Ep458: Alex Gruye and Assaf Arie – All That Can Go Wrong When Buying a Rental Property

Andrew Stotz 00:02
Hello fellow risk takers and welcome to my worst investment ever stories of loss to keep you winning in our community we know that to win in investing you must take risk but to win big you've got to reduce it to join our community for free go to my worst investment ever.com and receive the risk reduction checklist I've created from the lessons I've learned from all my guests. Also in the community you get a super special podcast listener discount on my six week valuation masterclass boot camp. In the boot camp, you learn how to value companies like a pro and advance your career in finance go to my worst investment ever.com to join our community for free. Fellow risk takers This is your worst podcast host Andrew Stotz from a Stotz Academy, and I'm here with featured guests. Alex green, and Assaf Arry Alex and Assaf Are you guys ready to rock?

Alex Gruye 00:58
Let's rock. All right,

Andrew Stotz 01:00
let's do it. So I'm gonna ask you guys just to give a little background about yourself so that the audience gets to know you. So maybe Alex, you want to start?

Alex Gruye 01:11
Sure. First off, thank you for having us on podcast. So my name like I said, Alex Korea. I'm out of the Twin Cities here in Minnesota, Minneapolis, to be precise. I'm a simple Midwest boy, and real estate property management broker here in the Twin Cities. And we head on with real estate investments, managing portfolios, etc. And all of the headaches and come along with it. So it's pretty much a little bit about me. Great, pretty simple.

Assaf Arie 01:50
Ay safaree was born and raised in Israel, and moved to Minneapolis about 10 years ago. Around 10, nine, nine years ago, I think now business finance and accounting major back in Israel move there after a certain military for three years, like most of us do, in a 200 unit. And business minded, I love trends, I love numbers. I love to understand a story from the numbers standpoint. I love risk analysis. And, you know, Alex and I basically partnered in Vanek properties met a company rawan, nine years ago, 2012. And then we started, and we had a lot of stories since then to tell about real estate.

Andrew Stotz 02:41
It's interesting, you know, all of my Israeli friends are all entrepreneurs, like very few of them that I've met, are in corporate environments. So it's been kind of fun. I've interviewed some different people on the show. So that'll be I may mention that as we go through, anyways, well, maybe what we can do now is I'm going to ask you to share your worst investment ever. And since no one ever goes into their worst investment thinking it will be. Tell us a bit about the circumstances leading up to an Intel us your story.

Alex Gruye 03:14
Yeah, so um, so our story's a little different. We This is going to be a story about a client of ours where we were brought in to manage the worst investment ever for them. So the and and, you know, I'll say it here. Spoiler alert, the end result? They made out very well. All right, so let's go to the beginning of it. We had a

Assaf Arie 03:46
jump into it, I would say not just that it did well, but and the first closing those two building blocks will tell the story. And the first closing I told one of them, I said, Don't confuse your lack of making money with you making the right investment choice. I was very blunt about that. So they don't get the confusion that Oh, yeah, we're smart. Let's make another investment without talking to this guy. No. He was he was very they were very lucky. Yeah. Sorry for interrupting Alex.

