May 15, 2022
Real estate has many moving parts and it takes a lot to make sure everything’s going smoothly. In this episode, Justin Brennan of The Brennan Pohle Group joins us to discuss how he and his team are running a tight ship and successfully scaling their business. He goes in-depth on doing proper due diligence and managing worksites and contractors.
[00:01 - 05:59] Don’t Go Big Too Soon
- Justin’s background and his team’s measured approach to investing
- Setting up operations and logistics in advance
- Careful due diligence before doing deals
[06:00 - 14:29] Properly Managing Contractors
- Spending time talking to contractors and visiting their worksites
- Understanding their software, billing, and supply chain
- The importance of having a foreman on site
- Don’t hire cheap contractors
- Considerations before paying contractors in advance
[14:30 - 15:22] Closing Segment
- Reach out to Justin!
- Links Below
- Final Words
Tweetable Quotes
“Don't go big too soon despite what you know. Some people say you're going to make mistakes, just don't make big ones.” - Justin Brennan
“Nobody's going to watch your money like you're going to watch your money. You can't expect people to watch your money like you're going to watch it because they're not getting paid your money.” - Justin Brennan
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Connect with Justin! Head over to The Brennan Pohle Group website or follow him on LinkedIn.
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I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns.
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Email me → sam@brickeninvestmentgroup.com
Want to read the full show notes of the episode? Check it out below:
Justin Brennan 00:00
Nobody's gonna watch your money like you're gonna watch your money and you can't expect people to watch your money like you're gonna watch it. Because they're not getting paid your money. So for you to say, Oh, I expect them to like work harder do this well, okay, well then give them a piece of the equity and maybe they will. But yeah, no one's gonna work the way you're gonna work. No one's gonna protect your money or your investors' money the way that you are either.
Intro 00:18
Welcome to the How to Scale Commercial Real Estate Show. Whether you are an active or passive investor, we'll teach you how to scale your real estate investing business into something big.
Sam Wilson 00:30
Justin Brennan is the CEO and multifamily investor of the Brennan Pohle Group. They own over 500 units. He's also a real estate broker. Justin, welcome to the show.
Justin Brennan 00:39
Thanks for having me on, man. I appreciate it.
Sam Wilson 00:41
Hey, man, the pleasure is mine. There's three questions I ask every guest who comes on the show: in 90 seconds or less, can you tell me where did you start? Where are you now? How did you get there?
Justin Brennan 00:50
Well, we started in 2010 was the first investment we bought in that was $100,000 condo in the midst of the financial crisis in Murrieta, California, of all places, which is actually the heart of the financial crisis, right in Riverside County. The irony in that, and then that kind of grew from a single condo investment rental property into two to four-unit deals, then we got into five to 10, then 20 to 50. And then now we're into the 90 plus 100 plus unit space, and then you're starting to hit those 200 unit deals.
Sam Wilson 01:21
Got it. I love that it sounds like you guys have taken a very measured approach to your investing. What have been some of the things you feel like you've done really well?
Justin Brennan 01:30
The logistics of setting up operations, especially from going in state to out of state investing, you know, we kind of mastered the different size of deals, not getting too big, too fast. You know, you hear from some syndicators and guys saying, I'll just go big, go big, and, you know, I get it, I get the thought, in theory, they're accurate. But the thing they're missing is that first of all, they never started big. So I don't know how they say that. Number two, there's more zeros in the big stuff and more big mistakes you're gonna make because you're gonna make mistakes. And so I'd rather make mistakes with smaller zeros where you can recoup that versus making a mistake that's 100 to 200 to a million-dollar mistake. And so managing those mistakes to where they were minimized and learning about along the process to where, you know, now we're at a point where you learn as you go is a part of that too. And now I feel like okay, we've gotten through some of those pains to where I'm not going to make the same mistakes twice. I mean, we're dealing with larger numbers, now you're dealing with $30, $40, $50 million deals or not 2 million, right? Or 500,000. So big difference.
