Host: North Terrace is a property management business in Kansas City. Today's guest, Brandon Lawfordge, bought it in 2017. At the time, North Terrace had 800 units under management. Today that number is 1600. So Brandon has doubled this business. But what else has Brandon done in those intervening six or so years? 20 x the value of his Kansas City real estate portfolio and ownership of North Terrace has been key to the strategy. So today's episode is all about this question of whether and how buying a property management business can help grow a real estate empire. Brandon's the perfect person to explore the topic, not just because, well, he's actually doing it. Also, he's an enthusiastic proponent of ETA entrepreneurship through acquisition. Brandon actually wrote a viral Twitter thread back in 2020 modeling out how to get to $10 million in net worth by buying a business. And his wife bought and owns a sizable local business herself. So while he considers himself a real estate guy first, Brandon has one foot solidly in our world of SMB eta. He understands the power of both real estate and ETA and has positioned himself at a powerful intersection point between the two. A perfect pairing with this episode would be episode 206 from December 11th with Brandon Shields, who also bought a property management business. Two actually link to that in the notes. Okay, please enjoy this conversation with Brandon Lawfridge, owner of North Terrace Property Management. Quick Announcement the webinar we ran with Sam Rosati week before last was fantastic. Recall, Sam covered how to do a financial model for a self funded SBA search deal. We had a huge amount of you register and attend and now we've got webinar number two coming up next week. Again with Sam Rosati. This webinar, the Anatomy of an loi. Sam is going to deconstruct paragraph by paragraph the actual LOI used for the same deal that we modeled in the previous webinar. You'll receive the LOI template for use in your own deal. I find that composing and sending your first LOI is a bit of a mental hurdle for searchers, so come get perfectly comfortable with this document, what the language looks like, what its implications are, how your model should feed into it, and more. You'll learn this LOI template with us and then have it and be able to confidently use it in your own deal. The webinar is next Friday, February 2, 11am Eastern. The registration link is in the show notes. Look for where it says Register for the webinar right at the top of the notes. If you can't make it next Friday for the live webinar you can register anyway to get emailed a link later to the recording. And if you don't know Sam Rosati, he runs a boot camp for self funded searchers. He's an investor in search deals, he has his own Holdco, he's a founder of SMBash, and he's not only a practitioner of all things SMB acquisition, he's also a phenomenal teacher of it. So come learn from Sam how to compose an LOI for your deal next Friday, February 2nd at 11am Eastern. Link to register at the top of the show Notes. Welcome to Acquiring Minds, a podcast about buying businesses. My name is Will Smith. Acquiring an existing business is an awesome opportunity for many entrepreneurs and on this podcast I talk to the people people who do it. I want to share an update on the Acquisition Lab. As you know, the Lab is a highly vetted cohort based accelerator and community for people serious about buying a business. After going through the Lab's month long intensive, you have ongoing access to almost daily Q and A sessions with advisors, regular live deal reviews with Walker Deibel, author of Buy, then Build Potential Deal team introductions, and a very active Slack group with other searchers on the path. Well, the update is that the Lab recently passed 60 businesses acquired and for well over $100 million in aggregate transaction value. Also, all members now enjoy lifetime access to the Lab because when you buy a business, it's often just the first of many and the Lab wants to support you in every deal, not just your first. Lastly, check out my recent interview with Shane Ursum, episode 105. Shane acquired a business with over $1 million in EBITDA in just six months and he attributes a lot of his deal success to what he learned in the lab. Check out acquisitionlab.com or email the lab's director, Chelsea Wood. Chelseieveenbuild.com Brandon Loughridge welcome to Acquiring Minds.

[5:18] Guest: Thanks for having me Brandon.

Host: Today we're going to talk about the intersection of ETA entrepreneurship through acquisition and real estate and that intersection occurs in property management businesses. You bought one and you own a real estate portfolio. So we're going to hear all about how the two of those interact, complement each other or don't. But let's start off with some background on you. Please Brandon, tell us about your journey to leading up to buying a property management business.

Guest: Sure. I am currently located in Kansas City and that's where I was born and raised. Went to the University of Missouri. After college I moved out to San Diego, but prior to moving to San Diego I had the good fortune of working for some very entrepreneurial guys and some brothers. That's why I say guys in Columbia, Missouri, where the University of Missouri is. And that led to starting a business kind of right as I was getting out of college. And that business was Internet based and very portable and had some family in San Diego and a business partner that was in love with San Diego. So we ended up taking that business out to San Diego right after I graduated from College. That was 2010. We lived out in San Diego for about four years, ended up growing, selling that business, had an opportunity to kind of take a detour and join a private equity firm. Obviously I did not have a traditional private equity background, and that was sort of my entree into officially doing something related to entrepreneurship through acquisition. I had been sort of a hobbyist researcher prior to making that turn, and then ended up coming back to Kansas City, working for that private equity firm for a little while, launching a business that failed. After leaving that and then realizing, okay, I need to buy a business here. I liked doing that for the private equity firm, but I didn't really want to be transactional. I would like to buy something and focus on it. And ended up buying North Terrace, my property management business, in 2017. So coming up on seven years here in the spring.

[7:56] Host: And where does real estate fit into all of this? Tell us about your portfolio.

Guest: Sure. So that Internet business that I mentioned, starting out of college, it was basically, it eventually morphed into kind of just an online agency type of a business. Search engine optimization being the core service that we offered. And anyone that's ever spent any time either in that world directly or has gotten into it to, you know, do SEO for their, for their business or for whatever reason, knows that it's a very, very rapidly changing industry. That's sort of the only thing that stays the same in digital marketing, specifically in SEO. And when your full business is based around that, it feels very fleeting. And like Google at any moment could change something and kind of put you out of business. So I'd always had an interest in real estate, and in my opinion that was kind of the opposite of something where, you know, just a single change by one company could put you out of business. It's sticks and bricks and very basic and illiquid and very slow moving. So I started basically taking the money that I was making off of that business and what I could afford to investing in real estate.

[9:18] Host: And were these investments or, or did you perceive that you would make a career in real estate?

Guest: I think at the time I wasn't necessarily planning on making a full time career out of it. I had just, it was 2010, like I said, when we started that business and I think that was. Yeah, that was also when I bought my first investment property. And at that time in Kansas City, as a result of the great financial crisis, kind of 0809, you could buy a great house for 30 to $50,000. And the main limiting factor was basically how much stamina you had to look at properties in a day that were just listed on the mls. It was not that deals were hard to find. So yeah, I mean, huge regret now it's easy to say in hindsight, but it would have been amazing to have focused on it at that point in time and raised a bunch of money and bought, you know, you could have bought thousands of houses like that that today are, you know, 150 to $200,000. Wow.

Host: I, I remember of course that time very well and I remember hearing about the, the most hammered markets. You, they just come up all the time in the news. Vegas, Miami. What were some of the other ones? I mean, where speculation, you know, where the growth in speculation had been mo had been peaking of course is where, where it hurt the most. But I don't remember hearing about Kansas City one way or the other. But that's, that is quite a collapse. And then, and then, you know, getting a return to normal over what has it been, 13 years, from 30, $50,000

Guest: to 100 collapse was certainly not as dramatic as those places you mentioned or Phoenix, some of the other Sunbelt type markets. Right. But it was significant and interestingly something that I noticed early and what attracted me to continue pursuing this was the rents did not have the same reaction as the price of the homes. Rents didn't go down essentially. They kind of moved up over time.

Host: Yeah. So the kind of fundamental value, if you just think about it from purely a value perspective, you could make a very clear arithmetic argument that they're just very solid, you know, assets to acquire. Great. Well, Brandon, one of the things that strikes me about this 13, 15 years going back to you getting out of college is that you had some zero to one entrepreneurship experience, you had online digital business experience, then private equity, real estate on the side. You're building this portfolio and then, and then buying a business ultimately. So you could have taken any of those and made a career out of them. It was there any. And where you have landed is that you're essentially a real estate guy, but also kind of an ETA guy You bought a business that complements your real estate portfolio. We're going to, we're going to hear all about that. I'm just curious if, if there were, why do you think you landed on, on the path that you did when you could have followed any of those into, into, into careers? I mean, digital is its own career, PE is its own career, real estate is its own career, the one you took, etc.

[12:44] Guest: Well, in terms of like making real estate my career, I knew that I didn't want to go be a broker or a lender or something like that, sort of a solo business where there's not much enterprise value to it. You, you can certainly make a lot of money and I would say from 2017 when I bought my business until a year and a half ago, could have made far more money being a broker theoretically than owning a property management company. But I was just kind of long term oriented in my thinking and wanted to build something with enterprise value, not just, you know, a Rolodex that in good times you can make a lot of money, but then in bad times you're scrambling basically, which is what a lot of brokers are doing now. I mean, transactions are obviously way, way down. So to answer the real estate portion of your question, I landed on, I wanted an operating business that could somehow kind of fuel and support focusing on building a portfolio over time. And it was not, you know, independently wealthy and able to just go buy enough real estate that I could manage it, you know, as my full time job. So. But then in terms of landing on real estate, I had already, you know, been buying and building a small portfolio and I was, I had kind of gotten to the point where it was annoying as a side hustle and I needed to hire a property management company and I went through the process of looking. Well, I used a third party property management company at one point and that was a pretty terrible experience. I wouldn't say that I was sophisticated at all in how I vetted that group. It was just a referral and went with it and it was a terrible experience. So then I started digging into the space and for as much flak, I guess, as it gets as an industry. And it is certainly difficult. There's also a lot of opportunity and a lot of, you know, kind of bolt on businesses that you can build around it, even outside of the very obvious let's use it to build a portfolio that we would manage. And I had, sort of separate from that decision making process, decided that while it was exciting to look at deals and Buy businesses for that private equity firm. I got a lot more excited about doubling something that you already owned than the inorganic growth of let's just buy more and more and more. It's a lot more exciting to make a change in a business and see it forever improved over, you know, oftentimes relatively simple things. I know at this point the cliche is, you know, get rid of the fax machine. I think that's like the SMB Twitter cliche. But there's a lot of things like that. And it's just. It's more exciting and interesting to do that and go deeper in one business to me than it is to just buy more and more and more businesses. So I think it was just the convergence of all those factors basically led me to, hey, the shortest path to get to where I want to go is buy an operating business. And that operating business should be in real estate. And if it's in real estate, here's what makes sense.

