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Global Investors Podcast
GI34: Successfully Syndicating Small Apartment Complexes with Aaron Fragnito
February 12, 2020
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GI34: Successfully Syndicating Small Apartment Complexes with Aaron Fragnito

Aaron Fragnito is a Co-Founder of Peoples Capital Group (PCG), host of New Jersey Real Estate Network, a licensed NJ Realtor and a full-time real estate investor. Aaron has completed over 250 real estate transactions, totaling more than $35,000,000 in Real Estate in his career.

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Transcript:

Announcer
Welcome to the Global Investors Podcast, a show that focuses on helping foreign investors enter the lucrative US real estate market. Host, Charles Carillo, combined decades of real estate investing experience with a professional background in international banking to interview experts in all areas of US real estate investing. Now here’s your host, Charles Carillo.

Charles
Welcome to another episode of the Global Investors Podcast. I’m your host Charles Carillo. Today, we have Aaron Fragnito. Aaron is a co-founder of Peoples Capital Group, host of New Jersey Real Estate Network, a licensed New Jersey realtor and a full time real estate investor. Aaron has completed over 250 real estate transactions, totaling more than 35 million and has a real estate portfolio of over 10 million. His company works with qualified investors to create passive returns through local commercial real estate. So thanks so much for being on the show.

Aaron
Thanks, Charles. Glad to be here.

Charles
So I touched on your back background a little bit but can you dive more into what you were doing before prior to becoming a realtor and full time real estate investor?

Aaron
Sure. Well I majored from Rowan University, with an entrepreneurship major which is a pretty open ended major. I had a landscaping business a small painting business before that, but I really didn’t know what I want to do with my life like many college graduates and so I went out to Colorado Springs to actually teach ski for Steamboat Springs actually in Colorado for about six months I was a ski instructor and through that I read a book called Rich Dad Poor Dad ready for that book, right? And of course, changed my life my friend change my life is many story I’m sure you hear on your podcast, you know, I read that actually read around senior year of college and then I started reading Donald Trump University books and David Lindahl and all that stuff and it made it look so easy to start a real estate investment company and all you had to do is go put up a letter of intent raise a little money, you’re gonna buy apartment buildings, so I so I don’t have any money or experience So I need to start as a realtor to kind of learn the market and make some money and work my way up from there you know, so I went back to Jersey I got my real estate license and I luckily was able to live a home my parents at age of 23-24 kind of getting started that allowed me to get started as an agent because I made about $500 my first six months and I remember my first commission check I made was actually $5,000 and I worked my butt off for it as you know, your first time you get paid in the industry is the hardest time you get paid and my broker gave me $500 and said read the fine print. So I then learn to read the fine print and at that point, switch brokerages, built up a team over time started flipping houses and met Seth Martinez, my business partner to this day and we started buying an income properties multifamily.

Charles
Nice. What was the main factors that led you to choose real estate as your investment vehicle?

Aaron
Well, you know, I really want to build wealth I really wanted to be able to have a passive income and not have to, you know, my options when I graduated college in 2009. I remember going to a job fair at the college and enterprise rent a car said that it could start me a $32,000 a year by the time I was 65. If I can make enough to retire if I put enough away my IRA, and I just didn’t appeal to me, and I knew I could use a little better than that. And my college advisor said take the job, it’s the best thing you guys 2009 you know, I said, No, I have a passion for real estate. I’m going to figure out how to make this work. And you know, it was very difficult, but I always and I still do to this day have a real passion to own real estate. I see beautiful buildings and you know, some are outside of my league and others are right up my alley. I’m buying real estate now that I’ve driven past as a kid and a teenager and you know, I buy real estate locally, kind of where I grew up as well and it’s really cool to buy a big, you know, 10,000 square foot building or something that you drove by as a 17 year old and having no idea how that all works and now I’m actually the guy buying those large commercial pieces of real estate in town. And so I always had a passion for that and that is able to not take the enterprise rent a car job and all my dreams.

Charles
Can you briefly explain a little bit about apartment syndication to our listeners?