Sam Wilson 02:37
Big, big difference there. When you say you got the logistics of operations figured out. What does that mean to you?
Justin Brennan 02:43
Yeah, so when you're going out of state because it was the big thing for us in 2017-18 said, okay, you know, we're in California, it's not the cheapest place to live, we want to grow. So we had to set up operations outside and my business partner Christopher Pohle had ended up purchasing a ranch outside of Austin. So that was kind of now second headquarters was outside of Austin's now we had Midwest and then west coast. And then going into each market, we were interested in primarily Midwest being Kansas City in Missouri, we got Oklahoma, Texas, Alabama, stuff like that, Tennessee, in setting up operations about six to nine months in advance, actually pulling in deals. And when I say operations, I mean property management companies, construction crews, logistics, legal accounting, all those things that you're going to deal with from kind of the back office side of things, lay of the land, good neighborhoods, bad neighborhoods, where's the development? Where's pat the progress? Where's the city planning on putting in money? Are there railways and other light rail systems, all these details that go into where's the market for the market, so we don't just go in and start finding deals and then kind of catch tail later. It's six to nine months in advance, get the lay of the land operations set up so that way when deals start flowing, we can execute quickly.
Sam Wilson 03:57
That sounds very time intensive. What is the practical way that you guys have decided to do that without you, Justin moving to Nashville, Tennessee and going okay, let me go spend nine months here and figure out what the city is doing?
Justin Brennan 04:12
I am flying in there consistently during that six to nine months. And spending three, four days of time meetings, driving neighborhoods, learning it. So yeah, it is time-intensive. But it's also avoided us from making really dumb mistakes and getting put into a neighborhood and we're like, we shouldn't have bought here. Right? Right. I mean, so perfect examples. You know, every time we're looking at a deal, I'll go sit at the property at different times in different days of the week. So I'll go in the morning. I'll go midday, and I'll go in the evening and wait for people to come home from work. I'll go on a weekday and weekend, typically a Sunday and I say Monday or Tuesday because I just want to see the flow of the area flow the neighborhood when you're getting past normal due diligence and things like that, right. So you need to understand what you're getting yourself into otherwise, you deal with horror stories like I heard recently from a first-time syndicator, who bought a property had money backing, it was his first bigger deal, didn't do proper due diligence, got into it thought they were getting a great deal because they had a great basis. And on paper, the cap rate looks great cash on cash, everything looks good on paper, then come to find out because of the lack of due diligence, there was a lot of deferred maintenance, a lot of issues with that property neighborhood not being the best setup. And they inherited a lot of delinquencies, bad tenants issues, and it just turned into a complete... And now they've lost well over a million dollars. Well, and the guys, he'll never do another syndication because he'll never get money again. He was backed by good money, good people. But because he operated so poorly, he's basically blackballed. No, right. I say, don't go big too soon, right. Despite what you know, some people say you're gonna make mistakes, just don't make big ones.
Sam Wilson 06:00
When you're setting up your back office, talking about attorneys, title companies, all of those, you know, other than calling your contractors and maybe even going and seeing their work like, what else, what other due diligence is there really to do until you're ready to send them a deal? I mean, there's only so many conversations you can have with a contractor like, Hey, you guys, yeah, we've done these three projects. Okay, cool. Well, and I get one together, I'll call you.