[16:06] Host: Yeah. And did you ever consider understanding that you had a real estate portfolio, that you were already feeling this pain point of property management, you needing to outsource property management, seeing that what was on offer out there wasn't good, you could probably do better. But did you ever consider buying a different type of business outside of real estate buying, you know, the H vac business or whatever. Or whatever it was? Because one thing, just to fill in a little bit of a gap here, you knew out in San Diego, you'd met Tim Ludwig, who's a big name in search, so you were pretty familiar with ETA and search for for some number of years. And so your aperture was going to be wider than just, oh, let me buy a property management business. You saw all of the. All the potential that was here in eta, broadly. So did you ever consider buying something that wasn't directly applicable to your own real estate portfolio?

Guest: Oh, absolutely, yeah. Looked at deals for years. When we had that online marketing business that I mentioned, um, we had the good fortune of having an employee who then became a partner in the business. And obviously it was. I was very young, my partner is only a few years older than me. And this employee that we had who became a partner really kind of ran the whole business for us at a certain point. And we were pretty free. I mean, I would say Maybe I spent 20 hours a week on that business itself, and the rest of my time was free and I didn't have any kids. And now it's one of those things where I see just how much free time I really had and wasted But I would typically.

Host: Brendan, did you quote, put in an operator and it actually worked?

Guest: Well, we were still there and no, we wouldn't have phrased it that way at the time. And we were still involved in the business. It's definitely different because it was not. Yeah, just buying a business and putting somebody in and hoping it works out sort of thing. We had built the business and he was there early, so really it was more of a. He was a business partner.

[18:11] Host: Yeah.

Guest: It just didn't happen to found it, you know, so, no, I wouldn't classify it as. As the dream of putting in an operator. But anyway, so we filled our sort of spare time, basically, which is constantly looking at new opportunities, things that we felt like could scale much larger than that services business, in retrospect, to the detriment of the services business, because it was actually not as bad as we told ourselves it was as a business. But so we looked at deals for years in every space, and we got close on some. I mean, just, I feel like I looked at so many that now I've forgotten most of the specifics, but I know at one point we. We were fairly close on a fence installation business in Orange county that was pretty interesting. We dug pretty deep in the travel space at one point because that had become a little bit in vogue in the search fund world in the same way that like document management and some of those other sort of classic search fund industries get kind of have a moment and shine bright and niche kind of travel tour operators where I. We had gotten kind of not far down the path, but somewhat serious about a business that took people on like niche vacations in Europe, basically, like go see castles in Germany and stuff like that. So, yeah, we had. I had looked at tons of obscure operating businesses with little to no common theme other than obviously we would hope there was some sort of way that. That we felt like there might be an edge in online marketing that we could bring to the table.

Host: And why do you think you'd ever closed on any of those if this search, such as it was, was going for, so it was lasting for so long?

Guest: I mean, I think a lot of that searching predated really my understanding of the SBA loan program. So raising capital to actually execute on one of those deals would have been. I mean, I feel like now I wouldn't. I would be very confident but at the time to, you know, find a business that's $4 million in enterprise value and don't really understand that, hey, there's this way to borrow 80 or 90% of that. That would have certainly held us back. And I don't know, we were fixated too on scalability to like an extreme degree. And like, we don't want to do this if it can't be a huge business. And I've certainly changed my thinking on that and care more sort of about durability of a business and the ability for that business to last a long time rather than quickly get really large. So I think we would shut down a lot of opportunities for that reason. You know, it's a somewhat attractive business, but can we grow it to 50 or $100 million a year? No. Okay, we're not interested.

[21:31] Host: Brendan, how much damage has the, you know, kind of Silicon Valley giant, quick like, incredibly fast growing business that. That is the bar that we were all shooting for. How much damage has it done? Lost opportunities, lost talent, who for year, you know, people like you and me who for years didn't go do something because they thought that we had this unrealistically, ridiculously high bar. It's just, it's really actually quite frustrating as I articulate it.

Guest: Well, it is. It's an extreme amount of damage. It would be. I'm sure somebody's done this, the research, obviously you could quantify that in a number of different ways, but it's. I think it's interesting how. And, and we weren't, just to preface this a little bit, we weren't necessarily like, oh, we need to have, you know, a Facebook level outcome or something like that. But again, like on the level of what I was saying, 50, $100 million a year in revenue plus kind of opportunity or this isn't worth, worth our time, um, and it's. I, I think it's caused a lot of damage because if you really look at who's successful and, and this took me a few years to come around and see this, you look at who's successful in a community and who do you want to be? Typically, it's. It's the small business owner that has a pretty simple business and has just kind of incrementally made that better over time and you know, know, maybe bought some real estate or whatever. And it's just, yeah, lifestyle business as a pejorative. It's like the opposite to me. Whatever. The opposite of pejorative is a compliment. I guess that's what a lifestyle business is to me. That's the whole point of a business. So, yeah, it definitely caused us to waste a lot of time.

Host: As you graduate into being a business owner, you're going to want to optimize your taxes like never before because for business owners, effective tax strategy easily amounts to thousands of dollars per year in savings. Steed is a tax firm that creates personalized tax strategies for entrepreneurs and business owners, including searchers and acquisition entrepreneurs. Steed has specialists on staff who understand the challenges you face buying a business and can maximize tax benefits you during the acquisition process. They're running an exclusive offer for Acquiring Minds listeners a free tax strategy session. There's a link in the Show Notes to book the session directly, so try out Steed Risk Free and see how their CPAs can deliver immediate value. You can learn more at steedstrategy.com or click that link in the show notes to book your free tax strategy session today. Well, another, another reaction to your story there. Boy, if you guys were turned on by the idea of buying a business but you didn't know about the SBA possibility, that must have just gotten you really excited when you were like, you know, after years of thinking you were going to have to raise money from, from investors or however you want to finance it to then learn, holy smokes, we can do that. We can get 80 or 90% of this thing financed by a bank. Yeah, that must be an exciting moment for sure.

[24:47] Guest: And I think there was two, like there was an initial couple years where I just didn't even know about it and it sounds funny now, But I think 10 years ago it was a lot less common and there really weren't. You know, even today a lot of people have the experience where they go into their local bank who says that they do SBA loans and you say I want to buy a business with an SBA loan. And they say, well you can't do that. It's for equipment or it's for real estate or whatever. Yeah, you know, it's just their understanding of the program. So there's still a lot of that sentiment out there. Kind of like in the non Twitter world and there weren't these like maybe Live Oak Bank. I'm sure it existed but like I don't think that there were these kind of will go any anywhere focused on ETA type lenders that existed at that time. So it's definitely a much more niche thing, people doing it. And then separate from that, the partner that I mentioned who was a few years older, he had had a successful outcome prior to our business. So I'm not sure how keen he would have been on. Like we were very married at the time, still good friends and partners on some real Estate. But we sort of had a blood brother type situation where we did everything together. And I would have and did, I think, write off opportunities that would need to be financed by things that were personally guaranteed because he wasn't interested in doing that.

Host: Yeah, makes sense. But you're right, I mean, you know, it's, it's so funny. One's own psychology. When you get into something, you assume that that's how things always were. So when I started learning about ETA and you know, all the way back in 2021, just two years ago, SBA was well known. But that doesn't mean that it was ten years before that. Like, there's been a lot that's happened since from 2011 to 2021.

Guest: So I explicitly remember that when I started researching using SBA loan to buy a business, there was like a handful of websites that even talked about it. And yeah, one in particular that had described like the timeline of major changes to the SBA program that made it viable, including like raising the limit from 2 million to 5 million, which I think happened 2014, 2015. Ish. Maybe a few years before that. But so it's only recently for sure that it's come into the general consciousness. And then with a sizing up of the limit as well.

[27:10] Host: That's good history. I didn't know that. Another quick aside on this. So travel businesses, I can't even imagine what the pitch is there. I know Greg Jeronimus, big name in traditional search funds, had a travel business. I know guesswork Investing online, looked at a travel business. But I mean, just indulge me. What's the 32nd? Why did it have. Why did it ever have a moment? A moment in. In the sun? From the search perspective, it doesn't seem to have any of the attributes that seem canonical today.

