Deals & Dollars: Real Estate Investors and Entrepreneurs

Creating a Passive Income Empire with NO DEBT w/ Farhan Malik

• Deals & Dollars • Episode 72

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Today we have one half of the REI Bros, real estate investor and operator Farhan Malik.

Strap in and meet Farhan Malik, a seasoned real estate broker and investor who has laid claim to over a thousand deals, including the audacious flipping of an entire town. As Farhan unfolds his journey, we get a candid glimpse into his early days as a licensed realtor, the partnership with his brother that changed everything, and their calculated venture into flipping an entire town.

Farhan delves deep into the significant lessons he's learned along the way, talking about the importance of mastering a specific area of expertise and learn about the game-changing impact of having a dedicated team and his unique approach to investing that remains Islamic Financing Compliant. In this episode you’ll learn how he ensures a return on investment for lenders, and his ingenious use of debt as a tool for success in real estate. 

Join the Deals & Dollars community today. If you're interested in becoming a guest on the show or receiving exclusive invites to our networking events, sign up on our official website.

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David Choi:

Three, two, one go, go. All right. Today we have a really special guest, farhan. I mean, I've been following you since I was 19 years old, when I was just a spring chicken at Rutgers. I've been getting your emails about turnkey, off market deals and just a tremendous success that you and your brother Chomale have had over the last few decades. Man, congratulations on all your success and thank you so much for taking the time to come on the podcast today.

Farhan Makil:

Thank you, David. Thank you for reminding me how old I am.

David Choi:

Oh, man, farhan, I'll tell you what, brother, when we were talking in the conference room and you were telling me, man, I only have a couple of years left in me, I'm a father of three, I really wanna spend time with my kids and not so much time working, I was just like that's what life, that's what entrepreneurship's all about, right, absolutely. Not having to work the crazy hours, it's having the choice to say you know what, I'm gonna spend time with my kids, I'm gonna spend time with my family and do the things that really matter. So again, congrats on that, man. I'm happy you made a conscious decision to do it. Appreciate that. Thank you so much.

David Choi:

And if the wife is listening, farhan is a good man. He is a good, good man. All right, so really cool stuff with Farhan. I mean, he's got a splendid track record of real estate brokering, fix and flips. I mean this guy has literally flipped an entire town at one point. He's done over a thousand deals. So I mean, without going too much into the nitty gritty of me giving an intro, farhan, can you just give a little background on yourself so the audience knows who you are?

Farhan Makil:

Yeah, absolutely. So I graduated from Rutgers and I started off full-time as a licensed realtor. And you know, back then there wasn't really much videos on YouTube. There wasn't a lot of. There was no Instagram. Facebook was just getting off the ground, so there wasn't a way for me to self-educate myself. There wasn't mentors that were doing this, but I had watched some TV shows about rehabbing and flipping and stuff and I thought the best way to get into the industry was to actually get licensed as a realtor. So now, if and David, we're both kids of Asian parents, so you could imagine that conversation with my parents that, hey, I got my degree, but I'm gonna do something that you don't even need a high school diploma to do. I'm gonna be a licensed agent. So I was foregoing some of the offers I had at Deloitte, at Johnson Johnson and some of these other companies, and so that was an easy transition to get them to kind of work with me and agree to allow me to do what I wanted to do. So what I ended up doing was I graduated six months early to just kind of split test to see where it goes, and thank God, since then since I was 19, I haven't looked back. But I started off as a licensed agent and I still have my license to this day.

Farhan Makil:

And the first year I think I brought in about like a hundred thousand or so and this is going back 2004, 2005 times. So it was decent money and that money went a lot further back then. But that was enough for me to get started in buying, fixing and selling. So I did my first flip that we got off of a billboard ad, spent a little bit of money on billboard and that actually worked for me. And then there was also a development actually not too far from Rutgers, the Hampton Club, where one of the buildings had burnt down and I saw that they were reconstructing that building and I saw that the units there were going for about $80,000 more than the current units and these units had one more bathroom and they were a little bit bigger. But what I started to do was I started marketing heavily while that new building was being built and I ended up picking three condos there and, sure enough, once that building was built and those deals closed, instant equity, wow.

