The amazing thing about investing is how anyone, no matter what background, can enter—even more beneficial if you have some previous knowledge and expertise to add to the game. In this episode, Lisa Hylton is joined by Aubrey Tatarowicz, a software engineer and the co-founder and Managing Partner of Collective Investing. Bringing her engineering expertise to real estate, Aubrey offers a unique view and strategy to passive investing. She shares some of those in today’s show while also taking us into her journey—from engineering to real estate. Aubrey takes us into her experience buying turnkey, passively investing through syndications, and going to multifamily. Giving insights to those who are thinking of entering the space, she then shares some advice on determining what asset class is the best one for you.
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Conversations With Passive Investors – A Software Engineer Passively Invests With Aubrey Tatarowicz
This is another episode under Conversations with Passive Investors. I’m excited about these conversations because they’re specifically created for passive investors to meet other passive investors, people who currently passively invest and yes, a lot of these people also invest in real estate in a variety of other ways. We’re going to talk a little bit about their experience both passively investing, as well as some active investing that they’ve done. On the show, I have with me Aubrey. Aubrey is a Cofounder and Managing Partner of Collective Investing. She started out as a software engineer at Google after graduating from MIT both with Bachelor’s and Master’s degrees. She approaches her real estate investing strategy with that same attention to detail that you would expect from an engineer.
She brings the engineering expertise to real estate by both using strong math and modeling skills to understand and structure investments to mitigate risk and optimize strong returns. Prior to moving into multifamily syndication space, she’s always been interested in real estate investing and even helped her father flip houses growing up. A few years ago, she started investing in real estate by buying a portfolio of single-family homes, and these single-family homes consistently returned positive cashflow. As an engineer, Aubrey wanted to leverage economies of scale and hence moved into the strong asset class of residential multifamily. I’m happy to have you on the show. Welcome to the show, Aubrey.
I’m happy to be here. Thanks.
I didn’t realize that you did some flipping as well.
As a kid, so it was like tearing up carpet and doing some of the unskilled work to save money on the flips.
Aubrey is one of my accountability partners. I met her through the Real Estate Investor Goddesses, Monick’s program and together we’ve been building syndication businesses along with your partner, Myriem. I’m super excited to have her on the show. In your bio, we touched on a little bit about some of the ways you got started in investing in real estate. The way I know that you started is pretty much your portfolio of single-family homes. For readers, yes, this is about passively investing. To some people, passive investing looks like buying turnkey. Could you talk a little bit about your experience buying turnkey, like how you found the people maybe starting with there and then the location of the properties that you’ve purchased?
The way that I got into real estate via the turnkey properties was listening to a lot of different podcasts. Actually, Myriem discovered this group. The group is called Cashflow Tactics. We met with them and it resonated what the goal was of investing in real estate. Prior to that, I felt that investing in real estate was out of my grasp because I didn’t have the education. I was intimidated by all the work that goes into buying a single-family home and doing all the work to rent it out and maintain it. That’s where my head was because of the flipping. When I flipped with my dad, he actually flipped them. He didn’t sell them but rented them out. Where I grew up, that made a lot of sense. I live in Brooklyn, so the markets are expensive over here. I didn’t feel comfortable buying around here because the numbers didn’t make sense.When it comes to evaluating multifamily, look at markets with fairly strong population growth. Click To Tweet
We met these people that were connected to the St. Louis market. What I like about these single-family homes is they had consistent returns and cashflow. The market was strong for renting, I believe about 40% of the people in the neighborhoods rent, so it’s not just a little bit of a rental market, it’s a pretty strong rental market. The rents are around $1,100, $1,200 a month. The purchase price of the houses is in the $80,000 to $120,000 range. That’s how I started out with the turnkey properties and discovered this through podcasts and networking. It’s a networking business I suppose.
Building on that, how was your experience being an out-of-state landlord? You live in Brooklyn and your properties are located in St. Louis, Missouri. How has that experience been for you?
