Mastering the BRRR Strategy and Brewing Beer with AJ Shepard | The Real Estate Investing Club #6

Transcript of “Mastering the BRRR Strategy and Brewing Beer with AJ Shepard”

Gabriel Petersen 0:01
And we are live. AJ, thank you for joining us today. Where are you calling from?

AJ Shepard 0:07
I’m calling from actually one of my investments.

Gabriel Petersen 0:10
Nice. Yeah. That’s uh, it looks like a single family. And

AJ Shepard 0:15
so we it’s a it’s a duplex in downtown Portland and we are converting the basement into a third unit. Oh, wow. Nice. So I refinished the the two, two units, and then I’m working on the basement that currently at us are a huge thing in Seattle right now.

Gabriel Petersen 0:31
That’s, that’s a big value play that people are doing up here too. Yeah. All right. So to get started, why don’t you tell everybody who you are, where you’re from and how you got into real estate in the first place?

AJ Shepard 0:46
Sure. So my name is Adrian shepherd. I live in Portland, Oregon. My brother and I are owners of uptown properties. Shepard brothers management, uptown beer. co we got into I got it. Real Estate when I was fairly young 23 bought my first place from my parents and I was able to house hack that rented out to a bunch of college students. And then from there, I just ended up kind of in the downturn in 2008 started picking up properties and we really utilize the bur method. And kind of during that time, I was a strong w two employee. So I had was able to get financing. I worked for a general contractor, like heavy industrial. We built the first coring plan in like 30 years I’ve been warehouser I’ve worked on like steel mills paper mills traveled gold mines, one of the projects was in like Dubai. Yeah, it was like heavy stuff. It wasn’t like a general contractor like working on houses or anything right? When I take on like a house project. It seems small in comparison to what I used to do, which is kind of nice. It’s not, doesn’t seem too complicated. So that’s kind of a background of how I got some training and contracting. Yeah.

Gabriel Petersen 2:16
Sorry. Do you act as the GC for your own flips down there in Portland?

AJ Shepard 2:21
Yes, we have a contracting company as well. Oh, wow. Okay. Okay.

Gabriel Petersen 2:25
So, so kind of just a rehash, you started, you know, 22 you bought your parents house, got in the house hacking. From there, you started buying rentals. And now it sounds like you You have a brewery you have a construction company. You’re all over the place. That’s, that’s awesome.

Unknown Speaker 2:44
Yeah. Cool. Cool.

Gabriel Petersen 2:48
So I guess this is going to be next question is I usually ask what is your what do you do in real estate? What’s your focus? It sounds like you’re, you’re you don’t really have one specific focus but If you can kind of sum up, you know all of your endeavors, what what is it that you do? What’s your what’s your, your main bread and butter in in real estate.

AJ Shepard 3:09
I mean, it’s the that first project that we did is really kind of our bread and butter. We have moved up and scaled up. We just completed a nine unit project and a 13 unit project. Okay, we took the rents on the 13 unit projects, five of the units were vacant when we picked it up, and we’ve raised the rents from 700 up to 1100 or so. So we we buy those properties, fix them up, get the cash for keys, get people out and get the unit’s fixed up, get the rents up and then we typically refinance, pull our cash out and then go look for another deal. So we’ve we’ve grown our portfolio, we manage about 500 units now, about a quarter of that as our own project. Coolio. So we do manage for other people obviously. But that’s kind of our bread and butter like we we set up the construction company to serve as the property management company. We don’t really do like projects for other people, we property management company was set up to service our own portfolio. Just take on other clients. So that’s kind of our bread and butter is that dilapidated problem child property that people just get tired of and need need to get out of. And we’re usually the ones that can come in, handle the hard problems that a lot of people don’t really want to look at. So we’ve used we’ve used hard money in the past or investors or all sorts of different financing techniques to get in, do the construction well and then get long term debt.

Gabriel Petersen 4:56
Okay, so you burn the vast majority of your projects in It sounds like I mean, most people, when they when they do fix and flips they stick to, you know, single family houses. It sounds like you just said 18 units, so you do multifamily as well.

AJ Shepard 5:10
Yeah, we started out with a single family homes, probably five, four or five years ago, the prices started getting up to be to the point where the rents didn’t really it didn’t financially make sense. So we kind of moved into duplexes and for plexes so we’ve done, I don’t know, five or 10 for plexes. And then we’ve recently started getting more into, like, we’re looking at like 1520 minutes. Now, after we’ve done we’ve done three or four, three projects at the like 10 unit level, and then looking to now do 20 or 30.

