00:01

Welcome to Episode 8 of Season 12 of the Growing Empire Show. Today I am back with my special guest Mathew Pezon and we're going to talk about metrics to gauge your assets performance - deciding when to sell or refinance and scale. So please 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

So if a property is not performing, what could be some of the reasons that that would happen?

00:47

Yep. So that's, that's a really good question. I break that down into two categories. So why an asset underperforms? It's either a property issue or people issue. So I'll elaborate on both of those. When it's a property issue. And I might speak to properties that I would look to purchase, in this case when I talk about underperforming assets. But it it thankfully, this hasn't happened to me yet. But deferred maintenance, right. So it's a property issue, it's deferred maintenance, repairs aren't getting done, there’re sewer backups. It's a mess, right. And it's leading to it's it's a family that lives there. And it's leading to a very negative living experience for that family. And property issues. Also increased vacancy costs when families move more people don't want to live in an apartment with leaks, leaking roofs, and plumbing issues and everything else. So that's, that's a, that's a property issue. That's the first type of underperformance for an asset. The second type, and we can talk about how we fix those. But the second type of issue is a people issue. And a lot of times, this is on the seller side. Again, where the seller, maybe allowed negative or harmful or potentially even illegal activities to be occurring at their property. So sometimes it's not disclosed to the buyer. And that's happened to me. That's, it's it's a problem. And then families that have children, or that they value safety or quiet living environment. Now, their living environment is affected by troublesome activities nearby. And that's not an issue that we want to have. And that's the type of community that we want to foster. So those are the types of underperforming assets are those are the causes. Did you want to talk about solutions? Or was that a later question?

02:42

I do want to talk about solutions, right? So you know, I always say when just it's very generic. But you know, when you're trying to get an asset to perform those two things, you got to impact the income and the expenses, right? So you've got to figure out how you're going to increase the income. And you're going to have to figure out how you're going to decrease the expenses at the same time. Yeah. Because if you are, if your expenses are increasing, just the same way your income is, you're still not making any more profit. So yeah, let's talk a little bit about the factors that, you know, cause these things to happen. The expenses, the deferred maintenance, and what you would do about those things, if you had them in your buildings,

03:20

right, yep. That's, that's great. That's, that's where I was going with my response as well. Yeah, I mean, I think you hit the nail on the head there. It's about increasing income and decreasing expenses. So on the property side, I said, there were two causes of underperformance property issues and people issues. On the property side, it's purchasing or acquiring a property so that you can not have deferred maintenance. You can get the repairs done. You have to you have to purchase the property so that those those issues can get resolved. And not only is deferred maintenance or repairs, ongoing repairs and expense. But typically, you also aren't getting more income for those properties, because their plumbing issues that the kitchens dated. No, the roof is older, the paint isn't fresh and clean, the trim isn't nice. The hallway isn't nice approaching the property, the facade everything, nothing is nice. So when you take care of the property, and you do those repair things, and the deferred maintenance things, and you resolve those things, because you're thinking with a long term mentality, not what am I getting for rent this month, that type of thinking leads to short term behaviors and decisions, which leads to less or profit in the long term. So when you resolve the property issues, typically then you're adding more. Again, it's business, it's about value, it's about people, you're adding more value to a family because now they don't have to worry about a roof. They don't have to worry about a data kitchen. They don't have to worry about windows not working. And therefore compared to the other property in the market, you are able to ask a higher price for your product because it's a premium product. We see companies do this all the time when they're offering a higher tier product. But they're also able to charge more for that product. And people want it because it's a better product. So when you do the right things for the property, the rents adjust upward. Also, you reduce your expenses, because now you have a new kitchen. So you're not replacing the faucets, you're not you have a new roof, etc. So when you do the right things up front, it makes all the headaches go away for everyone, and it increases your long term profit. So that was on the property side. I hope that answers your question on what do I do to increase income and reduce expenses. On the people side, causing underperformance issues, this is about reducing your vacancy. Because if there's an issue where a resident is causing problems for the rest of the community, then people leave because they don't want to be associated with that type of behavior with their family nearby and their children. So if you resolve the smaller problem relative to the larger community, people want to stay, and they don't want to leave, they don't want to go live somewhere else. Because they can live in peace right here. And that's the people at the end of the day, people want a safe, affordable, functional house that they can live and live their life in. And if they're having to constantly get in touch with the landlord, something's wrong. And we don't want that we want this to be we want this to be a seamless process for everyone. It's easier for the manager, it's easier for the resident, and it adds value to them. So if if the people issue meaning, and I mentioned some of the causes of that in my earlier response, but if there's illegal activity, loud music, constant problems at a unit that needs to be addressed with so that everyone else can have a good living environment that reduces your vacancy costs. That increases your profit by increasing your income and lowering your your expenses. And then you don't have all the turnovers and the churn and the finder's fees for for placing another resident and it can spiral quickly, if you're not doing what you need to do to make the community a better place.

