Managing Unexpected Renovation Costs with Seth Teagle

Seth Teagle is a firefighter turned real estate investor with over 1500+ doors. Find out about the costly mistakes he made early in his investing career, and how he has turned that around to create financial freedom for himself and his family.

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Transcript

Ciaara: 0:00

Hi everybody. Welcome to commercial real estate bosses, where we interview badass investors who are crushing it in the commercial real estate space. I'm your host, Ciaara Hoffmann. And on today's call, we have Seth Teagle of The Stream Group. So thank you so much for being on the show today, Seth.

Sean: 0:16

Absolutely. Thank you for having me.

Ciaara: 0:18

Perfect. So as usual, I like to start off by understanding more about your story. So tell us your background, what did you do before and how did you get into commercial

Sean: 0:27

real estate? Yeah. So I did 22 years in the fire service. I was a firefighter paramedic pretty much out of high school, did college and whatnot. Alongside being in the fire service. And then I would say around 2014 or so, as my life progressed, I was married and started having kids I realized that the grind of just putting my head down and working harder that was not going to get me to achieve what I wanted. And so at that time I reconnected with a guy, I was a college roommate of mine who had gone into real estate and he was a multimillionaire at the time, wholesaling, house flipping, doing all kinds of different investing. And I approached him basically and said, Hey, what did you do? Like, how did you go from who I knew, to this guy, same amount of time as me, but our paths are so far apart now, what did that look like? And how'd you accomplish that? And so he walked me through that, but that was the spurring or the starting of me getting involved in real estate. And and then, I worked for a gentleman for about a year and a half, learning the business helping him do project management and property management on his portfolio. And then finally decided that I was going to take the plunge into real estate and had realized at the time that I wanted to do commercial multifamily the biggest thing I could find the most doors I could find because I was looking for scalability and ultimately time freedom. So I jumped right into commercial real estate.

Ciaara: 1:43

And so what kind of made you realize that multifamily or commercial was possible because most people think Small I think oh, I can't afford that. So what was it that really made you believe like I could actually do this myself

Sean: 1:57

Probably just straight foolishness No, I don't know. I knew that you know having a full time job We would work 24 hour shifts and have two days off. So I knew I had some time. I knew that my initial reason for getting into real estate was for time freedom or just to buy back time. Cause the year that I really got into it. I was doing, I'd done a thousand hours of overtime that year. So when I tracked it all at the end of the year, I'd spent six months. Day and night at the, at a fire station in Columbus. And I was just like, man, that's not sustainable. As my kids are being born and I'm in that time of my life. And so the only way I saw a clear path to achieving what I wanted fast or quick enough was to get into bigger deals. And through the advice of the college roommate that I had found, local real estate meetups, I'd started building relationships. And then as I had been working through. That year to it was about a year to a year and a half maybe. And I gained experience and learned a lot of things about flipping single family homes and managing single family homes and single family portfolios. And I was like, this is another job. It's not what I'm looking for. Everything I had heard through podcasts and YouTube and just different people talking that talked about commercial was like scalability and your buying power and you're big enough that you can pay somebody to manage and pay for maintenance people and all those things. And so that just seemed to be what I was looking for. And then I got into my first deal because through the relationships I built, going to these real estate meetups, I had become let's say friends with an older guy that had been a mom and pop investor for a long time. He'd never done a cash out refi. So we had a lot of equity in some of his rentals. I had a home equity line of credit. I have no real money in the bank, but together I sold him on the idea of getting into something bigger than he had ever envisioned. And, we put our money together and bought an apartment building.

Ciaara: 3:46

Nice. So was it just the two of you on your first deal or did you raise capital as well?

Sean: 3:50

No no. So when we closed, it was just the two of us. He put in a couple of hundred thousand. I put in about a hundred, 150, 000. I leveraged the equity I had in my house and we were able to buy, we bought a 50 unit. And then we just split it 50, 50 and the way that we wrote the operating agreement was that I was going to do all the work. I was going to manage the construction, oversee the property manager, make sure the deal was a success. And then because he pulled equity out of his properties. I promised him that his cashflow would be enough to where the change in his mortgage wouldn't affect him. So he was living on the cashflow from his rentals. And he was like, as long as that number doesn't change. And I continue to get my monthly cashflow as I'm used to. Then I'm good with it. And so I did the work basically, he provided more of the equity than I had. So that was the trade off. But yeah, he got 50%. I got 50%. It was just the two of us.