Aaron
Sure. So apartment syndication is basically when you pull together capital from a handful of individuals, it could be one person or it could be up to generally 35 or so. But it’s basically a pool of capital together and those investors are silent investors, they’re non voting members of the LLC, and that means they don’t have a voting rights so therefore you’re selling them a security and the SEC is notified when you put together capital in that way. And it’s not too complicated if you have the right sec attorney but essentially pulling together capital and buying a bill.

Charles
Nice. And what markets in Jersey, are you guys focused on now? Are they if you know explain a little bit about them if they’re C or B. What type of properties you guys are kind of focused on purchasing?

Aaron
Sure, we look for six to 25 unit apartment buildings that are C’s or B’s, you know, we try to make us C into B or you know, that’s really our sweet spot, we try to pick C plus and make it a B, you know, and that’s a nice place to be in the market. We got started with D’s we got started with you know, tough real estate in tough areas. And you’re one of the first multi families we bought was on gun set at is called sunset as we figured out who bought is actually gun set and there would be like murders in front of our property. You know, just tough blocks. So, you know, getting started, we realized that if something looks really great on paper, they may be too good to be true, you know, location, location, location is important, and in the last few years really improved our holdings. But I’m not the guy who buys the fancy stuff either. I do not buy Class A real estate that’s hard to cash flow on and also gets hit pretty hard and possessions right in the middle of the road.

Charles
Yeah, for sure. Like I know that for my first couple real Investments was probably like my third one I purchased. And that was, it was like a C minus kind of, I guess you would say property and it was just I mean, what a nightmare to get it to get it going. It’s nothing, it’s just the difference between a C minus and a C plus makes all the difference between tenants, between everything, your turnover, everything.

Aaron
Well, there’s certain areas, you’re just not going to get a quality tenant, you know, and it’s because you’re just not gonna want to live there. It’s too dangerous area. So, you know, one of the tests I make is like, Am I comfortable there, you know, driving by going to the property, going after hours, you know, am I comfortable walking down the street? You know, and and the answer’s no, then, you know, maybe it’s where you start with real estate investing, but it’s not where I found a lot of the wealth was created. You really want desirable real estate that grows in value over time, and is more recession resistant.

Charles
Yeah, they’re not going to appreciate and they’re going to be a management nightmare. And the property manager you’re using for D is not going to be your C plus and above property manager that guy’s that guy’s going out the guns that avenue with a gun.

Aaron
It’s wild. Yeah. And the management Is so insensitive for that, you know, and it’s so degrading. Oh my gosh, getting yelled at by people, you know, who have their entire rent paid? It’s just by the government. It’s great. I love it.

Charles
So what is your normal course of action or business plan when you purchase a property? Are you guys you’re doing value add to it? Are you refining it? Or do you like to sell them or?

