Deidre Woollard: Hi there Fools, I'm Deidre Woollard, an editor over at Millionacres, the Fools real estate investing website. I'm excited to talk to a very experienced real estate investor today who's a member of the wealth-wired network. Arthur P. Johnson Junior is the Chief Strategy Officer at Pure Storage. He's also got a family of five, and in addition to that, he's got a real estate portfolio of over 50 units across four states. Welcome.
Arthur P. Johnson: Thank you for having me. I'm excited to talk to you and talk about real estate investing.
Deidre Woollard: Well, let's get into your journey. How did you get started in real estate and what has it brought you?
Arthur P. Johnson: It's funny. I can remember back when I was 16 years old, I was delivering pizza for pizzeria and the owner of the pizzeria was this really good-looking guy. He had a fancy car, beautiful girlfriend. I got to talk to him one night to find out how was he able to afford the car and the pizzeria and he said, I make money doing this. That was my first lesson in passive income. He owned several apartment buildings in Los Angeles and the pizzeria and made his money doing that. That plant a seed in my head, 16 years old, that real estate was a path to wealth. Fast forward 15 years later, I was working at a big tech company and I wasn't feeling very valued and I felt stuck. I thought the way to get out of it is to get to financial independence and the path to get there was investing in real estate. Back in 2003, I bought my first single-family home in Albuquerque, New Mexico, and now have 53 units across four states.
Deidre Woollard: That's amazing. I know you've got a busy, you've got a full-time job, and you've got all of these units across multiple states. How do you structure that so that you can get everything you need to get done? Because we all know that passive real estate investing isn't really quite so passive.
Arthur P. Johnson: That's right. That's a great question. I do have a very busy life with three teenage girls, a full-time job, married for 21 years and so there's no silver bullet. I think the thing that helped me was that I selected the real estate that would suit my lifestyle. You can get into wholesaling, you can get it fixed and flipping, but that's another job. For me, buying and holding was the best path for me in real estate to pursue that. Also once I've found an attractive market and had a great team, I want to get as much use as I could in that market. A lot of investors I see, they jump from market-to-market, but that's hard because it takes time to get a market settled. That was also important to me as well. I did wake up before everybody else, I'm a early riser, and also put systems in place to make sure I can be organized by having software and spreadsheets to help me with my properties. I got tell, like you said, Deidre, the first couple of years owning a property in a new market it's a lot of work, but after you stabilize it, it becomes very passive.
Deidre Woollard: Well, I think it's interesting the idea of buying and holding. It's similar to stocks and that buying and holding is really where you get your benefit. What led you to Albuquerque as your first market?
Arthur P. Johnson: I get that question a lot. Being the quantitative person I am, I did a spreadsheet of all the largest metros across the United States. I looked at population growth, income growth, rent growth, migration patterns and try to identify the key factors for a good market. Then I wanted to make sure I wanted to have my first location be close. I knew I could invest in California, but I want to invest too far from California, so I said I want to be able to get there in a day and back on a flight. Also, I wanted to have a state that had great weather and good sunshine. That led me to Texas, Colorado, and New Mexico. I flew to all three of those areas, checked out the areas, talked to realtors and I landed on Albuquerque because it had the highest per capita PhDs, had a good stable economy, and a very affordable housing and so I picked that as my first market.
Deidre Woollard: Interesting. How did you get that first step going? You knew you wanted to invest, you found a house. How did you deal with financing, budgeting, all of that, and what steps did you take as you made that first leap?
Arthur P. Johnson: I think that it takes a big leap of faith to buy a property in another state and then have somebody else manage it for you. For me, I'm all about relationships. I wanted to make sure I went to the state, met the team, build that relationship, and that started to give us trust going back and forth. I think that also dealing with a investor-focused realtor helped as well. Most of our clients were out-of-state investors and so she knew how to deal with us. She would take pictures of properties, send it to us, send us videos. We'd have an inspector inspect it from top to bottom. That gave us some comfort that we had good eyes and ears on the ground to help us out. For me, I was almost getting paralyzed with analysis. As I said, at some point I have to make a decision and take a leap of faith. But I started small. I said to myself, if I'm going to make a mistake, that's okay, it's my education and just keep on going. That's what got me over the hump.
Deidre Woollard: I love that you mentioned that because we talked a lot about analysis paralysis with real estate investing because we've seen so many people who read all the books, maybe they go to a couple of investing groups, but then they can't get over that hurdle. What was financing for you the first time? How did you do it? Do you have any advice for people trying to finance their real estate investment?