Ciaara: 4:38

Nice. So at the beginning when you were doing all this, were you also just learning how the underwriting and everything, all that on your own?

Sean: 4:45

Yeah. Yeah. The first deal I I would say I probably underwrote it on the back of a napkin. I went to rentometer and said, Hey, this is what I think the rents could be. I looked in the area and it's a tertiary market here in central Ohio. I'm like, it's not a super growing market, but half the population is renters. So I knew there was a good database, like a good base of clientele and tenants. And and so I basically just said, Hey, I think that, because I wasn't technically syndicating where I was giving a pref, I could underwrite it differently. But back to your previous question. If I raised capital, we closed and I had a plan, thought we were going to have enough money in the bank. I was going to slowly renovate some of these units. I could do a lot of the work because of my background in construction. And I thought maybe me and one other guy or two other guys could do this. And the first month that we owned it, we had 15 people leave. And part of it wasn't when we took over, there was an onsite manager. We let him go because we had a professional property management company. Now we didn't need him. When he left, there was like seven people living in the complex that were related to him. I never caught that. I didn't know enough to look for that kind of stuff in the beginning. So they all left and then there was other folks that were either non payers that I didn't realize. I didn't know to check economic vacancy, and then there was other folks that were kind of involved in drugs and whatnot. And so as soon as they realized like the gig is up we had a mass Exodus in the beginning. That altered the plan and then I had to raise more capital. Yeah.

Ciaara: 6:06

Yeah, for sure. So was it just the property, was it still in a good area or was it just that property had a lot of bad eggs in it?

Sean: 6:14

Yeah. We liked it because of the area that it was in. It sits right in front of a B class neighborhood. It was like definitely the eyesore of the area and it was isolated to where. You could make it whatever you want. It just so happened that the current owner was sucking the life out of it and not really taking care of it and putting the right people in there. And we recognized that, Hey, this could be really great. If we would just clean it up and get the right people in there and then care about it really. That was what we did.

Ciaara: 6:39

Got it. So obviously you learned a lot from that experience and then I'm sure you were able to build on that and grow. So what is your portfolio look like

Sean: 6:46

today? Oh, goodness. That one, I'll just stay there for a second. That one, we, when we refinanced it at month 14, we made 1. 2 million. So that really helped. I took my part of that money, bought a second apartment complex. And it was during the second one, I realized that I wanted to keep doing this Hey, this could be a new career. And I could really set up legacy. Investing and legacy wealth and whatnot. And so at that point is when I decided to start scaling and knew that I would syndicate. So now there's three of us that are like executive level in the company. And we have just I think we've sold a couple of deals. We're just under 2000 doors total right now in a couple of different states. And then we're doing ground up development now, as well, so it's gone crazy from the 1st deal to where we're at today. But we vertically integrated a couple of years ago. So we have a good staff and just takes a lot of the right people in the right seats to make it work.

Ciaara: 7:35

Perfect. So can you tell us about your specific role now, I'm sure it's evolved over time. So what is it that you do for the company specifically? What is vertical integration? How have you been able to use that to help grow the company? And so what is your day to day look like right now?

Sean: 7:51

Yeah. My role as a CEO and primarily what I do is I do a lot of marketing. I do a lot of investor relations. I do a lot of capital raising. I do a lot of the things like that, where what my partner and I always say that I catch him and he cleans them. So a lot of the brokers know me, they send the deals to me. Like I do the back of the napkin or the, we call it like the simple underwriting, yes, this meets our criteria. Yes. The underwriting model that I use I would consider more simplistic and yes, this looks like it could be a good 1 kind of, passes the sniff test and I send it to my partner and then he underwrites it or he'll send it to a person we had the underwrites with him and digs into the details more. So a lot of my day to day stuff is that, and it's just overseeing like making sure that everybody's doing what they're doing, that everything's moving in the right direction. Like right now during tax season, we've got K1's going on. We've got all kinds of accounting stuff going on. So I review financials. I review K1's. I make sure that all the investors that we have are happy and that they have questions, they usually will reach out to me directly. So that's a lot of what I do now. And then just planning. We're at a point now where I've stepped away from the tools and the day to day stuff. And it's more of looking like, where do we want to be at in 3 years or 12 months or 5 years and how we get there. And then when we try to like, look at getting into other markets, I usually do a lot of started a lot of those conversations with the brokers and whatnot if we have to go down there and look at property, I'll go. So I do a lot of that. As far as vertical integration, it just means that we weren't happy with what we were getting from 3rd party property managers and contractors and whatnot. And so we brought the property management in house. And then our contractors, we just continually had issues with contractors here in central Ohio that would either not show up or would show up and do it wrong. We've felt like we were always retraining them and reteaching them like how we do it, why we do it, what this looks like. And so we thought Hey, it would just be better for us to bring people on staff, as the management company scale, we brought in more revenue. Rather than pay a third party contractor to come in and do our painting and our drywall and our flooring, we just hired people and now they're on payroll. They understand the processes. They know how we do it. And it's streamlined everything. It's made us a lot more efficient. And then, yeah we employ, I think we're around 25 people right now we employ. So