06:58

So when you're buying these properties, are they always vacant? Or are they sometimes occupied? And how does your How does your plan change?

07:08

Yeah, that's a great question. It really depends. It's all over the map I work with, with people that are living in the properties that I have a property under contract right now where there's a dispute between neighbors, and they happen to be family members, and she just wants to leave. So um, I'm flexible with her to meet her needs of okay, when can she go and where she moving. And so that one's owner occupied. There are other ones where it's just an investment building and the landlord hasn't gone in five years. They don't care. And they barely even know who's living there. Right. So it's and then that that type of calculus has to be factored into, okay, what problem am I inheriting? What problem am I solving for you? And how do I, how am I going to deal with this problem? Right, so right? It's everything from an investment property to an owner occupant. And anywhere between.

08:05

Okay, how often do you review the health of your portfolio? Is this quarterly annually? More often? Less often?

08:12

Yeah. I mean, there's different types of health. Like there's, there's like, what foods am I eating today? Versus am I exercising every day for the long term? Right? And am I measuring my long term? Like, what's my annual checkup? And then what's my multi year checkup? Right, so for my, for my operational health, I meet weekly with my account manager from from Empire, Christina, Christina is fantastic on the ball love working with Christina. And so operational health, that's the type of thing of okay, what repairs do we have? What certificates of occupancy are we working on? What permits are open? Why are they open? You know, what, what do we need to do for retention? Because we want our residents to stay and be happy. So how are we managing through those retention issues and getting folks to stay? Because we want them to stay. But do they want to stay? So those are operational issues? That's weekly. Monthly, I'm looking at receivables and owner statements. So this is if something wasn't urgent enough to come up weekly. I'll look at the financial recording and repairs and other things that went on on a monthly basis and also receivables I'm looking at and what's the plan for those receivables? Are we doing the payment plan? Are we doing something else? So and then on a quarterly basis, I'm reviewing which properties might be candidates to look to sell. Um, as I mentioned, I've been purchasing since 2014. So I'm just at that that stage after you know, eight years of grind, with that it's okay, well, maybe there's some assets where it might make sense to sell them and put them back into the hands of either an owner occupant or someone else that wants to operate that property for the reasons that I said before. So I'm looking at that quarterly. So yeah, and then, annually we have our discussion So we talk strategy, you know what. And annually I would say, Okay, well, what am I still interested in the one to six family space and why? Is that still a core part of the company's mission or things growing and evolving and changing? I mentioned focusing more on single families, but then I ran into a lot of maintenance, just massive amounts of maintenance on different properties, and I shifted a little bit more to the smaller, multifamily 2, 3, 4 units. So that annually is a strategy. You know, where's the business going? What are the goals, and that's also a family decision. You know, I talk with my wife, I talk with our, with the Empire team on Steel City team and really talk with our advisors. You know, what, where should we be going with this business? Why, you know, what's changing in the market? How do we shift? So that's, those are yeah, that's, that's weekly, monthly, quarterly and annually.

10:53

Yep. Wow, that's amazing. Actually, I really appreciate the breakdown. Because, you know, sometimes I think people don't even know what they're looking for, to really analyze things. And you had said something really critical, and forgive me, because I won't say this as eloquently as you did. But essentially, you were saying, you know, you can't you can't ever look at this short term, right? It's not just about how much money are you collecting. Right? It's about how much money you're collecting. And how much money are you spending? And are you making the right decisions about the things that you need to do, including those deferred maintenance items, so that you can have a healthy outlook for the future. So that was really, really critical and really key. So what do you think has been the key factor in you scaling as quickly as you as you have?

