Real Estate Investing Mentor Program Creates Passive Income
Dave Dinkel: I’m Dave Dinkel. I’m here today with Raymond Gonzalez. We call him affectionately Ray.
Dave Dinkel: Ray has been in business since before 2006. His background was– you’re like a Mechanical Engineer, Industrial Engineer?
Ray: No, I was Financial Management.
Dave Dinkel: Oh OK with General Electric out of college.
Dave Dinkel: Coincidentally, one of the people who graduated with you is Alex Pardo.
Dave Dinkel: Which has been in the industry for a while and he happens to be a Mentor student, I don’t know if you knew that.
Ray: Yeah, I do.
Dave Dinkel: Yeah. He came to me about four years ago and he said you know, I’m doing a few deals but my spreads are very small and I can’t make a living doing this. So I said, “Well, let’s get you into the system and see if we can’t increase the spread, your profit spreads, and do more deals.” And the next full year, he did 53 REOs closed out. Now that’s an indication of something that’s changed. The market, I say the market changes all the time but at one time, 60% of deals we did were REOs, four or five years ago. That has changed dramatically. If you said to me, “What is it now?” I’m going to say, it’s probably 10% or 15%.
One of the big reasons is both the Short Sales and REOs, the lenders don’t seem to care anymore because of the auction sites, auction.com, Hubzu and so on have been coming up. And they literally are selling those properties to people that have no cognizant awareness of what’s going on in the marketplace. They’ll pay anything for them. The concept is “well it’s got to be an auction therefore I’m getting a great deal” and it’s not true at all. So, those people aren’t around long but it does disrupt normal investors from getting good deals where they would have before.
To come back to you, you did some commercial properties, multi-families.
Dave Dinkel: While you were away at Connecticut, yeah. And it worked out well for you. But you’ve moved back down to South Florida and you started to get into sort of single family and other stuff. In March of 2006, Ray took what we call a Fearless class, now it’s a one-day class from us and since then to now, well we chat about once in two weeks or once a week sometimes.
Dave Dinkel: And you call me about the deals and I check with him every once in a while to get his input on what’s going on in the marketplace. And it has been a great relationship for us. If I said to you right now, “Ray, what’s your split on wholesales versus rehabs and retail properties, what would say that number is?”
Ray: Right now, it’s only about 20% of the business, 80% is buying hold and of that 20% it’s probably, 5% wholesale, 15% wholetail.
Dave Dinkel: OK. Wholetail being lipstick on a pig, buy them wholesale, patch and paint them so they’re salable in the marketplace.
Ray: So they’re presentable.
Dave Dinkel: Presentable, you don’t get full retail but you get very close to full retail.
Dave Dinkel: And the benefit is time and money. You don’t have to carry it as long if you’re paying for the money. While I’m bringing that up, you said 80% as income. Now, you have how many doors, rental doors right now, approximately?
Ray: 60 doors locally.
Dave Dinkel: OK. How much of your own money is in those 60 doors?
Dave Dinkel: OK. I want you to understand that. He owns 60 doors which are rental income properties for him. He has none of his own money in them. So you don’t have many bank loans to do that. They wouldn’t loan you money for all those.
Ray: We recently got a– we got enough scale where we would attract a few local banks and then build a relationship…
Dave Dinkel: Refied
Ray: And then give us a portfolio of refi, of the entire portfolio.
Dave Dinkel: Up until then you borrowed private money.
Dave Dinkel: And what rate were you paying on the private money?
Ray: Our average cost the capital was close to 9%.
Dave Dinkel: Oh OK.
Ray: And now we got it down to 6, 6 and change.
Dave Dinkel: Which is a bottom line profit in your pocket. Bottom line is what…
Ray: The cost capital went down but then we had to pay for flood and wind. So kind of we’re about the same but at least now we have…
Dave Dinkel: Guaranteed financing so to speak.
Ray: Guaranteed financing you know. We have more room to do more deals because they’re hungry to do more deals. They need to lend us more money and kind of, what I realized that these small banks is like it takes so much work for them to do the upfront relationship. But once they get to know you, it’s very easy for them to give you money because they don’t have to do all the stuff again. You know they’re regulated pretty hard.
Dave Dinkel: Let’s talk about the largest profit you had on a deal.
Dave Dinkle: Which was recently.
