Deidre Woollard: Hello, I'm Deidre Woollard, an editor at Millionacres. Thank you so much for tuning into the Millionacres podcast. You've probably seen a lot of new stories lately about single-family rentals, about how institutional investors are buying up a lot of properties. I feel like sometimes that news can be discouraging for the smaller investor, but there's really a lot of opportunity out there in the rental property market. To get fired up about that today, I'm chatting with Mike Hills of the Atlas Real Estate. He owns over 50 units. He's got condos, townhouse, single-family homes, duplex, quadplex, trailer park, you name it. He's got the flavors. Welcome. How are you Mike?
Mike Hills: I am greatly Deidre. Thank you for having me. Like you said, don't be discouraged. There's always a way to buy. There's always a time to buy. As long as you're buying for the long term and not trying to be a market timer, you're going to be just fine.
Deidre Woollard: [laughs] Definitely don't be a market timer. I love that. Well, let's dive into it because this market is, I think on every podcast I do, I say this market is crazy. This market is bad as it's booming. [laughs] We've run out of superlatives. It's a very hard market that's putting a lot of stress on investors who are trying to find a good opportunity. What can people do?
Mike Hills: I think first and foremost, you have to learn what actually is an opportunity. What I would say is one of the things that we really focus on is markets that are opportunities, and trying to define what an opportunity is for me versus what an opportunity is for any of our buyers that are helping. Whether they're buyers, sellers. Because in this market, it's a great market to sell in but it can also be a great market to buy in, depending on where you are buying and what we're looking for. What I usually do is define goals first, and then markets that can meet those goals, second. I am a buyer of real estate. I've purchased four transactions totaling a little over $3 million in the last 12 months. I'm under contract on a $1.2 million asset in a city called Middleton, which is a suburb of Denver. Right now I closed. I think it's going to be the last week of August, 1st week of September. That's still up in the air because the seller has a little bit extra time written into the contract. But I am a buyer in this market, but let me say it this way, in today's world, we're using the sniper rifle approach, buying very targeted specific investments versus the shot gun approaches, which is what we used in '14, '15, '16, and '17, which is buy everything. Today, what we buy and where we buy are very important questions.
Deidre Woollard: Yeah, I think that is a great thing to focus on. You're absolutely right. When everything is cheap and below value, you can't go wrong. Right now when we're pretty much priced to perfection, you can go wrong pretty easily. Tell me a little bit about the transactions. Were you buying all the way through the pandemic or did you take a pause and did you see your investors take a pause as well?
Mike Hills: When the pandemic first hit, we told everybody to take a pause. Even our deals. Basically what we did is, we didn't cancel anything, we just pushed it out 30-60 days. Because one of the advantages that we have at Atlas is we also manage roughly $5,000 in a few different states. So what we were doing is not necessarily on the real estate side. Trying to figure out what was going on on the tenant payment side. I don't know if you saw yesterday, the CDC extended the eviction moratorium, not across the board, but there are some different criteria on it. I haven't spent enough time digging into it to truly understand it. But that's what we were doing and saying, what is going to happen with tenants, with rents? At the same time, some of the very big institutional investors out there, we work with a lot of these and without getting into who's who, there was three different ones, all said when the last pandemic hit, and I want to say it was the swine flu or bird flu, call it 2010 - 2011, the stock market crashed, but then it came roaring back. The real estate market stayed relatively the same as what it was doing. The same thing happened this time. In hindsight, that was 2020. But some of the biggest institutional people out there, researchers, they called was going to happen. Now, they didn't call the craziness of 2020. They didn't say there would be no seasonality, anything like that until we got into September, October. What they did say was that, generally speaking, when the market crashes and the pandemic hits, it affects the stock market faster and harder than it does real estate, because real estate is just more of a slow burn than say, the stocks are. They were right. Then in terms of specifically, probably by mid-June, we were buying real estate again because the pandemic hit, really froze everything, 1st week of April, last week of March- ish, and we froze. We told all of our buyers, hey, freeze. We don't know what's going to happen, freeze. By early summer again, June, July, the transactions that I did personally, I sold a single-family home in, I want to say the 2nd or 3rd week of September, 1031 exchanged. I refinanced the single-family home in August,1031 exchanged a single-family home in September, and then bought assets in October, November.
Deidre Woollard: Interesting. Doing my research on you, I noticed that you talked before about going through the great financial crisis. You were in the throes of it when all of that went down. This situation is so different than that. I don't believe this is a housing bubble but I have to ask, what are you seeing right now and what did you learn from that about the power of just not freaking out and holding on?