Gabriel Petersen 5:52
Gotcha. And so you’re when you said that it doesn’t really make sense financial you’re talking like the rent doesn’t won’t cover the debt on When you buy a property a single family property, importantly the rent doesn’t cover the debt.

AJ Shepard 6:04
The cash flow the rent coming in doesn’t the the market has been flooded with buyers and there’s not a much of a supply of houses. So the emotional first time homebuyer comes in and throws a huge offer at $500,000. And it just drives the prices up so that it doesn’t. It’s not on par with the rounds on Yeah, you’re exactly right. Like it doesn’t cash flow.

Gabriel Petersen 6:26
Yeah, yep, yep, yep. We we have that same thing going on here in Seattle. So we’re right there with you. It’s hard to find a single family that is that fits the criteria of buying it as

Unknown Speaker 6:37
a rental

Gabriel Petersen 6:39
is virtually impossible. Actually, we’ve been we’ve been marketing for for a long time, and unless you get it at a steal of a deal, it’s just it’s just not gonna work out. So

AJ Shepard 6:46
yeah, I mean, again, kind of back to our focus is that we pick up properties that have many problems. Yeah, a lot of the like the the two nine, the nine unit and the 13 unit that we just picked up. At the beginning end of last year, beginning of this year,

neither of them were financing

as far as like agency debt, so we actually tried to get Freddie Mac loan alone on the nine unit. And they came back and said, No can do you need to do like hundreds of thousands of dollars of repairs. So we ended up negotiating down a little bit with the seller but putting hard money on it. Getting those repairs done fixing it up, and then we just resubmitted for a refinance like two two weeks ago, and I think I heard back yesterday. It’s looking good, so nice.

Gabriel Petersen 7:36
Yeah. So going in a little bit into the nuts and bolts of you know, kind of how you run your business. So how do you get these deals? How do you find the deals, attract the deals? Is it mostly networking? Do you do digital marketing letters? You know, how do you go about finding the deals that you’re flipping?

AJ Shepard 7:54
We we run a brokerage. So I have five brokers working for us. They’re always looking at real estate. We have wholesalers FedEx around, we listen to Scott Derringer. He’s a wholesaler here in Portland. He was presenting a wind event last night. But yeah, we we do wholesale. We don’t do a ton of direct marketing. I have started a little campaign hasn’t been fruitful yet. We do some cold calling, but haven’t haven’t gotten a deal from there. We’ve mostly gotten our deals from the RL mass and wholesalers,

Unknown Speaker 8:36
the RMS MLS MLS gotcha.

AJ Shepard 8:40
Yeah. Or loop net two. We’ve gotten some deals off with 904 commercial. Okay. Yeah. And usually it’s like the ones that have been on there for a while. And so

Gabriel Petersen 8:52
you go to them, you’re like, obviously this isn’t selling so how about Yeah,

AJ Shepard 8:54
sometimes that’s all the seller needs is an offer. So we’re not afraid to like throw out some offers there. You know, writing an offer when, since we’re brokers as well doesn’t take us a lot of effort. Yep. So we were looking at a two and a half million dollar project just this last week and again, not financeable, especially in the current climate. It was it had four offices in it. Oh, okay. It’s mixed use. Yeah. So it was mixed. And the, the, the tenants in the office were not very desirable. And I mean, the commercial lending right now is as tightened, tighten the noose very, very much. And the agency debt on multifamily won’t count the income for the office. So it’s significantly higher and we went to the seller and see if they carry the contract and they’re not in essence, we’re, we’re trying to come up with some creative on what to do. We’re thinking we might turn the office into multifamily. Okay. So then we can but it’s a question Like well how can we can we get the office tenants out? So working through that problem right now? creative financing

Gabriel Petersen 10:06
is one of the I mean, definitely a good thing to have in your back pocket. That’s what so we market a lot for mobile home parks and that’s one of the things I mean we’re we have one under contract that we just cannot find financing for because well it’s an RV park but people just do not want to lend on that right now. And so getting creative with that with seller financing is is definitely something that I need to get better at. But that is a good a good tool in your back pocket for sure.

Unknown Speaker 10:36
Yeah.