Farhan Makil:

So once I was able to sell that, I was able to successfully transition my real estate business, which I just started referring everything out and start focusing on buying, fixing and flipping, did that for and I've been in this game for a long time, so I've been talking about 20 years worth of time.

Farhan Makil:

So I did that for a few years and then everything tanked in 2008, 2009. The market completely shifted and most of the deals were short sales right, they had no equity and so we started building up the business where we would process and negotiate short sales. So the way that we got into our strategy of rehabbing and fixing and flipping was we had to first short sale the deal to be able to create equity in something where there was no equity, and we did that for, I would say, a good three or four years, transitioned then back into just rehabbing when there was equity in the deals again, and then somewhere at the end of 2016, that's when my brother and I decided to partner up and go into business together, because we were running parallel companies all the way up until this time, and so when we did that, there was an enormous. At that time, the prices were just right, especially in this one town that we had identified, willingboro. So it was.

Farhan Makil:

It was the same exact town that was next to Rutgers Summer, right off of Eastern Avenue. It's a Somerset, new Jersey, which is in Somerset County. At that time the houses were going for like 300 to $400,000. That same developer, levitt, built the same exact town in Burlington County called Willingboro, and when we were, when we went down there, it's like we're pitching ourselves, like are we in our you know, are we right next to Rutgers and in our neck of the woods? Because the town looked exactly the same, the houses were the same, the models were the same, but they were not $300 to $400,000. They were $60 to $100,000 there. And it was. It looked like like, you know, it looked like the American dream. They had sidewalks on both sides, well-manu-cured lawns, but it's just. You know, the school system there was ranking at, like, I think, one out of a 10. But it was a great rental market, right.

Farhan Makil:

And so we knew that we didn't want to go wide and we wanted to focus in on one area, one town, and to do that you needed to find things. You needed to find a rental town, number one. Number two you needed to find a town where you could have one buyer by multiple properties right. So in a rental town you can have an investor and he's going to buy, want to buy more than one property there, and we needed an area where, on a cash purchase, somebody could buy it, fix it up and rent it out and get about a 8 to 10% return on their entire cash purchase. All of those things kind of checked the box and I think out of at that time, out of the 450 or so distressed properties we bought and sold over 120 of them, so about 25% of what that town had to offer as far as motivated sellers and distressed properties we controlled and you know, really dive down into that market, so much so that, like we're running comps on a property and three of those comps are our own sold properties right.

Farhan Makil:

So we really started dominating and one of the things that we were talking about in the conference room was that we have this limitation where I don't want to call it a limitation, but it's something that we abide by in our religion we cannot earn money on interest and we cannot pay interest. So what we did was we were basically selling rental properties. So we would work with high net worth individuals, find these properties in Willingboro, new Jersey at that time that we're trading for about 60 to 90,000. And each one of them, on average, would need 30 to 50,000 dollars in renovations. But they are. It's like renovating an apartment building, right, even though it's not one structure, they're all one of five or six models. So we knew what kind of deal we were getting in. It was the same SKUs, the same type of renovation, and at that time we had three project managers and I think we had like two GCs that we were working with. So at one point, at like the peak of this, we were running about 50 to 55 rehabs at a time, splitting them up, though, between three project managers and two general contractors. Right, the general contractors were not in-house, so we'd pay a little bit more for that.

Farhan Makil:

But, and the way that we were selling these properties was, we were doing a lot of marketing and you know most of the credit of this goes to Chamele. He's got a very deep network. We were looking for, specifically, people that had specialized careers, so doctors, and especially those that have that specialized in some sort of in some sort of practice, and then a lot of IT reps, attorneys, business owners, etc. The goal was for them to stop investing in stocks or businesses that were not tangible or they really didn't know a lot about. So the first stage was to educate them, to tell them why real estate is such a great investment, appreciation, you're able to refinance, tax-free, depreciation and cash flow right. Those are, you know, some of the big points that we, that we, you know, brought to them and we kind of offered a one-stop solution for them, like we will source the properties, so we would buy them and then sell it to them.