We jumped into the deep end because we bought the first two houses sight unseen. It came with trust in the process with the turnkey provider. I know there are some not so great ones out there. There’s a component of luck that I’m happy with our turnkey provider. They’re B-class neighborhoods for the most part. People will want to live there, the school system’s good. All of these things go together. The experience was pretty positive, but it comes down to the people you’re working with that we felt comfortable investing out of state. We bought them sight unseen and immediately hired a management company. The management company makes sure to find the tenants, handles the leases and collects the rent. They take their cut and send us the rest.
At this point, how many do you have?
We have eight single-family homes. We bought them over maybe about a fourteen-month period.
Can you share with the readers a little bit about the cashflow on them, like roughly on average?
On average, we’re seeing around $200 to $300 a month per single-family home. The cost to purchase them was about $25,000 to $30,000 because we finance them traditional mortgage with 80% mortgage on the house and put 20% down and there are some closing costs in there. That’s what the cashflow looks like after we pay our taxes, the insurance and in the mortgage.
Now transitioning to another way that you passively invest, which is passively investing through syndications. Can you talk about your experience getting exposure to that as well?
We enjoy investing in the single-family homes, but as we’re trying to figure out how we scale investing in real estate and how we do more with our money and maybe even get more involved, that’s when we discovered multifamily syndication. That immediately became of interest to do that on the active side, but before doing on the active side, we wanted to invest passively. We’re invested in an Atlanta deal. The hardest thing about syndication is finding out that it exists and learning about it. I wish I had known about this years ago. It was about learning through podcasts and networking from other people and BiggerPockets. I’ve done a lot of education on the BiggerPockets platform. I do their online portal and that’s how I discovered multifamily syndication in general and investing passively.
The beauty of your experience is one, you own single-family homes, a portfolio of them, eight to be exact, and then you’ve passively invest personally. Then you’re actively building a syndication business. All of those experiences combined, for someone who’s reading, they’re probably wondering what advice you would give to someone who’s thinking about investing passively in a syndication? We also want to get your advice for turnkey as well, but first for investing passively in a syndication, what advice would you give to them? Probably starting with finding sponsors.
The advice I’d give is talk to a lot of different sponsors and go to meetups. Right now, it’s harder to go to meetups, but go to meetups, talk to other people that have invested passively if you can find them, and keep an open mind. I’m happy with deals that I’m invested in passively because the sponsor team is communicative. Right now, during Coronavirus and all the questions about how is this investment going to handle what’s going on, the team’s been communicative. I know what’s going on. It makes me feel a lot more comfortable. Talk to different sponsor teams and get to know them because it’s a relationship that you’re going to have for some time. The hold periods are usually between 3 and 7 years long. You’re going to want to know what’s going on with your investment.
You want to have a good relationship. You want to make sure you’re on the same page with however that team communicates. You want to make sure it’s the right investment for you because this is not liquid like the stock market where you can exit whenever you want. You never want to be investing your last $50,000. This is not for your emergency fund. All of these things when evaluating the deal and the team to be aware of those kinds of differences I suppose.
Diving deeper on market, you invested in St. Louis, Missouri for your turnkey and then for your syndication passively in Atlanta, what advice would you give to passive investors as they think about deals that are coming to them and assessing different markets?
I would not invest in larger multifamily in St. Louis. It’s not a great market for that. It’s a strong single-family home market. The person that we work with that manages the properties, they know the market well. They’re well-suited to make sure they’re finding tenants and doing the repairs and they have a fairly large operation. The repair costs are pretty low because they use the same paint everywhere, the same floors, all the same parts. Repairs are less expensive and the numbers made sense. In evaluating that market, we’re following the 1% rule. The rent is about 1% of the purchase price of the house, which generally, given taxes and insurance, means you’re probably going to be cashflow positive.Buy a vacant property because then you can find your own tenant. Click To Tweet
When it comes to evaluating multifamily, I like to look at markets with fairly strong population growth. The sponsor team will probably be sharing that with you within the operating memorandum, so you’ll get information about the market. I like the Southeast of the US a lot in general. It’s not a market, but the markets within it. A lot of people are moving from places like New York City that are expensive to cities in the Southeast of the US because they’re getting lower income tax there, and the weather is milder in the winter. You see these migration patterns to those areas. I’m looking for strong population growth. I’m looking for what would call being B or C-class properties. On the scale of A being the nicest, newest buildings, I like the B-class properties because generally people can keep paying their rent. In rough areas, it’s harder to collect on rent and that’s going to affect your investment.
