3 Tiers of Capital Allocation for Multifamily Investors with Joel Florek

Transcript:

Joel Florek  0:00  

But then when you look at the percentage of dollars that you actually get to put in your pocket, you take a small percentage I always tell people of all the revenue that comes in, you know, generally you're only going to put 10% of the gross rents or 20% of the gross rents in your pocket after all expenses. So,

Taylor   0:22  

welcome to passive wealth strategies for busy professionals. Today, our guest is Joel Florek.

Today you are going to learn the three tiers of capital allocation for real estate investors and asset managers. Joel is a very organized guy organized mentally, he's got these things narrowed down. He's got a very clear concept around this. This is a great Listen, if you're looking for a way to think about planning, the business of your investments, the business of your real estate that you're buying. This is a great interview to live into, you can learn a lot from listening to Joel's process, and you know it, just listen to it and steal steal these ideas. These are great ideas. So you're going to really enjoy this one. I enjoyed it. There's quite a bit in there at the end. He's got a he's got a great story. And I hope you enjoy this interview with Joel flooring. Here we go. Joel, thanks for joining us today.

Joel Florek  1:23  

Hey, happy to be here. Taylor.

Taylor   1:25  

Happy to be talking with you. Could you introduce our listeners to yourself, your background and what you do before we get into the topic for today?

Joel Florek  1:35  

Yeah, I'm a multifamily investor from Michigan City, Indiana, where I currently call home originally from Marquette, Michigan, all the way up on the shores of Lake Superior. I started investing in real estate with a small four unit property when I graduated from college house hack that have worked creative financing structures for the deals that I've done since then, I followed up with the 16 unit, three unit and eight unit. 

And most recently, sponsored syndication for a 15 unit townhome portfolio along with was a general partner and 107 unit property that we closed up earlier this summer as well actively working to syndicate larger apartment communities that can support onsite property management.

Taylor   2:30  

Cool, that's a very succinct and full resume. You've got a lot of experience and the topic that we're going to discuss today is the three tier hierarchy of capital allocation in Asset Management now, it's a word soup, but it's a lot of great words a great topic, and I'm excited to dive into this. Can you tell us about why it's important to have such hierarchy before we get into the actual, you know, tiers of the hierarchy.

Joel Florek  3:04  

Yeah, at the end of the day, when we're investing in multifamily real estate, we're not just buying some random piece of dirt and hoping that the stars are going to align, and the assets can appreciate. We're buying a business, and we need to have a plan for the business. And things don't always go to plan. 

So we need to make sure that we have some sort of a plan, a process that we can fall back on, as we are going through the years of execution on on that business. So I kind of put together my own hierarchy for how I always want to think about what I should be spending my dollars on, because ultimately, every year, you're going to be pushing close to your budgets and you're going to be wanting to do more You're going to have to drop certain projects, push them off to the next year. And you need to make sure though, that you're taking care of the most important things. You know what, what, what's your one thing? 

People always say that with goal setting with you know what you're going to spend your time doing? Well, we need to look at our business and say, what's the one thing that we need to write a check for today, or tomorrow for that matter. So that's where I kind of came up with this IRR key so that way I can be more deliberate and clear in why I'm doing things on a day by day or month by month basis.

Taylor   4:39  

Cool. I like that a lot. I mean, I totally agree that probably our first priority or one of our first priorities as business owners, is allocating capital and really making sure we have some kind of algorithm or some way to make decisions and it helps if we Right, that algorithm before we have to start making some of these tough decisions in our business, so let's get into it. Let's start with, you know, the first tier of this three tier hierarchy.

Joel Florek  5:11  

Yeah, first tier is get units rented. So I always like to tell people money solves problems. You got a leaky roof, well just write a check and you can get a contractor to come and replace it for you. If you've got, you know, mechanical systems that are breaking down, ready to check, you can get them replaced. It's really easy your car breaks down. Just go to the dealership by brand new vehicle. write a check. It's easy. 

Well, you can only write so many checks. So the vacant space is the easiest way to be able to capture the most dollars just Tour de property earlier this year. It was a 48 unit property ended up losing our best and final pretty frustrated about that. But in touring the property during my due diligence as we're preparing for best and final, I found out that there were a couple units that were completely vacant down units, as you'll typically hear them referred to missing appliances, flooring in terrible condition, you know, some holes in the walls, and they ended up just becoming storage units for the maintenance manager. And when I asked why didn't they start renting those out? 