Justin Brennan 06:24
Yeah, exactly. You can certainly go and see some of their work. That's definitely something you want to take a look at. Understanding, you know, there are foremen who run the jobs. What kind of software do they use? How do they do billing? Who does their supply chain? Who's going to order the supplies? Is it going to be you as the owner? Is it going to be them? Yeah. How's their labor force? We're talking about labor shortages, especially these days. Right? So we're dealing with that, you know, in foreman on-site, you know, because a lot of times they're running multiple jobs. So okay, great. So the foreman is going to be here once a day in the mornings in the evenings, who's opening up who's locking units? Is it our job, is it your job, is it our maintenance staff? Logistically, how are we dealing with that? Yeah, what software are you guys using? Are we corresponding through that for just… because when you're doing renovations on value add? It's an assembly line. Right? Right. And so you have to really manage that correctly. So you don't have too many vacancies at a time. Too many not available at a time. It's like this seesaw assembly line battle between your kind of rental guys and your leasing staff. Right. And that blending those two together to where you Okay, five units a month come vacant? How long does it take you to turn those things? How long does it take you to market them? How long does it take people to get in there where you're collecting checks? And I kind of calculate check to check meaning person moves out, you're not getting any money once next person give you a check? Is it 30 days, 60 days, fortify like, what does that look like? Right? In timing that up and then layering over-layering. Because it's a dance, it's not easy to manage that process. And it's not a perfect science. So having a construction crew that gets that in can help you manage that isn't just all over the place is really, really, really important.
Sam Wilson 08:02
Yeah, absolutely. What about that, I guess that the management side of it, is there a certain size of construction company? You guys always look for where you say, Man, you've got to have X number of employees, you got to do X number of dollars in volume a year? Is there anything like that, that goes into that equation on your kind of due diligence?
Justin Brennan 08:20
Yeah, so you should definitely have at least one foreman on-site or an assistant foreman every day. And if you're going to run the jobs, and if they're leaving for a little bit, but they need to pretty much be there constantly in and out every day, touching the job site every day. And then you're typically going to have two workers per unit is kind of what I've seen the best flow from a labor force standpoint. So if you're going into renting a unit, depending on what you're doing to but let's… presuming you're doing a pretty good Reno, and you're adding washer dryers and some electrical work. So there's some rough stuff that has to get done. That usually happens first. See those guys going in and doing the rough electrical, rough plumbing, and then that gets done. So now coming in behind that as some drywall painting cabinet, guys, countertops, fixtures, plumbing, electrical fixture type stuff. Flooring is usually one of the last items going and stuff like that. And then appliances if you're bringing those in. So the two guys per unit. So if you're doing five units at a time, per month, right, that's 10 dudes on-site every day. Yeah. Plus your foreman, right? So Mister contractor, can you supply that? Yes, we can. Okay, what happens if you don't? Right? So just working through some of that logistical stuff? Because we've dealt with it, right. We're the contractor says x. And then there's five guys on site. And then you start falling behind, right? Because now you're not catching up to the rental schedule, right? And then you got to backtrack and all this other stuff. So it's not a perfect science.
Sam Wilson 09:49
No, it's not even like you said, if they say yeah, we can get 10 guys on-site plus a foreman. I mean, if you're not there, when the cat's away, the mice will play, especially in the
Justin Brennan 09:59
And that's where our staff comes on top of that. That's why it's so key. That's why we don't do any deals under 90 units anymore, right? Because 90 units is where the economies of scale come in, where you have on-site management, on-site leasing, on-site maintenance on-site, everybody. And so they're my eyes and ears on it. Plus, we have cameras, right? Plus, we have me, and I'm on-site every other week, and I'll just show up randomly. on purpose, right, and you just have to listen, nobody's gonna watch your money, like you're gonna watch your money and you can't expect people to watch your money like you're gonna watch it. Because they're not getting paid your money, right? So for you say, Oh, I expect them to like work harder. Do this well, okay, well, then give them a piece of the equity and maybe they will write that's maybe, oh, maybe but yeah, no one's gonna work the way you're gonna work. No one's gonna protect your money or your investors' money the way that you are either.
Sam Wilson 10:49
Have you ever made a bad by?
