00:01

Welcome to episode 7 of Season 12 of the Growing Empire Show. Today I'm here with my special guest, Mathew Pezon, from Pezon Properties and The Real Estate Lab, and we're going to talk about metrics to gauge your assets performance, as well as planning those exit strategies. So stay tuned.

00:20

Welcome to Growing Empires. Hosted by real estate entrepreneur and trusted investment advisor, Jennifer de Jesus. Growing Empires provides insight to building wealth through passive income producing real estate investments for those who want to build and manage a more profitable real estate portfolio.

00:41

Well, welcome Mat to the Growing Empire Show. I'm so glad that you're here. We're gonna kick off this episode with you sharing a little bit about the work that you're doing with the Real Estate Lab and also personally,

00:50

Yeah, Jen. And thank thanks so much for having me. I just want to say before we get started, I'm super excited to join your podcast. It's been a true pleasure working with you and your team over the years. So thank you so much for all you do for our portfolios and for the community as well. So I just want to say thank you before we start.

01:07

Oh, thank you.

01:09

Yep. So to your question about background, I'm originally from the Lehigh Valley, I went to Lafayette College, and I completed degrees not related to real estate. I did chemical engineering and Spanish degrees. I never intended to get involved in real estate. It just wasn't something that my family or historically, my family had done or that I thought was possible for me. So after I graduated, I went to work for an industrial gases company. And then I did the 401 K type investment planning for the future. Stock market, long term stock market stuff, it was never on my radar to get involved in real estate. And then after three years of working, I took a year off, and I completed a master's degree in 2013. And that opened my eyes to real estate investing through the coursework, and returned to the industrial gas business. As an employee, I worked another eight years as a full time employee and I began investing in real estate on nights and weekends. I'm proud to say actually, that after eight more years, 12 years total in that business, just last month, I finally pivoted from a corporate job into full time real estate. And I also accepted a role working as the executive director of The Real Estate Lab in Allentown. So it's been a fun ride. But that's a little bit of a background about how I got here.

02:21

Wow, that's amazing. And you're very young at that. So to be able to accomplish all that in a very short term is is quite amazing. So thank you. Today, we are going to talk about some of those strategies that you've used in your real estate endeavors to improve those underperforming assets. We're going to talk a little bit about planning an exit strategy. And I've asked Mat to join me to share his wealth of knowledge that he's gained throughout his years of investing. So we're gonna just jump right into some of my questions. So tell us a little bit more about how you actually said, I'm gonna get started investing. How did you dive in? What was the thing that just clicked clicked in your head? It's time to do this. How did you start?

02:59

Yes. So that's a great question. And maybe I can tell a little bit of a story. Sure. So I actually stumbled across real estate investing through my love of the Spanish language and traveling. Which don't seem like they're correlated at all, but bear with me for a moment. So during college, I lived in Spain for six months, and I wanted to turn to Spain after graduation, and I wanted to pursue further education in Spain. I just love the language, the people I love traveling, I didn't have the means to do that. I wasn't very financially savvy. So I sought various scholarships and ways to afford a master's degree. I hadn't even paid off my undergrad yet. I had been working for three years and real estate wasn't even on my mind. But then when I was awarded a Fulbright scholarship, to IE business school, I completed an MBA, I did it all in Spanish, and I got exposed to finance. And, and that's when my eyes really became open to the power of real estate. We barely touched on real estate in that curriculum. It's an MBA curriculum, it's meant for bonds and stocks and, and trading and, but there was a small portion on real estate and real estate finance. And it just it clicked. I think that was in April, and the program was another eight months. And I just knew from that moment that I needed to do real estate. I understood it, it was something tangible. It was something that I can see and touch. And so I just I knew at that moment, I remember where I was and how it just it made so much sense to me. And so it was actually it wasn't even in the United States where I understood that I wanted to be a real estate investor. It was overseas in that coursework. So and from that point on I I knew once I got back to the states that I had to do this, it made so much sense to me and I always had a I was born in the Lehigh Valley I always had a place in my heart and in my mind for renovating the housing stock locally around me just growing up in the area. So I combined those two things and when I got back in 2014 That's when I really got started.

05:01

Wow, that's awesome. So how long have you been investing in total?

05:04

Yep. So yeah, that was a good transition. I bought my first property in 2014. It was a single family home on the east side of Allentown.