Touching back on advice for turnkey, I know you touched a little bit about market and getting that 1% rule, but not wanting to leave people out who might be thinking about passively investing but taking that turnkey route. What advice would you give to them?
One piece of advice is it’s not nearly as passive as investing in a syndication. There are things that we had to do. We created an entity structure ourselves to protect us from legal ramifications, and all these properties had to be moved into a legal structure. That costs money that I wasn’t expecting. It was the right thing to do to be safe. There other little bits like if a tenant moves out, then you have vacancy. In a single vacancy, if you have one turnkey property, that’s going to hit you hard. Since we have eight, when we have a vacancy, generally the cashflow from the other properties can pay the cost of the mortgage and the insurance and everything for the vacant property. We’re generally cashflow positive, but a single vacancy or single make ready can affect your cashflow for a couple of months. That’s one thing that you want to keep in mind. The other part is you’ll want to make sure that you have reserves, especially if you only have one property, you’re not going to have the other properties carrying a single vacancy.
Do you have any rule of thumb regarding reserves given your experience with your eight?
Yes, I do. It’s on a spreadsheet somewhere. If you have one property, the general rule of thumb is to have about six months of mortgage payments and reserves. You can lower that down when you have more. When you have eight, I believe we feel comfortable having three months, but three months times eight properties in reserves in fairly liquid assets. This is around where we are. As you get to more properties, you don’t have to have six months for eight properties in reserves.
One thing that I would like to explore with you is the cost to enter turnkey versus syndications. What are your thoughts on the cost to buy into one of these turnkeys versus the cost to buy into a syndication deal?
For both of these kinds of deals that I’ve invested in, my turnkey properties generally were around $25,000, $30,000 to invest, to buy a single property because of the financing. Then generally for syndications, the minimum investments are around $50,000. That’s what you need upfront. With a syndication, you don’t need the reserves. Your $50,000 investment is pretty much invested and you can forget about it. You don’t have control of the exit. The sponsor team controls the exit and they’ll give you a projected timeline, but your money is there and not impossible to get out because you could maybe sell your position to somebody else, but that can be tricky to do. The cost to get into the single-family side, we needed $30,000 let’s say to buy a single-family home. There’s the appraisal, all the closing costs involved.At the end of the day, you're more in control with your single-family homes. Click To Tweet
Generally, you have to make a couple of mortgage payments before there’s actually a tenant. I like to buy a vacant property because then you can find your own tenant. You buy it, find a tenant and then put them in there. You have the cost of purchase and then the cost of potentially your legal entity structure. It’s a little bit more on your tax returns for the single-family homes because you have to figure out how to write off your depreciation, work with your CPA to do all of those things. You still should be working with a CPA on probably your taxes in general when you’re in any real estate because there are things to be gained in paying someone instead of entering in TurboTax or something like that.
Other people understand the Tax Code way better than I do. In a syndication, when you invest passively, you’ll get that K-1 form that tells you everything and it’s pretty straightforward. Very important is having the reserves. Both of those are passive, so you have to have the cash. For the single-family home, you’ll have that more reserves. For us, for the single-family homes, we had to qualify for a loan. I do have a W-2 job. I’m a software engineer, I’m still doing it. That helped me qualify for a loan. If you don’t have the income from W-2 job, it’s harder to qualify.
That brings me to some of the pros and cons between doing turnkey and then passively investing. I want to wrap up with touching on the active side. I feel like you touched on a few of these pros and cons between turnkey and passive, but to summarize for readers the pros and cons between them.