Mike Hills: Patience. Here's a story that I like to tell. My dad past couple of years ago. Let's rewind it to 2000. I bought my first asset, September 1st, 2001. I did what people call high fracking today. Millennials invented that word. I didn't make it up, but that's what I did. I bought 2001, I bought 2004, I bought 2005, bought 2007, and 2008. 2008, my wife and I got married. We had four rentals and a primary residence. By 2010, she was pregnant with our 1st child, and my father says to me, who is a financial planner, stock market guy, his whole career, whole life, says to me, hey Mike, you're upside down. I think it's time to sell. Regroup. I had some other stuff going on. At the time, I had a business partner, he and I owned two liquor stores and I was building a casino in a little town called Black Hawk, which is outside of Denver. I got kicked in the teeth on those deals. But my real estate was quietly okay, and my dad's like, okay, give all your houses back. Give up. Start over. You have a young family on the way. Now is the time. If you want to do it, now is the time. I am a stubborn person. I said, dad, I'm out of the casino and liquor stores. It was painful, expensive lesson. But I've learned from it and I'm out of it. My tenants are paying me, granted it's sporadic. My houses aren't worth anything. They're worth basically what I owe on them right now. But they're paying rent, my debt's being reduced. Why don't I just stay and just start over? I didn't. Like I said, I'm stubborn. By 2017, right before my dad died, he actually was at my house in Denver. He lives in California. He says to me, I'm really glad I kept you in there. I talked you into keeping all those rentals, all those years ago. [laughs] I was like, [laughs] such a dad. That is not what you said. But more specifically, I bought my first house September 1st, ten days before September 11th. I bought again in 2004, 2005, '7, and '8. Market crash, 2008 - 2009. What it did is giving me a longer-term real estate trajectory perspective. Because this is not a get rich quick scheme. I'm not buying to make a ten or 20 or 30 percent return over the short-term and turn around and sell. I'm buying targeted specific assets that I believe are going to long-term make money. I buy as though I'm not going to sell for 20 years. Now, does that mean I won't sell? No. I'll sell stuff. But it means my thought process goes into this. Because I'm not worried about what happens tomorrow or the September 11th, or the crash in 2008, or 2020 COVID. I'm not worried about that stuff. Because I'm not going to sell next year or the year after anyway. I'm buying as though I'm never going to sell. If I go in with that mindset, what happens in the short-term doesn't freak me out. That's what we see a lot of our investors do, is they lose confidence and they lose faith and they make mistakes out of fear. Frankly, I've ridden ups and downs in the market and I've been doing this 20 years. For those of you who are like, you're too young. Thank you, but I'm not. I bought my first house two-and-a-half months after I graduated college. I graduated from University of Denver in 2001. As they say, the rest is history. I would do all over again. I think the biggest mistake I made minus the casino, is not buying more. I trusted it. I think the proof is in the pudding based on the assets that I bought. I really trusted the philosophy.
Mike Hills: I didn't have anybody to ask about the philosophy. The smartest people in my life were telling me, "What are you doing? Don't buy real estate, nobody does this." My thought was I don't have anything to lose, what's the difference? Now today is different, I have something to lose. But it worked and I would say for anybody out there, don't worry about today, be forward-looking and forward-thinking and if you can take that perspective it makes whatever happens over the next 12-36 months. I want to say who cares. I don't mean to be flippant about it, but you're not buying for the next two or three years anyway. So why are so worried?
Deidre Woollard: Exactly, don't time the market, time your life. That's one of the things we always say. You mentioned 1031 exchanges earlier. I wanted to get your take on what you're thinking about the current administration. There has been some talk about changing a little bit. Is that a concern for you and are you using 1031 exchanges pretty commonly to level up in your investing?
Mike Hills: Yeah. We use 1031 exchanges very regularly. I believe and don't quote me on this but at the last literature that I read basically said that the 1031 exchange disappearance or what the current administration is going to take away is when their gain is over $500,000. That's my understanding of it. I have a hard time believing that Congress is going to pass that mainly because a lot of people in Congress are on real estate.
Deidre Woollard: True.
Mike Hills: Ten thirty-one exchanges it punishes those of us trying to spend money on the economy but that said because of the $500,000 limit. I'm just not that worried about it, I'm not saying that it's not going to happen. Just saying that, I mean, smart investors, you could change rules and guess what I'm going to learn how to play by your rules and I'm going to do it better than the government does. Again, I don't mean to be flippant. I can't control it, so why worry about it. Until it's a law the rest of it is just fluff until they say this is the new rule, then I'll deal with it. As of now, I am telling people if you're going to attempt 1031 exchange, I'd rather do it in 2021 because it's likely if they make the change it likely won't be until 2022. Now again, I don't have a crystal ball but that's my gut. I mean, it's spring in August, I can't imagine them passing that budget and then retroactive to January 1st. That seems unfair if you will.