Aaron
So yeah, we refinance the buildings generally. You know, that’s really our the best strategy tax strategy at the end of the day, we feel we also buy in an area here North Jersey, where we can really establish a nice amount of wealth growth, equity growth. Over time, we bind desirable areas with a lot of people living in a small area that’s North Jersey for you. We’re all running into Manhattan every morning and coming back to our apartments every night. So you know, I buy near train stations, that get In Manhattan in less than an hour, I don’t do Manhattan I buy outside of Manhattan on the Jersey side. And we know these markets really, really well doing for about 10 years now. So we know which areas to avoid and which areas are really up and coming and have great opportunities. So you have to know your markets well, but you know, yeah, it’s, it’s, it’s important. Stay local like that, also, and we focus on you I have sold buildings we just sold a 25 unit about a year ago made a nice profit on it. But you know, when you sell a building if you don’t do a 1031 tax deferred, yeah, you know, then you’re just going to get nailed on taxes. And that’s not a good strategy. You know, unless you have like something amazing you know, the next Facebook you’re going to put that money into then fine so then go but if you don’t have the next Facebook, and you’re doing well on your buildings and generally 60 minutes or larger, we cash flow nicely on good times and bad. And then, you know, real estate’s a great place to park your capital long term. I know, as long as it’s managed well, we have a management company in house, which is very, very important to our model, then you’re just going to keep on cash flowing with it, if you continue to raise that cash flow, and lower your expenses over time you’re building just to grow in value. And then every four to five years we refinance, you know, we pull out some equity, we harvest some equity, we pocket a bunch of cash along with our investors and that money is tax free money because you’re not exiting the investment. Okay, so, you know, we have a seven year right now we’re looking at right, we were like, okay, we just sell the building, you know, we got a sheriff sale auction for about 175,000. Okay, it needs another 50,000 Okay, and it’s worth about 450,000 or actually as is it’s worth like maybe about three and then if we renovated be worth like about five Okay, so, right okay, well we can put in another 50 into a one in four to 25 let’s say 250 after costs, you know and then you go ahead and the bank appraises at 500,000 and the bank says okay, pull out 300,000 of that, of that 500 at a very low interest rate, right with a phenomenal low interest rate and say okay, so we we get the 300,000 we get back 250 we put into the building to buy it and renovate it. And we pocket another $50,000 on top of that, and tax free money. And then you know, we have 200 grand equity so we can always sell the thing we really want to harvest that equity but we make about $100 a door and we have you know, management company, it’s a management fee. So, you know, the end of the day, I’m making a few hundred dollars a month on it, get some tax benefits from it. I got $50,000 back on top of all the money I invested, and I kept every dollar that 50,000 right, who normally if I made $50,000 and said flip the property I made 50 grand, I’m thinking about 15 of that to the IRS. So I’m really making about 35. You know, so you flip a property to make 50 grand, you got to make like 70 grand, because you can tax so heavily on flip profit. So you know, I flipped over 50 homes in my career, and that’s great. That’s Brandi on HDTV, and they tell you to go flip houses and make it look so easy. But the hardest dollar in real estate is flipping houses, you know, fixing some old broken home and making it a beautiful thing that’s going to pass an FHA home inspection. Come on, that’s a hard job, you know, and there’s not a lot of money in it. Because you know, if one of them loses in the year, and you did 10 of them, that one loss could wipe out three or four wins. You know, better off getting a job in enterprise rent a car.

Charles
Yeah, it’s funny with what you’re saying about doing the refinancing, because that’s a business model that not many syndicators do and I feel it’s so great, because when you’re selling it, yeah, you have the capital gains, but you also have any type of that deep appreciation that was written off now it comes and gets recaptured. So it’s Yeah, so especially where you are in high tax the Northeast, you’re getting depreciation on that off, you know, comes off, and now they have to pay it back off as well, you know what I mean? They got to pay that back and they have to pay their capital gains. So it’s a great model you have on doing refinancing, especially at the rates we have today.

Aaron
Yeah, exactly. And then we do a floating rate as well. So if we do refinance into a higher rate, we can kind of protect against that a little bit. So we actually get paid a premium if we refinance into a higher rate in the future. So it’s called a floating rate. That’s the way it just kind of hedge your bets against interest rates going up. And again, another long term strategy and then the 1031 tax difference at the end of the road, I’ll say we own a building for 15 or 20 years and we’ve exhausted the tax depreciation and now we want to go ahead and sell it and trade into a bigger building. You know, the 1031 tax difference, put that money from the sale into a third party have certain amount of time to identify it a similar building and moves on and, but you could trade up into an amazingly better building with the 1031 tax difference and defer any tax owed. And now you’re leveraging that money as well. So, you know, if you sold a building and you made a million dollars, you normally would owe 25% of that government, let’s say. So you really are making $750,000. But if you do, you know, and then you go, if you want to go buy a piece of real estate with that, you’re going to get alone and multiply that 750 times four. So you’re gonna buy a piece of real estate for about $2.9 million or so. Okay, right, seven or $50,000 down. But let’s say you do a 1031 tax for its right and you sell that building, you get a million dollars, you defer the taxes. So now you have a million dollars in cash, go buy that next building. And if you execute properly, well, million times four, that’s a $4 million building. So you just went from buying a $2.9 million building to buying a $4 million building. And we all know that’s a lot better. So it’s an awesome tax strategy.