Ciaara: 9:58

perfect. And so are you just focused on the central Ohio or do you do stuff out of state?

Sean: 10:03

We've got most of our stuff in central Ohio. We have some stuff in Utah. We have some stuff in Oklahoma and Illinois. And then we're looking aggressively right now at Jacksonville, Florida. So that's probably the biggest. We've tried to go deep instead of wide. So like I said, there's great deals in the Midwest. There's great deals in the markets that we're in. And then the stuff where we've gone out of state in Oklahoma and Illinois, our team is just basically either KP or co GP deals with local operators.

Ciaara: 10:31

Got it. So you mentioned earlier that you're now doing new construction. There's been a lot of changes in the market recently and labor and delays in materials, how has that affected that part of your business? Is new construction something that you think is going to be a more successful branch in this year, these upcoming couple of years, or what are your thoughts on that versus the typical value add play?

Sean: 10:57

Yeah. So traditionally what we've done is value add. And I think it's like the double edged sword because you buy something it's value add, but then sometimes you have this huge heavy lift that you have to go through and there's all kinds of unexpected things that you can run into. And I see a lot of people where they didn't budget correctly, or they didn't budget enough reserve for these unexpected things, and they start running out of money in the projects. They can go sideways quickly. And so I feel like there's a lot of risk with those. And we've done deals where we thought it was gonna be great. And by the time we got done with it, we're like, man, we spent 10, 000 man hours doing this job, and the amount of money that we made, it really only paid us minimum wage. So it wasn't really worth it in the end to take on that risk and the headache. So when we started looking at doing ground up, like I said, there's three of us on the executive level. One of them Tim walkie had come from Utah. He had done ground up before. So he brought that ground up experience. And he's built, I don't know, 7, 8 story apartment buildings done a lot of stuff. And I think for us it's predictable. I know everybody says the cost of material is higher, the cost of labor is higher. And where I've seen people run into trouble is if they underwrote a ground up development on 2019 numbers or interest rates, let's say, and it only worked in that scenario. When they got to phase 2 of their development, and now here we are in 2021 or 22 or 23, and the rates are, maybe 21, the rates weren't up, but if their phase 2 is starting today, they're running into trouble, right? People starting to sell off stuff or do whatever, just because it doesn't make any sense anymore to keep doing it. For us we're only building in central Ohio and we have a ton of growth coming here. There's all kinds of businesses coming, but then Intel's doing a huge 20 billion investment in the area. Because of them, there's multiple other major companies that are buying up here and coming here. For us, we feel comfortable. I feel like it's no more risk for us to do the ground up that we're working on right now in central Ohio than there would be me going and buying like a C minus property. And trying to do a couple of million dollars worth of renovation and bring it to a B minus or a B plus. In our area right now, the risk is I would feel almost equal and almost safer in development because it's more predictable, right? If you started in 2018 and then COVID hit. Yeah. Yeah. You're probably hurting. And then other parts of the country I wouldn't develop in. It only makes sense for us to do it right now because of where we're at.

Ciaara: 13:07

Make sense. So you mentioned earlier, one of your goals was time freedom I think people that get into this business, that's the theme, right? Everyone wants to quit their w 2 and just be working for themselves and have that flexibility of time to spend with their friends and family So what does that time freedom look like for you right now. You guys have 2, 000 units You've got property management. You've got construction people you're managing. So tell us about what your Time commitment looks like right now managing this big company.