The answer that the property manager provided was that the owner didn't have the money available in the budget that year to be able to get those units back online. Well, that year was two years ago, which meant that between those two units they had missed out on about $30,000 in revenue over the last two years. That revenue would go straight to the noi So, ultimately, that's that's the cash in their pocket at the end of the day. So they could have just spent 10 grand bucked up you know went to the bank maybe got a you know a loan, Frankly, pull out a credit card, go spend the money, get those units online, get them rented and get those dollars in vacancies the biggest place that people lose out on dollars?

Taylor   7:31  

Absolutely. Do you think that is more common occurrence maybe in the mom and pop owner type of situation where maybe the owners are retired and they're dependent on that income to, you know, fund their lifestyle, or they've owned the building so long that maybe they've got a little complacent or maybe they haven't kept rents up or what do you think are some of the biggest causes that force people to not act on this and get their vacant units rented?

Joel Florek  7:57  

Yeah, I would say complacency is Certainly a big one. Just, they don't necessarily need it and they look at their vacancy number and they say, oh, we're doing pretty well. We're at 85%, we're at 90%. Well, 90% sounds good. But then when you look at the percentage of dollars that you actually get to put in your pocket, you take a small percentage, I always tell people, of all the revenue that comes in, you know, generally, you're only going to put 10% of the gross rents or 20% of the gross rents in your pocket after all expenses. 

So that 10% vacancy from your top line revenue could end up being a 50% decline in the cash flow that goes in your pocket. But people look at the 90% occupancy and they say, oh, we're doing well as a business owner. When Frankly, you're missing out on quite a bit. I also think that, you know, from my experience of what I've seen, people, again, don't do a very good job of allocating capital over the lifecycle of their assets. And what ends up happening is, all of a sudden their mechanicals start start failing, they get a ton of water heaters and AC units and furnaces that are going down, they've got roofs that have to be replaced, they've got a bad parking lot. 

And then all of a sudden starts to be a situation where then they know they can't rent the units out for as much as they used to be able to. And you know, money continues to get tighter and tighter. So when those units become vague, and they say, Gosh, $5,000 and that's $10,000 or $15,000 to get it back online. I just, I just don't have the money. So you know, we're going to steal a lot is from that unit to move them to another unit, their furnace was bad. So that's no good. But we can also steal the AC and move it over here. 

And basically they strip the unit to now it's $20,000 to get it back online. And then they do it to the next unit and the next unit and then they, you know, end up with 510 15% or more of their units that are getting stripped away and, you know, on rentable down units

Taylor   10:30  

sounds like a rough situation. So, all right, number one, we're gonna we're going to fill our vacancies. We're going to get renters in the units. Number one, what about the second tier of the hierarchy?

Joel Florek  10:43  

Yeah, maximize your ROI. So arguably, you know, the first thing is, obviously, we already talked about filling units, that's probably going to be your best ROI. But there's a lot of projects that you can start taking on whether cleaning up Your landscaping is going to provide better curb appeal and make it easier to rent units. We just did that on our 15 unit that we just acquired in Chesterton, Indiana. 

That was our big value add project, spend 5000 bucks on some fencing and new landscaping beds, and it just makes a big impact when people come up to the property. They feel much better about paying a higher price and they feel that their landlords care about them as renters and they feel more confident in trusting that landlord to be the caretaker of their new home. So that can go a long way.

It might be you know, upgrade your kitchen, you know, do you replace all the cabinets or do you replace the cabinets? That's an important question. You got to look at your boxes are your boxes good enough that you don't have to replace them? I just redid two kitchens. At my second property that I purchased a 16 unit, replacing the cabinets would have cost about probably 1600 dollars between material and labor. rebasing, the cabinets only cost $1,000 between material and labor, and they look phenomenal. They look really good, he honestly can tell. So, again, think about how you can maximize ROI. There's a lot of times you can look at how to be more efficient about designing your units. 