Charles
Yeah, that is that’s fantastic. So what are your What are your partners and you look for when you find assess potential properties?

Aaron
Well, we’ll look at 400 properties to buy one. There’s a lot of different ways to value a property you know you obviously have your cash on cash return your cap rate and things like that but really to get into the nitty gritty you have to understand your market and be able to it’s a bit of artists be able to see opportunity through the clouds you know and and recognize opportunity where others don’t actually dig into the numbers a little bit and figure out that the owners brothers on payroll for $52,000 a year and gets a free apartment but doesn’t actually do anything because then there’s a management company also getting 8% now and wow all of a sudden Wait a minute, this is a deal there’s $50,000 a year going in some idiots pocket that doesn’t do anything. This is a deal I’m gonna fire that guy. So you know recognize that opportunity look at a building you know I look ability to say oh my god is not making any money. I bought a six family for sake about a year ago is making $37/month positive cash flow and I bought it and Our investor who’s invested for years with us said, Listen, I trust you guys, I hardly open the things you send me anymore. I just agree to it, you know, but basically, are you sure about this once they get $37 a month, and as a Yeah, trust this is a lot of value add in the rent through about 30% below market value. So in just a year, we brought the rents of now the buildings making nearly $3,000 a month positive cash flow, which is 100 times more than it was making before. You know, and the building value, we bought it for 450. It appraised at 550, the day we bought it, the time we bought it and it’s probably worth 750 now, after a year of owning it, you know, you can say it’s worth 655 you know, we have 200 grand equity and it’s making money. So awesome investing.

Charles
Yeah, that’s awesome. It’s knowing knowing your market and then knowing the expenses for that market, what it really costs to what it really costs to operate that property because you’re finding a lot of over expenses that are you know, usually over what we usually consider the 50% mark, they’re like just very high. But usually in this market or in any kind of market when you’re looking at properties, and you’ll find like, we were looking at a property and they were saying the management fee was 1% and we’re like, we’ll go back to the broker will wear what mainstream companies managing this thing for 1% you know what I mean? It’s completely so it goes both ways where you’re finding just discrepancies and something that you can make more efficient. But what are some red flags that you find when looking at properties that make you take a second look or third look, or just pass on it?

Aaron
Well, a lot of times the red flags are like people that over inflate numbers and you know, just send you or the cap rates 10% you know, that here’s the it’s a you know, there’s there’s three expenses for this bill, you know, Wow, I didn’t know that. That’s amazing that in dream world, so you know, it’s, yeah, I mean, that’s the red flags are all over the place. You want to you know, we deal with sellers directly, a lot of times and That’s always difficult because they are full of tricks and they’ll say one thing and do another and you know, so having brokers involved in the transaction does I think help you avoid pitfalls and red flags sometimes especially in larger transactions. So you know, we try to work good brokers that know not to waste our time. Generally work with some of the bigger names you’ll market sybilla chat, but if you start to kind of get with brokers that are experienced, don’t want to waste your time because they know a serious guy who’s going to really buy this building is going to nail down those numbers. So you might as well do it for me, and they’re not going to take the listing if it’s a piece of junk deals. So, you know, trying to work with good brokers is a good thing. And you know, but then always looking into the numbers further. One time I bought a building and the seller sent us a bunch of bank statements and the bank statement show even more rent roll coming in. They we thought the building was capable. We’re like, Hey, buddy, you know, this building is making more money than you told us. Is that true? Yeah. What somebody your bank statements What? You know? He’s like, yeah, yeah, what it’s a good building. You see, I told you see. And so we bought the building we figured out it was actually like a bunch of other properties that weren’t included paying into his bank account that he told us where those properties and the deposits weren’t very clear. And, and so he tricked us, you know, now it was still good investment. There’s a bunch of other avenues used to measure the intimate property, but it so happened that about a quarter of the tenants weren’t paying rent in the building, you know, it wasn’t the end of the world. We ended up repositioning uncooperative tenants, and then the building ended up being a very profitable investment. But, you know, there’s a perfect example the seller that shows falsified bank statements basically, you know, by just claiming other income from other properties was they were not property. And that’s a that’s something you know, I guess now I know can be a red flag.