Arthur P. Johnson: Financing is a very important part of your investing portfolio. For me, my advice would be, have all your ducks in a row. Make sure you have a good debt-to-income ratio, 28-35 percent. Your credit score's clean or as clean as it can be. Make sure you have the down payment. Make sure you have any potential reserves for any capital expenses or vacancy. Once you have that, then you start to build a relationship with a good mortgage broker, or with the bank that you have a relationship with. But remember, there are some shady mortgage brokers out there. Make sure you get a recommendation from a friend or somebody you trust. My advice is, on the financing side, get as much money as you can for as long as you can. You can always pay it back sooner and so if you get a short-term loan, you're constrained to that. If you get a longer-term loan, you can pay it back over the long term, or you can pay ahead of time, so get as much money as you can for as long as you can.
Deidre Woollard: How long did you hold that first property before you decided to get a new one?
Arthur P. Johnson: I held it for one year. My theory was if I can look at the property projections versus the actuals after one year and things were within reason then I think that I would invest more than one. I went one year before I got my second property and in the six months after that for my third property. I bought a total of five properties in that market before I went onto a new market.
Deidre Woollard: What was the process when you were trying to find a new market? Were you are trying to replicate the same experience? Did you want to diversify into a different type of market?
Arthur P. Johnson: That's a great question because I tried to find a market that had a hybrid of cash flow and appreciation. I realized it's hard to find both in the same market. My next market was focused specifically on cash flow. I went to the Midwest because they had the lowest asset prices there and they had a really good blue-collar tenant base in those areas. I went there for cash flow and I went to Texas for appreciation. One of my first biggest lessons learned was, it's hard to find both in one market. To diversify your portfolio, go to two different markets with two different things.
Deidre Woollard: That's really interesting. What about single-family versus multi-family?
Arthur P. Johnson: I think to each his home, but I'm a big proponent of single-family because I want to attract the tenant that's going to be there for a long time. I want to have the husband, the wife, 2.5 kids, the dog, the white picket fence, and a good school, and a good neighborhood. They're going to stay there for three or four years. If you have a one-bedroom, one-bath unit, you're going to attract some of that single or a couple and they move more often. I'd rather attract a couple or family that's going to be there for three or four years in a three-bedroom, two-bath homes, a nice yard and so that's why I prefer single family homes. The downside of that though, is that on the multi-family, you can get more appreciation and more cash flow on some multi-families and so there's a tradeoff to be made. But I think that the single-family home for me over the long run is a better investment.
Deidre Woollard: As you leveled up owning properties across multiple states, what tools and what team members did you need to build your empire?
Arthur P. Johnson: Yes, so I got lucky. I stumbled upon a tool called Stessa, that's S-T-E-S-S-A. It's like Mint or Quicken for property owners. It allows you to take all the information across all states and property managers and put it into a report. You're going to get income, expenses. You can look at cash-on-cash returns. That's in my dashboard for my properties. I also built a Google sheet to help me avail investments pretty quickly. Then again, the anchor of my team was investor-focused realtor, having a very good embedded property manager, having a contractor, and then having a good banking relationship. That's the core of my team in each of these areas. I worked really hard to build that team, and I've been very fortunate that the team has been great so far from me.
Deidre Woollard: As you're building up that team, are you looking from referrals from other investors? Are you getting referrals from one realtor to another realtor in another market? How did you go about structuring that team?
Arthur P. Johnson: I went about by getting referrals. I went to a lot of meet-ups and mental groups. I talked to my mentors, I talked to meet-up groups. I looked at forms online as well. What I also did to build this team was I tried to use what I learned in my corporate life and use that on my progress. I tried to manage it like they were my partners employees. I gave bonuses to my contracted at the end of the year. When it comes to my tenants, I treat them like my customers. I give them a gift basket when they move into one of my units, I send them a Christmas card and a birthday card every single year as I try to make sure that I know that they are my customer and I need to make sure they are pleased and happy. That's a lesson I learned from my corporate life I'm applying to my the real estate business.
Deidre Woollard: I really love that. I think that's so important. That brings me to a question that I wanted to ask you because I feel strongly that smaller landlords, small-and-pop landlords, really are important to the communities they own in. It sounds like you feel like that's really important too.