So that way you can do a better job. Another thing that I like to think about is how do you kind of build out a modular unit for that matter? Do you the manual like floor at you know, in these days, floating throughout the entire unit? Or do you try and break it up or maybe the living room has a certain floor? And the kitchen has certain flooring in the entryway has a certain flooring. So if entryway flooring gets damaged really easy. So in the next unit turn, you can just replace that small section of flooring as opposed to having to spend, you know, hundreds or $1,000 more to replace, you know, the entire flooring throughout the unit. So that's another thing I could think of another area mechanicals. 

I the 16 unit I bought the previous owner kind of had a rule of thumb that he would never replace an appliance or a mechanical system until he absolutely have to. So he would just pay for repair after repair after repair after repair. And we ended up with you know, nearly 30 year old water heaters electric water heaters because he just kept replacing the thermostats and the you know the elements in it and all that kind of electrical components. But the problem is they've filled up with a foot of sediment so the lower element was just sitting in sediment and they would go on an annual basis. 

So my basic rule of thumb Was that okay, every time a water heater went out, we simply just replaced it. So that way we knew we had a good water heater and there and hopefully for the next 10 years we shouldn't have any emergency calls on any of those new water heaters.

Taylor   14:32  

Yeah, that's a that's an interesting strategy he had I mean, you're it's going to be a curve going up worried about you know, how many frequently you get hit those issues. And you know, it's funny, you mentioned a lot of these things and right now I'm in the middle of redoing my personal residence to rent it out and move on to the next one. In addition to my multifamily investments, you mentioned two that are on my mind the kitchen remodel and then the kitchen flooring. 

I mean that the cat Are 60 years old, and I've just been painted over and painted over and I think it's probably time to replace all of them. Yep, tile flooring is original as well or near enough as to make no difference and it's got a few cracks needs to be replaced. And I think I'm at that point where rephrasing I don't know whether it's going to work I kind of don't think so even the boxes are fine condition like they're getting pretty old. So this is a near and dear to my heart this conversation but without, we won't go into that any further. What about number three, this third tier of the strategy?

Joel Florek  15:33  

Do you de-risk your asset? So this is the one that I get the most questions on where people say, I don't really understand that one per se. So I've got a couple examples of things that I've done in my properties to de-risk them over the last couple years. My 16 unit, for example, we had a water drainage issue. It never flooded a unit but what happens is when we get big rains, we got all the water from the roof of the building from the parking lot from the roof of our parking structure. 

And because of poor design from our city, and that town where a lot of their water runs off onto our property, and then it all puddles into basically that entrance. And that fills up a basically drainage area retention pond. And then it creeps its way up to a unit and it gets to where basically the person opens their door and they're stepping into a three inch deep puddle. Oh, very scary. So, a couple of things that we just did. This is in the third year of the asset. So did a lot of you know filling units and maximizing ROI type projects. 

And now finally my third year I said okay, now I'm ready to allocate some capital to de risking this asset. So we expanded the retention pond we about basically tripled the volume that that area, you know, could hold for water, which means that we get significantly less flooding into the street, which is great. 

We've only had that happen, I think twice this year where used to happen probably twice a month, which, which is pretty scary. And then the other thing we did is we built basically dugout and emergency overflow that wrapped around the edge of the property. So we dug down about a foot, foot and a half, and then basically rounded out laid new sod in there. 

So if the water ever got so high that it reached the building, the path of least resistance is to basically go into our little overflow and it runs like a river right around the side of the building back into the lake that's that the building sits on so that has happened once since we've done the project. And it worked exactly as designed. Another thing that, you know we have done is we expanded the area that we have for moving snow. So we had some situations where we get some really big winter storms. 

And the snow piles would fill up so much by our entrance that it made it pretty difficult to see around as residents were leaving their car ports. So you might have people coming into the property and coming out of their car ports at the same time. And you know, that was making people pretty nervous. It was making me nervous, obviously, I never want to see anybody have an accident on the property. 

So we expanded the area where we could move snow to a different part of the property, so that way, we move snowbanks to kind of a safer place now. It was also a project that we could get some nice little ROI out of Because, you know, typically I would have to pay once or twice a winter for snow to get removed by a loader. So that way we could clear out our areas and have more room for snow. So kind of, you know, kill two birds with one stone if you will, on that particular project. Some other ideas, you know, you might be cutting down trees, you have dead branches that are hanging, make sure you get there, get those down, preventing any sort of insurance issues that could come up, you might grind down walk walkways, you know, if you have concrete sidewalk that's starting to lift itself up and it becomes a tripping hazard. 