Farhan Makil:

A lot of these we would.

Farhan Makil:

Either we would give them contacts for contractors, but a lot of them would use us to do the construction for them.

Farhan Makil:

And then we had an arrangement with a company at that time, slatehouse, that would, on the back end property, manage it. They would list the properties for rent and manage the tenants for them. So it was it was kind of like a one-stop shop, to kind of build your portfolio in-house, focusing on this town, and so A lot of marketing went into that town. I mean we were at the sheriff's sale, buying two to three properties a week at the auction there and then just buying them, closing on them and then turning around and then selling them, doing the construction and then, once it's ready, out the door it went to the property management company and then they would put it up for lease, go through the qualifications, you know, go through all of the tenant applications and then finally rent them out. And that was just. You know, that was a massive way of wholesaling, because you're basically taking a product, injecting a forced appreciation by doing the construction, getting the cash flow to where it needs, and then you're basically wholesaling a ready to go product to a retail buyer.

David Choi:

Wow, wow. You were probably one of the first turnkey providers in the marketplace.

Farhan Makil:

Yeah, and to a point, you know and we did use that word, turnkey, but we learned to call them rental properties, right, because really anything in life is turnkey. Right, you're going to place a tenant, they're going to have some issues, the property is going to need some work, and that became an important component just educating our investors, who would then eventually become sophisticated investors as they started to build their portfolio, that this is a long game. Right, it's going to take years for the appreciation. But now you know the properties that they were all in for 120, they're worth like 300, 350.

Farhan Makil:

And you know, like I think that vision and that education is so important in the beginning that, because I, you know, I really try to stay away from that return key because there's so many things when you're managing, you know a property that can go wrong, right, you're hardly ever going to do that, right, right. So you know, when you're managing property management companies, it's hard to find somebody that's A plus Like we thought it was impossible right, at best CC plus. So we let them know that it's not turnkey, it's not passive, you have to manage property manager right, because they're going to have only so much incentive in managing your property.

Farhan Makil:

They're going to have so many other things right. You got to look at what's happening, you got to ask the questions and you have to have a general idea of what things cost to repair, right, and so to make sure that you're getting the highest ROI right, that your portfolio is being taken care of, gotcha.

David Choi:

Gotcha, out of curiosity, how long was that period of time in which you were operating out of Willingboro?

Farhan Makil:

So we were doing that between 2016, all the way up till about 2020, right before COVID hit. Got it, wow. So that's when COVID hit? Two reasons right. Obviously, covid changed a lot of things, but also the prices were starting to appreciate, where the numbers on cash flow did not make sense. Understood.

David Choi:

Understood and on average, what would you say you made per deal all in.

Farhan Makil:

So when we were wholesaling them we were about $25,000 to $30,000 for the property.

David Choi:

That's fantastic. Yeah, that's fantastic. So you were on a journey where you were hyper-focused on one town.

Farhan Makil:

Correct. One town and some of the surrounding towns, because the numbers still made sense in those towns in Burlington County.

David Choi:

The trend I find with you is that you are hyper-focused. Right, you went and got your real estate license. You did that successfully for a year. You got your cash and you started focused. You stopped doing the residential brokering and you got focused on the investment side and then, when you found a gold mine opportunity in one town, you went hyper-focused in that one town. I guess, like, first off, I think that is the number one key to success, especially for people who are not Elon Musk. If you could get away with that kind of brain, fine. But for the majority of people, if you want to have any level of success, you have to put in the time, mastering just one craft at a time. So thank you for sharing that, Farhan. I guess what would you have done differently Now that you know what you know? Is there anything you would have done differently when you were flipping that town?

Farhan Makil:

Well, a lot. So, and I think you know, to be fair, there's no way to know back then what I know now, right, cause so much time has elapsed and you know, so what we. So it's important, right, you know, if there's, I guess, younger viewers out there, it's important not to live with regrets. Your regrets are just learning lessons. It's very important to channel that energy and what you're gonna do now. The past is gone. You can't do anything about it, it's just the present and the future, right.