Alex Gruye 04:15
No, no, that's a great point. I'm glad you said. So. So is a group of gentlemen. It is their first multifamily investment. They had a couple of single family homes before that. And they were sold. A two building portfolio in a less, less desirable tougher side of town. That is well known for its problems. Put it this way. It's called the honey trap. You know, it's the ones where the investment on paper looks great. It shows very well. It shows a nice cap rate Create return etc where in reality you know high cap rates there's high crime you know you have very little cooperation from surrounding landlords and other property owners there which I'll chime in on some examples through that and authorities to authorities and authorities so so these gentlemen purchased these two buildings I think it was 20 units total soft right one eight unit and 128 and 12. And literally from day one of closing after from day one of meeting with us they were referred to us over by a larger lender that we work with so we thought we'd love to help them told us met the gentleman and told us you know, where the property was and it took us quite honestly we had to think about it over the weekend. Ironically enough, this area is where I first had my first property and I was at the time 2021 years old. So I learned a lot from this area and how to do things right and wrong and obviously through the wrong ones learn the right procedures to learn from an iron sight right so anyways, I was already pretty familiar with the area and knew I knew how it was with mine now these gentlemen are taking you know an investment of their own there and let alone their first multifamily investment so let's we got to think about this one Well, obviously we decided to go with it, we're going to really be hands on to help now with this with this area, you know, again, it's it's very, very hands on literally of holding the hand all the way through daily and that is, you know, you've got you've fixed something in a hallway for instance, a fire extinguisher fire extinguishers would be set off in the hallway we cleaned it up and the next day same thing happened or there was homeless people sleeping in the hallways there there was vehicles left deserted in the parking lots that just someone just said for whatever the reason it doesn't run who knows the story behind it but they were left for the owners essentially for us for the owner to tow out of there at their you know, it was a lot to deal with I think we have what three or four vehicles like that stuff. There was a time where somebody from a neighboring property threw something in the dumpster of one of these buildings that lit the dumpster on fire and ultimately burned down the row of garages of the adjacent property behind our property which was I think a row of 2030 garages literally all went up in a blaze because somebody threw something in our trash can to our property and our dumpster and it started this so you kind of get the picture of what I mean it's only funny now injury wasn't funny yeah wasn't that funny then was that happened

Andrew Stotz 08:05
at night like he got a call in the middle of the night Oh as the day

Alex Gruye 08:09
it was during the day and luckily enough I had we had a maintenance guy over there doing maintenance and he said well I'm stuck here in the parking lot with my work van because there's four or five fire trucks here because somebody decided to have a neighborhood cookout that was not planned so yeah luckily it was during the day but either way it's um it is a huge inconvenience so so now you know you kind of understand when I'm painting the picture here the area and the headaches behind it you know so for us with them it was again right away from day one how are we going to make this stable to get them to quite frankly get them out of there already right so with this comes you know you have your tenants not paying rent the rent to start was very low they were in the high seven hundreds and market there we brought it eventually up to over 1000 all right so you see that very very drastic difference typically what you're aiming for is to help is to have you know like a subsidy rental assistance renter in there that it helps assure that we have rents coming in through the programs of making sure that rents coming in right you know so there's that these owners when they purchased it they didn't see every they didn't go into every unit let alone I think they maybe went into a couple so you know in one way

Assaf Arie 09:41
wielding I think they've seen one of its building

Alex Gruye 09:44
yeah and for us we like to be involved with the whole process all the way through even before they close Can you get us into see it we can do a quick walkthrough with your when you're doing the inspection, you know give our input on some things we at least know the condition of the property can well prepare You know a soft can come from his end is preparing a performer a budget in place if we're going to do any value add attacking any of the common areas let alone the units themselves things like that so that's kind of where it was you know for us like alright we're already you know a month behind where we should be normally in our process for this salt we had units where you know all of the windows were broken I think we replaced probably every stove almost every refrigerator and every AC unit and all 20 units in our time there

Assaf Arie 10:37
and not this is not and this is not budgeted right this is not like okay we're gonna go in and here's here's 100 grand to replace all these things it's not in the budget and that

Andrew Stotz 10:49
means that means that the land owner is shocked every time you got to go to him and go we need more money yep

Alex Gruye 10:57
yep you know doing this strictly all from the cash flow if you will for a weekend right so so that's the picture of it so you know we got through units we got them stable I think we also in addition had some units empty I think two of them empty to start with right off the bat along with the damage in those empty units as well so filling them with the perspective you know appropriate tenant the qualified tenants whereas you know you had the seller beforehand at least from our end and revealing of the tenants file as the rest of the current residence files that there wasn't proper background checks there was movements maybe for an exchange for you know, you move give me $500 cash you move in great in all forces sometimes you see it where people will sell a property and they fill it right beforehand not often but there are some that they try and fill right before a sale so it's on paper it's filled that's great right? And then you realize after from a buyer standpoint oh these people weren't quite you know, they didn't do a proper background check there's no problem one thing after another with it so so we had all that on top of it you know, I think from there we decided Alright, we're gonna have a game plan here with them to lay out a budget for what we can now with we're already behind not having a budget and how are we going to get these units up to snuff to be the code even get the rental license up to where it be because in Minneapolis we're based on a tier system here. Tier One is the best tier two is mid and tier three is not where you want to be. That one I believe is correct me if I'm wrong but I'm pretty sure we started from the bottom there on tier three and worked it up to a tier one I believe on both properties with the amount of work we had to do so

