up into larger and larger properties. Within three years of that start, I was retired. I left my job of 20 years and focused on real estate full time.
N.L.: So you were in a corporate job, and you started real estate on the side and finally at some point was able to get away from that job?
L.E.: That’s exactly right. There was a point when my real estate business was doing so well part-time, that my corporate job was kind of holding me back. I was doing well in the corporate job, but I just wanted to go focus on something with a higher unlimited upside, and it was all mine—I had total control, total freedom in everything I chose. I left corporate America so I could have my own company, and be my own boss.
N.L.: You said there are three limiting beliefs that keep people from investing in apartments?
L.E.: This is what I discovered for myself, and through my students. I’ve been doing real estate since 2002, and I have been training others how to do it since 2007, and one of the things that attracted me to apartments was there is less competition than other parts of real estate.
There are three limiting beliefs, as you mentioned, that keep people out. Let me bust those up for everyone right now. Anyone who is listening right now is equally qualified to start in small apartments.
One of the first limiting beliefs is people believe they have to graduate from houses into apartments. Well, you don’t, you can just decide to get started in apartments just like I did. If you are already doing houses right now, keep doing houses, but add apartments to create another profit center for your business. No matter where you are, you are already qualified to do apartments.
A second limiting belief that keeps people from getting started is they are looking at apartment deals, and they say, ‘These are bigger ticket items, and I don’t have the financial resources to do these.’ You won’t be using your own financial resource, you won’t be using your own cash, you won’t be using your own credit. It’s all about finding the right deals, and find the investors and buyers for these deals, and knowing how to matchmake them.
The third limiting belief that keeps people out of apartments is when people say, ‘I don’t want to deal with tenants and toilets.’ Well guess what? Neither do I! I haven’t met anyone yet who wants to, either. You will be hiring management companies, professional management companies, to deal with those tenants and toilets, and you will be managing the managers.
Those are the three limiting beliefs, they are myths, and as you can see, anyone can be qualified to get started in small apartments right now.
N.L.: Can you tell us different stories on how to keep your houses, and how to keep your numbers. A lot of people become emotional about these things.
L.E.: First of all, we are in the world of commercial, and so there is no emotions. It is all based upon the numbers. By that, what I mean is, we evaluate apartment deals across the country sight unseen. We make offers on real estate sight unseen, because it is based on the property’s financials.
The simplest way to explain this is when it comes to a commercial income-producing property, the value of an income-producing property is a function of the income. The higher the income, the higher the value, and vice versa. So, we just need to calculate the net operating income (NOI) to find out what the value is. Then we calculate something called the cap rate—the capitalization rate—and that is simply the net operating income divided by its price. And we evaluate deals based upon the cap rate. It’s very simple math, it’s a very simple formula.
Whether it’s five units or 500 units, it’s the same formula. So, we can evaluate deals and make our offers based upon the math—not the emotion!—but, just math. It allows us to go through lots of deals and make formulaic offers before we even see the properties. It’s a very predictable business, that’s why everyone is going to love commercial.
N.L.: A lot of people are afraid of the numbers that they are something they are not comfortable with. What are different ways to overcome that fear?
L.E.: A lot of these extra zeroes are sometimes intimidating for people because there are bigger checks being made in these deals. That’s why we stick to the numbers. Stick to the numbers. Everything we do is make our analysis based upon the numbers. We found out what the net operating income is, we found out what the cap rate is going to be for this property, and certain parameters we stay within in order to make our offer. Then we simply don’t deviate from that.
It is a very non-emotional business. We make the offers, and then we see who is going to respond to that. I will tell you, in any offers we make, we always give three options to every offer we make to a seller, and two of them always includes owner-financing, so there won’t even be a bank involved in the process.
We and my office and my students can reply upon the math, and the system to find the best deals for us.
N.L.: How can real estate improve your life?
L.E.: I think our mindset and how we approach everything is 70 percent of success. Our mindset is the ability to take action despite fear, the ability to take action despite obstacles, and that’s a lot of what it takes to become an entrepreneur.