Guest: Well, it doesn't have recurring revenue. However, a lot of niche travel businesses that have, you know, a good marketing pitch or hook, like, okay, we're the adventure travel company to South America or something like that, or even that's not a great example. Maybe Cat, we're the Castle Tour company and. Or the Architecture travel company. There is a very high repeat rate of customers, so it's certainly not recurring. But. But there's the opportunity to build a really, really tight relationship like you probably could. And I'm totally making this up. I'm not citing a study, but I bet if you did the research on the lifetime value of like a Viking Cruise customer, it's definitely not one Viking Cruise. I wouldn't be surprised if it's like four or five Viking Cruises and I think the same would hold true. And in sort of these higher end niche travel businesses, they have a really interesting working capital kind of structure, negative working capital. So usually you're getting paid a year in advance or six months in advance, whatever it is, and then you're paying for everything as it happens. So that's really attractive. So you don't need any working capital essentially. And then if you've got a good model, you could obviously take that working capital, or at least the profit portion of that working capital and expand into new tours, acquiring customers, whatever it is, and it could grow very fast, theoretically. So the specific one that we looked at was like European focused and I think they had Castle tours and things like that and they had proven out that it did have a high repeat rate of, of business and it did have the really attractive working capital. So I think those are the reasons that it was interesting. And I don't know if you've planned a, a family vacation in the last few years. It's a huge pain and there's almost, and I know that's, I'm saying family when this, the typically the profile of somebody that does this is not a family but just planned a vacation period, it's a huge pain. And personally I've never used a tour company but I could see the appeal for sure of just yeah, here's what I want to do and you figure out the logistics. I don't have to think about it.

[30:15] Host: Well, thank you for that. And one thing, one more thing before we return to your story. You just touched on it and you said to, said it to me explicitly in our pre call as well. Essentially, you know, you had this, this agency, it was throwing off cash. You, I, I'm putting words in your mouth, I think, I can't remember how you put it, but you didn't think it was that strong of business or that great of a, of a business and so you were looking for something else and you now see that differently and what is what. And I think what you said on the pre call was, you know, back then you didn't look at service, you didn't smile upon service businesses generally. And now of course you love them. You've, you've already glanced off it, but address that, that directly and how you've evolved your thinking there.

Guest: Well, specifically the service that we offered there was link building in SEO, if you're familiar with that. But you know, just, you've got to get links to pages to rank well or Websites to rank. Well, it's changed how you sort of qualify what a great link is. But in general a link is a vote. You go out and get more votes, you know, and we were at the higher end of that. You know, there's everything from you can do very spammy stuff up to, you know, the best is going to be if like the New York Times mentions you and it's just totally inorganic and, or totally organic. Excuse me, you didn't do anything except maybe produce some amazing content to get a link. So that was the business we offered. We, our client base however was not the end user. It was large agencies where they would much rather, instead of building up a capability in house to go out and get links. They would rather just have a price from somebody like us at that time and they can just mark it up or pass it on or whatever. It's you know, just like a GC versus self performing work. It's a lot easier if you own the relationship to just mark something up. So we had quite a few really good high level agency relationships. I mean we had a ton of them. But if you look at the top customers that we had that were spending a lot with us, I mean tens of thousands a month up to, you know, I think the top top customers were probably over a hundred thousand a month and for years and just that feeling of Google being able to sort of theoretically shut our business off at any moment that constantly was rattling around in our brains. And so we would convince ourselves that hey, we shouldn't put much effort into this because it could be gone at any moment. And we then allowed that to kind of creep into how we treated the rest of the business I guess because a more appropriate response would have been to say well, what are other service lines that we could offer these customers since we have these great relationships, what are other things that their clients need that they would love to just mark up us offering the service? And we've aggregated all this demand from a bunch of different agencies. So we can, even if they would perform it in house, maybe we can do it better or cheaper or whatever because we've got, you know, we can keep a full time team busy or whatever. The thing is, that would have been a much better response than let's do something totally unrelated because uh, we just don't like the idea of this service business because it's never going to be, you know, a 50 or $100 million business. I think it probably could have been a $10 million business and probably with great margins. So it was.

[34:18] Host: That's great.

Guest: It was definitely a lesson learned.

Host: Yeah. And so, and, and, and how does that fit into your, your overall evolution of going from an aversion into services businesses to an appreciation for them? Because is it kind of what we've already said, that like, let's not fixate on 50 and $100 million opportunities. A $10 million business, which many, many, many services businesses can realistically get to, can throw off, you know, two, three, four, maybe million dollars a year. Sounds pretty good to me. Sort of thinking, yeah.

Guest: And, and now it's kind of a thing that I will forget about or I'll, you know, there's some shiny object that's starting to distract me, but thankfully I can, I shut that stuff down very quickly now and remembering that feeling and how basically that that business still exists today and we sold it in 2014 and one of our employees at that time also has started like the same business again and does very well with it. So this business that in 2010, 2011, we started and felt like it was going to go away at any moment so we wouldn't focus on it, is still alive and doing well, you know, 13 years later. So then I use that just again as a reminder where, especially in my business now, because some of the issues sort of rhyme with issues that we would have had in that business, but there is no, like Google that could turn it off. So that was the primary problem that we had with that business always. And just, you know, it's a, it's a good reminder and way to kind of keep myself grounded and focus on what I have that's working and just keep going.

[36:08] Host: Well, I do want to just throw in my perspective here and make sure the audience is clear. Your concern that Google could, there was platform risk, what they call platform risk, like one change in the bowels of the Google organization or the Google algorithm could overnight sink that line of business. And that is a very valid concern. And there are countless examples of that happening with respect to SEO, with respect to E commerce, if you're on Amazon, FBA businesses, basically any business that somehow relies on one of the biggest big, big platforms is very beholden to the whims of that platform or that algorithm. And it is a very, very real risk. So you were, and I know you're not saying the opposite, you were right to be concerned about that. But where, where you're saying you were wrong was the play was not to just exit digital agencies altogether. It would have been to spin up a different line or 2 or 3 of offerings to your, to these great clients that you had and, and, and reduce the over reliance on SEO link building stuff. So yeah, just want to, just want to make that clear that the platform risk that you guys perceived was real. And even though there are plenty of businesses today that make millions on Amazon or make millions on link building and SEO, they're very vulnerable. They're, they're just as vulnerable today as they were in 2014. Google itself, we're seeing with GPT. Who knows what happens with consumer, consumer habits around search. But I mean there's a question today of whether SEO itself is, is doomed. I'm now getting a little bit off track, but I wanted to throw that in there.

Guest: No, I do, I have thought about that for sure over the last year since I think it's been about a year since I started playing with ChatGPT and other AI stuff. And yeah, the, I would be absolutely frantic if we were in that business. Still worried about what it looked like in the future.

Host: And one other thing I'll say about an agency business, I know you, you and I both are my first million listeners, so we're familiar with a fan favorite guest, Andrew Wilkinson, who's, who goes on that show quite a bit and he'll be familiar to people on Twitter as well. Holding company of mostly or almost exclusively digital businesses. But Andrew got his start buying businesses because he had an agency that grew over some number of years. It's a kind of high end for startups. User experience, I think. UX agency. Don't know it's not exactly, but it's some digital agency. And to your point, like he grew to the point where it was throwing off a lot of cash. He owns it to this day and it was his, you know, Warren Buffett has had his what the insurance company or whatever. The, all the, all the cash that was throwing off from being thrown off from his insurance float. Wilkinson and his team had the cash coming off of an agency that they then started deploying into, into acquiring businesses. So agencies can be, yeah, they can be good businesses to your point.

[39:00] Guest: B sure is basically the same story as well.

Host: Ah, give us 30 seconds on that.

Guest: Well with. He had an agency business and they, they spun off a lot of startups and I don't know that any of those really became too much. But then he went on to buy another agency business and kind of doubled down on their core and it was doing really well. And then they used the cash that they were earning off of those businesses to go and buy unrelated businesses and Then built it to the level where it was a pretty impressive holding company before then. Now he does, you know, institutional funds and has investors, but that was all with his own money and, you know, kind of a self funded search before that was a term.

Host: Great history there too. All right, Brandon, let's return to your story now. Okay, so you were in San Diego, you moved back to Kansas City. What year was that? And how big is your real estate portfolio at this point?

Guest: That was 2014, and I think I had about 12 units.

Host: And is this when it's. It's not for another three years that you buy North Terrace. So tell us the story of the actual acquisition of North Terrace, where your property portfolio looks like where you're living.

