Updated: Jul 4, 2020
The first million dollars is always the most difficult, find out this mistakes Aaron Fragnito made as Peoples Capital Group built it's first million in real estate wealth. What would Aaron have done differently? How can you scale quickly and what regrets does Aaron have getting started. Find out that and more through this short podcast.
Also why is the cash out refinance the best way to manage your real estate portfolio? We cover that and more today on the Passive Cash Flow Podcast. The Passive Cash Flow Podcast is for beginner or experienced investors. Learn how you can diversify out of the stock market, own a part of an apartment building & start earning Passive Cash Flow! Peoples Capital Group has been helping passive investors build wealth in NJ real estate for 10 years. Visit www.PeoplesCapitalGroup.com to find out if you qualify to start earning passive income and pay less taxes via investing in real estate. IRA's and 401K's are accepted. -- https://www.facebook.com/peoplescapitalgroupnj/
Aaron Fragnito: All right, ladies and gentlemen, welcome back to the Passive Cash Flow Podcast. This is Aaron Fragnito your host and episode number 14 here at People's Capital group. Today we're going to talk about how I made my first million in real estate. It's quite a story, so many mistakes in there. Also to clarify, a lot of people in real estate they say they made their first million and everything. Now as far as I'm concerned if full disclosure, I think being a millionaire means you take home a million dollars in a year. I am not a millionaire, I'm not taking home a million dollars in cash in a year, that would be crazy. I'm 32 years old and we haven't built our company quite there yet, but I certainly do have well over a million dollars of equity in real estate. When I say my first million, I'm going to talk about how I created my first million dollars of real estate net equity. If I sold all my real estate, I'd have a well over a million dollars. I think that's quite an accomplishment, I want to talk about that and how I built my first million in real estate over the last 10 years here in New Jersey. Again, if you want to learn about how you get invested in one of our apartment buildings go to peoplescapitalgroup.com. We buy a new apartment building every single three or four months here in New Jersey. We work with passive investors who get awesome returns on their investment and to learn how you can qualify for that investment opportunity go to people'scapitalgroup.com and put your information in. We'll contact you see if you qualify or come to one of our upcoming events here at People's Capital Group. Let's jump into it here, how did I make my first million? What were the mistakes I made? What were the smart things I did? Obviously did a few things right, but I probably did a lot more wrong and those make better stories so we'll talk about those a little more. The first building I got, well the first commercial piece of real estate I bought was a six family building with Seth and we got this by putting signs on telephone poles. That sparked me off to your getting buildings, buying, renovating, refinancing, getting our money back. We bought the building for about $220,000, it was a motivated seller. He mismanaged the property, there were about three vacant units on the property and out of six or half the building was vacant. We bought the building for 220, put another 50,000 into it or so and got it fully leased up. At this point is fully at least up six family in Newark there and we had it appraised for about 500,000 so we pulled out about $350,000 of our money. We got back our entire initial investment and we pocketed some cash on top of that. Now that's tax-free cash that we pocketed because when you do a buy renovate, refinance out and you refinance that cash out of your property that's non-taxable income because it's debt. We're not selling the building, we're not exiting the LLC, we're buying, renovating, refinancing the building, we're getting all our money back and if you do your job really well, you get some money on top of getting all your money back. That's called a cash out refi. We exercise that strategy until today, that’s how our investors make awesome tax-free returns on our buildings but now we do it on a larger scale. It's more profitable doing it on a 25 unit than it is on a six unit you can imagine. We still do six units but we prefer larger scale buildings these days. That was our first building we bought renovated, refinanced out, if you had Google that BRRR strategy, well before everyone, all those millennials like bigger pockets were talking about it, we were doing it in Newark so before it was called a cool buzz word, we were doing it. The BRRR strategy is now buzzword and you can Google that BRRR and that's what everyone's doing these days and it's an age-old practice to build wealth in real estate. The only difference is now the millennials, which I am so I can make fun of them, have given it a name so now it's called the BRRR strategy so it's really cool to do now because it's got a name. That's how we did our first building. From that point, we got a 25 units building. Now remember this all kind of start with me making a plan as well. I was a ski instructor in Colorado after I had graduated from college and is around 2010 and the market was terrible so just going back before I got that first building was Seth. I really don't know what I want to do with my life. I was a ski instructor in Colorado, I remember Enterprise Rent-A-Car said I could work for Enterprise Rent-A-Car. Went to a job before I graduated college and they said if I worked really hard at Enterprise Rent-A-Car, they'd start me a $32,000 a year and then by the time I was 65 if I put enough money away my IRA and made the right decisions I could retire. That didn't really interest me. I said no, that's not the path I want. I don't want to build someone else's dream and slowly climb the corporate ladder and sure I would have done just fine at Enterprise Rent-A-Car. Maybe I'd have my own franchise by now. Who knows man, I would've climbed right quite quickly. I would have been a millionaire anyway, but for the most part I did have a passion for that. I went out talked you how to ski in Colorado for six months. I've read Rich Dad Poor Dad, I read Trump University books, I read David Lendl and I learned how to do all these all these things in real estate. They made it seem so easy so I went back and to New Jersey, got my real estate license, started selling houses as a