I will tell you what inspired me to get started in real estate while I was in my job in corporate America for 15 or 17 years, I saw my job was at risk. Not for anything I did, but my job, my financial security, my family’s financial security was at risk because of the bad decisions of the people running the company I was working for. That was what inspired me to find a back-up plan. I needed to take care of my family, and that is what led me to find apartments as part of that back-up plan.
One of the beauties of being an entrepreneur is we have control. We choose how we spend our time, we choose how to spend our brain power, it is all under our control. Anytime I have a low point, I ask, ‘What am I going to make happen to accommodate this?’ That is the beauty of being a real estate entrepreneur. We have total control.
N.L.: In your new book, How to Make Big Money in Small Apartments, you state that real estate entrepreneurs are just in the marketing business. What do you mean by that?
L.E.: In that book, one of the core things I point out is we are not in the real estate, we are in the marketing business. If our phones are not ringing, it is not a business, it is a hobby. We have an incredible simple business model, because we are always marketing for two things: deals and dollars.
Deals means I need to find motivated sellers, to find properties I can put under contract; marketing for dollars means if I want to sell a piece of real estate, I need to find a buyer. If I want to hold onto a piece of real estate, marketing for dollars means I need to find a private investor. No matter what, I am always finding deals, and I am marketing for dollars—and we simply matchmake.
As soon as you are able to wrap your mind around that, it has nothing to do with your money or your resources or your cash or your credit. It’s about your ability to find the deals, find the dollars, matchmake and bring those together.
N.L.: What is one of the biggest deals you have done with your students?
L.E.: Two of my students had no prior experience, had been laid off after 25 years from their respective company, and in the first ten months [of working with me], they purchased four projects for $6 million using none of their own cash, none of their own credit, and later on they found a deal—a 294-unit apartment complex, an $11 million project. But, they started from dead scratch, with no experience. Talk about mindset, Nadine! They just chose to play big and the chose to play big up front.
N.L.: What strategies can people use to get into small apartments?
L.E.: You can wholesale small apartments just as you do homes. Wholesaling means you find a small apartment, you put it under contract to purchase, and you find a buyer for these apartments and sell your contract. It’s called ‘Flipping the Paper.’
You are simply assigning your contract to someone else. They go through the closing, they buy the property, and you get paid a very handsome assignment fee, typically $10,000 or more. It’s going to be a five-figure check. The title company will collect it for you, and there is no real estate license required.
Another way, if you want to buy and hold for passive income, if you want to start accumulating apartments for mailbox money coming in, apartments were made to be cash-flow vehicles. You simply start finding the apartments, analyzing the numbers like we teach, get them on a contract to purchase, then you go raise your private investor using a formula I teach in the book.
You’re going to hire a managing company to watch the property for you, you’re going to manage the manager, and you enjoy passive income.
Finally, if you are in for rehabs, buying distressed small apartments—properties you can buy at a discount where the occupancy is down, the rents haven’t been raised in a long time—and sprucing them up, increasing their curb appeal, it has a drastic effect of raising the value of these properties. You can then turn around a sell these properties or refinance them to pull out hundreds of thousands of dollars, if not millions, on these projects.
N.L.: How do you find your deals and how do you find your investors?
L.E.: In the book, there are three primary methods I teach. First, there are websites, like LoopNet and MLS, but you go on the website and it is just a matter of running the numbers and cherrypick the deals that pass the numbers test.
Residential brokers and realtors can be identified that could send you a “pocket listing” when you build relationships with them, which I talk about in the book. One of my 18-year-old students used a script that we teach to contact brokers, and made $30,000 on their first apartment deal this way.
Finally, a third way to generate your deal flow, is direct mail and postcards you send to apartment owners to see if they are interested in selling. You work the relationship with them, and make them an offer to purchase. No outbound calls, it’s all inbound—they will be calling you!
When it comes to finding buyers, you want to wholesale your property, it is the reverse of your deal flow. The same website you found the property is where you can advertise it for sale. You can advertise your property on MLS for a flat fee without a real estate license. Craigslist is a great way to sell small apartments.
The single largest buying group for small apartments are single-family home owners. The same place you can find sellers of small apartments you can find buyers for the same small apartments.