Assaf Arie 12:51
we do remember the city remember the list from the city

Alex Gruye 12:54
yeah the list from the city was before from the sellers having to take care of things that were not done and if I'm not mistaken the list was

Assaf Arie 13:02
that thicker that day 14 pages 14 pages of citations that was never even disclosed through the underwriting process or perfectly asked for but yeah by the buyers yeah

Alex Gruye 13:15
so yeah so it

Andrew Stotz 13:18
was it was there ever a point where you were starting to worry whether you could actually turn this around? Or did you always feel like we can do this

Alex Gruye 13:26
I think for us you know we always have the we like the challenge right? We have that mentality we like the challenge I think we've grown our business space at least on one level you know that being part of it not fully but that is part of it I don't necessarily ever thought of like a give up mentality but it was a definitely a stressful alright how are we going to make this work I made it went down to we were very efficient with our maintenance to do as much as we can in a day if it was you know many units for work order requests you know, we attacked high utility bills from high water bills which for us again that's on the front end of our process of reviewing looking at the units reviewing the due diligence from a utility bill standpoint prior we're pretty good at saying all right, and efficiencies This seems off this seems really high you know, so going through no leaks and they're getting efficient you know, toilet stoppers, the fill valve in them something as simple as that. I mean, you can have a water bill that ends up being three, four or five times what it normally should and on an investment that completely throws your return for the year out the window. Right.

Andrew Stotz 14:40
and discovering where that is, is probably a challenge.

Alex Gruye 14:43
It is it is it always is. We have our methods of attack there you know, we work with the residents closely for the typical you know, for instance, like the water, running sinks, dripping faucets, leaking showerheads, running toilets, those are always the common culprits right? And I think we got it down to a pretty good system and this probably at the time was one that really helped us critique our system right?

Assaf Arie 15:06
reinvented Lean management properties.

Alex Gruye 15:10
Yes

Assaf Arie 15:11
reinvented the word lean on those Yes. And I'll tell you I'll chime in here I will never get here's we understand real estate and we knew from day one we're going to get a stable we're going to bring mainly subsidy people on subsidies in there it's right by the airport so airplanes are flying right above your head it's not an attractive area it used to be what is it for soldiers army bunkers okay it was big bankers that was converted to apartments is right by the airport it's not attractive area it's people that have bad credit bad backgrounds typically that's where they end up living we decided okay this we have to accept that you know, our criteria were dropped from here to here from like our normal criteria to even allow otherwise nobody would have was would have been stamped vacant right? We knew that we're going to do that we're going to bring the people in subsidies that needed opportunity coming from homeless shelters we started working with certain programs to get them in they sponsor the rent, we knew we're going to be able to get the seven hundreds into the 1000 1100s on some of those two bedrooms and we'll sell it will recommend them to sell it to somebody else that's going to be their starter property but you know what they're going to start out from from a better starting point from where they were right because there's gonna be a stable property that can be we didn't want to stay there but we knew somebody else knowing where they're coming in started property get it for cheap that cash flow and then turn it around to somebody else like them and get the heck out of there right. But our fear was that the owners the buyers will give up and if they would have given up and sell too early they that would have been the worst investment ever in real estate that was the fear our fear was the buyers the owners would give up and not want to follow the plan that we knew at the end we'll get them money and we'll get them good money but that was the fear so the fear of not less on us more on them

Andrew Stotz 17:21
and Can you recall a conversation that you have with the owners which was the point where you were really afraid that they may give up

Assaf Arie 17:33
oh with Henry we can see names here multiple we met with him in prison few times and I felt he's like what is going on but it's out of control or expenses How is it happening a lot of expenses are on our credit card I don't know how we're gonna get paid back

Andrew Stotz 17:54
those are tough conversations.