Charles
Yeah. There’s only so much due diligence you can do so if you’re getting the P&L profit and loss. You’re getting rent rolls, you’re getting T-12 whatever. And, and then you put that toward your bank statement and you’re trying to you know, you’re kind of looking at them and looking at the information and there’s not, I mean, there’s only so many ways you would know what’s going on and, and then the other thing too is once you take over a property as well, you know, somebody’s paying late, someone’s not paying late, you don’t know that you don’t know how strict they are in late fees. So all this stuff has to get won’t gets washed out in the first six months of you owning a property and kind of figuring out what is going on to get it going, which isn’t the end of the world, but it’s something that can kind of slow down the whole value add process of that you’re trying to do,

Aaron
Right, right. A lot of the research we’re doing isn’t always on the building. You know, like that building Passaic I bought for 450,000 likes, I know that I’m going to work with all the tenants there and do cash key. So really, wherever the building is doing right now, isn’t all that important. No, you’re buying good building in a good area. It’s good condition. You have an inspection of the property done is physically it’s in good shape. And you know, you know that there’s room to improve. So whatever the owners collecting isn’t all that significant because he’s a bad property owner and that’s why he’s selling you the property for 25% off and you’re going to do better than him you know, so you also have to have confidence in your system. But you know, another time I bought a property from a guy who was the town inspector and that it was a big mistake because he ended up just finding us and finding us one tenant put a TV on the corner for a few days one time and he find this $11,000 because he thought we bought the property to cheaper price from him and you know, we got a great deal on it but he was angry after the closing so he just nailed us some fines and I learned that day that don’t buy property from the town inspector.

Charles
So with passive investors investor you. How are they How are you usually compensated through syndication? Say you’re doing a refi in a property you take over a property your plan is to refi it say in three or five years, how are they compensated on that?

Aaron
Sharp so our investors own a percentage of the LLC we create a new LLC for every purchase period, a small fund for every purchase. So if you own 10% the LLC you get 10% of cash flow 10% tax depreciations at the end of the year, and then we refinance the building, you know, we buy cheap and forced value into it and get better cash flow out of the building, we get our expenses down, figure out more ways to make income on the property when we go to refinance after about four to five years of doing that. And now the building appraises for much higher value. So we pull out a 70% loan to value amount 70% of the property value, not too much a safe amount but a higher amount of debt. We pay off our old debt. So there’s cash left over from the cash out refinance. And then we split that up amongst the investors. So there’s $500,000 left over from a cash out refinance will 10% of the LLC get $50,000 that day, at the refinance

Charles
Nice when you’re speaking to new investors, and I imagine you do this as being a real estate agent, as well as just working in General networking, what advice would you give to new investors? Maybe they haven’t started avoid mistakes you made, of course. But what other things would you say?