Guest: Sure. So I actually prior to 2014, during that period of time that I was talking about where, you know, I'm spending half my time on the agency business and then the rest kind of exploring opportunities, I had talked to the owner, founder of North Terrace, and I had kind of reached out cold obviously and said, hey, I'm kind of interested in buying a property management company in Kansas City. And there's not that many that look interesting to me because at that time I was pretty fixated on focusing on properties in a pretty tight geography in Kansas City, kind of cool, historic, kind of a hipster type area. Just because I thought if I'm going to spend all my time on this, that's the kind of area I want to be in. And so there was really only two companies that were on that list. I reached out to both of them. One I didn't hear back from. Then North Terrace I did hear back from. We had some conversations. I. I'd have to go look back at my email, but I think we even got to a price at that time over the course of a few months. And then we had a disagreement over working capital. And as you'll hear a lot of people say, where owner thought it was his and I thought you should get some working capital. And it was enough of a disagreement. I felt at the time that it's not going to work. So we said, hey, let's talk again down the road, maybe things will change, but for now, I don't think this is a fit. Then sort of after that conversation, we went on to sell the agency business and join that private equity firm, both my partner and I, and bought a few businesses for them. And then in the middle of that period of time, moved back to Kansas City, continued working for the private equity firm. They're pretty like geographically agnostic on a certain level and started itching to really make a go at buying something. Then I mentioned briefly my partner and I left that private equity firm and kind of flew a flag that we were going to go buy business. Business or businesses. It was a little open ended and while we were looking for opportunities, we found what we thought was a good opportunity in kind of the insurance lead gen space and we started a business there. It was cool domain eligibility.com and started building that out. And so it's truly a startup and it just, it did not become anything, unfortunately. Um, and so that was kind of a year of focusing on something that it was a good experience, but could feel that it was like we're running out of money. We got to do something. I then went back to that conversation and I had been running the real estate portfolio on the side this whole time and went back to the owner of North Terrace and said, hey, I'm interested again. And I, I need to make a move and we can get past that issue we had before. Like I'll make it work, I don't care. Because now in retrospect, it was pretty trivial. I think it was a $50,000 difference kind of a thing. And ultimately opportunities, good opportunities are so finite. And I was so specific in thinking, you know, I want this company that manages this kind of property and you know, a long laundry list of things that, that this company met. So to lose the opportunity over. Okay. Industry standard is working capital works this way. We're not seeing eye to eye. Like I should just eat that and chalk it up to paying more for the business if I still like the price. Yeah. So that conversation was October, November ish. Of 2016 and we ended up closing March 1st of 2017.

[44:42] Host: And so that was. That did it, that that sticking point on working capital really was all that needed to be removed for the deal to progress. Once he said that he was in,

Guest: there was some stuff in the meantime that helped a lot on the seller side. Obviously I take no credit for any of that. He had just happened to exit a few deals that the company obviously managed, multifamily deals. So that took out some of the issues with. It's super common and this is now an issue with, with my business. Like it'd be pretty difficult to sell because a large percentage of what we manage are deals that I'm an owner in. So why would I not. Why would I want to sell that? But how could I sell that and how would that work? It gets kind of hairy. For sure. He had sold Everything at that moment unrelated to me potentially buying the business. Cause it was all before the conversation had started again. He had also bought a farm kind of 45 minutes away and was liking spending more time there. I had already demonstrated that I had some of the more difficult things I think, to find in somebody that would buy this sort of business. Like just the block by block kind of like obsession with real estate in the areas that we focused in. It's sort of hard to put a teaser out and say buy a property management company and then hope that the person that presents themselves just has that. And he recognized that that was fairly unique. So it was just sort of fortunate, perfect timing when we came back around to it.

[46:23] Host: Why is a block by block real estate obsession? I love that, by the way. Why is that something that's critical in, in property management? I can understand that if you're going to be a real estate agent or if you're going to be a real estate investor buyer, but a property manager, they don't need to have their finger on the pulse of the, of the values of the market as much do they as the, as those other groups?

Guest: I just said, well, for one, it was a pretty concentrated client base. You know, we had about 800 units under management when I purchased the business. Today, for context, we're about double that. But I have a, you know, elaborate client concentration thing that I prepared for the business plan that I had to create for an SBA loan. And I don't remember exactly the sort of tail on it, but the top five clients probably represented half the business. And then it, you know, kind of fell off after that. So knowing what I know now, I don't find that very concerning. Obviously at the time it felt very concerning. And any reasonable lender is going to bring that up as a potential big deal, as they should, and being able to demonstrate credibility to, to those clients and to the lender through just like, you know, we start talking about a property that we manage or one that we could manage, whatever. And I can say, oh well, I know that was owned by so and so at such and such point, and they sold it and bought this. And just like all this, you know, deep domain knowledge that you would expect to take years of like being in the business to have. If I, I walked into it with some level of that, it's a lot more plausible that I'm not going to like lose these clients because I don't know what I'm doing or I don't know the market or whatever the case may be.

[48:19] Host: Tell us a little bit more about North Terrace. You said it was, it had 800 doors, 800 units under management. What else can you tell us about it at the, at the moment and when you bought it?

Guest: Sure. Well, at the moment that I bought it, we were certainly more, you know, quote unquote, old school. I guess that's somewhat the business and somewhat just, you know, the market has changed. One of the things that I really liked about property management is I felt like it was 10 years behind a lot of other businesses. I think maybe that's, Maybe it's not 10 today, but it's still a few years. The things that have become industry standard in say plumbing or H vac or even more progressive lead generation industries like mortgages. The way that a lead has worked, for instance, in the mortgage space and go fill out a Quicken loans form and then that helps you. Yeah. Brace yourself. It's going to be hell for the rest of your life. Essentially. Yeah, it's the complete opposite. In property management you gotta work super hard to get like a single callback. And I found that really attractive. And we still have super long ways to go on getting to that level that I wanna be at. I don't think I wanna be quick in loans of lead generation, how we work a lead, but still there's a lot of opportunity there. But we were extremely old school when I bought the business. Um, you know, didn't take online payments. It was like you come in on Monday morning and there's a $20,000 in money orders on the floor. Which is like terrifying to me to think about now. But that was like every Monday morning with like the two by four in the brackets holding the door closed kind of a thing. So I'm trying to think of other good examples of how old school we were. I mean, no, the resident portal pretty much only advertise on Craigslist. Just kind of like the, you know, doing business like it was 2000 or even before, maybe even today. It's not like we're, you know, bleeding edge tech progressives or whatever. But for the property management industry, especially for kind of this smaller scattered site, small apartment building space, we at least have all the basic blocking and tackling done that you would expect in larger buildings. The obvious resident portals and online payments. And we have a more professional office. It doesn't, you know, when I bought the business, the office had all these like little pony walls and you could hear every single conversation that anyone ever had. There were no private offices, which was like crazy to me. And Drove me nuts, so I'd always be outside on my phone. So yeah, we've made a bunch of incremental changes like that, but employee wise we're probably about double what we. So that's kind of tracked. I think we are kind of at a tipping point though now where incrementally we can add units faster than we have to add labor on the management side, which is an interesting tipping point obviously to be at. And we've.

[51:43] Host: They call that, they call that scale, Brandon.

Guest: That's the, that's the word of choice I'm not supposed to say. Right, but so yeah, and, and Brandon,

Host: how, how can you give us some revenue numbers around where it was and what it is today? And, and headcount, you said doubled, but how, how many people then and now?

Guest: Yeah, when I bought it it was, it was 12 or so and we're about 25 today. And today we're 4 million ish year in revenue. And when I bought it we were million and a half. There's a lot of pass through. So that number gets kind of, it doesn't necessarily track with, to reality of what's going on in the business. For instance, there was a year that we had a huge rehab project. The way that we do accounting, which is not the way every property management company does. Accounting is that flows through us theoretically. Like it depends on what, what it is. But like on that large rehab project that we bought, all the materials for, that kind of, that did flow through us, the materials. So you know, it's like a half a million dollar spike, but it's not at the same margin as regular revenue, if that makes sense.

Host: Okay, okay. All right, well, and you're just kind of reminding me of something that a property, a service that a property management business might deliver for its clients. Let's step back and just. Sure, everybody knows what property management is, but just in case, and so that we're all on the same page, give us 60 seconds on what property management does and the suite of services that it, that it offers to its clients and what its typical client looks like.

Guest: Sure. So like I mentioned, we focus on scattered site multifamily. So that's 10 to 100 units for the most part. We do have a little bit that's larger than that where there's staff on site. But our typical property is, let's say it's 40 units. The staff all works out of our central office. We don't have a single person that does essentially everything on the management side for that business in the Way that you would if you had say a 200 unit apartment complex. And you've got someone on site to do all of the management functions. They're going to do everything. So the services specifically that we provide to a property, we do the leasing. So we're going to market it online, you know, coordinate professional photography and 3D tours. We pretty much do those on every unit. Leads are going to come in, we're going to work the leads, do showings, process applications, process renewals, just everything around keeping occupancy high essentially. And then the actual, you know, management of the property is getting bids from vendors on contract services. So that's things like your trash if that's not covered by the city. Pest control, landscaping and lawn care, just everything that goes into running a property and then, you know, holding those service providers accountable, paying the bills, doing bookkeeping for the property. And then we do maintenance and turns, which are two different functions in our business. They're not carried out by the same group of people. So a tenant has an issue in a building and tells us, hey, X small thing is happening. We do that with in house labor as opposed to calling up, you know, a handyman or something every time something happens. And that's our maintenance department. And then make ready or turns, kind of the industry terms is after a resident moves out, we then obviously have to get that ready for the next unit or next person that's going to move in and be able to market the unit and make it look presentable. That is a separate department from maintenance. Um, and typically that's a relatively small scope of work, but maybe 20% of the time it's like a large renovation. And at large in our terms is say $30,000 per apartment or less, where we're doing like real upgrades, you know, maybe new counters or new cabinets and counters, new vanities, new flooring, etc. So yeah, just kind of everything that goes into running a property day to day, there is a murky line between, especially at this size, between property management and asset management. Asset management is the higher level thinking of, hey, basically, in my opinion, an asset manager makes the business plan and gives it to a property manager to enact the business plan. So we're supposed to be just enacting business plans. What happens though, more often than not at this size is you have an owner who's not focused on it full time and isn't necessarily a sophisticated real estate investor. And I don't mean that in a bad way, but it's again, they're not focused on it full time. And they're not, they don't have a professional sort of asset management program that they put every property on. So we end up bleeding into doing asset management as well, which sometimes is good and other times is, is frustrating because it's. Thankfully none of the clients we work with right now are like this. But at times there are clients who think basically, you know, I bought a property, my job is done. Here's a spreadsheet that a broker gave me, now make this happen. You know, and it's not that simple. It's an ongoing thing where the owner has to be an asset manager so that we can be effective property managers.