You might want to come in there and you know, with a special machine that can grind down that concrete you have a nice smooth walkway. It's something that in you know HUD regulated properties They're going to debut on on the sheet. And you know, other properties. That's typically something the city's never going to come say anything about. But it could be a potential insurance claim that you might have to make if somebody trips and breaks their arm or something. So,

Taylor   20:16  

yeah, absolutely. I mean, I think you're in a softer sense or softer, return sense. Your residents, your tenants, notice that you're making a lot of these changes, especially year over year, they'll see okay, they ground down this part of the sidewalks. I'm not going to trip here, they'll see, you know that it's safer to drive if you're piling the snow up somewhere else to use both of your examples. And time over time. You know, they'll come to appreciate that you're making changes to the property, particularly if it was previously owned by somebody that wasn't really taking care of it. So yeah, they can hit your return to

Joel Florek  20:54  

Absolutely, absolutely.

Taylor   20:57  

That's great. I like all of these three. That's very helpful. And you also wanted to talk today about goal setting in your life and your real estate investments. Let's touch on that a little bit. I mean, us, you said you started with a quad bright as soon as you can basically start buying real estate. So that's great. I mean, what do you think about this? This goal setting, you know, mindset in your life?

Joel Florek  21:22  

Yeah. I mean, you hear people talk about mindset and goals exhaustively. There's hundreds, probably thousands of books related to the subject. There tends to be some problems, though, that I believe come up with some of the ways that people talk about goal setting. I guess I'll start out with a kind of, you know, general theme that I think works well, but then I like to break up kind of a different component to it. 

So you know, visualize, what do you want your life to look like? You know what are the things that you want to be doing? Where do you want to live? What type of material things do you need or want to be able to achieve? The lifestyle, you know, the things that you like to do. So I love to sail. Right? So I want a sailboat. You know, I'd love a great big, beautiful, expensive racing boat that I can bring all my friends out on. And you know, we can do the ocean racing. And, you know, that'd be fantastic. So there's, there's the part about basically visualizing and designing your life. 

So that way, you can see it, touch it, feel it in your mind, you can taste it, assign a dollar value to that, right. How much is that going to cost you? Then think about a little more critically. You know, do you have to own the private jet? Or could you just use one of those jet share programs so you're only spending 50 grand a year on your airfare 100 grand a year in your airfare versus having to spend 20 million. Tony Robbins does a great little exercise where somebody stands up and says, I have to be a billionaire like that's the only way I can live the lifestyle I want you to know, you wanted a super yacht. 

He wanted a private jet he wanted, you know, have these beautiful vacations and you know, basically Tony Robbins is like, Hey, can you just use a jet share program and you know, rent a jet when you want to fly private? How much you spend per month to is there, you know, 20 grand a month to do that. 10 grand a month, like okay, now you can live that lifestyle. How much are you really going to spend time on the super yacht? 

They got us like, probably three weeks a year, and you're like, Okay, so if you're only gonna spend three weeks a year, how much does it cost? And, you know, super yachts ranged from, like, tiny ones. 50,000 a week up to a million dollars a week or potentially more. But still, so you can say okay, well now you only need To have $250,000 in your budget for your super yacht, you know, desires and basically broke down this guy's expensive, crazy lifestyle. And thinking about a little more critically said, you don't need to be a billionaire. 

You just need to make about a million bucks a year after taxes. So plan on making 2 million bucks a year. What kind of jobs or businesses could you create to do that? And then God make it happen. So I really like the way that Tony Robbins talks about the kind of thinking critically about living this dream life, if you will. 

Here's the problem for most people making $2 million a year when you're might be struggling to you know, feel like you're living paycheck to paycheck your household might be making 30 5070 or even $100,000 2 million bucks could seem total out of reach. Because you know, you're never going to make that in your current job, you've got to totally transform and change your life. So it just becomes this kind of, you know, put up that stuff on your vision board. And it could almost be discouraging from a daily basis. 