Assaf Arie 17:57
Right very tough conversation.

Alex Gruye 17:59
Right and we had months of management where you know we held our bill essentially to make sure that property can keep afloat and get where it needs to be well coming out of you know this whole

Assaf Arie 18:14
so to just to understand when we knew the properties for sale, we knew money going to come in and we knew we had to go in and do a push to really get the units look nice and it was upwards of 25 grand at closing that we got for our back bills, right make that happen.

Andrew Stotz 18:33
Right? So then you guys were out also in the sense that you were extending kind of credit to the owner. So tell us how did it end up?

Alex Gruye 18:46
Well, so the one the 12 units we sold for them to two years ago so almost yeah right around two years ago and they made up very well on that one. And the alpha want to say a mouth seraphinite letter and I do

Andrew Stotz 19:07
not necessarily but just Okay, all right.

Alex Gruye 19:09
But they may not very well with that.

Assaf Arie 19:12
Older mother doubled of money

Alex Gruye 19:15
and they double their money. They and then from there they still had the eight unit because by that time we were stable on that one to keep it going and turn it around. It was kind of the better of the two of you Well, yeah, and ironically enough, Andrew we actually just closed and sold that one on Friday. So this whole fun trip just came to an end on this portfolio for them literally on Friday. So I mean again they made out very well double of the money. We turned something that from literally from day, one of My worst nightmare?

Andrew Stotz 20:03
How would you describe the lessons that you learn from this experience?

Alex Gruye 20:11
Well, I would say in real estate, proper due diligence, for starters, I cannot stress that enough have the proper team, especially when it's going into your first and it's not that they didn't come for help, I think they came for help maybe a little later than, than planned or should have a few Well, you know, for us, it's right away from day one. And early on in the in the purchase side of things, what we like to do with all of our clients, and this was, again, kind of a benchmark for us on it was, we want to be involved, whether that's representing you to purchase the real estate because some of them we do this one in particular, they I believe they had a friend that was the realtor or a colleague was referred over the realtor for them, so help them through. So we weren't involved early on with this one of all the due diligence phase, the inspection phase, looking at all the leases in place, all of that. So again, so getting back to you it's that cruncher having having the full proper due diligence on the front end, the real the planning, right, the planning going into it. And going into it on the right, the right foot with the plan and makes absolute sense. From that

Assaf Arie 21:23
standpoint, is that's it, they don't have the experience, get somebody with experience. Right. Know, the area you're going into that area is known to be probably the worst area in Minneapolis. Right? You know, have some areas have bad pockets, that's known to be one of the world's very attractive because they're playing traffic, they are attractive, because those are what do you call silos, silos, where the very industrialized units like that was converted to apartments. And then know, the underwriting, you know, this real estate is very popular these days. And, you know, underwriting is as good as you know how to underwrite right? It's, I can make, you know, I'm an accountant, I did auditing for four or five years, I've seen small businesses, big businesses, successful businesses, fellow businesses, I can, I can sketch whatever I wanted to perform. The key is to actually make something that works, right? Know, the nuances of the investment, know how it works, know how to operate know, the drivers know, the opportunities in the area in the market. Know the risks, right? There is money to be made in this kind of territory, but it requires a certain talent that they didn't have. And we were offered management in neighboring units. I don't know how many times because we were the nicest buildings in area. And we said, No, no, thank you, you know, we kind of did them, you know, it's business, we got paid, I don't want to say we did it in favor, but we're like, okay, we need to help these guys upgrade, and get out of this neighborhood, because they're good guys that kind of get stuck there. Right? So it's it's, do your underwriting, understand the risks. And in real estate, if you don't know the area, drive by, either in the morning, either an afternoon bid or an evening, see what's going on. There's drive by shootings there on a weekly basis, and we're concerned at times for staff. Now concern for our staff at times, I mean, this is not just a level of risk of losing money, there's like, potential risk. Yeah, windows with bullet holes in them in our in those properties. That happened multiple times, right, shooting in, in the building. So those things that, you know, you open a crime map, and, you know, it's right there that now, you know, you go on a main street that you have stores and all that, okay, it's a little bit more crime because the store is the main street is there's nothing there. I mean, the crime is high, because it's a high crime neighborhood. Yeah, those are the big red lights. Right? So it's just like, none of that was done for that particular purchase.