Gabriel Petersen 10:38
Okay, so you do single family do multifamily? When you look at a deal, obviously you’re looking for you know, something with a lot of needs a lot of love something that needs you know, has a hole through the wall or something like that. So, kind of go into what is the criteria that you look for, be at numbers area, whatever, whatever it is, what is your criteria that you use to identify If I have a potential project for you

AJ Shepard 11:02
yeah so like what type of metrics do we do we look at if we are having affinity to two bedroom units the Portland market the zero bedroom and the one bedroom units just the the price per unit is a little bit higher on them as well there’s a large supply coming into the market all the all the new studio apartments yeah all the all the new apartments that are coming online like the the new ones, the luxury ones are all zero bedroom, one bedroom. Really interesting. Yeah. So that’s, that’s kind of a niche that we also kind of like, when we look at stuff, we like to see two bedrooms, or at least some sort of two bedroom accent. But we actually I mean, we look at income. We usually do a pro forma off of what we believe that the rents can be and kind of a back of the napkin when we’re looking at something we’re printing again, we’re going A lot of units here in Portland. So we’re familiar with the area familiar with where we look. So we can, I can look at usually a deal sheet and see if the rents are low. And we’re typically looking for a deal where the rents are low and we know that we can get them up or that we can implement rubs, if you’re not familiar rental utility billing system, makes the tenants makes the tenants pay for the rent on a pro rata basis. So we also use like the 1% roll. I mean, I know a lot of people are familiar with BiggerPockets and Brandon, they’re 1% roll. If you can get one, the one 1% of the sales price to be around you. That’s a it’s a killer deal. I want to say that we find we can get pretty close to that after we’re done with construction.

Gabriel Petersen 12:53
Okay.

AJ Shepard 12:54
So as we look for you know, you got we we We have a good idea of what our budget for construction is going to be. And then after we know that we can put that money in, and then we look for a stabilized, if we’re stabilized at like, point eight to 1%, then we know that that’s going to be a pretty good deal. So if you look at the current rents, and then where they can be, and use those future rents, and then you use the construction budget and the financing that you have, and you plug all that in, we’re somewhere between point eight and 1% of the sales price plus the budget, like it’s usually going to be a pretty good deal.

Unknown Speaker 13:41
Nice. That’s very nice. So we will

Gabriel Petersen 13:44
I, many people say that you should never be using what a property could be you should only buy as it is. But I mean, I’m with you, if you if you can, if you can see that you can put so much into the property, especially if you’re I mean you have a contracting company, you’re a little bit better at this. Most people but if you if you know what it’s going to be, I personally think that you can definitely be using those numbers to to buy the property.

AJ Shepard 14:08
Whether that’s in real estate, that’s how you make money is adding value. Being able to increase those rents or decrease expenses are the levers that you can pull that will make a property worth more and until you make your money that’s why you can do it better than the last guy. Yes. Yep.

Gabriel Petersen 14:30
All right, we’re gonna shift gears a little bit here. I want to hear a little bit about your stories, your experience, that kind of thing. So you know, real estate has its ups its downs, peaks and valleys. You know, it’s a roller coaster sometimes. So what has been two things what has been both the hardest thing you’ve experienced so far? And kind of what lesson did you learn from that? And then you know that the peak what what’s been the thing that you’ve enjoyed the most of your real estate career?

AJ Shepard 14:57
Ah, one lesson that we learned, we learned a while ago is when we first got started out we were kind of taking anything that we could get. Yeah. And we were doing contracting for someone else for some other people. And what we we ended up not getting paid on a project, like a significant amount. I think we ended up losing like $150,000 on it. And through three or four years of court battles like it was we we ended up walking away with nothing. So that was a very, very hard lesson. And we we learned, make sure have everything in writing money up front, like not not waiting till the end of the deal to get your money if you’re not at least involved in real estate some aspect. Yeah, so that was a hard lesson. So we That is why we one of the reasons we only do work for ourselves. With the we do some work for our Property Management clients, but having an understanding of what you can and cannot do. And how that lesson is helped is recently, we had one of our property management clients, and he’s like, he’s got a four Plex. And he wants to add two more units to it. And he’s like, Hey, can you guys help me out with us? And that’s like, that’s a $250,000 project that would take up a ton of my time, and then I’m not gonna get any benefit from it other than like my contracting, right? That’s just, it’s just not worth it for me to spend my time there. So I guess that lesson has proved to be helpful in some aspects that we we know what we can and cannot do. And I think people respect that too. Like he came back and I was like, and you guys are awesome. You have you understand that you can’t take it on and you understand that you may not have been able to perform on it and like I really appreciate just your honesty. Yeah, that was that was kind of the Good boy. My son kind of made me feel good after turning him down to

Gabriel Petersen 17:05
realize you both did the right thing for him and you save time. Yeah. Could have been spending in other words, yeah.

AJ Shepard 17:11
So I guess the lesson is Be confident in what you’re doing. And if you’re going to do it, do it. Well. What was your reminder The second question you had there? Yep.