Deidre Woollard: Yeah. I like what you said there about if you can't control it, if it's in the future, if it's uncertain, don't stress out about it. Don't make decisions about things that happened. That is really solid advice. One of the things I wanted to talk to you about, you are one of those people who's made the leap from house hack and a couple of properties to owning a lot of properties. I feel like a lot of investors get stuck at a certain level. They own maybe their first house, maybe they get another, they move up, they rent out the first one, maybe they get a duplex or something like that. They've got maybe five properties. But how do you get to that level from 5-10 or 15 or 20. What's that path look like?
Mike Hills: For me, it was really two-fold. I live in Denver proper. For me I was buying single-family homes and again by 2013, I owned nine single-family homes. When I say single-family one was with a townhouse, the other I think eight were of the single-family homes, I lived in one of them, the rest were rentals. I started looking at this and what happened is the prices were clicking up, this is still 2013, but the rents were still good, were relatively low. I discovered that there are these multi-family units out there that I get better rents and not necessarily just pure cash flow. I can get better rents. I can spend the same amount or maybe a little bit more money and get more cash flow for the same kind of downpayment or close to the same kind of downpayment. I started exploring that and what happened is, again, without saying that I'm purely a cash flow investor because I'm not. I'm not an appreciation investor which I would refer to a speculation and I'm not a purely cash flow investor which I would refer to as somebody that's ignoring appreciation. Everything that I own, I want a blend of the two. I want to buy in an appreciating market with strong cap rates, strong rents, not the best, but good enough that I can get paid three ways being positive cash flow, debt reduction, and depreciation. I want all three. Even in this market, you can find all three. So what I did, I bought my first multi-family in January of 2015. I put the wheels in action in 2014 and I did a cash-out refinance on a single-family that I bought in 2007, poured money out, and bought my first quadplex in January of 2015. I got my feet wet doing that by July, August, September 2015, I was like, hey, I'm onto something here and that is when we went ahead of steam into multi-family. Again, not a huge multi-family. But here's what I found and I don't want to speak nationally just in the markets that I'm in which is again like four states. What I found is that the average investor or realtor for that matter doesn't know much more about it, they know single-family homes. The average commercial broker which is where most people think apartments have to be. The average commercial broker doesn't want to do eight plexes, and six plexes, and ten plexes because it's just too small of a rain. They're out there chasing the 20,30, 40,50 door units and the average investor is doing single-family. What we created at Atlas is this niche of 2-10 units that we have dominated for years. Again, I'm not trying to be braggadocious by any stretch. I'm just simply saying if you look at the stats from 15, 16, 17, 18, and 19, as a company we did more units in terms of fourplexes than any other single company. I will put them all together, I bet they did more than us, but as one company we did a lot of this small multi-family because people completely ignored them. It was too much for the realtor or single-family investor, and it was too small for the commercial guys and girls so we attacked this market. Here's a funny thing, we're not smartly more, everybody has caught on that how cool these little fourplexes are. In fact, you can still get residential financing with them. So they've caught on. What we've done is we've changed. The stuff that I've been buying recently, I bought two fourplexes and eight-plex in Phoenix in October, November, I bought a nine-plex in Colorado Springs in April, and I'm buying a six-plex in Littleton close at the end of this month, early September. We become most of what we do and how we do it and financing plays a big piece of that. What kind of financing you get all of that stuff but pure package? Fourplexes are really expensive now, it's not that you can't buy them but just insanely expensive, just like single-family homes. What we're always looking for at Atlas is that next first-to-market. To be first to figure out a trend or to call a trend, or be on the front side of the trend. So not only we again, do we get that cash flow where we can ride that appreciation story up as an example of that little fourplex that I bought in January 2015, one of my neighbors just listed. Just to give everybody an example, I paid $407,500 for this asset my neighbor listed last week for 900.
Mike Hills: I'm looking at this going, and my down payment was 90,000 bucks. Now it's been six years, but that's an amazing return on appreciation. As an example, when I bought the building, took it over the rents were $700 a unit. Seven times four 2,800 bucks, my rents today are just under 6,000. That is what we target. Now $400,000 quadplexes don't exist in the Denver Metro area anymore, but that's not to say that even the lady that's selling her building for 900 grand, I think you can get $6,000 a month in rent. I still think that's a pretty good buy. It's not the greatest buy, but it's a decent buy, and you're buying in an appreciating market.
Deidre Woollard: It's really interesting because I think one of the things that we saw during the pandemic is people moving to single-family rentals, obviously, but also a lot of the garden style apartments. You're not the first investor I've talked to who said those low slung, smaller apartment buildings are where people want to go and they are really solid investment. But you also made a really good point about one through four, because there's a difference in financing one through four verses once you get past four. Can you talk a little bit about what happens when you're buying those six plexers and eight plexers that you mentioned?