05:13

Okay. Tell me a little bit about are you only investing in Allentown? Do you invest in other areas? Tell me how you chose the Lehigh Valley.

05:21

So the Lehigh Valley, as a market, was simple for me because I was it was in my backyard. I was working locally here in the Lehigh Valley. So that was why and then Allentown was, it was a market that at the time, and still is, in many ways a rental market. And I had always wanted my business to be about impacting the community longer term. I wasn't interested in short term profits or flipping to try to get a profit quickly. I had always wanted to be a long term investor and someone who is invested in the community creating value for the community long term. So in Allentown, and in other parts of the valley, that's that's what, that's what owners do. And that's why I chose Allentown. And also, I was living right there, too. At the time. I've since moved to the other side of the valley. But that's why I chose Allentown it was it was, it was just a good market. It is a good market to help families find housing.

06:19

Okay, so besides Allentown where else do you actually own properties now?

06:23

Bethlehem, Easton, basically the Greater Lehigh Valley. I'm looking at some deals on the fringes, the Western Lehigh Valley as well, north. So Lehigh, Northampton, Berks County's potential Schuylkill counties.

06:38

Okay. So how do you buy these properties? Do you buy them cash, you buy them with leverage a little bit of both?

06:45

A little bit of both, but usually with with cash initially, and then looking to refinance. So basically, my company is a direct home buying company, and we help homeowners whose houses don't necessarily fit the traditional listing model. And we help those sellers save on fees and commissions and avoiding costly repairs, and also the parade of buyers through the traditional listing methods. And we give the sellers a firm closing date with little chance of the deal falling through. Or like a traditional buyer could potentially back out, my company doesn't do that. So for those reasons, sellers, get a speedy and efficient sales process with my company on their timeline, not on the buyers. And so for that reason, oftentimes the purchase is in cash, but it doesn't have to be.

07:32

So you're always going direct to seller. In other words, you're not buying stuff on market. Am I correct in saying that?

07:39

That's correct. It's it's rare that that I'm buying properties that are listed on the market, just because I've built relationships with with neighbors, over the years, that I can speak to them directly, just through the various ways that I either reach out or through referrals. So it's almost never through the MLS actually, that I buy.

08:01

Okay, and what made you decide originally, that that was going to be the way that you were going to go to invest?

08:06

I saw the, I was working with a couple of realtors and I just saw how I learned also in business school, I learned that business is a people business. And so I wanted to work directly with the seller. Because I thought that with with fewer levels of different agents or other people between me and the customer, I could serve the customer's needs best by talking to them directly. That doesn't necessarily work for everyone. But I'm a local person, I'm from here. And I want to talk to my neighbors. I happen to like working with people and and meeting others. So especially people that I have an invested interest for the long term next to their property, so why not talk to them? Right. So that was my mentality there.

08:51

This must take you an awful lot of time, if you're doing it yourself. So how much time were you committing initially, when you first got started? I mean, I know. Sure now without the corporate job, right, you can invest full time. But prior to that when you were working how like how much time were you dedicating to this every night?

09:08

Yeah, so it's I'm glad you asked that question. So as a newer father, I thought that I had a lot of time before or, you know, I thought that I thought that I was busy before I should say and now now it's on a different level. So no, it's a good question. It's it's about I was it was a balancing act. I was I was balancing the corporate job with trying to work with sellers trying to meet them. Well, can I meet you at noon on Wednesday? No. What about and so it's about it's about shifting and trying to be flexible while also meeting the person's needs. So and also too, when I was getting started out it was one or two or three houses. And so it was it was more manageable to find a fourth and also take care of those activities. As you know, as things have grown, it's it's not possible to be involved in every repair decision or conversation with with tenant or we're going to transaction buy or sell. So I have, I have gotten myself out of some of those details by using your team and the Empire team to handle the management of the property and then also on selling. So, okay, fantastic. I don't know if that answered your question. But it's, it was initially it was a it wasn't as scalable because I was doing everything myself, it was probably 10 to 20 hours per week, nights and weekends. And now I'm, I'm doing things more efficiently because I've done this for so many more years, but it's also now full time for me.

10:41

Okay, fantastic. So what types of properties are you buying? Other than the ones direct to seller? They single family multifamily, commercial, what what are you buying?