So what I like to tell people to do is break down that dream life into three different steps. So maybe that $2 million a year, is there like ultimate dream life? I'll call that level three. Level Two, though, what does that look like? You know, maybe you're not flying a private jet. Maybe you're just flying first class wherever you go. Right? Maybe you're not renting super yacht.

But, you know, maybe you just have a nice boat of your own, that cost you $50,000 a year and that's still a really nice budget. 

So you can You could have a nice 5060 foot, you know, yacht sitting in the Marina and be able to go enjoy it for that budget. So maybe your level two dream life is 250,000 or $500,000 a year that you need to make. And then level one is the closest thing to where you're at. So it might be that currently you have a W two job. And you just you hate working for somebody you want to have the feeling of financial independence and freedom. So it might be how do I replace the income I'm making now?

 By working for myself and making sure that I have the time in my schedule to do some of the things that I love to do. So for me, my dream life level one was making $75,000 a year. It was having about 10 weeks a year of what I like to call flex time where it's It's not necessarily a pure vacation, but it means I can answer emails while I'm sitting at the dock at a you know, sailing regatta I can, you know, answer some phone calls while I'm, you know, on the beach with, you know, with my family down in Florida on a trend. So you might stay with family when it goes someplace I you know get a little creative. 

But for me, I'm living my dream life every day I get to wake up and say I am living my dream life today, right now. And that feels fantastic. It's it's the most empowering feeling I think you can have is to say that you are doing exactly what you want to be doing. Now I want more. Don't get me wrong. I've got level two and three that I'm chasing after right now and I'm working hard every day to do it. But I get to do it with a smile and even when things get tough. I know that I'm where I want to be where I said I was going to be And I did the work and I made it happen. And that gives me the confidence that I can make the next step happen, even if I don't completely know how I'm going to be able to do it.

Taylor   28:13  

Nice. I like that. It's definitely an empowering way to think about things once you hit that first level, and if I can read your mind a little bit, I can tell you like the number three. So we'll take a quick break for our sponsor, and I got three questions for you right after that. All right, Joel, I got three questions for you. Are you ready?

Joel Florek  28:33  

I am.

Taylor   28:35  

All right. First question, what is the best investment that you've ever made?

Joel Florek  28:40  

A lot of people like to say the first investment was the best investment and sure That was great. But I will say that my second deal that I did was a 16 unit property. And the reason why I like to say that was my best investment is because that's when real estate turned from a hobby. To a business for me, with my four unit, I knew that I could pay all the bills with my day job, if everything went wrong, I could fully support it off of my w two income. 

When I bought this 16 unit. That's when the numbers got real and my w two income, couldn't support that. So the only way that I could support the property is to make sure that I filled the units that I raised the rents by you know, doing value add projects that I made sure that, you know, I took care of the property so it would produce, you know, income for me for years to come. I worked out a great creative financing structure to get that deal done. I bought a $685,000 property for only $5,000 down. Cash flowed about 1000 and a half bucks a month for me right away. Now that property does over $3,000 a month for me. So it's it's really been a great asset. I've refight out a bunch of capital. Still cash flow really well so I've been able to use that capital to go buy more deals. So it for me, that was the big turning point where I said, I'm going to do this multi family thing full time.

Taylor   30:18  

Nice. I like that. On the other side of that what is the worst investment that you've ever made the

Joel Florek  30:22  

worst investment so the first unit that I went to go renovate, I was so excited. I you know, I had these visions of making this beautiful unit so I bought granite countertops. I did a really nice job on making this. You know tile floors that floated through the kitchen into the entryway into the bathroom, my tile the whole backsplash of the bath or of the tub stall, the tub surround. And then people came in for showings. 

The first thing that they said was Wow, look at how bright the lights are. Look at the paint. It's you know, it's it's a nice clean paint scheme. It's so bright and here, it's so nice and I'm like look at the thousand dollar countertop right in front of your face. Don't you like that? And, and, frankly, the, the renter demographic who is renting that specific unit. That was not something that they cared about. Sure it was nice, but all they really care about is having a clean unit that looked like their owner took care of it. 