Justin Brennan 10:51
Not yet? Not knock on wood, man. No, not yet. We could have you know, we ended up last year having to pull out of a deal that in hindsight, was kind of it was weird as a blessing because we were finding things out. And then but we had money hard. And there was really wasn't there wasn't an out force legally at that point. But just so happened, there was a fire on one of the properties during escrow, which ended up giving us an out legally. And then hindsight 2020, you're like, gosh, that was actually a good decision. Because it may have ended up being a bad buy for us at the time, you know, kind of looking forward now, six months later, like we got, you know, a lot going on with this other property at the moment. So it would have been put us in a tough spot. So that was a little bit of luck. But I'd say there's no accidents, things happen for a reason. And there are no accidents. The craziest things happen in life.
Sam Wilson 11:46
But what's a lesson or a mistake you've made that you feel like you could help someone else not make?
Justin Brennan 11:52
Don't hire the cheapest contractor. I made that mistake once even though I did my due diligence on them, right? We checked them all out. I even tested them, like on a small portion of the job first to see if they could execute. And they did. And I was like, okay, so you got you got a little $3,000 portion of the job you executed. Okay, now we're gonna graduate you up to the next stage, and then come to find out, they're just full of hot air. And they took about $17,000. And, you know, so I mean, it wasn't a massive mistake that we couldn't recuperate from it, it was a $17,000 mistake. But imagine if that was another contractor on a much and that was only on a 30 unit deal. I say the mistakes are made. Imagine that was a 200-unit deal. And that was a $200,000 mistake, right? Do not ever, people know this intuitively, but just stick with this. Don't ever pay the contractors in advance. I mean, progress payments, you can do a deposit, typically, maybe 25%. But a lot of times, you'll get bids come in and they'll say 50% up front and then 50% Upon completion. Yeah, kiss my you know what, right? I will pay you a 20 to 25% deposit upfront, then we will do progress payments, right, depending on the length of your job, and then you will get the final payment within 30 days of completion.
Sam Wilson 13:12
Yeah, that 25% Upfront is largely contingent upon what they're bringing, if they're not bringing any materials, and it's all straight labor. Correct. If it's straight labor, I would be really hard-pressed to give them anything. Well, sure.
Justin Brennan 13:24
Yeah. So the usually the deposits are typically based on materials they're bringing on site roofing or fencing or, you know, basic stuff, then you're typically paying a 25% deposit, because there's an on site move for materials.
Sam Wilson 13:41
Right, yeah, I get it. I was a contractor for way too long. I completely understand it.
Justin Brennan 13:46
And I'm a licensed GC. So but yeah, I would never, we just learned that battle. And you'd have to fight it a bit because they want some more payment up front. Because they're either, with all due respect, not all of them. So I don't want to aggregate but a lot of really bad money management. So they're floating a job here for job there and money moving here for that here. And they can't really manage their money correctly. So they're taking money from here to pay some guys over here. And you see how that flows. And you're not going to use our job as your cash flow or so.
Sam Wilson 14:15
Right. Not only that, but also just the risk of them. Like you said, backing up and walk and you go oh, okay, well, thanks. Well, that was enjoyable writing you…
Justin Brennan 14:23
I paid you 50% upfront, right? Yeah, you go deposit, but that's specific, usually for materials.
Sam Wilson 14:29
Right. Yep, that makes a heck of a lot of sense. Justin, if our listeners want to get in touch with you, what's the best way to do that?
Justin Brennan 14:35
Google me, man, Justin Brennan on Google. That's probably the easiest way to have some stuff pop up or you can go to our website, which is brennanpohle.com. That's B-R-E-N-N-A-N-P-O-H-L-E.com. And, yeah, read whatever you want.
Sam Wilson 14:53
Great. Sounds good, man. Justin, thanks for your time today. Certainly appreciate it.
Justin Brennan 14:55
You bet. Thank you.
Sam Wilson 14:56
Hey, thanks for listening to the How to Scale Commercial Real Estate Podcast. If you can do me a favor and subscribe and leave us a review on Apple Podcasts, Spotify, Google Podcasts, whatever platform it is you use to listen, if you can do that for us, that would be a fantastic help to the show. It helps us both attract new listeners as well as rank higher on those directories so appreciate you listening. Thanks so much and hope to catch you on the next episode.