10:54

Good question. All residential, no type of commercial or self storage or anything like that, or mobile homes, manufactured homes, nothing of that nature. Only residential properties. Historically, I'd say up until the last year or two I really specialized in single family homes. But over the last couple of years, I've focused more on multifamily, at least to two units or more. It's basically between two and six units. And I also do still buy single families. But anything really up to six units, anything larger than that I don't really do right now.

11:28

And why was it initially single families? Was it about the a better deal? Or was it like a condensed amount of risk? Well, what made you actually say it's going to be single families, and it's going to be rentals?

11:41

Part of it at the time was just really what I could afford and get financing for. That that was how I was thinking at that time. But as as the business grew and matured, I also saw that I was the single family home. The end buyer for single family home is a family and families and a focus on family has always been important to me. I wanted to my end buyer to be someone who could live there and and a lot of times to their programs to help those families afford homes, a lot of first time homebuyer type programs. And so that was always something that was that resonated with me. So I wanted the end buyer to be a family that would live in the home, whenever it was time to sell the property. So that that was why I started with single families. But now after COVID and other things, I do like the cashflow a little bit more. And I like have the multi families and I like the one roof, one boiler, just one system servicing the needs of multiple families. Because at a certain point, you start to pull your hair out with how many roofs there are leaks. And it becomes you want to maintain a good living condition and living environment for your residents. And so it's a little bit easier at scale in multifamily to provide that good solid living experience that we want for all of our residents.

13:02

Okay, and you said you stay away from commercial, industrial and all those asset classes. Tell me why.

13:10

I, it's a good question. I have just seen and there are a lot of investors that do very well in those spaces. For me, like I said before, it was about investing in the Lehigh Valley improving the housing stock. That was something that was important to me, but also just a more fundamental level is that housing is a basic human need. And I wanted to I wanted to provide that I and I didn't know when my business was starting how difficult COVID was going to be on industrial properties, commercial properties. February of 2020, I almost had a commercial property under contract with two commercial units. And then those were shut down. And so I'm glad for the focus on residential. And that's just my personal investment philosophy. It's not, it's not that it's best for anyone else, or better than any other way. But I just wanted to invest in basic human needs. And I saw a need for the housing stock here in the Lehigh Valley to be improved. So that's why I went after that space.

14:10

Okay, great. So tell me a little bit more about how you actually found these properties.

14:15

So as I started to get into, and we can dig into this, I have been reaching out to my neighbors for the past seven years, directly. A lot of times it's via letter to introduce myself. In the beginning, I was handwriting all of them and saying, hey, you know, I own XYZ property, a couple blocks from you. Just as a point of introduction to introduce myself. I hand wrote, I had handwritten 1000s of letters, which I don't do anymore, but I really wanted to take a personalized approach to reaching out to my neighbors. Now I use a form letter and things but it's it's direct mail. I also have a website. Perhaps we could link it to the show notes. And so neighbors find my website through, just through their own Google searches about selling their house. And then I also do Pay Per Click Activities and other type of online optimization stuff that started over the last six months. And then also referrals. People know, I can think of probably seven or eight referrals off the top of my mind where I worked with the homeowner, they were pleased they had a family member or friend, and they referred me to that person. And then I bought that house too, just because they were so pleased with how the experience went. So it's all those things. It's It's It's SEO, online presence, direct mail, marketing, referrals, relationships, it's all the things

15:41

You had said earlier that this is a people business, do you feel like people skills was the thing that really helped you go from this letter to the actual acquisition stage?

15:52

It's, it's about, so the short answer is yes. And I can explain why. It's about people feeling comfortable, and that you're a trustworthy person that you're not trying to just rip them off or that you're, that you're a real person, that's not some type of scam. So in the beginning, it's you just have to cut through the what are all the doubts, and then you just address those doubts with the person. As an example, oh, thank you so much for responding to my letter, I'm sure you probably get these, you probably think it's a scam. But it's not. I'm actually a real person, you know, I'd love to meet you and talk about your property, and you just address the things that, you know, they're asking, and some people just come out and say it. And it's obvious what they're thinking and other people you have to, you have to just let them know that you understand that they're calling a letter, and who is this person on the other side of the phone. It's, at the end of the day, it's a business, it's about, it's about adding value, creating value for other people solving problems. And so by by helping the other person feel comfortable, you're, you're already getting further than many other people do just by identifying what they're feeling. We're, we like to think that we're all rational, you know, people, but a lot of our inner workings are driven by emotion. And so you need to address those those fears, those insecurities that the other person has, before they're even willing to talk to you. They don't they don't want to know what you're offering for their house. They want to know is this, can I do business with this person? Can I trust this person? So no one's going to sell their house to someone they don't trust. It just doesn't work that way. So it's those are some of the tips and tricks that I think about when I'm talking to someone for the first time. I really tried to put myself in their shoes. It sounds so cliché, but what are they feeling? What are they experiencing here? And how do I, how do I resolve those insecurities?