Mike Hills: General rule of thumb, Fannie Mae, Freddie Mac will not insure or finance anything that's more than four units. When you buy four-unit and under you can get owner-occupied financing, frankly, you can buy it and put less money down, or you can get investment financing which is generally 25 percent down, but you can get a 30-year fixed rate mortgage on those properties still. That's a rule whether it's 4, 3, 2, or 1 you get a 30-year fixed rate mortgage versus as soon as you jump to five, it's considered commercial financing, and the commercial financing is generally speaking, adjustable rate mortgages along with a balloon payment at the end. Like one of the ones I have is a 10-year fixed 10-year balloon, but a 25-year amortization, which means I'm paying as those on a 25-year note, my interest rate is fixed for ten years, but at the end of that 10-year period, I have a choice. I am forced to either pay it off. I'm forced to either refinance it or enforced to sell it because I pay off the loan. Generally speaking, I don't love adjustable-rate mortgages. What I have found as I have a portfolio lender who on commercial assets will do 15 years and 10-year for that matter, fully amortized, fixed rate mortgages. Means my mortgage payment is higher, but my interest rate exposure is less, and right now with interest rates being so low, I'm trying to lock in all of my interest rates because again, part of my goal is not to juice my real estate for cash flow today. I have a job, I run the brokerage outlets, I have a salary, my cash flow is fine. I like the 15-year fixed-rate, fully amortized, even loans on commercial deals, because it builds wealth, it creates wealth because it's paying off the bank faster and it gives me interest rate exposure. Now, if I was a single guy and I didn't have a job and I wanted to live on my rentals, I could do that, no problem, but that's not what I'm after today. That's why Deidre when you asked me a question a few minutes ago, I said it all depends on your goals and what are you trying to accomplish on the front side, that drives what we do on the backside, and for me, it's wealth creation, not necessarily cash flow. But for our listeners, if you're listening and you're 60 years old, you don't maybe care too much about wealth creation, you're looking for cash flow. The first thing we do if we sit down and say, "Hey, what are you trying to accomplish? What do you want out of this? Because we can tailor what you want out of what we're going to do, but that's always the first step."
Deidre Woollard: It's really smart having your exit strategy when you enter is really important. Let's shift a little bit and talk about one of my favorite topics which is accessory dwelling units or ADUs as both an investment and I think as a solution to affordable housing. I think they're really important. I've been keeping track of different markets that are allowing them on properties now. Why are you following them?
Mike Hills: More units is always better. The more units, you can just make more money. Denver passed an ADU policy, if you will, for lack of a better term recently, which I follow closely, I would say that the houses that already are set up for it home run for them. Because there are people that have built ADUs or what I'll refer to as a mother-in-law suite that are illegal, and now they're no longer illegal, which is super nice. That said, I think there is value in owning real estate where an ADU is possible. The problem becomes, is that construction costs are so darn high right now that the math as of today doesn't necessarily support the building of the ADU, but that's not to say it's always going to be that way. So when you make that purchase on something that is ADU compliant or allowable, if you will, it means that you are betting on the future. Building it the next 90 days, it's probably going to be really expensive because everybody knows lumber has gone through the roof, finding contractors and handy men; it's hard right now. The cost benefit may not be worth it yet, but that's not to say that it's not always going to be that way.
Deidre Woollard: True. What are you thinking about manufactured housing, manufactured ADUs, tiny home communities? I feel they definitely have a place. I know that communities like that they get a bad rap, but I don't necessarily think that it's always deserved, and I think in some cases, it's a really good affordable housing solution.
Mike Hills: I think they're fantastic. The funny thing is, realtors, get this wrong as do investors a lot when they think of manufactured homes, and they confuse the term manufactured with mobile because from a Fannie Mae, Freddie Mac standpoint, from a financing standpoint, a manufactured home is on a permanent foundation. It's no different than a home on a permanent foundation, but most professionals, and I don't mean investors, I mean real estate professionals mix up those two. I think the risk on a manufactured home is just understanding that when it comes to disposition or sale of the asset, just know that it will likely be a little bit harder to sell because there's a stigma around manufactured homes, which is dumb, but it just exists. From a tiny house, I think tiny houses are fantastic. In my life, I have four kids. Tiny houses are nowhere in my future. I have zero desire to play in that game because I will pull all of my hair out if all six of us had to be in a little tiny house, but for single people that rent has gotten too exorbitant in big cities, tiny houses are really cool fit.