11:41

So I bring this back to, to business and what is the purpose of business, and that's to add value to your community. And so very simply, if, if you're not adding value to a seller and a family, you're not going to scale because you're doing a bad job. Right. So the key to scaling is to help people. Add value. And you're not going to do that by skimping on repairs and doing a core job. So and you're not going to do that by getting in over your head. And paying too much for something that later now is unsustainable. It goes back to the three principles that I mentioned before. You have to think long term and sustainably and you have to add value to your community and your residents. So that's, that's the high level kind of philosophical answer, I guess. But I want to bring I want to break this down very tactically, for your listeners. Sure. Before you add value to your community, because that sounds great. But what does that actually mean? You have to look inwardly first, it's kind of the everyone always says this, but you have to put on your own oxygen mask on the plane before you put on your neighbors, right? So you know, so you have to look inwardly. So very simply, is my credit score good? Do I have, does my income exceed my personal expenses? Because how will it that happen for rental property if you're not doing it for yourself? Sure. Do I have income from a job or investments so that I'm able to get financing? Because generally, financing is needed to purchase real estate. Do I have access to capital? So whether that's my own capital, a bank's capital, refinance capital of business partners, or family members, colleagues, do I have access to capital? So it's, those are just some things. But first, to scale, it's inward facing. Everyone loves to see the outward stuff, and oh, growing a business and look at all that outward success. But it really starts internally. It starts with how you think. What's your attitude? How, what's your mentality? What's your mentality around wealth around money, it's, and it sounds a little bit philosophical or whatever. But it's true, because you have to look inwardly before you look outwardly, and you have to conquer your own personal finances, and your own investments before you you look to take on the responsibility of providing housing for another family. It's a big responsibility, and it shouldn't be taken lightly. So back, so in terms of scaling, after you look internally, then you can start to look externally. So that's when we get into the things that we talked about, about adding value to your community through asking questions like, Who can I help? And this is, okay, so single families, this is multifamily. So am I helping as an owner, occupant seller or an investor? So who can I help? Who has a house that they can't manage or deal with? But they can't sell in a traditional way for whatever reason. Whether they're going through something on the personal side, or there are property issues, or they're moving or whatever. So at that point, that's when you can start looking externally to buy properties that are sustainable for the long term, long term thinking sustainability, and that's when you can start to scale. But behind it, I'd say 80% plus of scaling is, is you, the person. And who are you? What type of business do you do? What type of level of integrity do you have? It's very difficult to scale a business and take care of many, many, many families, if if you aren't putting their needs first, and if you're if you don't have integrity as an operator. So you have to start inward first and then look outward. Everyone loves to focus on the deal, but 80 90% of what happens to scale is before the deal, right? It's it's your profile. It's your access to, to education, to capital, how you view the world, your lens, your your your personal investment philosophy, and then much much later as the deal. Sure.

15:48

The episode will continue in just a moment.

15:52

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.

16:51

And I assume since you've been investing since 2014, and now into today, that you've seen shifts in the market, right? So I assume that you've had properties that made more sense to refinance versus sell. How did you make those decisions of which to do? How do you read what you know, should you refinance, pull off the equity reinvested? Should you sell it? How are you doing that?

17:16

Yep. So the trigger that goes off for me to start thinking about that is if leverage gets below 60%. So again, meaning if the if the property is worth $100,000, and the mortgage is now $60,000, that's when I start thinking about what do I do with this property? That that that spread, that equity, isn't doing anything really to affect the value of the property. It's kind of just sitting there. So that's when I start to look at what to do with that equity. In terms of selling versus refinancing, if if I would sell a property if and we mentioned annual planning, if the annual plan is going in one direction and that property is going in another direction, then I would look to sell that property. I can see what that is for myself. But some some investors have different criteria about where they want their their business to go. So it's not going to be the same for every person. But I would just say that if if the property isn't aligning with where the business is going longer term, and again, it's already been six, seven years at this point, then I would sell it. But if I want to keep it, because it's a core asset still aligned with the direction of the business, then I would look to refinance that property and usually up to 80% leverage. And I would do a cash out refinance, and then go do the next, make the next acquisition or do the next project.

18:42

Okay. Are there any other factors that you use in determining to sell a property besides the overall portfolio? You know, does it fit component?

18:51

Yes, yes, there is one of the thing. So I look at what the cash flow of the property is on an annualized basis. And I say, how many years would it take me of that cash flow to achieve the net equity in the property? And if it's more than 10 years of cashflow, I would look to just accelerate that cash flow now and sell it. So as an example, if there's $150,000 house that a family could move into as their primary residence, and let's say the mortgage is $90,000. And my annual cash flow is is $5,000, let's just say as a rental. So that's, that's $60,000 of equity, that's 150 minus 90, and it's earning $5,000 of profit annually. So that will be 12 years of cashflow to get the $60,000 of equity. So in that case, I would love to sell that property because it would take 12 years in order to recoup the equivalent annualized cash flows. So that and we've seen that over the last few years where the value of the single family homes has increased to a point such that the highest and best use of that asset is no longer as a rental but as a home for a family to move into and be their primary residence. That's, and as I just did the math right there, and I think it makes a lot of sense then to sell to that family. Because they are going to have more utility for the property than me. Again, it's all about value in business, who's going to get the most value of the asset? And in this case, it's a family at that point.

20:16

Sure. So what are some of the key ingredients to selling for a profit? So you've now decided you're going to sell a property versus refinance it. What are some of the things that you're looking at prior to you actually saying, hey, it's time to list the property to make sure that you are maximizing your total profit and total equity on that on that investment?