Arthur P. Johnson: Yes, I think that you are seeing a trend with a lot of institutions like Blackstone and BlackRock that are owning these rental communities across the Sun Belt states. I think that's fine and they're doing it to make a return on their investment. But they're treating the tenants like they were a number. When you live in one of my properties, you know that you can be treated in a special and unique way and you have a great place to live. Another thing that I'm doing is that whenever someone moves into my units, I very rarely raise the rent. I think it's important for the tenants that are moving to the apartment to know, hey, you know what? My rent's going to be pretty stable over the time I'm here. Other tenants fear every single year, 50 bucks here, 70 bucks, there, raises the rent. It's important to note that they are going to have a very stable rent environment in my units.
Deidre Woollard: Did what you've set up there help you when it came to the issues of the eviction moratoriums and people having tripled paying during the pandemic?
Arthur P. Johnson: That's a great question. I got lucky because in the Midwest states where I have most of our properties, they had a lot of state and local governments rental assistance. My property manager was very aggressive in filling out the forms to get that rental assistance to my tenants who needed that. I had 53 tenants, I only had one tenant that couldn't get out because of the moratorium. Everybody else who had an issue were able to get a rental assistance or workout a plan. A setting that helped quite a bit. With the moratorium going away, I do think there's going to be more evictions, unfortunately, but I think that there should be a good way to work around that eventually.
Deidre Woollard: Yeah, it seems like what you mentioned there, it's been hard for some tenants to get access to rental funds. There have been a couple of studies about that, that the funds have been out there, but landlords and tenants have really struggled with getting access.
Arthur P. Johnson: Yeah, it's funny just because I think that in some cases, my property manager had to fill out the form for the tenant and just had them sign it because they didn't understand it or they didn't want to take the time to get rental assistance. I didn't quite understand why it would such a big barrier to getting this free money from the government. We had to really, in some case, hold the tenants hand to get them to fill out the forms to get the rental assistance.
Deidre Woollard: Interesting. You've got 53 properties. What are you planning to do next? Are you planning to continue to acquire? Are there new markets you're looking at?
Arthur P. Johnson: Right now I'm being very selective. I think that I've reached my passive income goal from the rental property and so I'm being very selective. I'm trying to stabilize all the properties that are not stabilized yet. I'm even considering calling some of the under performers, a couple that haven't been performing as well as I want to. But my goal is to create generational wealth, and my hope is that one or more of my daughters will take over the portfolio when I get of age to do that, and they will take over the portfolio and then they can pass it onto their kids. I want this to be the bedrock of wealth that I can help create for my family.
Deidre Woollard: I like that. How are you talking to your children about real estate investing, what you're doing? Do you show them as you go along so that they see that this is an opportunity?
Arthur P. Johnson: In between TikTok videos, when I can snatch their attention, [laughs] I try to share with them and talk to them about, hey, listen, we own property here, here's some units we have. They don't always like that discussion, but I think that the more I see it, it's starting to sink in, because one-time I quizzed my oldest daughter and say, listen, Killen, obviously you've been paying attention, how many properties do we have? Where is it located? She answered every one of my questions. I think right now they're still in that teenage phase and this is something that's not interesting to them now, but I think that the more I talk to them about it, and the more they understand financial independence, building wealth, they'll really see that they have a pretty big advantage with the portfolio.
Deidre Woollard: What do you think about financial literacy, education in general? I feel it like we just don't teach teenagers how to budget, certainly anything about real estate and owning a home. What do you think needs to change?
Arthur P. Johnson: This is one of my passion projects. I agree. I think that in high school in particular, there should be curriculum in every public high school that teaches kids about financial literacy. They teach them about foreign languages, teach them world-class, out-class, teach them a life skill class. I think there are about 27 states today that mandate the curriculum in public high school. It should be all 50 states, at some point. This is going to help build wealth and lift up the entire country for everybody if people who know how to budget, how to invest, how to save. If you look at the student debt problem today, I think half of that could be solved by making them more literate on the front end, because in primary, you're trying to build them on the back end. I'm a big proponent for financial literacy curriculum in public schools and also after schools as well. I think getting it to that junior, senior in high school, freshman. sophomore in college is the right time to introduce these topics.
Deidre Woollard: Really interesting that you mentioned student loans. National Association of Realtors just came out with a study about how student loan debt is keeping so many people from home ownership or from investing from all of that because they are so burden down with debt. I think that's a really important factor for people to think about before they take on that kind of debt.
Arthur P. Johnson: If you think about that, that burden of debt hanging over your head, impacts what job you look for, it impacts your budget after college as well. It has such a big impact on the trajectory of these young kids. If you do that at early age, it's going to sit you off into an area that you may not want to be in 10-15 years. It's important to have them to launch correctly out of college as opposed to being burdened with all this debt.