Dave Dinkel: You found the property by an out of area owner.
Dave Dinkel: Contracted with them. Did you do a patch and paint or did you do a full rehab?
Ray: Patch and paint. We painted the inside, painted the outside, did a roof repair, re-carpeted the place and that’s it.
Dave Dinkel: So was it tile or in carpets in bedroom or…
Ray: No, we’d left the tile where it was, we just did carpet in the bedrooms and the common areas. Left the tile where it was, left the kitchen, left the bathrooms. They were functional. Cleaned it. Put a new hot water heater in. We just fixed what wasn’t working. If the rest is working and it was functional, we left it.
Dave Dinkel: OK. And you’re profit, your net profit on that property?
Dave Dinkel: 187, OK. Now, it wasn’t a million dollar property because…
Dave Dinkel: It was 5 and change.
Ray: It was 510.
Dave Dinkel: 510 when you sold it, OK.
Dave Dinkel: So it’s again, the reason for this is you had a motivated seller.
Dave Dinkel: And he took effectively what became below market value and you took advantage of it, that’s what you need to do. The demise of most new investors is because they think they have motivated sellers. But if they’re talking to you only about price, they’re not motivated. You solved his problem, you’re a problem solver.
Ray: I did.
Dave Dinkel: OK so, let’s go back to it and you have 60 units now. And they’re chugging away and one of the big issues I have that I tell students about is if you’re going to be a landlord, don’t be the landlord. How do you handle 60 units? People paying, not paying, all different times.
Ray: The biggest thing that we’ve done is really transition from the business operator to a business owner. And when I say business operator as opposed kind of you know in the kitchen, cooking, doing the work themselves. And as we transition, it wasn’t an easy transition because you have to learn skills that aren’t necessarily real estate related but business related. So you know drawing up a position contract, for example, drawing up an ad to pull the kind of person that you’re looking for to make sure that their values are in alignment with yours. So it’s almost like a marriage like, right? You’re selecting this person.
And then going about creating systems as best as you can and most of us entrepreneurial with the ADD kicking in you know you kind of want to get it done. But this getting it done attitude will leave you always doing it. So we’ve created systems for everything regarding property management from the lease in to the move in, everything is auto filled. As a matter of fact we may consider looking to sell that product.
Dave Dinkel: Oh.
Ray: But everything is, everything is done in terms of how to market the property, how to screen the tenant. We even have a system like once you get the deposits had a– it’s an Excel type score card and you put in how long they had had their job. Is it– how stable is the employer because what you’re really buying is a stream of income. And then when you look at it like that from a financial perspective, you literally qualify with the two-year leases. So we’re always improving the system to minimize cost and turn over.
So from the management standpoint, these things are humming. If I spend 10 to 15 hours, that’s a lot. 15 hours to be a month where we have an eviction and we have maybe one a year. For the most part, we don’t have those problems. They mostly anticipate it on the front end. When we do have a problem, it’s a tenant that we bought a property with that we inherited. But if we put them in there, they all go to the bank and deposit. I mean there’s a way to make it work. You just have to think of how to do it otherwise you’re going to become a motivated seller yourself.
Dave Dinkel: Yeah. Which is great because that’s– motivated landlords is where we get a lot of deals.
Dave Dinkel: Yeah. And the average lease is about three and a half years that a landlord lasts in a lease cycle and so on.
Ray: I just have a very quick funny story. I was at a property the day before. I had to go home and change. And the landlord that was in Broward, three duplexes. And the landlord and tenant, Dave, it looked like it was a Jerry Springer. The landlord was cussing and spitting and then there was no water in the property. It was a– at one point I said you know, they wouldn’t let me in. So I had to use charm and I kind of get there on by using some charm and I– in the middle of it they were all fighting I raised my hand and I couldn’t find a way to stop them from fighting so I just raised my hand like a school child and all of sudden they started laughing. And then I knew I had them.
Dave Dinkel: Yeah.
Ray: But– and it happens all the time especially in these lower income type neighborhoods with the landlord. I mean this is a craze I’ve never seen. I thought I was going to shoot my way out of there.
Dave Dinkel: What do you think your cap rate is on all the properties? Do you know that?