Farhan Makil:

So, man, the properties that I flipped, that I shouldn't have flipped, right, how many things should I have held? I mean, when we were doing short sales, right, I was getting two families in Kilvside Park for like 120, 140,000. We're with 8, 900 now, right, so what should I have done differently? I should have held more, right, that's the real game in real estate, right, and we were talking about family, and you know what entrepreneurialism provides for you, which is being able to have that freedom, right. How do you get that freedom? You gotta first know what. You know what your, what your expenses are, both on the business side and on the household side. Right, and it's just making comfortably enough money more than that to be able to support whatever you wanna do and however you wanna live. And the fastest and the easiest way to get to that is by holding properties right. Cause if you got a wholesale business, a signing, it's just, it's a constant market data, this and it's just a lot of transactions.

Farhan Makil:

And don't get me wrong, business is a great way to you know if you're selling t-shirts or whatever you're doing. If that business is systematic and operationally functioning very well, you're gonna make that money passively, right. But with real estate it's who's really doing all that work, right, it's the tenant. Right, they're waking up in the morning, they're gonna work. They're doing all of that stuff right To do what 30 to 40% of their income is paying you rent. Right. And it's like you can, as you build your portfolio, you can kinda rest easy that, hey, this is gonna cover a lot of what I need to do. So if I still wanna build a business, I don't need to take so much away from it. I can keep pouring back into it because the portfolio or you know, or the number of properties that I have, is kind of feeding me for now. So I don't need the business to feed me.

David Choi:

Yeah, you know.

Farhan Makil:

So, to answer your question, we would have held a lot more right. So, instead of selling those things that we were selling, maybe not bring buyers into the photo?

Farhan Makil:

instead of bringing buyers in, we would have maybe brought them in as lenders put onto it and maybe do a hybrid, where we take an acquisition fee upfront to run the operations and to be able to pay ourselves upfront while we're in it for the long game, right, and so we don't regret that. We learn from it and we pivot and that's what we do now. Right, there's a huge emphasis on us, you know, building the number of units that we own.

David Choi:

Yeah, so that's great. You say that man You're. We just spent three hours, like no joke, just in a conference room talking about data, about operations, about-.

Farhan Makil:

Fun stuff, right, yeah, right, invigorating, I don't know.

David Choi:

So, like about how to get better, like how to squeeze out an extra 10%, 20% on our marketing spend, right? But the fact of the matter is is that it is a hamster wheel, right, like you are constantly having to evolve, come up with new acquisition strategies or exit strategies. You're gonna have to find a new way to sell deals, right, and the landscape the legal and the just the real estate landscape in general is just constantly changing. So if you're not adapting, you're gonna die, correct? So either you, as the operator, have someone in your company that is just a complete rock star, a plus, plus, plus player that cares about the company as much as you do very hard to find or, as the operator, you need to be constantly evolving, joining mastermind groups, learning, right, and, quite frankly, dude, we live in New Jersey and I didn't meet you until we went to, like I think, arizona or something like that right, yeah, we met.

Farhan Makil:

I think we met in California or Florida, one of those states.

David Choi:

Right, right. So like it's a constant moving target and I'm glad that you said that, hey look, I wish I held onto more assets, I wished I took some of the cash and instead of pocketing that money you don't seem like the rolly BMW crazy kind of guy but instead of spending that money elsewhere, maybe deferring that upfront payment and holding for the long term I think that's really great advice for the listeners. What are you doing now? What are you doing now to kind of learn from the past and build towards the future?