Deidre Woollard: I'm back with Mike Hills and we're talking about building your rental property portfolio. You mentioned before you live in Denver. Obviously, we've seen that market explode. At Millionacres, we have an office in Denver. Some of my team is out there and some of them are investing. We've got one party members who did his first house hack recently. What are you seeing in Denver and as someone who has been there a long time, what has that run-up been like?
Mike Hills: Let's be honest, it's been fantastic. Let me say this right, so I do a radio show once a month. I just get invited on to just speak as an expert in the local market. The joke that I make on this radio show is that when I'm sitting at this particular building right from the 12th floor, and I look out the window and I can see the highways that cut across Denver. The citizen in me gets really frustrated at all of the people that are clogging up our highways. The real estate investor in me is like, "Yes, move to my city, drive my prices up, drive my ramps up." That part I really like. Here's what I'll tell you about Denver; is Denver expensive? Yeah, it really is. Denver is a big city, not nearly as expensive as some of the other big cities nor is Phoenix, we've been buy heavy in Phoenix for a few years now. What I do as I look at this and say, from a Denver perspective, the government is relatively mild. It's not super red or super blue. It's relatively mild. Public schools, while they could always be better comparatively across the nation, Colorado public schools are pretty decent. There's areas that they're not great like any big city but public schools are pretty decent. Outdoor living, quality of life, wage earners, businesses moving here, public transportation, all of these things are checks that yes, I like to invest in Denver, and as long as those things still check off then I'm buying in that city. Now that said, I haven't purchased a single-family home in Denver on investment loans, so 25 percent down, probably since 2014. Why? Because they've got too expensive. I started buying a multi-family, but that's not to say that I don't recommend people that move here to buy single-family homes because I think the single-family home market is going to remain strong for a very long time and that's one of the things that we watch consistently. Because for me, I like to buy in markets where the population is increasing. It's simple supply and demand economics. If people are moving there, if the population is increasing, that'll likely means that prices are going to continue to rise. As soon as population starts to decrease, I'm really analyzing my investment strategy. I don't mean increase at the rate of inflation, I mean increase over inflation. Are people moving in to drive prices up? I like to buy in markets where that's what's happening.
Deidre Woollard: You mentioned Phoenix before too, so that's a market that I've been following. I know that this year of Phoenix was one of the hottest markets. Have you been investing there a long time and are you watching what's happening there too?
Mike Hills: Yeah. As a company, we were there, we bought in 2010, '11, and '12, sold out at the end of 2012, 2013 and reinvesting there in 2018. I don't know if you've seen the stats, but they say that Phoenix has increased 34 percent in the last 12 months. I can tell you that the investments that I, again, I own an a-plex and three, fourplexes in Phoenix Proper. Those have all crushed it over the last couple of years. I'm still buy heavy on Phoenix. I would say, Phoenix does have a water issue, it's the desert, and the western half of United States is in drought right now. I think that will change. Obviously, I don't have a crystal ball, but drought tend to be cyclical. But if that continues for a long time, that could hurt the values of real estate. That said, Phoenix is one of those big cities and when we moved their, I started buying two and a half, three years ago. I was shocked at how low the prices were compared to what a big city it was. Again, this is just a big criteria, in some areas, we avoid some areas we buy in, but we have an office there. We manage 5-600 doors from our property management side in Phoenix and are very buy heavy in that city and have been for a few years now. Love that city. My wife wants to move there, it's too hot for me, but she wants to move there.
Deidre Woollard: [laughs].Denver, Phoenix. What other markets are you looking at?
Mike Hills: I have offices in Denver, Phoenix, Tucson, Colorado springs, Fort Collin's, Salt Lake City, Boise. One of our business lines is in Las Vegas. We're strongly considering opening Reno and opening in Kansas city.
Deidre Woollard: Interesting. Recently interviewed someone in Kansas City and excited about that market. You mentioned Boise. Wow, that market. I feel like everyone from California has been like go into Boise. So how long have you been in Boise and what have you seen there?
Mike Hills: We've only been in Boise maybe nine months, but same thing. It's basically the West Coast of the United States is fleeing. I think some of that is COVID related. I think some of that, whether you'd like to hear this or not is political motivation related. I think some of that is just cost-related. Look at the stats on San Francisco and look at what some of the crime bills have done to that city. It's made national news and until that gets under control, I think people, not all people, I think some people will be like, this just isn't worth it. It's not worth a headache to live in this cities and frankly, I grew up in Sacramento. I'm a die-hard, San Francisco fan, sports fan. Love that city. I've been to 47 countries and San Francisco is one of my all time favorite cities on this planet, at least that I've been to. But it's a tragedy what's happening there right now and all of those people leaving have been driving up Denver real estate for 20 years. Denver, Salt Lake, Phoenix, Boise, as far away as Nashville, Austin, Reno, Kansas City. It's almost like the left side United States, right side United States, the coastal cities, they're moving into the center and being like, "Look, this price just isn't worth it." That again, is one of the things we track because I want to take advantage of the people that are moving to the cities and write the appreciation story up and as soon as that stops, because I do think it'll stop and people start moving back to the Bay Area and back to LA and back to San Diego because those are fantastic places to be. It's just the current climate is annoying, if you will. [laughs]
Deidre Woollard: Well, you bet just Colorado Springs, I talked to somebody recently who said that there was a lot of people coming from Denver to Colorado Springs. Have you seen that movement from Denver? You mentioned Littleton before. Are you seeing movement out of the city as the city gets pricier?