Sean: 13:39

Yeah. So I think that my goals or my definition of that has changed over the years. When I first got in and I was just trying to not have to work overtime. Since I had left the fire service, my oldest is 11. So for 11 years of her life, I was missing birthdays. I was missing holidays. I was missing sporting events. I was missing all these things that were important to me. And now I get to go to those things. If you have a W2 and you're a 40 hour person, you're home every night. So that's what you've always probably experienced. Where for me, I had been missing all those things. So that was a big part of it. Just being home, I was spending a third of my life at a fire station on a regular schedule. Let alone days when I would work extra, whether I wanted to or not, because they have the ability to order you in or force you in, which just means that, you have to come in. There's no option, no matter what you have going on. So in that perspective, I have a lot of that time. I would say that I probably work more hours now than I was in the fire service at times, but it's on my terms. It's where I want, when I want, if we want to go to Florida for a week, I can go down there and I can work remotely. I couldn't always do that. When the first couple of years it was a ton of time, I was spending 12 hour days at the properties and trying to build this thing out and vertically integrating it as though it sounds great, Building something with no systems in place is very difficult. It's very tough. It's very time consuming. So I don't want to just brush by it and like, well, that was easy. But we knew that getting to the other side of it was great. And my partner and I, that, that have built it, have always kept the book who, not how in our like forward thinking, and that's, we would get to a certain size and we're like, okay, great. Now let's hire somebody. They can oversee that. And then, okay, now we're working on this. We're spending all the time working on that. And then we finally get to a point where we're leveled out and we have some structure to it. Okay, let's hire somebody to oversee that. And so it wasn't until probably the last year and a half that I wasn't doing 10 hour days. So like I said, I got time freedom, but I didn't work less. So it's not you're just sitting on the beach all the time, hanging out, but I get to work when I want, I can take off when I want. If I've got something going on I got to travel somewhere with the kids, volleyball or whatever. Like I can go do all those things. Where before I was chained to. Going in every third day, no matter what.

Ciaara: 15:46

Yeah, that makes sense. So you basically, you have your flexibility, your freedom back. You can work when you want. You can work remotely. And I think ultimately, that's what everyone's looking for, right? They don't want to be chained to a desk nine to five. Let's walk through one of the deals that you've gone through. I know you mentioned your first deal but it doesn't have to be that one. It could be one that was more challenging or one that you learned a lot from and just walk us through what worked, what didn't work, how you found the deal,

Sean: 16:13

that kind of thing. Yeah. Let's go over a medium sized one, I guess we did a 40 unit. And we bought it. We found it off market. It was a realtor in this tertiary market of Ohio. Had seen some of our stuff and called was like, Hey, we got this deal. I know you guys just bought up here. We had bought 180 unit in the same vicinity. And he was like, would you guys be interested? So we went, we looked at it. We thought, man, this is a tremendous value add. The rents were easily 300 below market. It was just not ran very well. Single owner, younger guy. Had never had apartments before. He bought it from his brother. He was the maintenance guy. He was the leasing guy. Everybody was texting him. They're paying him his rent via PayPal or cash app. Just ran that way. A lot of deferred maintenance. And I think that in theory, it looked like a great deal, right? This is a great value. I would come in here, raise the rents to the CapEx, we can refi and get our money back out. And just the normal thing that people talk about. One thing that we miss, I alluded to it earlier where I see people get in trouble is the CapEx. So that was only like maybe my third, fourth deal. What we did and the error that we made from the get go was one we went in only with one contractor and walked all the units and then he gave us his pricing for fixing these units. He only lasted about two or three months of us owning the property before we had to fire him because he just stopped performing. When we went to market to say, okay, we need more contractors. What can we do? The pricing he gave us was so low. We didn't realize it, but it was so low that when we actually brought in good contractors, the pricing had gotten so much bigger. We didn't have enough capex money to bring in quality workers. So that was a big one where we had to really split hairs on. We had to start triaging things like, hey, we wanted to do this. We're not gonna be able to do that now. Hey, we want to do this thing over here. We're gonna have to pause that or maybe we're like, renovating the units. We want to do all LVP and stainless and we want to do all this stuff in the bathroom and now we're just doing carpet and Not linoleum, but I can't even think of it right now. The similar to that linoleum is a brand. So it's the the, yeah, basically vinyl but they make vinyl now that looks like hardwood, or they make it looks really good. So we had to go cheaper on the renovation, which in the end was the right thing to do anyways, because we could still get the same rent increases. But the big one on that one again that we missed was there was like big, there was a couple of big potholes, like in the parking lot of the parking lot was concrete. And we thought, hey, we'll just square this off. We'll have somebody come in and pour it. We had a concrete contractor. Come look at it. He's oh, yeah, that plan sounds good. Here's the price for that. Great. That's what we budgeted. Then when we closed and they started cutting away. The concrete to get it to be square. It started breaking and falling apart all over the place. And what we ended up realizing was, even though we scoped sewer lines, we had never ran into having a scope like the basins where the rainwater goes in the parking lots, like the catch basins. And what had happened was that one was built with cinder block, which is what kind of what they did in the 70s and it had basically just crumbled and eroded. And so when it would fill it with water, it was exiting where it was supposed to, but it was also pouring out of the container and it was eroding the dirt underneath the parking lot. And as the trash truck and other vehicles will drive on it, it was just crumbling it. Again, we saw a symptom of a bigger illness, and we didn't realize that was there until we had bought it. Then again, now we have this big giant square peg of a parking lot problem. And we're going to try to stick it into this round hole that we only had budget like 20 grand for and ended up being almost 100, 000 to fix the parking lot. And that was like us trying to figure out how we're going to do this and make it work as it should have been probably a couple hundred thousand. Stuff like that is, I think, is learned over experience where either A. I'm not going to get into those kinds of deals or B. Now we come through with 3 to 4 contractors. We do formal inspections with groups that we know and trust that have done work for us in the past. So we get the full picture. And that's one of the biggest things that I learned early was, you get that wrong, then it doesn't matter what your returns say. It doesn't matter what the underwriting says. It doesn't matter what the deal looks like. You're off by 100, 000, 200, 000 dollars on CapEx. You're in trouble.