[57:53] Host: Well, so you're saying that if I am a rich person who bought a 50 unit building because I just want to park my capital there and people will say that while passive income is elusive and often it's an over promise that you might get something like that, that in fact in real estate, if you can get it, if you buy big enough that a property manager can just do everything. But you're saying that even then. Not really. Because unless you're also hiring an asset manager or also charging the property manager with explicitly with the doing the asset management as well, you got to think about it more than just make sure, you know, the place is leased up and it's maintained. You got to think strategically about it. Somebody's got to be making those decisions.

Guest: Yeah, yeah, that's exactly. I mean it's, it's akin to the joke that you made earlier in our conversation about so you're telling me you just installed an operator. You know, we are management for the business but without, you know, we don't have time to divorce ourselves from the day to day constantly and be thinking higher level. The owner has to do that and if they're interested in something being totally passive, then they should probably invest with a real estate GP who then that is their value add. They are an asset manager and you know, it's just not feasible for us to go and constantly shop every comp or whatever you would put in that asset management bucket. We try to as a value add go a lot further than typical property managers would. And it's sort of like a bonus that we will give feedback on that, you know. But yeah, it is not passive as you might be led to believe.

Host: But why wouldn't you just offer asset management as an additional and premium service that is paid for optionally?

Guest: We should, I mean it's, it's an interesting sort of case study and understanding what you're buying basically where there was that, like I mentioned the client concentration. And a lot of the reason I think that those clients chose North Terrace was because. And North Terrace was really just. It wasn't just the seller, but you know, more or less at that time it was the seller. He was a lot more. More involved with each individual client than I am. We have just more structure and hierarchy where there are certain things that I'm just. Or certain clients where I'm really just not that involved. We just do property management and that's sort of the end of it. But for instance, at that time he wrote all of the monthly reports for every single property. I don't do that now. I'm involved with bigger clients and involved on my deals. But there's a lot of deals that I don't really see much month to month. And I kind of look at it quarterly or annually. So he sort of offered that asset management to everyone at no additional charge. So. And it was totally blurred, you know, and I don't think he called it asset management. It was just, you know, the business was started because he managed a property of his own and a neighbor basically said, you're doing great, like would you manage mine? And it just mushroomed that way and so he just didn't think of it any other way. So it was, I don't think it was purposely a growth strategy, but that's what it ended up being.

[1:01:32] Host: There are, to use your earlier word that rhymes with so many seller profiles where they were, they, they kind of fell into the business because they were doing something themselves and a business grew around them. And so many of their clients, at least the early clients, they knew personally and they just over delivered and over delivered and over delivered. And when a new buyer you. Comes in and really needs. Needs to professionalize that and set some boundaries, it's a bit of a pickle because you have to now kind of kind of claw back some of the services that the clients were getting for free from the seller and start charging for them or figure out some other way to, to, to, to deliver them. That that's profitable to you?

Guest: Yeah, absolutely. And then there's there is an additional added kind of wrinkle in property management where at times it feels like everything we charge for is a direct like value destroyer essentially for the client or our property. We're this weird dynamic where we're both partners and we're their foe in a sense because if we just start charging more, it's seen as at times, or at least in the Short term revenue is kind of finite, but expenses could be infinite if we start charging for things. And obviously that's how you value a property. So if you used to get a service for free and now it's charged, you're paying for it. Not only are you paying for it, but you're also multiplying that through, you know, at a multiple the way the property is valued. So it's really a big deal. So I have been more focused on, let's figure out how we can generate revenue for the properties. And then occasionally I say, hey look, we've done X, Y and Z. I need to charge for this in this way now, you know, so I lead, lead with the value obviously and then try and ask for a little bit of it back.

[1:03:29] Host: And is the, is the kind of counter point to them, you know? Yes, this is some money up front. Yes. It might look like it hurts your, you know, when you take the cap rate it like you might hurt. Basically I'm just, looks like, might look like I'm destroying a little bit of value of this asset. You probably don't want to use that word, but in fact, you know, I'm, I'm, I'm, I'm tending to your business, your asset. And in the long term this is simply an investment. You're investing a little bit more now for, you know, know, a better maintained property, higher rents, whatever it might be over time.

Guest: Yeah, I mean a good example is we over the last two years switched our leases to go from 30 day notice when somebody wants to leave to 60 days, which has pretty much become the industry standard, at least in Kansas City, that everybody does 60 days. Well, the sort of old school is we would always do 30 days. And in fact, when I bought the business, everything rolled month to month. After the initial year, we didn't do any renewals. And that drove me insane because on a 12 unit property, three, four people move out. It sounds like a very dramatic percentage. Oh my gosh, we're 25% vacant. Well, yeah, we would be. That's just three people. You know, it's a very kind of law of small numbers hurting you. Um, and so for one, we started doing renewals. They're not a ton of work, but it's, it's, I mean to go from not doing them at all to doing them is work. So we, we did them for a while for free and then we started charging. And the predictability then of locking in your revenue versus not everybody has come around except for one and agrees with that and is like yes, this is really nice. I can actually tell my exposure month to month, how many people could be leaving. And then as part of that switch from 30 to 60 days, we never used to do anything prior to someone moving out, except in rare circumstances to understand what condition that unit was in and prepare for what the turn or the renovation is going to look like. They would move out. Then within a handful of days we get over, we do an inspection and then decide what to do. Well, with a 60 day window, it's far enough that you can go say 40 to 50 days out, do that inspection and figure out, oh, this is a big deal. Like here's the scope of work, here's a general idea of what the budget's gonna look like and you can be ready to start, you know, start work within a few days of that move out, not start planning within a few days of that. Sure are. And that we charge a little bit for that inspection. But it more than pays for itself in the fact that units are coming online like a month earlier.

[1:06:24] Host: Well, that's a, a great segue. Brandon, you talked about the proverbial, the proverbial fax machine earlier. Swap out the fax machine, put in some SaaS tools and you've transformed the business.

Guest: Ha ha. It's that easy.

Host: But there are, but there are levers to pull and all of these businesses that are not very tech forward or haven't really been kind of looked at strategically for a long time. What were some of the fax machine opportunities in your business? You've already given us a few, but I know there are more.

Guest: Yeah. So our website was not attractive. It was like a, you know, web builder kind of a thing where you, it's almost like a word document that you're building the website in and you upload it on the FTP server or whatever.

Host: Yeah.

Guest: So modernizing our presence online, for sure we never used to use professional pictures. Part of that stemmed from the fact that how our pricing scheme worked still, but, but for sure then was basically you pay a management fee and that's inclusive of everything including marketing. So any expense that you know, we would bear was just on us. So if I have to pay for every unit turn to get professional photography and it's just out of my side, it's not covered by the client. That's a huge expense. But then just kind of like the example I just gave about increasing turn times. It's pretty obvious that professional photos are going to help rent units faster. So we basically said, hey, I'm sorry But we're not going to cover this cost. But we would love to do it. So put it on the client and everybody's opted in and now there's a library built up and it's not, it's sort of a one time expense for the most part. So we've basically a lot of branding stuff is what I'm driving at and taking online payments because you think of just the work that goes into it. Used to be a check would come in. We didn't have any check scanners in the office. We would prepare physical deposits. You could imagine the big, you know, with 50 or 60 properties, the big file folders where they're separated by owners and we're separating deposits and we've got to go twice a week for the first two weeks of the month and then once a week for the second two weeks of the month and on and on and on. Now for the last say three years, I think it was about two years, well, no, two or three years into my ownership that we mandated online payments and there are still stragglers for one reason or another that do not pay that way. But it's 95% plus and that every step that goes into processing a check is now just, you know, they pay it online and it's in the, it's in the operating account and it's basically reconciles itself. So that's an extreme amount of administrative work that's saved. We used to do physical in person lease signings, which I'm always uncomfortable, you know, when I go to buy a car or something like that. You're constantly in these situations where you're signing a legal document but you really don't have an opportunity to review it like realistically unless you're the person that's just going to sit in the office for six hours. And that was not by design. That wasn't why North Terrace did it that way. But that's just the reality. Here's your lease, sign it and get out of here with your keys. We now send that all ahead of time via and do E signature. And then the day you move in just come in and pick up a copy and some keys and thank you, gift, whatever. So that's like another one of those things where Instead of spending 30 minutes with every single person, it's like a five minute thing and a better outcome for them and super organized on the back end because we don't have to like scan a lease that's already in the system. So trying to think of other good examples, it's just an infinite list of tiny little optimizations like that basically you know, using. We weren't cloud based before we had a server but it was physical. So you think about you go inspect a unit. Well what does that look like? Well everyone of course uses their personal phone. They've got the pictures on there. They all have their own separate way of how they get those pictures onto the server. Maybe they email them to themselves, maybe they plug their phone in and move it over on the computer but it's slow. They probably forget half the time because it's like clunky to go do something in the field have to come back to the office and finish the process. So now I'm like crazy about like any work that's performed that's going to end up on our Microsoft in our kind of server, quote unquote, that's in the cloud needs to originate there. Unless it's just like in some program that you can't do it that way. But don't start a Word document, save it on your computer and move it in there like originate it there so that I can see everyone can see that it's been started and photos the same way. So just very long list of things like that. No single thing that's like incredible. But they all add up to a lot of efficiency and organization that's you know our lives can go haywire pretty quickly if little things are not organized.