Andrew Stotz 24:14
So let maybe I'll summarize, you know what I take away, one of the things that after interviewing many, many people, I've come up with kind of what are the six common mistakes that people make in the top number one most common mistake is failed to do their research. And here is a great example. I also point to Episode 83, I interviewed a man named Josiah smeltzer. And he was also property. And that's funny, that story is funny and terrifying. But the point is, so many people seem to go into these things without doing their research. And it doesn't mean I mean, you've demonstrated that. It doesn't matter what the investment is, you could make money out of almost Anything. But the point is, is that you've got to do your research to know. And I think about, you know, if I was using my money, I would even say, go stay in the apartment for a week, see what you find out? You know, there's just so much, you know, you don't want to overdo it, but doing your due diligence on any investment is critical. And so that's the first thing that I take away. The second thing is, you know, why are some real estate companies huge, it's because they've built internal expertise, and how to look at the properties that they're buying. They build their internal checklists, they build their internal system, because they've been burned many times, and every time that they've been burned, they're building that expertise. But if you are someone that is buying property, and you don't have all that wealth of experience, my goodness, go to guys like you. And you know, the worst case is just go and meet people like you and talk about it. And I suspect that if somebody went to you today said, I have this property, and I'm thinking about hiring someone like you guys to help me, I'm talking to a couple, could we sit down for a little bit of time to talk, even just that time sitting down would bring you a lot of value if you're a real estate owner. But most importantly, what you're going to realize is that experience is super, super valuable. Because if you do that, before you buy the property, then you can put into the valuation of the property, these type of elements that you may not have expected. And then that way, you're also paying the right price. Because I say anything can be a good investment. It just depends on what you buy it for, and what eventually you're able to sell it for. So those are some of the takeaways. Anything you would add to that?

Assaf Arie 26:53
Well, you're spot on. In real estate particular is good area, some time ago, different times of the day, see what it is talk to the neighbors talk to inspect every unit when you buy real estate, never skip. Even if one unit we just were closing on a building next week. And you know, there's one unit that was trouble getting in like, nope, we're getting into before closing otherwise, there's no closing. There's no more skipping on units, right? Where we get every unit see everything with your own eyes, chat with the people talk to them, a lot of it in real estate is that is you'll see a lot of the problems when we started to, you know, to manage those buildings, is we realized a lot of things we could have seen before the closing there was a water issue on one of the units that was kind of patched right before closing, going into that unit talking to those people that they wouldn't they told us everything that happened and they didn't even know they thought were the same company. They were like, you know, you guys told us we'll come back and like we told you why. Number eight,

Andrew Stotz 27:57
as a point to point out point, the point from that too is that due diligence doesn't have to be brutal and hard and all that right out observing. It's about asking questions, and it's about knowing the questions to ask. So I think that said, that's probably Yep, talk to them. The

Assaf Arie 28:14
residents are very chatty, they talk Can you ask them? Hey, what do you like about this? They'll tell you to say what's, you know, what would you do better? And they'll Oh, and they will tell you every do better. So give me a chair.

Andrew Stotz 28:27
That's so weird. So I want to address this to property buyers, people that are out there buying properties. What one action would you recommend that they take to avoid suffering? This fate?