A pro for the turnkey would be that your tenant is paying down a mortgage. There’s this other side of things where you’re building equity in this home that you own. I did 30-year mortgages on these. In 30 years, I’ll now have a paid-off house in addition to all the cashflow or I could refinance later on and pull some of that capital out. A pro on the syndication side is generally you have the cashflow and then on the exit, there’s usually a larger payout. A lot of the plans that syndicators will do is target forced depreciation by doing improvements on the building. A lot of times you have the cashflow and then you have more at the end of the exit.
Both are fairly passive. I would say a pro for investing passively in syndication is it’s more passive. Once you send that equity, once you send the capital, then you sit back. The sponsor team has your bank account and you’ll get your cashflow, assuming things are running as planned. On the single-family home side, there’s more setup. That’s a con. Contrasting single-family home versus the deposits for the syndication is on the single-family home side, we created an entity structure and then a business bank account. All of the mortgages come out of the business bank account and all the rents come in. Any other costs come out of us. It’s a little bit more set up and paperwork. At the end of the day, you’re more in control with your single-family homes. If I own them, if I wanted to get my capital out, I could sell them. I’m in complete control.
One other pro for doing the turnkey is that for those people who perhaps want to have those assets on their bank book or their portfolio to be able to go out and buy maybe a fourplex or whatever, a twenty-unit apartment complex. You have those assets that you can bring it to the bank to say, “I have these already that I’ve been managing.” Whereas for someone who’s invested passively in a real estate syndication, they can’t necessarily go to the bank and be like, “I have this real estate syndication that I’ve invested in,” because you’re not actively managing that asset, you’re just passively investing. That is also trade-off.
There’s nothing right or wrong with all of this. It’s understanding what works best for you, what your goals are and what you’re trying to achieve. That actually brings me to the last bit here, which is your decision to play actively. You noted that your decision to play actively in multifamily syndication was a desire you had before you decided to passively invest. How did you determine that you wanted to do multifamily? How did you determine your asset class of choice for the active side?
I learned there are other options. There’s storage, there’s retail, commercial real estate on the business side. There are a lot of different options for investing in syndications. Where I landed on multifamily is a strong asset class. The numbers historically show that. The reason being everybody needs somewhere to live, and we’re in a housing deficit. There’s more growing demand and there are growing units coming onto the marketplace and in the market. Some markets have a lot more units than they do have the demand, but in the markets that I’m interested in, generally the population growth exceeds the added units. It’s a strong supply and demand relationship there. What you’re essentially doing on the active side is you’re buying and running it like a business. There’s a playbook for it. You can rinse and repeat and continue to use similar strategies and learn from previous deals and optimize the whole process. I like it in that it being such a strong asset class. I’ve lived in New York for years. I’ve started to understand multifamily in a sense of being on the side of the venture. It makes sense to me.
I also think it’s interesting that you rent and don’t necessarily own a place that you personally live in, but you own eight single families. Putting in existence, eight multifamilies and you’re actively building a business. Do you have any thoughts that you want to share when it comes to using money to buy homes versus using it to invest like the way you’re doing right now?
I know a lot of people look at it and they’re confused by the fact that I rent my primary residence and I own real estate, and I own eight single-family homes. There are a lot of factors in it, but I see my money going a lot further in the investments. I’m throwing rough numbers around in New York where the numbers are crazy, if I want to buy a two-bedroom apartment, depending on which neighborhood, I’m looking at $1.5 million to $3 million. I’m looking at a minimum of probably $6,000 to $8,000 in mortgage and taxes every month. That’s a lot of money and you have to have the down payment.
I could have put all of my savings into a down payment potentially on a place for my primary residence, and I’d still be on the hook for $6,000 to $8,000 a month. That’s a 30-year mortgage and that’s a big commitment. I see it as a liability. If you’ve read Rich Dad Poor Dad, being stuck paying six to $8,000 a month on a mortgage and taxes is a big liability. On the flip side, I put my money into these investments, I think about it as this cashflow can offset a lot of my rent. I could invest by buying my own place or I could invest somewhere else. My housing cost gets decreased by my cashflow.