[1:11:49] Host: So Brandon, it feels like when I hear that that in fact your opportunity set was this is the fax machine story.

Guest: Yeah, I would say that it was.

[1:12:02] Host: Or the hundred fax machines maybe I should say there's not one, you can't do it in one fell swoop. But a hundred small things as you said at the very end there add up.

Guest: Yeah, I think the cliche with the fax machine is that your job is complete once you get rid of the fax machine. So that's just, it's all just table stakes in my opinion. And there's still a laundry list of things like that that we still do in an old school way. It's interesting. I like many small business buyers probably have not even seven years later spent as much time in each individual department as I probably should. It's one of the flaws I guess with the fact that this business is also like I'm buying real estate all the time and deals can sometimes take up a lot of time so they take you off working on the business but I'll get into some department and realize okay, we don't need to do this this way. Like there's no reason that. A good example recently is our bank reconciliations were very manual and we do a lot of them. But because every property has at least one operating account, sometimes they've got reserve accounts or other things beyond that. So call it 150 bank reconciliations every month. And that's just monthly. I'd rather that happen weekly or even daily. And that's just like crazy to imagine giving the way that that happens now, which is like taking a physical statement or printing off a statement or exporting it into Excel and side by side on two monitors doing a reconciliation. Well, turns out no one had looked into the fact that the property management software platform that we have has kind of a like a Mint.com style or QuickBooks online integration that through Plaid you can log into almost any bank. So far we haven't found one that it doesn't connect with and it's doing 80%, 90% of the reconciliation for you. And that was just when we started using it. With relatively complicated reconciliations, they'll get simpler over time because it won't be a month, it'll be a week or a day. So it'll instantly always be right. So I feel like there's always going to be opportunities like that to discover. But just that one thing alone is probably, I think we figured out it typically reconciliations take four man days now, two people, two days. And this could turn it into like a, you know, an hour or two hours a week type of a thing. And our data is really up to date.

Host: Well, I want to pivot now and spend some time on the business of property management and some of this, you know, the strategic value of it above and beyond kind of the business operations itself. So it has certain characteristics that we would look for as searchers in a business. It's business, it's B2B. It is very recurring. If you're doing a good job, maybe even if you're not doing a good job, it's very sticky because as we're kind of getting a sense for listening to your, what you all do, you're really quite entrenched in the operations of your clients assets, their, their properties and ain't going anywhere. It's not going to be disrupted by a robot or AI anytime soon. I mean it's very kind of physical in some sense and, and, and it's extremely fragmented. So you know, North Terrace was a small business and there are countless, countless really tiny mom and pop property management businesses around, around the country. So there's probably more things that I'm overlooking. So a lot to like there. And then when you add in the real estate angle, if you've got aspirations of real estate, it that's just kind of this interesting cherry on top. So let me put a pin on that. We're going to come back to it. Despite all the, the pros that I just said. One screaming con that everyone will tell you about property management is that it's a really hard business. You know, services businesses generally are hard but the property management is extra hard. And we're getting, just by listening to you, we're getting a sense of that. I mean it's, it's just a lot of moving pieces, people, properties, doors, units, owners, tenants, turnovers. I mean and that's what you're being paid for is managing all of that churn. So talk to us about that. What, what's it, what's a day in the life like? Why shouldn't every searcher listening to this go out and buy a property management business or should they?

[1:17:02] Guest: Well, it's starting off with a little aside. It's one major downside that popped in my head for whatever reason during that question was the fact that I am envious of businesses that have more pricing power than we have. We don't have much pricing power. I have started being less flexible on new clients. I was quick in the past to be very flexible on our fee schedule and then I realized there's no reason to do that. Like it's just, I'm just giving away money and it's hurting us and it's, I'm going to feel it forever because once we start managing a property and the management fee is X, there's no raising that. I mean I don't think I've ever done that. So yeah, there's no case where we raise it versus using my example of the, the fence business that we looked at. Everyone knows that over the last few years those sorts of service providers, sure the inputs got more extensive but no problem. Just adjust the output and figure out a place where you've gone too far and dial back or you know, you can be more dynamic in how you adjust for things. That's very.

[1:18:17] Host: And Brandon, is that, is that something intrinsic to property management or is that just the difference between recurring and project based work? Where in recurring it's a little bit. That actually might be one of the flaws of recurring is that it's hard to raise your prices because you're, you're not going to market every time you, you know, Whereas project based, you're, you're re going to market all the time so you can choose to raise your prices pretty and you know, much more frequently.

Guest: I think that's true, but I think it's like really accentuated in property management kind of for the reasons that I said earlier, where every dollar that we make is a dollar that a property doesn't make and it's, you know, then call it $20 in value for that property that if you look at it that way as a finite thing where revenue is unchanged. So yeah, I think you're right. That is an issue recurring versus project. But it's like even more significant here. You know, I get price increases on software platforms that we use annually. And I don't say I never expected this price to go up. And the interesting thing is we get a raise two every year as rents go up, but that doesn't track with our expenses. So a recurring software platform that raises their price, it could be 5% 1 year and 20% the next year and 3% the next year. And they could respond more directly to the actual inputs, whereas we really can't. It's, we're at the mercy of the market. And our fee as a percentage of that, and that percentage is rarely changing on existing clients.

Host: And, and Brandon, isn't it also kind of intrinsic to property management because there's kind of an industry expectation of what property management should cost. It's like, what is it, like 8 to 12% or something?

Guest: Yeah, that's.

Host: Maybe that's as a consumer, that's, as

Guest: an individual, that's a single family kind of pricing scheme scale. Our apartments are less than that. Okay, but yes, you're right, there is. And there's, there's almost like, I don't think there's any room for. If you said, hey, I, we charge 15, but look, we get 25% higher rents. It's like it wouldn't pass the smell test even if you could demonstrate it, or it'd be very difficult to demonstrate.

Host: What do you mean it wouldn't pass the smell test?

Guest: People would just be like, I don't, I just, as a rule, I would never pay 15%. I see property management, even if it was like, look, Nat, you're making a lot more money. So. And that's like a pretty extreme example because I'm doubling the typical fee essentially. But even if it was a tighter range than that, hey, we're, we don't charge seven like our competitor, we charge nine. But here's what you get. That would still probably get some pushback.

Host: Yeah.

Guest: So that's, that's tough. That's one thing not to like for sure.

[1:21:04] Host: Yeah, that's a big one.

Guest: And in terms of. You're right, you do kind of. You have a lot of, a lot of masters and it's. And they're kind of in conflict with one another. You've got. I don't know if you mentioned vendors as another constituency, but that's another constituency that we have where, you know, we've got clients, residents, vendors and employees and they're in a way on the same team, but also in a way all in conflict with one another. Um, so it's extremely difficult to manage that balance. And I'd say that's the biggest challenge. It's not the, you know, the, I think the cliched thing that people say is, you know, toilets or whatever in the middle of the night. But you can solve those kinds of issues with pretty low scale, somebody on call. It's not that big of a deal. Stuff happens over time. It's just normal small business problems essentially. But that constant sort of tension between. How do you deliver the message to a resident that I'm sorry you're unhappy with X, but it's not in the budget and you know, we don't think that when you lease that apartment there should have been an expectation of X being as good as you're hoping for. It's just there's a lot of like, murky, nuanced situations like that where there's no good closure for them. And it's frustrating to sort of be the. On the chopping block for that because, you know, we don't. We're not going to throw our client under the bus and say, hey, I'm sorry, you know, Will owns this property and he's really not interested in paying for that right now, you know.

Host: Well, it's. It's a good point too, that maybe. Correct me if if wrong, the. One of the difficult parts of this business is that you're the, you, you. Where you sit, you get to absorb all of the negative energy of the tenants. You're the buffer.

Guest: Yeah.

Host: Between the. That the, the tenant to the owner. You're always the bad guy. You're always the one just. Yeah. Like I said, absorbing that energy and having to kind of try to diffuse it if you can, can.