Alex Gruye 28:42
I think like go ahead, yeah,

Assaf Arie 28:46
Talk to a property manager talk to your broker and your real estate agent. They they supposed to have your best interest, but they're getting really nice check when you close right so they're very motivated by the dollar amount. Talk to a seasoned property manager they'll get you a lot of insight on the market. A lot

Andrew Stotz 29:05
of manager property managers not getting paid for the transaction. They're getting paid for taking care of that over time after this I know the motivations behind the different people.

Assaf Arie 29:16
If Andrew chose us as your property managers right futures as as your property managers were interested in getting into the property they're going to succeed for you because we're getting paid on an ongoing basis on that property and we want to see that growing we want to see you you know expanding from there and want to do more. If we only get paid once on a transaction like this, you know we're like I don't know I got some bills to pay. Here's a property we can close next month, right? I'm not saying that all agents are like this. I'm not saying the whole agents are like this. But the motivation of property manager is to work with you for a while and the property they'll enjoy managing that will do well for you. They know they can cut your distribution checks on monthly, quarterly, semi annually basis or wherever you want to And that works with talk to a manager if you're in the real estate field talk to seasoned property manager that have properties around and knows the town and have some reputation, you know, some positive reputation out there.

Andrew Stotz 30:12
Alright, last question what's your number one goal for the next 12 months

Alex Gruye 30:20
um I think for me for the year that we've all had and still kind of continuing to have as obviously stay healthy keep positive every day and I think just continuing on the path of wanting to help people wanting to help the investor on their on their purchase managing all the way through and taking care of that and being able to be better than I was yesterday and take something in new every day from that from the experience whether it be the worst one or the best one and to continue growth from there from both a personal side and a business side

Andrew Stotz 31:01
great in a soft

Assaf Arie 31:04
you know my my mentality is you know 1% improvement daily right always always improve a little bit always refine a little bit get burned make mistakes learn from them, you respond on I loved how you said that, you know, you know, those larger companies that got burned so many times they know the boundaries, you know, they know whether they can see them or not they know where they're at. And I'm a big believer you just earlier today I was talking to somebody about that said you know you there's mistakes gonna be gonna be happening and you cannot avoid them. And you know, what you got to do is know there's a problem, addressed a problem fix it and don't repeat that that's how you get better so continue to improve continue to deliver a good properties for residents, get good returns to our owners. And, you know, hopefully health for everybody. That's the number one things now in the world.

Andrew Stotz 32:01
Yep. Well, listeners, there you have it another story of loss to keep you winning. And for both you guys, I you know, like to say that when people come on this show, you know, many people that I asked to come on the show, say No thanks. People don't like to talk about their worst experiences, their worst investments. But what I would argue is that for the listeners out there, whether that's in the Twin Cities area, or any other area, around the US around the world, reach out to these guys, they show that they understand and they've been through it, and they've learned from that. And that's the kind of person I want to work with. And that's the type of person that we have on the show. We build trust and understanding between all of us as we build this community. My number one goal for the next 12 months is to help you my listener, reduce risks and increase return in your life. To achieve this I've created our community at my worst investment ever.com and when you join you'll get that special discount to my six week valuation masterclass boot camp. As we conclude, Alex and Assaf I want to thank you again for coming on the show. And on behalf of a Stotz Academy I hereby award you alumni status for turning your worst investment ever into your best teaching moment. Do you have any parting words for the audience?

Alex Gruye 33:27
Oh, just you know, keep them like you said, give positive see all the way through. And Andrew, thank you for having us on.

Assaf Arie 33:35
Andrew, thank you and, you know, your best, your worst experiences are going to be your best funniest jokes 1015 years later, so take it easy when they happen, you know, be serious about it and fix it but know that it's gonna make such a great story. 10 years from now, like the role of garages burning down the street.

Andrew Stotz 33:58
Exactly, and they're gonna fit onto that improving 1% every day into that list, proving what you're doing. And that's a wrap on another great story to help us create, grow and protect our well fellow risk takers. This is your worst podcast host Andrew Stotz saying. I'll see you on the upside.