For readers who live in these expensive markets, I live in LA. Aubrey lives in Brooklyn. I want people to know that there is another option that you could use that $100, $200, $300 or more that you’re going to go put as a down payment. You could consider putting it into syndication deals to the extent that you don’t want to do any work directly with real estate or you could do turnkey properties. There’s still a lot of great opportunities with turnkey. I hope that this interview has highlighted that there’s no one way to approach the passive investing. There’s that turnkey and syndication path. There’s a lot of good stuff there. Before we head into my level-up questions round, is there anything else that you want to share with my readers regarding syndications, passively investing?
The biggest question I get asked is, “Should I invest in this indication or should I do this?” It’s a personal question. Before deciding where to invest, you want to reflect and think about, “What are my goals and what financial goals do I want to hit and how much time do I have?” A lot of people will want to be hands-on in flipping houses and doing all that work. That can be fun, but it’s a lot of work. The first thing to do is to evaluate your goals. Once you understand where you are now, where you want to go, then you can evaluate what’s the right real estate investment or even if it is.
Here are my level-up questions. My first one is what are you grateful for right now?Before deciding where to invest, reflect, and think about your goals and time. Click To Tweet
I’m grateful for my health and my family’s health. It’s been a crazy time and I’m fortunate that I have a family to support me. We have a dog and the dog has helped me keep my sanity because she’s adorable. I’m thankful for the place on how fortunate I am to be where I am. I have a home office, I have a software engineering job that I love right now. I actually switched companies. I work at Lyft and it’s great. I feel fortunate to be where I am.
What have you attributed to your success and continuous growth?
I read a lot, both fiction and nonfiction books. I am analytical and I have high attention to detail. That’s where the engineering comes in and it served me well in my engineering career. It’s serving me well on the real estate side as well. My analytical mind and my software career have helped. It’s a well-paying job space I suppose. That has helped me level up my real estate game.
What do you know now that you wish you knew at the beginning of your journey?
Just knowing about all these different options in real estate, there are these passive options that we talked about on this episode, but there is a whole load of other options to get into real estate. I wish I knew about syndication a while ago. I spent a lot of time investing all of my money into index funds and that’s fine. It’s better I suppose than putting it in a savings account that gets you nothing but then you can get hit hard by the market conditions. I wish I knew about this earlier, but that’s the past. Just knowing about all these different options, the more I learn about real estate, the more exciting it is. There’s a way to invest any situation that you’re in.
Before I let you go, can you share with my readers your business and who you seek to serve and what you’re seeking to do?
My business is called Collective Investing. You can find it at CollectiveInvesting.com. We’re a real estate syndicator business. We target properties in most of the Southeast of the US, Raleigh, Durham and Charlotte are our top markets right now, although there are a ton of great ones. The people that we want to invest alongside us, the kinds of passive investors that we’re looking to serve are people that want to get into real estate, but they don’t have the time to do all the groundwork themselves. A lot of our potential investors are engineers like myself because that’s my network and those are the people that can resonate with what I talk about. The way that I explain and analyze deals resonates with that group. Any investor that is looking to invest passively, we only work with accredited investors right now, but that’s what we do.
Thank you so much again, Aubrey, for coming on. I appreciate it. I know people definitely got a lot of value from this episode in terms of the path forward for passively investing. The world is their oyster, so to speak. Thank you so much.
- Real Estate Investor Goddesses
- Cashflow Tactics
- Rich Dad Poor Dad
About Aubrey Tatarowicz
Aubrey is a co-founder and Managing Partner of Collective Investing. Aubrey started out as a software engineer at Google after graduating from the Massachusetts Institute of Technology with both bachelor’s and master’s degrees. She approaches her real estate investing strategy with that same attention to detail that you would expect from an engineer. She brings this engineering expertise to real estate by using strong math and modelling skills to understand and structure investments to mitigate risk and optimize for strong returns.
Prior to moving into the multifamily syndication space, she’s always been interested in real estate investing and even helped her father flip houses growing up. Four years ago, she started investing in real estate by building a portfolio of single-family homes. These single-family homes consistently return positive cashflow. As an engineer, Aubrey wanted to leverage economies of scale and hence moved into the strong asset class of residential multifamily.
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