realtor and eventually teamed up as Seth and bought that six family, I described previously. It was good way to get started, I'm still a realtor today. I worked hard, built a team as an agent and for about five years, I worked very hard as an agent from about 2010 to 2015 and then I started slowing down the realtor side and focus more on the investment side. I started flipping houses as well around 2012. My first flip was not a successful investment. We lost about $7,000 on it, had a lot of challenges. I brought on a business partner whose last business filed bankruptcy and it was a business coaching business. I decide to team up initially with a business partner who had filed bankruptcy in his coaching business for other business leaders. He would coach people how to run a successful business and his business filed bankruptcy. That's the definition of ironic. I decided he was a good business partner. I teamed up with them, we did a flip together and he ended up stealing money from the account, not getting the right insurances, not hiring the right contractors, not doing his job right, not being a good partner and stealing money most of all. Aside from just being an incompetent partner, he was a thief as well so I ended up having to get rid of him very quickly and quick claim the deed and everything like that. A lot of challenges there, I ended up cleaning up the mess and only losing $7,000 and I never forget that person, that investment, that deal, such a mistake like that on my end to hire such a loser who I knew wouldn't be a good partner, who was not successful in business, didn't have any money or credit and he was like 65 years old, what was I thinking? In this case I was taken advantage as a young entrepreneur and I learned the hard way that your partner is so important to have the same values as you, work with integrity and honesty and complement your weaknesses too like Seth does today. My current business partner and he's amazing, we've been working together for eight to 10 years now and basically he really complements my weaknesses which is so important and I complement his weaknesses well. It's important because everyone has strengths in this world and everyone has weaknesses and you got to know what they are. You got a partner or someone who complements your strengths you could say, right so they have their strengths are your weaknesses and vice versa. Anyway, I flipped a house there lost some money, I bought a six family with Seth, that went well. We got our money back out, then we bought a 25 unit property. Now that was in South Jersey about two hours away from us and we hired a management company, it was very reputable and they promised the world and completely under delivered and kept the building at about 75% occupancy which was really far below the 95 they promised, so we got rid of them. We hired a small family-run company there, management company and then he ended up meeting tenants at the property, collecting the first month's rent and security deposit and running off with the money and doing the same thing with another tenant for the same unit an hour later. He would meet three or four people at the property and lease out the same unit to three or four people collect all the money and run off. Obviously not a very reputable property manager so we had to take them to court. At that time we decided to develop our own management company, so it's around 2013 or so. We had that 25 units, we are starting to buy a lot of twos and threes here in Newark and East Orange and we're starting to really acquire a lot of real estate as I raise capital and we bought, renovated, and refinanced out and then leveraged that Capital again and raised more Capital to buy more buildings. As we got bigger and bigger, 30, 40, you start to realize okay we are so reliant on a management company that if you're going to be building a real estate holding company, it really makes sense once you get over 50 units to start your own management company. It's not a very profitable venture but it allows us to keep control of our assets and by controlling our assets, we make better money, our investors are more confident, everyone makes better returns, more consistent returns and we can protect our investor’s capital a lot better than just hoping some management company does their job and answers with integrity because we found out that management companies can lie to you. They can send you the information that’s not accurate, they can send you falsified documents. They can meet tenants at the property, steal the money and not tell you about it. They are people as well, management companies have the flaws. There are some great ones out there, but in our experience the big one and a small one were both a complete waste of time. One was even a thief, so that was even worse. We developed our own management company then about six years ago or so and we did not look back from that point. There were a lot of challenges, we hired a contractors that were really good. We said, "Okay, you're such a good contractor we're going to put you on payroll. I'm going to pay you $80,000," a year and the guy works like six days a week for us, seven days a week, but all of a sudden jobs started taking longer, things weren't fixed properly, and as soon as you put a contractor on payroll, "Jobs take twice as long now, what a surprise?" When you pace one per the hour, it takes more hours. We realize the right way to pay contractors is on a completion basis, on a production basis, if you finish the job, you close out the permit and you get paid. There's parts along the job and for each completion level, you get a check, that's the right way to pay contractors. We figured that out the hard way putting contractors on payroll, try and develop our own construction company, as we were flipping a dozen houses. At this point it's 2013, 2014, we're starting to flip a lot of houses, and one of the biggest mistakes I made and Seth made was that we got really distracted flipping houses. We flipped about 50 houses over about five or six years, and 90% of them were profitable ventures, however, there was about 10% of those flips that didn't make money, about 5 out of 50 didn't make money. In fact, the losses were so large on a few because we got into high-end flips that it really devastated our gains on our other flips, at the end of the year we're like, "Wait a minute, if you lose a ton of money on three high-end flips and you make decent money on eight low end flips, you break even at the end of the year." Flipping house is a very