Gabriel Petersen 17:22
Yeah, so that was a that was that was the trough. So what in real estate? What has been your peak? Like? What do you enjoy the most out of everything that you do? You know, what brings you back to real estate?

AJ Shepard 17:34
Man

coming in and seeing the finished product is like one of the best things I think is in real estate like seeing that before photo and the after photo and knowing that we’re the ones that made that happen, is super gratifying. And maybe that’s like self serving. I don’t know I’m, I’m more of a creator, not a disrupter. Yeah, so like adding value creating value like that, that is what keeps me going back and looking for those hard projects and looking for a way that we can create value. So it’s, it’s pretty exciting like you see in some of the places and then coming in and seeing brand new countertops, brand new kitchens, like it’s just it’s, it’s pretty gratifying. So that is what keeps us coming back. I mean, I wouldn’t lie when but, you know, money’s nice. Of course. And like we were, it’s, it’s fun scaling up like, we’ve got a bunch of employees now. I think. If you talk to me three years ago, we had it was just me my brother and maybe two employees, and we’re up to like 17 employees three years. That’s it.

Gabriel Petersen 18:52
So how long did it take you to go from just you and your brother to the two employees

Unknown Speaker 18:58
that took The years

Unknown Speaker 19:01
Wow, okay. Yeah.

AJ Shepard 19:04
He started in like 2010 like opening the company and opening other doors before it was just my brother and I buying properties, refinancing them, we manage them ourselves. So we started buying properties in 2008. together. We picked up one or two, the first year three or four, the second year, kind of five or six. And then we just kind of kept growing that way. We 2010 we opened up the property management company, we opened up the brewery. And then yeah, the property management company has actually provided a lot of good leads to we ended up buying 14 houses on contract from one of our clients, which was and you know, it’s kind of interesting she was her husband had passed away and they were the ones that developed The whole block. And she’s like, I want to sell them off one by one. I was like, I’ll do you one better, I’ll buy the whole thing. And she’s like, that would be amazing. She’s like, as long as you keep them as rentals, and you don’t like sell them off. And I was like, Yeah, absolutely. Like she wanted her legacy and their legacy to live on. Right. Like, and, and, I mean, to this day, we still send her a payment every month. So it’s been, it’s a good relationship. And it reminded me of the fact that, like, everyone’s interests are different. I mean, like, trying to find a motivation as to why people are selling is very important. And trying sometimes it’s just not it’s not always money, it might be something else. So there’s opportunity there. Yep.

Gabriel Petersen 20:48
Yeah, we’ve said we’ve seen that in our own our own business too. It’s you never know what somebody is actually. What somebody values it’s, it’s huge. I mean, a lot of times it’s not money, especially when they’re coming in from like a you know, Google Search how to sell my house fast, something like that. So we’ve seen that ourselves too. Okay, so now we’re going to actually, before we move on, do you have one of one favorite project that you’ve done in your in your entire, you know, 15 year span

AJ Shepard 21:17
favorite projects? Um, we’ve done a lot. We did a four Plex It was one of those, I think our first four Plex. And we were able to take the rents from like, I want to say like 400 to like 1200. Wow. But yeah, I mean, just getting those people out. Like we took it all the way down to studs, and we took out some walls, like repre, sheetrock everything, all new, eminent when we came in, like the tenants were just like living in filth. And so it was was one of those like stark differences that really worked out and ended up being great. So cool. Yeah.

Gabriel Petersen 22:10
And Okay, so now we’re gonna we’re gonna switch gears one more time. I want to hear a little bit about you know, a little bit about your personal stuff. So what habit in your mind contributes the most to your success as a real estate investor or the success of your of your company.

AJ Shepard 22:26
Um, the one habit I would say is persistence. Unfortunately, like a dog with a bone, I will chew it until it is gone. So, you know, being able to focus on one thing and then getting it done getting it working. Moving on to the next thing, I would say that, that focus, having good partners to come in I tell you, my brother incredibly, like people always look at us and like you guys can work together and we we come up with And each other quite well. So being able to work with people, and especially partners is has been good.

Gabriel Petersen 23:09
And you are you’re not the first person to say persistence on the show. That’s a that is seems to be a common thing amongst real estate investors

AJ Shepard 23:15
common trait. Yeah. It’s like, we always get to like the last 5% in a project. And it’s like you just like, oh, man, it’s like this little timing thing. And it’s like persistence and like getting that

Unknown Speaker 23:29
done. Yeah, just like the electrical outlets.

AJ Shepard 23:33
We got to do like when he when he worked on it for five months, and you’re like, man, it just seems like there’s this tiny little thing. I gotta run to Home Depot for one tiny dollar part so I can get it finished. And it’s just that making sure that you just do it all the way and get it done.