17:38

The episode will continue in just a moment.

17:41

As an investor, we know it's important to stay on top of market trends and real estate opportunities that add value to your portfolio. We also know that having a trusted source of reliable information to help you stay a step ahead of other investors is critical to your success. If you're interested in having these types of resources, as well as access to me and my team, I invite you to join the Empire Investment Club. A free service that gives you an easier way to make sense of today's and tomorrow's real estate opportunities. As a member of the Empire Investment Club, you'll get access to relevant resources and investment focused experiences such as live interactive webinars, market trend presentations, and investor socials designed to equip you with what you need to succeed. So whether you're an active investor, passive investor, a combination of both or just starting out, the club is where you'll get what you need to build a portfolio you love. To join, just head over to JenniferdeJesus.com, sign up, and we'll see you in the club, where everyone's on a journey to becoming a better investor.

18:40

That's really interesting, because when you think about these mail campaigns, or you know, I think about the, you know, the yard signs of the signs that are stuck to trees, we buy houses, in those flashing neon lights. It, it makes me just and I'm assuming it does to the consumer as well. It just It looks like it's going to be an aggressive sales pitch. So to hear you say that it's not at all about that even though you start out with a mail campaign. It's actually very interesting. It's a very interesting twist to, you know, the general mail campaign.

19:14

Yeah, I mean, I look at it as two different parts. There's the marketing side, which is the attention getting side. It's the it's the grab your attention, there's so much clutter and all of our inboxes and YouTube and social media and all this all this demand on our attention. So you have to as a marketer, you have to get through all that. And you have to quickly help a potential customer see how you are going to solve maybe a problem they do or don't have. That's the marketing side and that's the side that can get a bad rap, so to speak, or give a bad impression. But after that once the person calls then it's about the human side, the understanding what they need, what they want. And another way that I look to defuse any type of, if someone someone they call one of these signs, they think all you know, I can't even trust this person, I think they're gonna, I think they're gonna rip me off. That's another one that I hear. And I try to just, I try to be honest with people in every regard, but I just say, look, I might not be the buyer for your house. And that's okay. Can we have a five minute conversation? And can we just agree that if at the end of the conversation, I'm not the ideal buyer for you? Are you okay with that? Well, of course they are. Because it's just an exploratory conversation. I think after you get through that marketing, that tip of the spear, just to get someone to call, at that point, you can really have a conversation with someone and get to know them and what's going on for them. What is the issue that they have? So that you can work with them to try to solve that issue. And most of the time, I'm not the buyer, for every seller, and that's okay, too. It's okay. And that's how I lead in with these conversations. Because I don't want anyone to feel pressured, or that, that they're being ripped off or, you know, or whatever they might think. Because there's I tried to just defuse all those things on the front end, so that we could just talk person to person.

21:09

Great, that's great tips and tricks that you got there. Actually, this is a great segment too then, you know, of all these people that you're sourcing, right? So you're sourcing all these deals, right? You're doing these mailers at that moment, you haven't yet decided if this is the right house for you. So Right. How do you transition to I got you on the phone, how do you know now it's the right type of investment purchase for you?