20:35

That's a great question. So profit, at the end of the day is value. And so to maximize your profit, you have to create the maximum value for your customer. It's just business 101. So you have to know your buyer. Is it a family owner occupant? Is it an investor? What matters to that person? Why? So at the end of the day, when you're when you're operating a real estate business, you have to know what your customer wants to be successful. So that's the high level answer, tactically. So if you're looking to maximize the value, you don't want to under improve or over improve a property that you're looking to sell. Because you want to meet the needs of your end buyer. That's the goal. Again, who's my customer, what do they want? So if you over improve a property, you're providing services that an end buyer didn't ask for, they don't want, and they're not willing to pay for. So, you're you're basically spending, you're you're adding no value, but spending your money to add no value. There's no reason for that. Because your customer isn't willing to pay for that value. On the other hand, you can't under improve a house, because then you're going to be letting your customer down. So you're going to, they're going to be at your their customers that want a certain product, and you're not going to be delivering what they want. And that, that's not good either. Because your property is going to sit on the market, and buyers are going to overlook it because you're not providing what they want. So they're just going to move on to the next house or scroll on to the next Zillow listing or whatever, because you didn't improve the house enough. So you can't over improve, you can't under improve. You have to deliver exactly what your customer wants. And that comes back to knowing who your customer is and what drives them.

22:30

Very good feedback. That is really, that's really awesome. I completely, I couldn't agree more to be honest with you. I couldn't agree more. So we're going to be winding down here. But I'd like to talk a little bit more about the Real Estate Lab and what you're actually doing with the Real Estate Lab now. And then I'd like you to share with us, your website, both yours, you know, personally, and then the Real Estate Lab as well and anything else you'd like to share?

22:58

Sure. So the Real Estate Lab is it's a it's a nonprofit based in Allentown that provides opportunities for real estate entrepreneurship. We provide knowledge networks and capital to demographics that have historically for various reasons, been excluded from real estate ownership, and then marginalized and largely kept out of owning rental properties. And so the goal of this program is to give knowledge networks and capital to those people, and help them renovate their own communities and invest in their own communities and become real estate entrepreneurs. When prior, they wouldn't have had those opportunities. And it's a difficult business to get into. And we really peel back the onion, we show exactly what needs to be done to find rental properties that makes sense. Invest in the community, we provide a lot of knowledge but networks. It's also people business, you need to know contractors, you need to you need to know banks, and we open those doors and facilitate those relationships. And then there's, there's there's capital available, what if deals make sense. There's there's the Innovation Fund, which is helped its finance over a million dollars of properties for downtown Allentown participants. And so it's a and then that those funds are then replaced through refinances and rejuvenated for the next cohort. So it's really about helping people that didn't have access to real estate gain access. So I'm the director of the Real Estate Lab and it's something I'm very, very passionate about. And I'm excited to be involved with. And and then on my on the business side for my business. My company is called Pezon Properties. It's www.pezonproperties.com. And we're based in the Lehigh Valley, as I said, and we basically are homebuyers. We work directly with sellers and solve problems and help them meet their needs and we buy properties.

24:55

Well, you are an amazing wealth of knowledge and very educated very experienced. And I certainly, I think it's a breath of fresh air that, you know, not only do you do what you say, but you really mean what you say. You know, when you're talking about giving back to the community and doing right by people and just trying to be the best, the best that you can be every day. So thank you, Mat, so much for all of your information. I'm sure that everybody thoroughly enjoyed our episode. And I appreciate it very much.

25:26

Thanks Jen. It was great being here. And thanks to the Empire team, and everything that you do for our community as well. And it's great working with your team.

25:33

Thank you for listening to this two part segment with my special guests, Mathew Pezon, from Pezon Properties, and the Real Estate Lab. I hope you enjoyed both episodes. And please stay tuned as we're going to talk briefly about what you can expect from Season 13.

25:49

So the theme of season 13 is common investing mistakes that can be avoided. And we are going to talk a whole lot about all the things that people avoid talking about. We're going to put it all out there for you to make sure that you can learn from others mistakes and errors and make sure that you don't make them yourself. We're going to talk about purchase contract strategies and how to avoid buying a bad deal. We're going to talk about life changing real estate lessons that our guests have learned over the years. We're going to talk about the 12 pitfalls of investing, and how to avoid those when you're making your next real estate investment purchase. We're going to talk about the worst investment mistakes you could ever make in hopes that you also don't make those mistakes. We're going to talk about the reality of managing your investment property. And what's your time worth? Does it make sense to hire for management services? And if you're going to do so, how do you plan for that purchase? And make sure that it's an affordable piece of being able to manage your investment property. Because after all, your time is probably more valuable. So we're going to talk about how to make sure when it's the right move, what kind of cost factors you have to think about and how to make sure that when you're buying you're buying right so that you have the flexibility and the opportunity to get professional management for your investment properties. We're going to talk about how to avoid being a bad landlord. And of course, we will have our question and answer segment. So if you haven't already decided that you're going to join us for season 13, please make sure that you do as I'm sure it's going to give you a whole lot of information to help make sure that you can be successful in your real estate endeavors in the future. We will see you in season 13. Take care.

27:40

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

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