Mike Hills: Yeah. I think this has been almost like a COVID trend where people are still moving to Denver, but they're not moving to Denver proper, they're moving to the burbs. Logically, if you think about it, and I'm not saying that I know this for a fact, it would just seem like people that are living in these high-rise condos, whether you rent or buy, and you're downtown in a downtown metro area, and you buy and you move in there so you could experience the city life or the parks or the ball games regardless to the city you're in. Now you're trapped in your apartment or in your condo because of COVID, you can't walk your dog, and everybody in Colorado owns dogs, you can't walk your dog, you can't take your kid out or kids out. You're stuck in there, the pool, the bar, the gym, they're all shutdown because of COVID. Well what do you do? You're like, I'm going to go buy a house in the burbs, at least there's a yard in the back. Now I think that trend will come back, but that's what's happened, I mean, if people are moving out of the bigger cities, and more importantly, the city center's into the burbs, then it's one of the factors that have fueled the rise in the prices in the suburbs. It's a trend that we haven't seen before and yes, I do think people are moving from Denver to Colorado Springs, I think that's also price driven. I also happen to think that COVID has taught us that people can work from home. If you can work from home, and you can telecommute, then you don't need to live in the city in which your company is located, you can do it from home. If you only have to go into the office one or two days a week, but you can buy a bigger, better house 45 minutes away. You buy that bigger, better house 45 minutes away and deal with an actual commute only one or two days a week. I think that's one of the things contributing it to. Will that change? Yeah, because that's what happens. The only constant is change, and that'll change again, but that seems like what's happening. The prices aren't quite the same, but Boise and Colorado Springs are very similar feels as cities. About the same size, not quite but about the same size, price points' about the same, rental pool seems to be about the same, both very conservative cities politically. There's definitely reasons we like Boise so much as it reminds us of Colorado Springs.
Deidre Woollard: In each of these markets, do you have property managers and are they in-house property managers or are you contracting with people? How does that work?
Mike Hills: When we expand cities, it's all Atlas employees. That way we can teach people the Atlas way. Every now and then we will acquire a small property management company so that we can go in and have some scale to the property management side of the business. But for the most part, when we move into a city, not most part, when we move into a city, we want everybody to do it the Atlas way. What that does, it allows us to have consistency on the property management side, the PM side, and allows us to have consistency on the investor side, so that investors can trust whether they're buying an asset in Denver, Colorado Springs, Phoenix, Salt Lake, Kansas City, wherever that the management's going to be the same. That consistent message is very important to us.
Deidre Woollard: When you're buying properties, are you buying turnkey or do you also have contractors and you're going through that value-add fix up process?
Mike Hills: Little bit of both. I can tell you that the three assets that I bought last year were all value-add. The one that I personally bought in April was not value-add, it was pretty much a set building. The one that I'm currently under contract on, going to buy, is also not value-add, it's pretty much a set building. Now, the reason that I did that is my projects that I bought six months ago, eight months ago, now, whatever it is, there's just a lot of fricking work [laughs]. This is what I do, but I like to have a little bit of both because when you're constantly doing value-add, it just gets expensive. That's not to say that I won't do it. Again, from our investors perspective, one of the first thing that we do is sit down and say, hey, what are you trying to accomplish? Are you an older person that just simply wants annuity, so you're buying it, forgetting about it, you don't want to put work in? Or are a young person that you're trying to do a value-add play to maximize your dollars because you only have enough money to buy one deal? That's part of the discovery process, if you will, just depending on what people want to do.
Deidre Woollard: Let's talk a little bit about that. We talked about exit strategy earlier. How do you know when it's time to exit? Is it more based on what your plan is or more based on what you're seeing in the market? I know we talked about not timing the market, but how do you know when it's time to let go?