You know, they don't want water leaks. They don't want holes in the walls. I spent $120 on those LED, recessed lights that sat in the ceiling tiles, and that's what they loved. So needless to say, I spent probably a month and a half I did the work myself of an extra work, trying to really go above and beyond and I spent thousands of dollars more than I should have. And now if I ever have any problems in that unit, it's going to cost me a lot more now to fix any of that tile work. So ultimately, I wasted a lot of money. And so thankful I was on the very first unit I did because I learned a lot. And I feel like I have not made that mistake since then.

Taylor   32:32  

Nice. Well, once we hit stop on the record button, I got a few questions for you about that. All right, what's the fed off live? My favorite question of these three is what is the most important lesson that you've learned in investing?

Joel Florek  32:46  

The most important lesson I would say is to make sure that you're very clear about your goals and it goes right back to all the goal setting so Why are you doing what you're going to do? Make sure you really understand it and you understand that, you know, the goals that you're shooting towards are going to actually help you achieve what you want. Because ultimately what we all want is to be able to have, you know, the lifestyle that fits with our own kind of aspirations and, you know, hobbies and family and what have you.

 So, kind of the example, I almost bought a window manufacturing company, had, you know, 1520 employees did almost $2 million in revenue is really low margin business, but it would have still been a good deal for me. The numbers made sense. But when I sat back and thought about what that business would do to my lifestyle, I was really worried and I didn't think that I thought Actually that it would more likely than not bring me away from my goals that I have for what I wanted my lifestyle to look like. So I was, you know, under contract had my money down on the deal. And kind of you know, in the 11th hour, I decided to back out of that contract because I felt that it would hinder the lifestyle that I would have with my family. And I decided to shift my focus and just stick with multifamily, which was doing a great job at the time of getting me closer to that lifestyle. So just make sure you're really clear about, you know, why are you doing what you're doing today?

Taylor   34:41  

Nice. I like that. I like that example. In that decision, the thought process, it really sounds like you did make the right decision for you. And that buying that company really would have negatively impacted your lifestyle toward the you know, away from the direction that you wanted to go. So that's great. Thank you. For everything today, where can people get in touch with you? Where can they learn more about what you've got going on and get in touch?

Joel Florek  35:07  

Yeah. Joel@JFH capital. com is my email you can read JFH capital.com It's my website. Check me out. I'm on Facebook, pretty active. They're pretty active on bigger pockets as well. So feel free to connect and love to chat with anybody. Talk about real estate, talk about life talk about sailing.

Taylor   35:31  

I was thinking, you mentioned sailing but prior to that I've been thinking is that map over his shoulder and nautical map it definitely kind of looks like a nautical

Joel Florek  35:39  

it is. That map is actually one which we used. In college. I used to Captain, a 47 foot catamaran. Take a bunch of my college friends, they would get back like 15 of us would drive 30 hours down to Fort Lauderdale rent this boat. We'd already pack on it, we'd sail across the Gulf Stream about 55 miles over to Bimini island in the Bahamas. 

Do what college kids do, you know, have fun, enjoy life in the Bahamas for the week and then sail back, hop in the car drive 30 hours north, back to the winner at Michigan TAC and that was our that was our spring break for a couple of years in college. So anyways, that that map is of Bimini Island means have had a lot of good memories there. So it always reminds me get what's what's my goal and I want to take my family off on a, you know, cruise around the world someday. 

That's something that my wife and I met through sailing. So I always want to make sure that we keep that close to us even as life gets crazy. We have a little too, you know, to two and a half year old daughter, you know working on growing the business so gotta keep keep focused on what the bigger picture really is.

Taylor   36:56  

That's great. I love that story. That's awesome. I'm glad I asked and it's been a great conversation today. anybody that's interested should definitely reach out the email address. And that link you mentioned could be in the show notes for anybody that missed it or you can certainly rewind and catch that. Once again, thanks for thanks for joining us. Thanks for everything. Perfect. Hey, thank you, Taylor. Been a great conversation to everybody out there. I hope you are enjoying the show. If you are, please leave us a rating and review on iTunes is a very big help. It helps other people learn about the show. If you know anyone that could use a little bit more passive wealth in their lives, please share the show with them and bring them into the fold. I'm sure we can help them out as well. I hope you have a great rest of your day and a great week and we will talk to you on the next one. Bye