0004 Ben Mizes - Arch Buyers and Clever Real Estate (Real Estate Investor)

Investing in Depth

Today’s guest is Ben Mizes, a real estate investor based out of St. Louis, Missouri, who is co-founder and CEO of Clever Real Estate. The first two words that came to mind as we wrapped up our conversation were inspiring and impressive. Ben shared in detail how he started with a limited capital base to make his first investment in residential property as a so-called house hack. He used an FHA loan, which is a federal assistance program from the Federal Housing Authority to help typically lower income buyers purchase homes with as little as 3.5% down. He then parlayed that initial investment into a real estate portfolio with dozens of units within a few short years. At the same time, he shared his parallel journey as an entrepreneur to found Clever Real Estate, a fast-growing company that is changing the structure of the industry. This was such a fun conversation and it’s possible to take away insights on multiple levels — from the mechanics of real estate investing to a street-level view of how the macro policies of recent years are playing out in real estate as an asset class to some of the structural shifts occurring in the industry. If you would like notes from today’s episode, please subscribe to our free newsletter. I hope you enjoy this conversation as much as I did. Feel free to email [e-mail] with feedback.

2:05 An accidental path to real estate investing

3:45 House hacking defined: buy a multi-unit property with the goal of living in one unit for free while the rent from the other units covers all of your expenses.

5:01 Real estate investing 101: Ben’s first investment came after he developed a rental property calculator to estimate financial requirements and returns and scoured Zillow daily reviewing newly listed properties.. “I would model… pretty much any deal that was interesting that hit the market until it got to the point where it could hit the market and without using my tool I would think ‘is this going to be a good deal?’”

6:57 Getting lucky by making your own luck: “We ended up buying a building for $220,000 that was worth $285,000 the day we closed which was a great first investment, albeit a little bit lucky. But I attribute a lot of it to being aggressive in our search and being confident to take that first step because of what we built and the confidence from modeling all these deals.”

8:07 A practical, line-by-line how-to guide on how to develop financial assumptions when investing in real estate (e.g., down payment on purchase price; interest rate; gross monthly rent; electricity; water and sewer; garbage removal; insurance; taxes; vacancy rate; repairs and maintenance; capital expenditures; property management fees; leasing fees).

13:30 How Ben built knowledge about repair, maintenance, and capital expenditure costs despite not having any background or experience in real estate, construction, or property development: desk homework through books and podcasts (e.g., Bigger Pockets, Wheelbarrow Profits) combined with real world homework by casting a wide net for contractors on other properties he had considered. Used bids and meetings with 15+ contractors as a form of education.

16:40 Benefits of using FHA loan to finance purchase: low down payment of 3.5%, low credit score bar, and limited income history requirement.

17:38 Some best practices Ben adopted: personally knock on each tenant’s door to introduce himself and set mutual expectations on the service level he would provide, how to get in touch, and overall relationship; used cozy.co, a free tool to automate rent collection online.

20:20 How the first real estate investment played out: after a $7,000 initial cash outlay for a down payment, Ben became the owner of a 4-unit home that generated $2100 in monthly rental income against $1418 in monthly mortgage payments.

21:10 Expanding the real estate portfolio: flipping first property to fund a deal to purchase an 18-unit portfolio in St. Louis.

23:38 Real estate 201: a riskier investment in a home needing significant renovation.

24:10 Creative ways to source real estate deals: driving around looking for properties in disrepair and then contacting owners directly; using rental listings on Craigslist as a signal that the owner might be older and could be ready to get out; driving around town looking for physical for rent signs on properties that are not listed online as as signal that owners might be older and ready to retire.

27:40 Growth mindset as a new real estate investor buying first renovation project: “Our goal was not to make money. Our goal was to not lose money and to walk away breaking even. And we kind of viewed it as our MBA or our School of Hard Knocks education where if we could come out of our biggest project not having lost money, that was enough to be a win for us because we really wanted the education. So, with that type of goal in mind, this deal made sense… it gave us a bit of a margin of safety and confidence to chase after the deal hoping that we’d get an education and don’t lose money with the chance of actually having a really good return.”

29:35 School of Hard Knocks Lesson #1: habitability inspection to qualify for FHA loan can have stringent requirements.

34:13 School of Hard Knocks Lessons #2 & #3: properly scoping the job and vetting contractors before hiring them.

37:20 Putting in sweat equity when running short on funds during renovation: Ben finds himself renting “the biggest drill I’ve seen in my life” from Home Depot and using it to jackhammer holes in the home’s concrete floor.

38:22 How the renovation investment played out: $400,00 purchase using conventional mortgage with 20-25% down payment from a capital partner who got half the equity. $150,000 spent on renovations. $4500 monthly aggregate rent across three units and Ben lived in the fourth unit alongside his business partner. After the renovation, the building appraised at $690,000. They got a cash out FHA refinancing with a $550,000 mortgage, which allowed them to pay back their capital partner and recoup the entire renovation cost. They now own an income-generating building with none of their own capital tied up in it.

39:30 Securing commercial financing as an investor with limited track record. “Banks are really looking at the property manager because they’re the ones that make or break these deals. It’s not really about who owns it. So, the first question they asked was… is Chris going to be managing this for you?” When seeking commercial financing as a new investor, you should “bring to the bank a really good team to show… here’s the team that we’re going to use so that me, as an inexperienced investor, am not in a spot to ruin the whole deal.”

42:55 The long-term evolution: building an in-house property management company to reduce costs from misalignment of incentives with outsourced property management.

44:37 Risks to real estate portfolio: tenant default; exposure to neighborhood and regional decline due to portfolio concentration.

46:11 Launching Clever Real Estate as a technology-driven start-up changing how the industry works. Clever provides discounted listing services for property sellers with a national network of other 10,000 agents who will list a home for $3,000 or 1% of the sale price.

47:40 Why agents work with Clever. The most expensive part of being an agent is prospecting for clients. Clever takes this out by marketing more effectively than agents, allowing them to reduce their cost base and pass on the savingstot clients in the form of lower commissions. “The agents often look at it as if they are discounting their commission in exchange for getting new business.”

49:10 How Clever makes money: receives 25% of the fee that agent makesl.

52:10 Long-term potential sources of durable advantage for Clever: intellectual property that optimizes matching between sellers and agents as well as differentiated, high quality content that adds value for consumers.

55:55 Recommended reading

• Inman for recent developments in real estate news
• Principles by Ray Dalio as a recent read that helped Ben think about what it takes to build an organization
• Bigger Pockets podcast
• Ben’s personal site is here and his writing on real estate investing and personal finance is on his terrific Medium page

Note: This podcast is for educational purposes only and nothing here constitutes a recommendation or offer.