Mike Hills: I think it's really situational. Let me say it this way. One of the things that I coach and teach on is, each one of my children; I have four kids a 10, a 9, a 5, and a 3. For each one of my kids, I bought a house and put it on a single-family home and put it on a 15-year note, fixed rate, fully amortized note before they turned three years old with the goal of when that kid hits 18 years old, that's their college fund. I never have to save money again, I never have to worry about it, I never have to save into it, that becomes their college fund. I had those houses earmarked purely for college. Now, that said, one of the assets that I sold at the end of June, I sold a single-family that I bought in 2004 and this is pre-kids I just refinanced that particular house, I refinanced into a 15-year note when my son was two, my old son, that became his college fund. What happened is the market went absolutely crazy and I had 500 grand in equity in that one house. That house was earmarked for his college, but it became almost draining because there was so much money that his college was already paid for by that house because it had increased so much. What did I do? I sold it and I 1031 exchanged it into something that will still pay for his college. I didn't lose sight of the original goal and I wasn't taking money out of my son's, so to speak, pocket, still pays for college and there's just better uses of that money. When I buy, I buy it as though I'm never going to sell it, but then I'm constantly checking my strategy. Is this the right market to own in? Do I still like this market? Do I still like this asset? Is it performing the way I want it to perform? Is it underperforming or overperforming? Let me say it this way. I used to think my goal when I was a younger investor, I said, okay man, when I got 100 doors, I'm done. Now 100 doors is way closer than I ever thought I would be. This next purchase I'll have in the high 70s in terms of door count. Now I'm like, 100 doors is imminent. It may not happen for two years, or five years, or one year, I don't know, but getting to 100 isn't my goal anymore. That's the other thing with goals, is goals constantly change. Why? Because life changes; kids, goals, jobs, money. If I were to lose my job tomorrow, my goals would immediately change. Maybe not my goals, but the manner in which I manage my properties would immediately change. As an example, my CPA [laughs], and I'm going to share this because it makes me happy, but my CPA, I do a bunch of cost segregation and all my stuff. About 3-4 months ago she's like, "I hope you saved because you're going to owe the IRS about $130,000-135,000 for 2020." I was like, "What?" Very frustrated. She sent me my tax returns finally today because we filed an extension and all that good stuff and she's like, "Oh, you're going to owe a little less than 40 total." I was like that's like finding 100 grand. Now, it's all my money, but, I'm way happier with owing 40 than I am 140 for [laughs] obvious reasons. There's a six-digit reason to be happy with that. But my plans changed when she said, "What do you have worth 140 grand?" Why don't just keep $140,000 sitting in cash in my bank because that would be a waste of money? I go buy real estate. So 140 grand, I was like I've got to move some stuff around, 40 grand, way different. That's what I mean, when life throws you curve balls, you just got to be ready to pivot on and be very honest with yourself in terms of what to do next.
Deidre Woollard: Absolutely. I want to pivot a little bit and talk about Atlas specifically because I noticed on the web site that you've been working with Zillow since 2018.
Deidre Woollard: At Millionacres, we've been studying and buying and watching all the players. But what has that been like from your perspective?
Mike Hills: Zillow is no short of amazing. I love what they're doing. I love the fact that they're helping the consumer. Because in the end, this is all driven by the fact that they are trying to make the consumer experience to buy and sell real estate better, and that's it. Anybody that says they are hurting the industry is usually saying that from a very selfish perspective. Now, I have the ability to say it from a selfish perspective they are helping the industry because they are also helping us because they are a client of ours. But that said, I think what they are doing is no short of amazing. There's a lot of press right now. It was both on CNN and Fox News in the last few days. Articles on both sides of the aisle talking about institutional investors coming in and squeezing out first-time homebuyers and American. Whether that's true or not true, we can talk about that in the second if you'd like. The Zillow is not doing that. Zillow is actually helping the transaction. They're trying to help the consumer regardless of what people think, are they squeezing out realtors? Are they not squeezing our realtors? I don't happen to think that they are. In general, maybe some feel that way but that's not their stated mission. I think it's great for the industry, I think it's great for consumers, they're streamlining the process, and I love what they're doing. I hope that I would say that even if I wasn't working with them because I believe in the mission that they're trying to accomplish.
Deidre Woollard: Aren't they also selling a lot of their properties to institutional investors though?
Mike Hills: I don't know. Here is what they're doing. They're not owning anything, they are selling. Everything they buy they turn around and sell. If the institutions buy them, they're not picking and choosing based on who's buying, they're just trying to sell the houses. If the institutions are buying, that's not what Zillow has created, that's what institutions have created. Think of Zillow, every time they sell a house is no different than you or I. They happen to be a very big entity. They're just simply selling house and they're not allowed to discriminate just like we aren't as to who's buying the house. I would make the argument that those two things, Zillow in institutions, it might be a by-product but it's not the goal.