21:32

Yeah, so there are, there are a couple more, but there's the three main things that I look at to decide are value, sustainability, and if it's a long term hold. So I'll break those apart. So value, I'm looking for, I'm always looking for an opportunity to create value for a seller and a future resident who will be looking for a great place to live with their family. So as an example, how would I find value and what does that mean? Let's say a house needs a lot of repairs. And let's say that a seller can't or doesn't want to do those repairs, for whatever reason. I would take on that burden for them and handle any cleanouts or anything else that they don't want to do. There could be a myriad of reasons why they don't want to do that. It could be it's too difficult for them family heirlooms, or maybe they have too many belongings, they just don't want to think about it. Maybe they're moving to another area, and it's just too much, or maybe they lost a job or they just need, they can't focus on it right now. So there's a whole bunch of reasons for that. Once those repairs are done, that the house is practically brand new. And you know, because Empire Construction does a lot of turnovers. So that also adds value to the family who's going to be renting that home. It's new finishes, it's a new kitchen, it's new windows, it's new flooring. And compared to many of the other homes in the neighborhood, this is going to be a step above. And so we're going to create value for the family that's going to be living there. So we help the seller deal with things that they don't want to deal with. And property probably couldn't even be sold in a traditional way. Because buyers want the, they want the property done, they want a beautiful, they want it nice. Well, if a seller can't do that, that that opens up an opportunity to create value for that person and then do the repairs so that a family can live in that home and have a nicer home than the rest of the homes. So that's that's how I create value. And that's, that's one of the criteria. The next one is sustainability. And it has to be, the property that I buy has to be set up to be viable for the long term. And what I mean by that is so financially, the rental income needs to more than exceed what the mortgage and operating expenses are in order for me to be able to keep and hold on to the property and repair the property and keep it in that good condition. And then lastly, I mentioned long term hold, I think with at least a five year time horizon for all of the deals that I look to buy. And so I need to look at the area. Is the area a place that I want to be invested in for at least five years? What's What's the neighborhood like? What are the schools like? Are there jobs coming in? Are there jobs leaving? What's going on in that neighborhood? And because I don't look to flip or do anything short term for a quick buck, that's not that's never been my model, I have to think okay, is this an area that I want to be longer term? And I make my decision based on that

24:33

was a great points. Thank you. So in regards to assessing the property, I assume that there is also a really critical financial calculation that you're doing. And you hear all kinds of things right. You hear people talking about the BRRR method, the 1% method, the you know, the ARV method cap rates, what do you use financially to assess? You don't have to give me necessarily all of the keys to the car. So but just curious, what are you using to financially assess the property's viability?

25:06

So, that's a great question. And I look at, I think the way I want to answer that is when I look at properties, I track properties that are sold on the MLS, and I look and see, and then I, I'm always downtown. And then I go look, and I see that a lot of times owners that that pay closer to or even above market value, they're unable to then reinvest in the property. Because they likely overpaid for the property, then they also have cost to exit that property, for selling costs. So they're reluctant to do maintenance. That is not a position I ever, ever want to be in. I take my commitment to the residents that live in my homes very seriously. So in order to provide a an above average, or even an excellent living environment, for the residents in my properties, I need to be at, I need to be below value when I purchased the property and do all of the repairs that the seller wasn't able to do, so that I can afford to maintain that property longer term. So generally, I like to be maybe, it depends, but the way that I look at it is I don't look at a strictly cashflow number. Because that can change over time. We've seen some rent growth recently and things I really look at for the smaller properties, what can the property trade at today? And then I'd like to be maybe as a as a convenience for doing all of the repairs and maintaining a good unit, maybe 10% below that, or maybe in a good case 15% below what the the appraised value is, so that I can ensure that the family that's living there has all the resources that they need to to have a good living experience. So I usually look for the space that I'm in. Now, industrial investors or commercial investors, they're not going to look at it like that. But for small residential, that's how I look at it, because the comps are the value. That's the valuation. So I try to be just under the comps. And then it allows me to take care of that unit long term.

27:04

Okay. And I assume for a general rule of thumb, it's, you're kind of assessing it based on you know, how low can I buy it, plus my renovation costs, I still should not be paying over market at that point. Right? I should be just around market after I add in my capital improvements or renovations? Correct?