Deidre Woollard: Yeah, I absolutely agree. We're in this bizarre real estate market, prices are higher than we've ever seen them, interest rates are still low, but that's going to change. What are you seeing and what do you think about housing affordability and its impact on the country as a whole?
Arthur P. Johnson: That's a fantastic question. I think housing affordability has really gotten off the deep end. I think the medium price of a home in the US is $330,000, which is crazy. It's gone up 10 percent or something like that in the last year. I think the one benefit now with COVID and people working from home, people can now live and work wherever they want for the most part. There's still some companies that don't allow to do that, and some professions are not allowed to do that, but I think that allows you to open up these other pockets of communities in the Midwest and the Southeast that are more affordable. My sense is, a lot of these have very high cost locations like New York, Los Angeles, San Francisco, you're going to see a net migration out of those counties, out of those cities, into more frugal areas. That's going to create better jobs, there's going to be more spread across the economy. I think that although the affordability has gotten worse, I think the one thing that we're seeing now is the ability to not have to work in these high-cost urge. You can work wherever you want. But it's gotten out of control.
Deidre Woollard: Yeah, absolutely. It's been fascinating to watch the impact of remote work. You've been investing for a long time. It sounds like you started relatively young, but what do you wish you knew before you started investing in real estate?
Arthur P. Johnson: I would say two things. Number one, I wish I would've focused on cash flow out of the gate. Appreciation can be good and it could be a good chunk of returns, but a speculation. I think that for me, I'd focus on cash flow and having appreciation be the icing on the cake. I probably would have done that out of the gate first. Number two is I would've treated it like a business from the very beginning. I treated it as a side hobby or a side hustle, and literally invest in the infrastructure needed to really make it easier to me when I had more properties. I would've treated like a business initially, I would have thought about the tenant as a customer initially, I would've built up better systems initially, instead of having to do it so late in the game. Those two things I would do over again if I had to start today.
Deidre Woollard: One of the things I've noticed is that when people are getting into real estate, they don't necessarily understand cash flow. They think of it just as the rent coming in and they don't factor in all of the other things. How do you think about maintenance, long-term issues? How do you plan for that so that your cash flow covers all of the things that can happen in real estate that can be really random sometimes?
Arthur P. Johnson: That's a great question. For me, I'm very conservative when it comes to my projections. I take the median range as I get an estimate from a property manager, and I take the low end of that range for the estimate at rents. Then I always take a 12 percent which is very high vacancy factor, that's about six weeks a year vacancy factor. When it comes to capital reserves I reserve about $2,000 every year for some of them in-house. I also reserve estimate about $2,000 in repairs and maintenance every year. Then the rest of the stuff is pretty straight for us. The property taxes the insurance, the property management fee. I don't pay for utilities, that still pay me home. That's my projection. The three biggest assumptions for me that are different is going to be the vacancy factor, capital reserves, and repairs and maintenance. For me, I'm on the more conservative side, and my goal is to get a 15 percent cash-on-cash return at the end of all that. If I can find properties like that, then I would invest in that all-day. If it didn't quite meet that bar, I'll pass on the investment.
Deidre Woollard: Do you mentor other real estate investors, do you help people understand the steps they need to take in order to buy their property?
Arthur P. Johnson: I try to. I have a group that I mentor informally where we talk about budgeting, savings, 401k investing, real estate. I'm part of a couple of groups as well, like online groups. We talk about real estate, different ideas. I love talking about it, and I love encouraging other people to do it. I think the thing that I see the most, is we talked about before is analysis paralysis. There's some folks I've talked to for the past five-years that are still reading up on real estate. It's a big boom. I really trying to encourage you is just take action and you're not going to know everything at first, but just take actions. Most important that you can do is take action and then learn from there. But I do enjoy mentoring other folks when it comes to real estate investing.
Deidre Woollard: You mentioned before you're probably not going to be in major acquisition mode for a while. Are you planning that this is, you're going to hold the properties in retirement and then pass them onto your daughter's. Is that your plan?
Arthur P. Johnson: That is absolutely the plan. I want to be able to pass this on as generational wealth to my daughters and to their kids as well. I think it's a good foundational part of our state plan to do that. I think that my hope is at least one of my three daughters, who have the interest in taking over the management of properties. [laughs] If not, maybe the son a lot or no. But my hope is that they'll eventually become part of the family business.
Deidre Woollard: As you buy properties, are you also selling and are you using 1031 exchanges as part of that?