Guest: It's true. We deal with that in a few ways. One way we deal with that is by just vetting the owners and the properties that we will work with on the front End, we're not mercenaries and if you can tell that the person is, is not going to be good to work with, just kind of get those signals, then we're not going to do it. That's not how we're going to say it to them, but just, you know, probably going to blame it on the property or something. And then if the property is not a fit, that's pretty easy to just say. I mean, usually people aren't emotionally attached and you could just say, hey, I'm sorry, this is just kind of a crummy property. We don't want to do this. And so that's one way we deal with it. Vetting on the front end. I'm also don't put us in positions where I'm afraid to walk away from a client. You know, we don't get in too deep. So if, if a client seems great, but then an issue happens and they say, you know, whatever the issue is, I'm sorry that this really terrible thing happened, but I'm not going to pay with pay for that. You know, we would say, okay, fine, then we're not going to work with you. And then we do a lot to try and they're very small things, but try and be not just there's this kind of like old school landlord ethos of like, you know, we do what the lease says and that's the end of it. Kind of not like customer service oriented at all. And it's pretty basic stuff. But like we do a little move in gift that I mentioned earlier. When they sign a lease, we actually leave it in the unit. We don't give it to them when they come into the apartment. So it starts off with our leasing team is great. They're very like, that's the fun part of leasing apartments. So it's kind of easy to be really positive there. They make sure it's a great experience. Then the first interaction they have with us when they move in on moving day is they've got a surprise little gift bag from us and it's got, you know, it's kind of like useful stuff and it's a water so that they can take a break from moving and like just kind of thoughtful and then yeah, and we check in with them. We do like a bonus program for. One of the things I'm always talking about on Twitter is Google Reviews. We do a bonus program where we ask, hey, how did that service order go today? If they say it was good, if it's bad, we deal with it. If it was good Then we say, hey, we'll give a $10 bonus to the maintenance tech that did that today if you just mention them by name in a Google review and we really follow through. And that has been an amazing hack. And it's like it kind of spreads throughout the business. And we also then give a bonus quarterly to whoever gets the most Google reviews on top of just the per review mention.

[1:26:09] Host: Yeah.

Guest: And it's, it allows everyone to talk about a lot more positive things and you know, not get so down when they're only dealing with complaints.

Host: You know, that's a great little hack. And I feel like anybody running any sort of business where they're interacting with the public and their teams are interacting with the public, you could, doesn't have to be property management. You could offer a same sort of incentive that's to the consumer and that, that indirectly trickles up to the, to your, to your crew people.

Guest: Yeah, and it's. That one has been very successful for us.

Host: One of the things that you said in the pre call, Brandon, was that because the business is so difficult, the business of property management is so difficult. Rather than seeing that as a negative, you saw that as opportunity. Can you just articulate what you meant there?

Guest: Yeah, I mean I think it like I just mentioned that old school attitude of we do what's in the lease and that's it dropping that attitude for one, to the extent that it's possible because you, that doesn't inherently have a limit. Like yeah, sure, we could come and do your laundry for you too. We'd probably be everybody's favorite landlord if we did that. So within reason what we can afford to do, just not having that attitude and being customer focused without it having any sort of. Not only does it not have a negative implication for our business or for our clients in terms of like costing them more because we're just like, oh, you know, screw it on the late fees or whatever, like we're enforcing policy, but we're doing it positively and we're doing a lot of stuff above and beyond. So I would say that's the main way that we've kind of dealt with that challenging opportunity and not just, you know, sort of been frustrated.

[1:28:02] Host: Okay, well we're, we're bumping up on time, Brandon and I want to spend the rest of it talking about how this can complement somebody building a real estate portfolio. I asked you on our pre call, are you a real estate guy with a property management business or vice versa property management business guy with some real estate holdings and you self Identify as a real estate. Your real estate first. So we've spent most of our conversation talking about property management business because this is a searcher audience. But now let's, let's bring them together. And for anybody listening who either already has real estate or aspires to build a real estate portfolio and more than just, you know, a couple units, but something substantial and really build wealth over years, over the long term. How. Talk to us about how owning a property management business has served that goal and how it fit, how it all fits together.

Guest: Yeah, I mean, makes me think again of that comment that you kind of made about, oh, it turns out real estate's not as, as passive as we've been led to believe. It's not. It's a business just like any other business. I think that there is more infrastructure in place in the real estate industry to allow it to be a more passive business than, you know, just buying whatever operating business in another state. Like it's feasible to think that you could buy an apartment complex in another state and there are people you can find and put together a team to run that business for you. But it is still a business that you have to oversee. And that's what I want. I wanted to build a big portfolio and to give me the time and space to oversee that business. This is the clearest path, was find an operating business that allows me to focus on my real estate portfolio. Even though I am a real estate guy with a property management business, I actually spend way more of my time on the property management business than being the real estate guy. I'd like for that to shift over time. And it has shifted in the right direction over the past few years for sure, to where it was sort of 95. 5 on 95 operating the business and 5 on looking for deals and putting them together. And it's gone in the right direction where it's a lot closer to an even split. And that's part of what, I don't know, inspires me to work on the business though, to accelerate that shift. But just there's a million advantages. I know what things cost because we do projects for clients. And if I was just that client, I wouldn't have that exposure. I get a lot of inside information on transactions from either things that we are a party to in some way, like we're managing it or whatever it is, or brokers are just more apt to share information with me because, you know, if we have clients that are going to sell or if I'm personally going to buy something, you know they want to be there to do a deal with me. So. Or one of my clients. So it just puts me in the middle of a lot of opportunities and a lot of interesting information that you would just be on the outside of if, if you were not running this business. And I do have a funny analogy that I often make.

[1:31:37] Host: Please.

Guest: That I don't know if I mentioned in our pre call. But if someone said to you, hey, I want to buy apartment building. Let's say I live in on the West Coast, I want to buy apartment buildings in the Midwest. I've done the research. Kansas City is great. I have started talking to people about deals and now I just need to hire a property management company to kind of make it all happen and come to life and I'll, I'll give them the spreadsheet and they can do it. Okay, that. I'm saying it in a little bit of a flippant way, but it doesn't sound that crazy. But if you change that from real estate to anything else you said, I always say barbershops for whatever reason. But if you said, I've identified that barbershops are undervalued in Kansas City and they charge too little for haircuts and it's actually shocking. They, the haircuts look just the same there as they do in la. And all I got to do is find the barbershop management company who will put my business plan into practice and execute it perfectly. You'd be like, this person is insane. This is the worst idea I've ever heard. So I don't know if I just had to gratuitously get that illusion that I like to make in there.

Host: But that's good.

Guest: That's kind of why you always as a owner have to at least plan to do the asset management. Because it's just, it is not that simple that you can just flip it over to somebody and it'll come out the way that you were promised. But for whatever reason we've. We've all been tricked into thinking that's possible. Even, even I have been tricked into thinking that's possible to a higher degree than it is seeing it fail over and over.

[1:33:27] Host: Well, okay, so you do you have just explained that be owning a property management company does have this kind of knowledge flywheel effect of being a player in the local market. You got access to all of these, all this information that you might not otherwise. And people too, presumably. Let's take the question of property management owner and real estate portfolio owner in three parts. So if you already have a real estate portfolio, which you did. If you don't, nor do you have any intention of building one, how does property management look as a, as a business to get into? And finally, if you don't yet have a real estate portfolio, is, is buying a property management company maybe an accelerant to get there? So you didn't have to memorize those. I'll take them one by one. So the first one was, was you, Brandon. Like for somebody who already has more than like a unit or two or three, but maybe a substantial portfolio and they're entrepreneurial, they're not just a real estate investor. They might want to buy a business or have a business one day. Sounds like at least based on your experience buying a real property management business makes sense. How would you, what would you tell that person?

Guest: Yeah, if they're going to actually operate the business or have a partner that's going to actually operate the business and they'll really be involved, then yes, I think it makes sense if they're just doing it to say we have our own management company but they're not going to be that involved, then I think it's a lot more of a toss up whether that makes sense. I have seen clients of ours who said we're going to bring management in house and started a property management company, but we're not like in the business themselves and it did not go well. You, you should at that point just hire somebody like us because it's effectively the same thing.

Host: Great. Now what if you are just a searcher, no interest in real estate, you don't have a portfolio nor do you intend to build one. What, what. So, so the, just the, the, the, the merits of property management without any kind of strategic play into, into a real estate asset builder. What would you say to that person? Is it a. We've talked about the pros and cons, but would you say look elsewhere or what would you tell that person?

Guest: I would tell that person at the moment it's definitely a good momentum business. There is like institutional demand to kind of aggregate property management companies, especially in the single family space, where if you had an opportunity to buy one or a few property management companies, there is a real opportunity to professionalize those and then sell them on as a business that you're thinking, I might hold this forever. I don't see the point in doing it if you're not also going to be building a portfolio. That's what's so attractive about it is the fact that it's this rare business where the operating business, you know, could double, for instance, like mine did in seven years. But the. Your portfolio, like my portfolio, is 20 times larger than it was when I bought the business. So business 2x portfolio, 20x. That's. I can't think of many other examples of businesses where you kind of move the client base in your direction a little bit more proprietary to your own deals or whatever it is in that other business and not scale the operating business kind of in lockstep. So that's really attractive and makes those kind of problems we were talking about before with all your kind of different constituents with opposing issues. It lessens the blow a lot when you think about it that way. So I would say it's one of those two things. Either you're going to build a portfolio or you're optimizing a business to sell it on to kind of an aggregator. Just a pure third party business that's going to be around forever. I don't know if that's an interesting opportunity to me.

[1:37:50] Host: Great, thank you. But let me just double click on the 20x your real estate. Your real estate portfolio. 20x your property management business doubled. Sorry. And so you're. So you're saying that you 20 extra real estate portfolio because of the strategic play that. That. That is North Terrace.

Guest: Yeah.

Host: Like it wouldn't like if you had. Didn't have North Terrace, you wouldn't have 20x your real estate portfolio.

Guest: Correct. I would not have for sure.