Ciaara: 20:10

Now you have an interesting background. You were a firefighter for many years. I believe one of your partners was as well. And you guys created this education company called the Firehouse Bros. So can you tell me about that? What is it that you guys do there and how do you benefit the community?

Sean: 20:24

Yeah, I appreciate you asking. So Tim and I were both like I was a fire instructor for the state of Ohio and a paramedic instructor. So I would teach people how to get into the career. And when I got out, I always wanted to give back. I always wanted to basically teach people what I didn't know. Cause that's the first thing that I realized when I got in that first deal, like you just don't know what you don't know. And that was like our goal was like, look, what are all the things that we've learned along the way? If I can help people not step in the same holes that I did, how much would that save them? How much would that increase their ability to get into commercial real estate safely? And I always say, be the training wheels for them, cause that's what I needed. That's what I wanted when I was getting into it. And I just couldn't find that. I didn't know. And I would also say that our unhappiness with some of the events that you traditionally go to, because they're very high level, they're very surfacy, they don't really get into the weeds and even just the stuff we've talked about today a lot of you're not going to hear and have conversations about that stuff at a conference, unless it's like you and I talking at a table or over dinner, and we wanted to create something where, look, you can either Attend, we do quarterly multifamily academy classes and go through all the, here's how you find it. You buy it, you fund it, you fix it. You force appreciation and what it looks like to refi the debt structures. Stuff that I didn't know when I got into it or we call it the command center. But it's kind of like mentoring group, where it's very hands on. It's very one on one, like with me or with Tim, and we really just try to help people get here's where you're at. Here's where you want to go. We try to help engineer the path to get you there. And then giving you like the training wheels to do it safely. And wisely so that you don't get into one of the deals that we've been in, where, like I said, you could have wrecked, could've lost it all on any one of these things, if you bought wrong or didn't figure that stuff out. That's what that program is. And we were actually doing our 1st live event here in Columbus. So people can come meet as a person. And then we got speakers and a lot of these guys 1 of them, for instance, he was just spoke at Best Ever conference. So it's people like that, where you're in a conference, you're in 1 of 1000 people. And this can be a room of 20, 25 people. So it's just keeping it small and really impactful.

Ciaara: 22:28

Perfect. All right. Thank you for being on the show today Where is the best place people to find you online if they want to learn more about your company and about the firehouse

Sean: 22:36

bros? You can go to TheStreamGroups.com if you're looking to invest or look at our portfolio. If you're looking for kind of training or figuring out what that looks like for you TheFireHouseBros.com and then I'm on all social media platforms so you can just look my name up and it should pull me up

Ciaara: 22:53

Perfect. All right. Thank you, Seth. And thanks everybody for tuning in today. If you guys enjoyed today's show, please write us a five star review on Apple podcasts or Spotify. Every review helps us to reach more and more people looking to get involved in commercial real estate.

Sean: 23:07

Thank you very much.

23:09

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