Arthur P. Johnson: Yeah, I've done four 1031s. I think that's an amazing tool. For those who don't understand, there's a tax code called 1031 exchange, which basically you can sell a property and the proceeds. If you put it into a like-kind property, will be tax-free. It's not like if you're going to eventually sell that second property, you have to pay taxes. But for the most part, for that initial sale is going to be tax-free. I've done that four times. The downside is that there's certain limits on time and how you can do that. You have to identify certain properties within certain amount of time. You have to sell it within a short amount of time as well. If you can find a deal within that time frame, it's a great tool to use as I was lucky enough to do it four times on my properties and I did not pay taxes on the sale.
Deidre Woollard: Excellent. Yeah, that's a great strategy. What are you thinking about some of the moves of the government to try to make housing more affordable, subsidizing the building of homes, things like that?
Arthur P. Johnson: Yes. It was a tough one because you have to pay for it somehow. You have to try and help and broaden that safety net. But you also, you can't burden one part of the society to pay for that as well. So you have to find a way to have a balanced investment and imbalanced cost with some of these initiatives, and so we're going to find a way to have everyone share in the investment. Then we have folks share in the benefits. I think that's going to be great. But I do think there needs to be something to be done because especially where I live in the Bay Area where prices are very high, is so unaffordable. There are people that are commuting two hours each way to work because they can't find affordable home close to where they want to work. That's gotten to be tougher. I think that there should be ways to think about ways to subsidize that housing.
Deidre Woollard: Yeah, definitely. Certainly, in the Bay Area, it's been an interesting market to watch. You don't invest in the Bay Area, is that right?
Arthur P. Johnson: I don't but I wanted to. Even back in 2003, I looked at Sacramento. I looked at Modesto. [laughs] I looked at even Southern California, but I could not find properties that have things that I wanted so I had to go out of state. If you're living in a low cost area you have an advantage, you can invest in your own backyard, so take advantage of that. I wanted to invest in California. I really did, but I just could not find properties that fit my criteria.
Deidre Woollard: Have you considered investing in other types of property, commercial real estate, are you just focused on single-family rentals?
Arthur P. Johnson: One thing that's caught my eye is real estate syndications. This is where you have a group people invest in one real estate projects that's driven by a sponsor and you share in the spoils of that project. It could be a commercial building, it could be a land deal, it could be industrial warehouse. There's a lot of platforms that are emerging to provide access to these syndicated deals. The benefit is, although the returns are not as good as direct close investing is much less time-consuming. You have experienced sponsor who has done this before, and you pay them a modest fee. The returns are close enough to where it may make sense. I started to invest in a couple of syndications as an experiment to see how it goes. So far so good, that could be one of the ways I can still get explore the real estate without direct ownership.
Deidre Woollard: Interesting, yeah, we cover real estate crowdfunding in Millionacres, and I've talked to those syndicators as well. You'll definitely have to do your due diligence, but it is an opportunity.
Arthur P. Johnson: That's important for me. I always focused on the most experienced sponsors with a track record. The key question they get from them is let's compared on other projects, your projections to the actuals to see exactly how accurate you guys have been in the past. For me, that's something to vet through a lot of the sponsors.
Deidre Woollard: Excellent. Do you also invest in real estate investment trust or in the stock market at all?
Arthur P. Johnson: I don't invest in reach, but I do invest in the stock market. That's my initial foray into investing. When I was 16 years old, my first stock was Nike. [laughs].
Deidre Woollard: Nice.
Arthur P. Johnson: I love Nike and so somebody said you should invest in what you know, and so I bought some Nike. I still invest in the stock market today. Although today I'm less about picking individual stocks. I buy more index and just figure out asset allocation. But I try to turn my daughters into it. My daughters each have Vanguard accounts and so they invested in the S&P 500. My oldest daughter, she took her allowance in her job money. She bought like an iPhone, an Apple watch, and she bought a Mac computer as a Killen. If you would have invested that money in Apple stock and waited a couple of years. You could have bought like 10 iPhones. You should always take some money invest it in the products, will take the rest invest in the stock and that's how you can make money.
Deidre Woollard: I love that. My father did something similar with me, but he told me not to invest in Disney, which turned out to be a bad idea because [laughs] I could've done much better. But anyway, but thank you so much for this. Where can our investors learn more aboutWealth Noir and your path and real estate investing?
Arthur P. Johnson: Sure. You can find Wealth Noireverywhere. You can look at Wealthnoir.com. You can find us on LinkedIn. You can find us on Facebook and Instagram.
Deidre Woollard: Fantastic. Thank you so much for your time.
Arthur P. Johnson: Thank you very much.