27:23

Correct. And I explained that transparently to the seller. Because I tell them, Look, you could probably get a higher offer somewhere else. But I look to take care of the residents longer term, I need that margin. And I one of the conversations I have very regularly with sellers is I can't take the appraised value, subtract the construction costs and make that your offer because there's a lot of risk in construction. There's financing costs, there's refinancing costs, there's all these costs, and I can't, I can't do that. And if it were, if it were viable, I say it nicely. But if it were viable, you as the seller would do it, I can't come in and make those repairs for you. And then so purchase price plus repairs equals appraised value, I can't do that. No one will do that. There's no reason to take that risk. So that's, that's why I explain what the margin is to the sellers. And I say, Look, I need to be able to be incentivized to do this, this, these repairs on your behalf, but also to take care of the property long term, which I said. So that's how I discuss it with sellers, I think it makes sense for them. And a lot of times, they're not interested in doing the repairs anyway. And it's a win win for everyone. And plus, they know that if they list the property, they're going to get low balled by investors, probably worse than me, someone might try to flip it, they're not even invested long term, and then they have to pay realtor commission. So in a lot of cases, it makes sense to work directly with the buyer, they're gonna get an offer right about what they would anyway, they're aware of the condition of their property. And then they don't have to deal with contracts falling through and realtor fees and all these other fees, they just take what they would get and do it simply with me.

29:03

Plus, I imagine the timeframe is shorter, too, right? So they really are in some kind of distressed situation, it would be great to be able to complete it quickly.

29:13

That's correct. That's correct. And so when I explain those things, and a lot of times it's at the kitchen table with a family, and I explain these things to them. And I give them the option, they're they're free to list the property on the market. But a lot of times they they a lot of times they do and a lot of times they don't. It just it just depends on what they want. And like I said it's about that's what business is it's about people. I take a no pressure approach look if there's a better option for you, who you just met me from a letter. Who am I to say that you should do? Something else I just give them the options and then they they can choose so

29:48

It's funny you say at the kitchen table. That reminds me back in the day when we used to present offers to people face to face and then you know technology took over and now there's no human connection anymore. Because, you know, we've got, we've got all kinds of technology. But that's interesting. It reminds me that, yeah. So let's fast forward a little bit. So we talked a lot about how you acquire the properties, decide what properties you want to buy, how you do your analysis, make your final decision. Let's now you've got the property, right? Let's say matter of fact, Let's even say you've got the property. You've done the renovations. Now you've got tenants in there. What are you doing to gauge the performance of the property from this point forward?

30:33

Yep, that's a that's a good question. The I look at what's my. So I'm looking at three things. What's my return on equity, my return on investment and my IRR. So IRR is a little bit more complex, I won't get into that too much, but just know that it exists. The return on equity that I'm looking at, and this is something that I'm looking at, I'd say quarterly, how much equity is in the property. Meaning and when I say equity, what's the appraised value? Or what can I sell the property for, less what the mortgage amount is? That difference is the equity and I look at what's my annual income from this property after all expenses, divided by the net equity in the property. And the reason why that's important is because after six or seven years or eight years, if a property the mortgage has been paid down, and the value has gone up, it might be time to reposition that equity into another property. Some investors want to just pay off their mortgage. That that was never I never really understood that that wasn't my my model. I wanted to take the equity in one property and then go renovate two more. Because my mission is to renovate the Lehigh Valley housing stock, in addition to other things. So if there's equity sitting in one property, that means I'm not doing my job. So I look at my return on equity. I'm also looking at my return on investment. So what was my initial investment in the property and what is the income of the property net after all expenses over divided by that, that net that initial investment? And so that's, that's somewhat of a, the return on equity is a longer term view, return on investment is more right now, or in the first couple of years. And then the IRR I'm just looking at that basically factors in my capex and inflation and the appreciation of the property and all it's the it's basically the full lifecycle Return of the asset. So those are the metrics that I use.

32:44

Thank you for listening to part one of my two part segment with Mathew Pezon. I know you must have gotten a lot out of today's show because Mat is an incredible wealth of knowledge, so please make sure that you stay tuned to our next episode. And until next time, take care.

33:00

For more information about how Jennifer can help you plan, develop and manage a strong real estate investment portfolio visit growingempires.com

Follow up show notes:

www.pezonproperties.com

www.realestatelaballentown.com

Pezon Properties https://www.google.com/maps?cid=5338297514363952134

http://www.youtube.com/@pezonproperties

https://www.facebook.com/profile.php?id=100083406127584

https://www.instagram.com/pezonproperties/

https://biz.yelp.com/login?return_url=%2F%3Ffwp%3Dtrue&utm_medium=y4bweb&utm_source=y4bweb-header&utm_content=login-cta-header-btn&utm_campaign=claim-flow-y4bweb

https://twitter.com/PezonProperties