Ray: Yeah. Our cap rate is anywhere from 13% to 15%. But those are real numbers, so you know I include even, a lot of times they’ll put the capital expenditures like roofs, electricity, they’ll put them on balance sheet. But we’ll go ahead and I’ll actually back that out and put that into the income statement because it is a cost of the operations. So, with these landlords they say they can run a property at 40% you know, 35% to 40% of gross. You’re not going to do that. By the time you pay a property manager, pay taxes, insurance and carry you know and have a real reserve for people moving out and moving in and run it right.
Dave Dinkel: Mm-hmm.
Ray: We’re running them at around 50% of gross.
Dave Dinkel: OK, great. Now, one things that comes back to me is you said when you call me up a long time ago and said to me, “What do you think about using relatives in my business? I’m thinking about hiring.” What did I say?
Ray: Don’t do it.
Dave Dinkel: What did you do?
Ray: I did it.
Dave Dinkel: What happened?
Ray: You know you learn. You know I have this belief you know– that being said, my girlfriend, I call her my wife, we’re not married but she is my wife. You know she works with me in everything that would kind of to get us to here, a lot of it, most of it is her credit you know, getting us so that I know the numbers, right? I know what things cost. Like that was her doing because I would ignore the books. And she got on it and now, we look at the balance sheet and income statement every month. You know the importance of kind of like transitioning from a level one investor which would be kind of someone doing a few deals to actually getting yourself out of is like I can come here in the middle of the day and talk with Dave. I just had lunch with Gus, I was out there looking at property.
Dave Dinkel: Gus is one of our closers.
Ray: One of our… Right.
Dave Dinkel: Yeah.
Ray: So you kind of go on be the entrepreneur and not kind of be doing it all the time. One of the biggest things is you know before we’re doing it, doing it, doing it. And…
Dave Dinkel: And it’s doing it for you kind of works itself into your system. Yeah.
Ray: And you do what you let me had– I still work and then I do the parts that I like. I do the acquisitions side. I go look at new deals. I don’t like talking as others too much so I have, I mean we hired a sales guy and he does that. And I just kind of look at the deals and say, “Hey, you know from a due diligence standpoint and say, does this make sense for the company?” I go raise money. And it helped free up my time to go do these things and create a relationship with the bank now.
So another bank sends me letter saying, “Look, you got a $10 million line with us. Go find something.” You know whereas if you’re busy kind of making ends meet or just doing deals you’ll never kind of build that lifestyle and kind of– we bought a home. I told you we bought a house not too far from here.
Dave Dinkel: Yes. Yeah, very nice one. Did you start in the business with a lot of money?
Ray: No. I started with no money.
Dave Dinkel: Oh!
Dave Dinkel: You mean you can do that?
Ray: Yeah, yeah.
Dave Dinkel: OK.
Ray: So, you just got to get a little more creative. You know money does makes things easier and sometimes you get used to having money there and you kind of think money is a solution so you kind of– you got to have the balance at. Money does makes things easier. At the same time, you know that deal we spoke about where– we spoke about a deal that I did at one point with a seller and she had one house she was going to lose it, poor old lady. And she had an extra lot. And we were able to pay up all her liens, subdivide the lot and it took me like seven months and then I got a reverse mortgage and gave her house back and sold the lot. And she loves me, to this day, I still get Christmas cards. She calls me Jesus. And you know I’m her angel. And I made like, we made like 70 grand on that deal.
Dave Dinkel: Yeah.
Ray: You know the Ray you’re speaking to now would have passed on that deal. It would have just been too many hurdles. But at that time, you know I had to learn and you learn and you know it’s just part of the…
Dave Dinkel: You fail forward.
Ray: Right, you fail forward.
Dave Dinkel: Yeah, we talked about it a lot before you did it. We talked about it the whole time you were doing this especially on the septic tank that was in wrong yard and the wrong lot came up.
Ray: In the other lot.
Ray: We didn’t find that out till later.
Dave Dinkel: Didn’t find it out until you guys started building.
Ray: But sometimes you know like a lot of things you know, David calls it, you call that one dogged persistence.
Dave Dinkel: Yeah.
Ray: I call it you know pit headed, P-I-T. I have a pitbull so I know what it is. They just go at it and they just don’t stop. And the crazy thing is they’ll do the same thing over and over. They would sound like insanity but if you keep doing the same thing with the same intensity and hitting it hard. I know its eventually going to follow your way.