Deidre Woollard: Let's talk a little bit about what I saw on Atlas, which you talked about the virtuous cycle, which is turning renters to homeowners and to investors who then offer properties to renters and so on so forth in the circle. Why is that your mission? Also why is that important for communities?
Mike Hills: To take a step back, when I started buying real estate, personally, I was trying to protect myself financially, trying to protect myself if my boss fired me, trying to protect myself. I didn't grow up with a lot of money, went to a good school. My parents struggled and sent my brother and I to an all boys prep school. When I went to four year university my parents helped but I had an academic scholarship. I still got out of school with roughly $25,000 in student loans, which I'm well aware is way cheaper than a lot of students today. But still $25,000 20 years ago was a lot of money. It is a lot of money today, was a lot of money 20 years ago when I graduated. People don't have enough money to retire. One of the things that we're trying to solve using real estate is this issue of retirement. One of the things that we help and coach and teach on is strategic buying to help either create retirement or supplement the retirement that you already have. I've got ways to buy real estate inside an IRA with a fully amortized bank loan. It is the slickest retirement planning on the history of the planet in terms of returns. But for the purposes of this, we don't need to go there today. What I can say is that, our mission to uplift humanity is all humanity. What we've grown into is taking our tenants and saying, "Hey, you rent houses from us. We want to coach you and teach you how to become buyers." Because the fact of matter is most Americans', Number 1 source of wealth creation is their home. We want to coach people and teach people how to do that for the virtuous cycle, starts with our tenants. If we show them how to be better stewards of their money, it helps all of society and it uplifts the community, it uplifts all humanity, gives people a reason to get up and go to work. It gives people some pride of ownership. They rent from us and then they can buy and then they turn into investors, and that is the virtuous cycle. It's watching people that are first-time homebuyers that are in their mid-40s, that never thought they could buy a house, that turnaround and buy a house. I've chills right now because I can picture some of these people's faces going like, "I never thought this is possible." It is possible you just got to know the game. One of the things we do is we teach people the game. We do it very openly, very honestly with our owners that own the real estate. We say, look, we're going to coach and we're going to teach people how to buy houses. We're not trying to hide this from anybody. We're trying to create this community because when people own, when they have pride of ownership, it uplifts a humanity and it uplift the communities. It also teaches the children of the people that are owners that they can do this too. Not just one race or another race, all race, all people, all education level. Because you don't need to be a genius to buy a house. Everybody thinks that it's complicated. Once you learn the rules, you can take steps necessary. It may take two years. You can fix your credit, you can get more income, you can quit buying new cars. You can quit being a consumer and learn to be an investor. If you learn these tricks and learn these trades, holly molly the future is bright. That's why we do that?
Deidre Woollard: I just love that. Especially, the part about showing children what's possible is so important. We talked a lot on other podcasts about how to increase the home ownership rates so that it's all equitable. It really does start with education. This is pretty much an awesome place to end it. I just want to ask you one more question because you mentioned there are 100 doors, you're moving past that. What's next? Are you looking to retire early? A lot of people have that goal in real estate. Are you going for 200 doors? What are you thinking?
Mike Hills: I would simply say that I haven't put defined what my goal is. Instead of noodling this new thing in my head will be really fun someday if one of my kids or multiple of my kids go to school, go to college, go on the real-world, get kicked in the teeth. Because I want you to go learn what the real world's like and then maybe come back and maybe we have a family office. Maybe I become an author something that I've thought about, maybe do some speaker circuit. I love coaching and teaching. The real estate just affords me the financial freedom but retiring, I would be bored out of my mind. I love what we do. The joke that I make of that little kid they have to go to college, I love to travel. Or my kids have to go school so I can't retire until my kids go to college anyway. I don't like golf that much and my liver would explode because I'd party my face off if I didn't have a job and my wife would be like, get out of my house. Now but in all seriousness, I don't think there is a defined goal. As long as this remains fun, I will continue to do it. We're having a ball. I love coach people and teaching people and watching, whether it's the virtual cycle or the investor. Watching that aha moment, watching that light bulb go off in their head. We're like holly molly you mean I can do this too? It's like, yeah, you can. Is it scary? Yes. Is working till you die scarier? Absolutely. Everybody listening knows this. That first purchase on an investment is freaking nerve wracking. But it's also addicting. The second one you're like, this isn't that hard, and then the third one you're like, this is awesome. Then when your family and friends start coming to you being like what are you into? What is this? Then you get to coach and teach again. That part I absolutely love.
Deidre Woollard: Thank you so much for coaching and teaching us today. This was fantastic. Reminder to listeners, you can learn more about Mike at realatlas.com. You could always email us at media@millionacres to share your thoughts. Stay well and stay invested.