hard gig. The hardest dollar I'd ever earned is flipping houses. The easiest dollar was probably being a listing agent or owning income properties that are well managed by my management company, but it took years to get there. Being a listing agent was a great way to get started. I made good money that way quickly, I was able to make $50,000 by my second year I made about 150 by my third year, much better than Enterprise Rent-A-Car. I was able to make money very quickly, however, is a realtor that money was highly taxed, and I worked seven days a week and I hated that weekend's, bottom of the totem pole, working as a realtor it's tough. I burnt out with that, but I did very well, by my third years an agent I had a team, I was at Remax, I was making 150 grand a year. I was flipping houses with Seth. I was buying properties with Seth. We were developing our management company. We were making our mistakes on the 25 units in South Jersey, which we eventually sold for a very nice profit, and those investors today reinvested mostly in properties up here with us. If I could go back and do it all again, I would definitely have stayed on track. We make so many mistakes as entrepreneurs, as real estate investors, as business owners, we get off track because there's many talking heads out there, there's a lot of people telling you to do this or do that or this guru made money doing that, this guru made money doing, that's why I started this video explaining what I mean by how I made my first million, because there's many gurus out there, and I hate it, you listen to their videos and they're, "All success." They've never made a mistake and it's false, it's wrong. If you've never made a mistake then you're bound for one, and I'm not going to invest in you. You want to invest with the guys that they're like, "Listen, I've lost money. I've made money. I know those red flags are. I know what those things are that I've done, those mistakes I've been. I've seen other people lose money. I've teamed up with the wrong people. I've bought the wrong property. I've overestimated resale values. I've underestimated construction costs. I've made these mistakes. My partner and I have survived these mistakes together, and we've had stronger business leaders, stronger men, stronger investors, and right now we're running the strongest company we've ever run." By having those mistakes, by talking about those mistakes, not only do people realize you're human and that really at the end of the day you're actually stronger and better off for them. Our failures make us who we are, and they build character. I love the story my pastor told me years ago when he shot the basket in the wrong hoop and he lost the game for his high school basketball team, and the coach said, "Well, that builds character." My pastor said, "Well, if that builds character then I don't want any." Character sucks, character is hard, it's tough. My losses maybe who I am today, and I'm not saying obviously most of our investments are successful. We've never had a loss when it comes to apartment buildings. We've never had a loss when it comes to long-term buying holds, they're far more forgiving. As I said in other videos, the best way to make money in real estate is being a listing agent or owning apartment buildings long-term that are well managed, and everything else is hard, it's very hard, it's very hard to flip houses. It's hard to manage contractors. Basically HGTV's tells you and those gurus tell you, "Hey, go out, start a construction company because that's what a flipping business is, it's a construction company." You are now reconstructing houses, and sometimes they could be a hundred-year-old houses. It's very complicated. It's very difficult. It's very time-intensive. It's very capital intensive, and it's filled with risks and unknowns, and it's the riskiest way to make money. The reason HGTV tells you to do it. The reason the gurus tell you to do it after paying them $30,000 is because it's all around us, everyone loves the idea of taking the ugly block, a house on the block, and making it nice, it's a pride thing, and we get it. It's very sexy to take something that's ugly and beat up and to be the hero and come in and fix it up, and make it better, there's a reward to that, there's a tangible physical reward, but guess what? If you're just here to make money in the real estate business, that's the hardest way to make it, so have fun redesigning your home, fixing up a home, maybe it's a hobby, maybe you like painting, maybe you like themes, I enjoy painting, I really do actually, I enjoy landscaping. I actually enjoy doing that in the weekend, but that's not what I'm going to go out and do all the time, I don't want to do that, it's not the best use of my time. When it comes to real estate, if I just stuck with, continue to buy apartment buildings, raise capital, improve my management company, fine-tune those systems, I would have got 2 million very quickly. It took me about eight to 10 years to get to a million dollars in net worth. I would've got there much quickly if I just fine-tuned our process of buying and repositioning apartment buildings, which we do today. My time is fully invested now, buying and repositioning apartment buildings. If you want to learn more about how you get invested in those apartment buildings, how you can start earning passive cash flow through New Jersey apartment buildings without having to do any of the work or take the risk with the mortgage, and take the risk with all the responsibilities without all that, but still earning nice cash flow, nice tax benefits, nice benefits of owning passive real estate, go to our website, people'scapitalgroup.com, put your information, and see if you qualify for an upcoming investment. We make it very easy to invest with us, very attainable low starting amount. Go to people'scapitalgroup.com, see if you qualify for one of our upcoming apartment building investments, and I hope you learned a few things and how I got to my first million if you haven't figured out, I basically kept buying, renovating refinancing buildings, we did the 25 unit, We sold that for a nice profit. We kept buying twos and threes and sixes, and now I'm buying a three million dollar building next month then a million-dollar building this month, starting to really steamroll nicely, then I'm building my wealth at a six-figure rate every quarter now. To learn more about how you get invested passively in these buildings, go to people'scapitalgroup.com, my name is Aaron Fragnito. Good luck to you.