Gabriel Petersen 23:52
Alright, so going back all the way back to 2008. If you could tell that version of you, when you bought your first rental, you know One piece of advice, what would it be?

AJ Shepard 24:03
Start with multifamily.

All the time. It’s like instead of buying a single family home to house hack, like buy a four Plex outside, it’s with an eye. FHA has like tighten the noose a little bit but I mean, you’re still like even our broker clients I’m like, buy a duplex and move into a duplex instead of like buying a big single family home and house hacking. Like if you can use that that first time homebuyer the mortgage insurance Yeah, you won’t cash well at first but you’re gonna be so good, so much better off in a couple years than you would with a single family home. Yep. Yeah, I

Gabriel Petersen 24:42
agree with you there. It’s funny that I, the last guest we just had on was the VP of renter’s warehouse and he does single family and he was actually the opposite. He was saying that stick with single family because the rent renting base is tends to be better and and when things like COVID happens Don’t lose tenants. I thought that was interesting, but I my view, multi families is the way to go.

AJ Shepard 25:06
So, I mean, the fact is, if you’re buying a multi family place for yourself, you’re going to buy in an area that is more reasonable than, like some of the multifamily areas for I didn’t just give you a little insight to what we do to like we stay in higher income areas. Okay, like working on we only our work on the west side of Portland areas that we know very well. Like there’s some areas that are east of in Gresham, or you do get the, you know, a lot more section eight, a lot more. But I mean, if you’re willing to live in a multifamily place, like that’s going to be great, you are always going to have renters.

So

Unknown Speaker 25:52
I get

Gabriel Petersen 25:54
to actually, this is usually a 20 to 30 minutes show. So we’re kind of running at the end here, but before we go, I want to ask you About the brewery. It’s been a long standing dream of mine to own a brewery. So just tell us real quick. I did. How did you build that brewery? Like what what inspired it and how’s it going right now?

AJ Shepard 26:10
I mean, no surprise here. It was a real estate planning.

We, we we were able to get a lease option on the building from the owner. One of my fraternity brothers worked for this guy. And so we all went into business together, like don’t create a business and then be able to buy the property. So we started out as a we had six taps, just a bottle shop and then we also did homebrew supplies. And then we had the storage room that was about 800 square feet. And we just used it for storage. So a couple years go by and we like start looking at the metrics of brewing beer and like what’s going on and we’re like, well shoot, we should just brew beer. So then another girl went out of business. We ended up buying all their equipment. We Constructed that storage room and turned it into a brewery had to go through a whole zoning change to get it over to F to like, plan it all out. A contracting company did that. And then we bought the building to before we did that. And then we now have a brewery. So it’s called uptown beer. co. That sounds scary. And Alan and then we’ve separated out the brewery business from the bottle shop. So the brewery is binary brewery. Very cool. Yeah. It’s gonna be it’s gonna be up in Seattle here soon. Oh, nice. Yeah, so I love going

Gabriel Petersen 27:34
down to Portland. So the next time I go down there all I’ll definitely stop by

AJ Shepard 27:37
Yeah, one of my one of my buddies runs the Westie. And Stu, my other partner just opened up a new bottle shop over by Redmond, Oh, Oh, nice. Over in Phinney ridge. So we will be on tap on because we’ll be making trips to Seattle. And so we’ll be on top of those three places. So there’s the West and in the west to believe very cool

Gabriel Petersen 27:59
stuff. Do it. Yeah. All right. So for everybody watching and listening, if they wanted to get in contact you what is the best way for them to get in contact with you?

AJ Shepard 28:09
Probably through our website uptown pm comm

or you can email me AJ at uptown pm

Unknown Speaker 28:17
calm. Cool, cool. Yeah.

AJ Shepard 28:20
Happy to answer questions and chat about real estate. You can find me on bigger pockets, obviously there.

Unknown Speaker 28:27
Yep. Damn.

AJ Shepard 28:29
Yeah, LinkedIn. all that sort of stuff.

Gabriel Petersen 28:31
Perfect. All right, AJ. Well, thank you very much for for getting on here. I mean, I really appreciated you know, hearing everything you had to say and I’m sure everybody listening and watching also appreciated it. So thank you for joining. People watching listening if you want to get in contact with AJ. He just said where to go. LinkedIn, his website, his email, any of those works. So we’ll see you next time. And again, AJ, thank you for staying on.

AJ Shepard 28:54
Yep. Thank you. Thanks for having me.

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Topics you’ll learn more about throughout our episodes:

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