Farhan Makil:

So on. Well, on the holding side, right, in retrospect, you can have your cake and eat it too, because if you do the construction and then you cash out ReFi, you can get that money upfront, tax free, and then still hold onto it and get the cash flow right. And essentially that is what we're doing now, right? So on the buy and hold strategy, one of the things that we talked about was Islamic financing. Right, so we can't earn money on interest and we can't pay interest. Right, so I can't just go to a bank or get lines of credit, et cetera. We do get lines of credit, but it's always 0% interest with these credit cards. Right, but that'll only buy you 12 to 18 months and there's only so much credit line that you can get on multiple credit cards. So the structure that we have is we essentially get private money and it's private lenders, but they are also of the same Islamic faith and they're looking for an outlet to invest their money or to partner up on deals or to lend money to, and their issue again is we can't pay interest, but they also, because they're of the same faith, they can't earn money. So it's like it's a happy medium, it's a match, right, and so what we started doing is we started focusing on folks that are a little bit older, folks that have IRA money, et cetera, where they're not looking for a crazy high return on their money. They're looking for something simple, and they're looking for something that is recurring and very low risk, right?

Farhan Makil:

So that's what we target on the capital side, and on the lending side, what we do is you can't have a lender borrow a relationship, so, even though there's a lien that goes against the property for them to protect their interest, it's really based on the revenue like a business, right?

Farhan Makil:

So we don't. We structure the deals where we don't have to pay anything until the property starts to perform. The payments come from rent. The thing now is, though, because the portfolio is large enough, we're able to pay them from the entire portfolio, even from day one when they join in, but we are basically pegging a 6% to 8% return on money, and it works essentially like an interest only loan, right, so they're getting 6% to 8%, but it's coming from the rent, right, and in our agreements, there's ways where and you have to have it this way to make it compliant with our fate that if, because there has to be a level of uncertainty. If the rent doesn't come in, then we don't have to pay that month. Obviously we have never done that because the portfolio is large enough to kind of withstand any of those properties that are not performing.

David Choi:

Love that man, I love how you like cuz bro. My company is called leverage companies for a reason. Right, debt is a powerful, powerful tool. The world runs on debt, right and some, and Just in the three-hour time span that we spent together, you, you went to my office and prayed right and and I said my gosh, this guy is awesome, he's abiding by the faith right and so Huge kudos to you, brother, on keeping your faith.

David Choi:

It's it's amazing to see, it's, it's inspirational and and awesome that you figured out creative ways so that you could still operate in the real estate game without having to make Crazy amounts of cash to operate.

Farhan Makil:

There's only so much that you can buy with your old pocket, right. So you have to leverage. You know, and it's you know, that Construction and, I think, management, those are the three key things that you need in real estate to be successful.

David Choi:

Absolutely, absolutely. Those are three pillars, for sure. Um, so you? So for me it's really simple, cookie cutter, right, I'll buy an asset. I'll try to buy it 50, 60 cents on a dollar. I'll turn around, renovate it, rent it out, get a new forced appreciated value, go to a lender, do a cash out, refinance. I get that done over a six, nine, 12 month period right, and I get all the money I put in. Right, I pay off the first lender and now I have long-term debt sitting on the property and it's cash flowing. It's a it's depreciation towards my active income because I'm a real estate professional. It's depreciation for my other other gains throughout the rest of my portfolio, right, and it's Appreciating in value while I'm doing principal paydown. So it's a phenomenal. I mean my returns. You just can't get it on the stock market or with any other private. My personal returns are just out of this world, right? I Mean, how does that even look for you? Do you have a cash out? Play mine Like, what is the exit on? On your, on your assets?

Farhan Makil:

So there are a few Islamic banks that offer Just residential financing for folks that are looking to purchase a home, and the way that they Structure it is they'll have a subsidiary LLC that'll go on the deed and it becomes basically like a co-ownership, but it's pegged to the interest rate. We're in talks with some of those companies, and also with community banks, to do a refinance Based on the terms that we need so that we can cash out, you know, the private equity that we have in our Properties that's being financed and then just reset I call that for new acquisitions and then on the back end. So it's just, it's a to abide by the faith. It is a little bit more work, it's a little bit more hustling, but you know, because we've been so persistent with it, you know eventually we're gonna be able to successfully burr out of them. I'm gonna take our private equity.