Aaron
Well, yeah, I mean, based on some of those stories there, you know, I mean, at the end of the day, we, you know, the easiest money I made in real estate was being a listing agent as a realtor and owning income properties. Okay, now, the property management individ was a tricky thing to learn to develop property management company took many years to really perfect that craft. But I have to give people you know, a warning, do not just jump into fixing flips, right? There’s so many people that go to these guru events. And they’re like, yeah, go buy my $30,000 book and CD and start flipping houses. Like, that’s crazy. Because you’re flipping houses as a construction company, you’re starting a construction company. You’re going to be a general contractor, hire a general contractor that knows a lot more than you about construction. And whatever he tells you, you’re probably going to go with unless you’re small Then your general contractor and go struction better than him, which if you were, you probably would need to hire him. So, you know, you getting tricked by your contractors with fix and flips is just going to happen. It’s part of the business, they’re going to tell you one thing and do another, they’re going to be great for years and one day, they’ll just never show up again, break your heart, you know, the promise you they could do a job for 100 and it really cost 200 at the end of the day, and Oops, that’s your problem. Now, you know, he’s nowhere to be found. So, you know, all these things happen with contractors, construction projects are precarious. There were so many moving pieces, you have town inspectors, you have architectural drawings, you have the townies to vote on variants and things like that, you know, so I’m flipping houses is the riskiest way to make money in real estate my opinion. It’s the most difficult, the most complicated, and it’s the highest risk by far. So that’s why we developed our company people’s Capital Group because buying apartment buildings isn’t easy. and managing them is definitely an acquired taste. But over time, once you really perfect the ability to find these good deals, analyze properties properly, recognize that value add. And then the other half is knowing the local town ordinances, knowing how rent control works, knowing how to structure these acquisitions, how to import our have relationships with banks, so you get really good terms on your, on your money that you’re getting to buy the real estate. You know, all these things are important. The management of the real estate afterwards for 510 15 years, there’s a strategy for each block of time and one more aggressive, less aggressive, less aggressive, forward over time. And so you know, you have to go to execute. But if you can do that, or work with a company like ours, where you can invest passively and get all those benefits, then it’s really a better way to make money in real estate. People always need a place to rent, flipping houses if the market drops out. Good luck, you know, but if you own income properties in Good area where a lot of people want to live, middle the road real estate, not the most expensive guy in the block, not the cheapest that people are going to want to rent your space to go pay for.

Charles
Yeah, no flipping house for sure is a very high risk. And they always tell you and you’re going to have these seminars and 13% you get your, you know, get your money at 13% with three points and all this kind of stuff. And, oh, it’s extremely high, we’re gonna make all this money and the biggest problem we have when we did flipping years and years back was finding the having the crew consistently to do the work. And I was full time in real estate and even doing that, I don’t know how people would even do it part time because the project management, it’s not like you just show up every two weeks and check on your project. It’s a daily thing daily, not I mean, where you have to be there, let people in make sure that stuff’s getting done. You have to cut checks. somebody puts the H back system in at 9am but not gonna wait till you know, they’re not going to wait till 7pm for them to get their check. They want it when they’re leaving and all this stuff. So yeah, but anyway, so well thank you very much for being on how can listeners learn more about you and your business?

Aaron
Sure, our website is PeoplesCapitalGroup.com that’s people’s with an S. PeoplesCapitalGroup.com and we have events here at the office. Every week we have webinars as well. We actually have a meetup group called New Jersey real estate network with over 3300 members in it. New Jersey real estate network.meetup.com.

Charles
Okay, awesome. Well, I’ll put all those links and all that information into the podcast notes in the YouTube notes. So I want to thank you very much for being on the show today. And I look forward to speaking with you soon.

Aaron
Great, thanks a lot. Have a good day Charles.

Charles
You too.

Charles
Hi guys, this is Charles from the Global Investors Podcast. I hope you enjoyed the show. If you’re interested in investing in real estate and you don’t know where to begin, set up a free 15 minute strategy call with me at schedulecharles.com. That’s schedulecharles.com.

Announcer
Thank you for listening to the Global Investors Podcast. If you’d like to show, be sure to subscribe on iTunes or Google play to get new weekly episodes. For more resources and to receive our newsletter, please visit global investor podcast.com and don’t forget to join us next week for another episode.

Announcer
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of harborside partners incorporated exclusively.

Links and Contact Information Mentioned In The Episode:

About Aaron Fragnito

Aaron Fragnito is a Co-Founder of Peoples Capital Group (PCG), host of New Jersey Real Estate Network, a licensed NJ Realtor and a full-time real estate investor. Aaron has completed over 250 real estate transactions, totaling more than $35,000,000 in Real Estate in his career.

Peoples Capital Group (PCG) works with qualified investors to create passive returns through local commercial real estate. The owners of PCG are experienced in locating discounted apartment buildings for sale in Northern NJ and implementing a value-add strategy to create max returns for their silent investors.

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