Dave Dinkel: Yeah. More than that but a lot of people say you know if you do the same thing over and over that’s what the definition of insanity is. The reality is most people quit way too soon. That’s the problem with the business. They get frustrated. They have an expectation “I’m going to have an instant result.” And they don’t get an instant result therefore they quit. But you’re right, the more you do it the more easier it becomes, the more professional
Ray: And you get better at doing it. You don’t jump the same way, you can try to get stronger, you have to kind of learn and I think you and I have spoken about this over the phone, I mean where, you know my– and you said, don’t hire a family. One of the biggest challenges I learned is this theory that people can have this instant gratification and instant consumption that goes along with the victim mentality usually. And if you get one of those into your business or into your life and sometimes your spouse, you know it could really, it could really…
Dave Dinkel: Cost you a lot of money..
Ray: Yeah. And you try and fix them. You’re always looking to fix somebody else just to work on yourself.
Dave Dinkel: Hey, you can’t fix other people.
Dave Dinkel: They have to fix themselves. It’s just like dieting. A guy came to me one time, he wanted me to do a multi-level marketing campaign for non smoking. He was a guy that did autopsies. And he’d done over 20,000 and he said to me, “You know, if you open a person that smoked and you squeeze their lungs, it’s like Styrofoam and it doesn’t come back. A normal person’s lung you squeeze it and still comes back.” I said to him, that’s what you need to sell the product. I said, “What’s your experience with people stopped smoking?” He said, “You tell them they’re terminal, in three months they quit. They don’t ever pick up another cigarette. But try and get them for the last 30 years to quit and they won’t quit.” And that’s up to them. it’s a choice. We all have choices.
Ray: You know in life, you get your musts. You know and whatever you make a should you don’t get it, right? This morning it wasn’t a should for me to get up and go to the gym even though I had other appointments and stuff, it was a must. So I got up at 5:00 and went to the gym. And you kind of, in life, you get what you tolerate.
Dave Dinkel: Yeah, yeah.
Ray: You know if you tolerate– if it’s OK for you not to have a six-pack, that’s OK for you. And if it’s not OK for you and this is your standard and this is how you live your life, you’re going to have it.
Dave Dinkel: So many people get comfortable but not so uncomfortable they won’t make massive change in their lives. They just stay stuck in a rut.
Ray: Like no man’s land.
Dave Dinkel: Yeah. If you had to say anything at somebody new that might be coming into the business, what would you say to them?
Ray: You know, set your goals, set your visions and make sure that most importantly you know why you want it and that you’re driven by it. And that you understand– that you understand what drives you. And like what drives me is pain so I’ll do more of to avoid pain and I think that’s true for most than they will to get pleasure. And also you know so pain is not the only way. Find an environment or a peer group that’s playing like two higher levels. So for me, it was Dave at that time. He wasn’t really looking at mentoring anyone so I got with Nan. I figured if I get with Nan…
Dave Dinkel: That’s right. As a matter of fact, to tell that story briefly. You asked me to mentor you and I said no for a long time because I wasn’t doing it.
Dave Dinkel: And what you decided…
Ray: And not only he wasn’t going to do it. He was adamant about not doing it. I mean he was like, “This guy is going to take up my whole time. He’s not going to pick up quickly enough. I’m going to have to repeat myself.” And this is where the pitbull came in, right? You got to keep at it. And I said to myself not consciously but subconsciously I said I mean yeah, subconsciously, I wasn’t conscious what I was doing. I said this is not working. And then I went after Nan. And then I didn’t like go after Nan like on purpose it was just she was more available. And I became genuinely interested in Nan and she became genuinely interested in me and then what I realized is that Dave doesn’t control Dave. Right? Nan controls Dave. And I said, if I get to the master, she’ll put enough pain on him where you know. And then over time, he started taking my calls. And then he started being nicer, you know?
Dave Dinkel: And the rest is history. [Laughter]
Ray: Right. And then he was like, OK oh boy, he can actually listen. He does what I want him to do and he’s picking up things quickly and…
Dave Dinkel: And it has been frankly an extraordinary experience for me to work with you. You’ve really done super and you continue to do so. And thank you very much for coming today.
Ray: Appreciate it.
Dave Dinkel: Thank you guys.
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