Farhan Makil:

And then, you know, find that next market or find that next set of deals that's coming in from our current business that we want to hold on to.

David Choi:

I will say this, though right like you have been faithful and God has provided, right like the fact that matter is is that I can't raise money Nearly as good as you and your brother show mail. My, my capital is significantly more expensive than the capital that you're raising, and it's because you've you said you know what I'm gonna, I'm gonna abide and I'm gonna trust that God's gonna provide. So, dude, love you man. That's freaking awesome. I appreciate that. So now, now you've got, you've got the, the capital, the capital raising machine going right. I see emails. You're doing education.

David Choi:

You came to my office. You're dropping bombs on text message marketing, even though the rest of the world is like texting text messages, dead right. You gave me strategy on data. I know that from from our talks. You want to stay lean. You want to make a solid profit margin on your active income, on your wholesale biz, on your fix and flip stuff. But your real focus is a um Units under management and really building up a passive income vehicle. Right, where are you now and where do you want to be in the next five years?

Farhan Makil:

Where I'm now, I think I get pulled into the wholesale business a little bit too much. I want to be completely removed from that and I want to focus on the value-add hold plays right. So More subject to deals on larger assets, more seller finance deals on larger assets and built a rent. That's how you can quickly build up. You know the properties on the ownership and that's like you know. That is really where you're gonna get the most Benefit out of being in the real estate industry and that's kind of what I want to focus on now, not so much the cash flow I want that to be automated but focus on the balance sheet.

David Choi:

I love that. Guys, if you're listening, I need you to hear him say those three strategies one more time. Can you go again?

Farhan Makil:

Sure. So we want to focus on seller financing deals. Those are deals usually where the owners own the property outright and essentially you don't need a lender. You, the lender, becomes your seller becomes your lender, so you can structure that deal without going to a bank, without going and getting private equity, any of that stuff. And if you have a Large enough asset and you have a seller that does not want to have a massive Capital gains problem and they're willing to take the money over time, that's a great play there. And if they have, you know, and if they want to leave a legacy and they want to leave that cash flow for either their Grandkids or their kids, that's a great play to do, because a lot of those owners are afraid that if I pass on like Two or three million dollars to my kids or my grandkids, they're gonna blow through that money. So that's a great place.

Farhan Makil:

Subject to, if somebody's got super cheap financing on a deal that they got, let's say, you know, around the COVID time, you can basically take advantage of that and get that same rate on that financing. And then the other play is built a rent right. You're basically Getting raw land and instead of selling the units off. You hold on to them 15, 20 years until the property needs improvements on the bigger ticket items like the roof, the HVAC, etc. But you basically create value, you create cash flow. You just have to do your numbers in advance to make sure that it makes sense. But you know, once that project is done you can have another 20, 50 units, you know, depending on what you build absolutely.

David Choi:

Absolutely for a hawn where you know what markets are you investing in now and if people do have deals listening to their podcast, what kind of deals are you looking for that they could send you?

Farhan Makil:

So we're primarily in central and south Jersey. Our offices is located in Kendall Park and you know, right now we're looking for Anything residential or anything commercial right in, but we focus on residential. So we're not really doing much with With Commercial apartment building. What we are doing apartment buildings but we're not doing offices, industrial etc. So as long as it's residential, whether it's a single family, a 10 unit, a 15 unit, that's what we're looking for in that demographic and in that geographic.

David Choi:

Fantastic. So so if you're listening and you have deals in central south Jersey residential, ideally Not, you know, not office or retail, it could be apartment buildings, but you know it had mostly a residential component If you are of the Islamic faith and you are looking to place capital and you're having a hard time finding a safe place, to find reoccurring, extremely safe revenue Farhan show mail I'll put my golden stamp on it. You guys are good people. Thank you so much for coming on the podcast for hawn. If the people want to reach you, what's the best way to get in touch?

Farhan Makil:

Instagram. I think is a good way the REI bros could reach both shaman I. That way we check our account, we check our DM, rei bros.

David Choi:

Thanks again, brother. Thank you so much, you gave it oh.

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