Host: Okay. Okay, great. Well, that's pretty compelling. But what about the, you know, you had said going all the way back to the top when you were in private equity with your partner and friend and you guys realized that like doing transactions was less fun to you, which is kind of like what you're kind of implying that that's what private equity, a lot of private equity is. If assuming you're not on the operation side of private equity, you're like the private equity one, doing deals. A lot of it's just doing deal after deal after dealing with or. And. Yeah, and growing inorganically. And you really liked the idea of getting into a bit, buying a business and then getting into it and pulling the levers and making it grow. And you've done that in your property management business. But we're also hearing that you've been doing a lot of real estate deals as well. And in fact you'd like to shift much more of your attention to doing more real estate deals. So isn't doing real estate deals just that kind of just transaction by transaction by transaction? The same thing that you didn't turn you on about private equity?

[1:39:16] Guest: No, I classify them totally differently because I don't say it's like easy to buy a property. It's certainly not easy, but it's nothing compared to buying a business. And just the level of, you know, nuance that comes with buying a business. It's really, when we buy like an apartment building, we're just buying a client, you know, it could be someone else could own that building and we manage it for them and it's going to be basically the exact same output on our side or I might as well buy it or put together a group to buy it because it's going to be the same amount of work and at least we also own the building. So. No, it doesn't. It does not feel transactional in the same way, like. And it also feels like it's building the business of having that portfolio, basically.

Host: Thank you again for your. I love that you take a position that just a property management business by itself if you're not also pursuing a real estate portfolio or some kind of roll up and exit strategy. It's maybe not the most compelling place to focus your years of your life as a searcher. But what about one of the other kind of strategic fantasies people have about property management where you, it touches all the vendor relationships that you talked about. You touch so many different vendors, general contractors, H Vac, all, I mean basically all the vendors that service the properties you have these relationships with. And so you just know a lot of people, you're well networked in that world. But also, you know, rather than, you know, paying the, you know, the mechanical contractor who's a different business to go in and the landlord's paying them to go in then go into the building and fix something. If that mechanical contractor were owned by Brandon as well, it gets more interesting. And if, you know, if you have this fantasy of kind of buying all of these different vendors up, so you own a property management company and all of its attendant vendors. What about that play? Because I've heard that people talk about that many times. Is that realistic?

Guest: I think it's interesting. We haven't done a ton of that. There's definitely some. And so like using an example of something in our business that's kind of gone in and out of house a few times. Groundskeeping and then also snow and ice removal. So groundskeeping used to be in house, then we moved it out of house, then we moved it back in house and it was terrible that second time and now it's like, never again will it be in house. I would rather put our efforts into negotiating and being like, we. It creates a little bit of an adversarial relationship with the client. If even if, you know, we use sort of industry standard practices to bid and, you know, there's no like bid rigging or whatever you want to call it, to give it to us exclusively, we still have to produce a great result of what's another very difficult business. I think groundskeeping is pretty hard. Um, so I would rather, on things like that, just focus on getting tons and tons and tons of bids and making a marketplace for vendors and then hold those vendors accountable. And when a client is unhappy, oh, hey, I drove by my property and it looked terrible. It's not like, okay, now I got this on my plate too, of making sure that the landscaping division is good. You know, we can be more nimble and trade those vendors out. And there's, you know, other reasons, liability reasons, specifically on snow, where it's just like, okay, we can make a little bit of money, but do I want to deal with the slip and fall lawsuit associated with the snow, or would I rather just have a vendor deal with that because it's their problem? So there are niches where it's interesting. I think the more predictable, kind of like capex type niches, it's more interesting than day to day service. So, you know, doing project management or construction management for bigger projects. And again, you're just kind of negotiating with individual vendors and coordinating projects, not self performing. That's pretty interesting. And we admittedly don't like, charge very much for that right now, and we could probably charge more.

[1:43:45] Host: Okay, Brandon, the, the third case here was somebody who aspired to build a real estate portfolio over the course of their lives, their careers, but doesn't yet have one. Should they go out and get some? Try to get in the real estate game first and then think about bolting on a property management business as you did, or is buying a property management business as a searcher, operating it, you know, kind of getting their arms around it for a few years and then going out and starting to build a portfolio. Does that make sense?

Guest: Yeah, I think that really makes sense. The second version that you said, where if I had, you know, I don't know, $250,000 and I could buy a small apartment building in Kansas City, or that's my down payment and working capital to buy a small property management company with an SBA loan, I would buy the property management business because you immediately have a really, really interesting differentiator. You've bought a job first of all, so you can focus on it full time. Buy one small apartment building isn't going to tick that off the list. So you still have to fill your time with something that's going to kind of pay the bills. So you've got that issue covered. Plus you have just a great entree into all the folks that control all the deals basically. Right, right. So I think it's. Yeah, it's a great hack.

[1:45:04] Host: Do you think that you'll buy a business again or do you just have this. You're just getting closer and closer and closer to having this real estate port. Growing real estate portfolio with property management business kind of serving it, humming along that to buy a business or to think about buying a business would just be a distraction. What do you think you'll ever return to ETA proper?

Guest: I don't know. I struggle with that for the moment for a variety of reasons. I'm definitely not buying anything. I would say probably at least 5 to 10 years. I have a 7 year old and a 1 year old first of all. And then. So that's enough of an explanation right there. And I enjoy the flexibility that I've now kind of gotten to the point with this business where I can be pretty flexible. I mean, there are times when it feels like I'm in the trenches still. But then there's other times like the past couple of summers I have just kind of worked 10 to two or three every day with my older son's schedule. And then we would do stuff outside of that and it was a lot of fun. So I want to maintain that while they're young. But then my wife and I bought another business that she runs and it's good sized, certainly by like self funded search standards. It's good size. And so that really scratches the itch of buying another business and you know, buying a larger business, I guess. And then there's the two married together is, well, literally married together I guess. But the two businesses married together is very interesting. And her business, we acquired it about five years ago, but we initially had some investors that we've since bought out. So there were things that we might have considered doing earlier. But now when it's just all ours, we can, we can do. You know, it's kind of trendy Twitter stuff that you hear about like shared services. You know, she's got, I have 25 employees, she's got 50 or 60. And there's not a natural synergy between the two businesses. But for example, both businesses need HR support and neither business has someone focused on like recruiting talent. Both could probably afford somebody like half time to do that. So the notion of, okay, this is interesting. Maybe we can bat a little bit out of our league by combining some of those needs a little bit. We're just in the early stages of sort of going down that path. So I think that scratches the urge or itch to buy another business and focused on optimizing what we have, basically.

[1:48:02] Host: Yeah, well, it sounds like you got your hands full. And also lots of entrepreneurial stimulation to go around. A lot of interesting things. I mean, you guys. And by the way, I really hope that your wife's name is Katie. I really hope I'll convince you to convince her to come on because the business that she bought is a big kind of institution. Retail furnishings, furniture store in Kansas City. So between you, I'm seeing kind of this Kansas City power couple, the real estate magnate and, and, and the woman who owns, you know, a decades old, I don't know how old it is, but a really well known and well respected and beloved furnishings store. Really pretty neat. What does. So I, I feel like, Brandon, it's fair to say without pumping your tires that this is going awesome for you, that it's, it's really working out well. And as maybe with a lot of small business acquisitions, it's been a little bit slower than maybe you wanted, but it's certainly going in the right direction. And you're starting to, as you just as you said an hour ago, you're starting to really feel that some good scales around the corner. What does it, what does a good outcome look like for you five or ten years from now? And are you on your way there?

Guest: Yeah, I mean I would like, I would like a team. I feel like I have a good team, but there's some gaps and I would like some of the things that I feel like I have to be involved with because we don't have the capacity in house currently. I would love to fill that in. So a great outcome would be to grow a little bit more to the level where I felt like we could afford a few additional kind of high level people. You know, we don't have like a cfo and that's, that's not necessarily a common title in a property management company. So that's not like surprising on the surface, but I would love to have, yeah, sort of a more sophisticated financial analysis team basically. So yeah, I think just growing to the point that I can afford to grow our team in some areas will be great. And then to feel, I mean this directly related to that, then I would feel like, like right now if I was to go on vacation for a month, I would be worried. I would be checking in a lot and just the classic kind of like small business type stuff. I wouldn't feel like things were probably growing in my absence and I would love to sort of work on the business to the point that I didn't feel that way. Basically if I was gone a little bit more of a self sustaining thing. Not something that I have to swoop in and fix stuff. Although I, you know, swoop in and make a lot of messes too. So professionalizing and institutionalizing and then ideally most of that growth comes from properties and partnerships of my own. So it's more principally owned than third party business as well.

[1:51:34] Host: Anything I didn't ask you, Brandon, that you wanted to make sure that this, this audience heard.

Guest: Can't think of anything.

Host: Okay, well, what is a good way for people to reach out if they have a question for you?

Guest: Sure. Twitter's good. X my handle is my last name lafridge L A U G H R I D G E or email me brandonortharris.com Great.

Host: I should say here that you did a, a thread on buying a business that went kind of Viral back in 2020 and got you, I guess, got you a lot of attention. I remember seeing it and I feel like it's. I've seen it more than once. I have it here in front of me, but it basically just lays out a compelling argument for eta. This was, I don't know, just the normies and the masses got a hold of it and it went viral. But I'll link to it as well. Looks like it has 6,000 bookmarks. 6,000 people?

Guest: That's crazy. I didn't know that number.

Host: Yeah, that's actually the. Of all the kind of KPIs of a tweet, that's the one that matters the most. It's what people really want to save. So congratulations for. For 6,000 people pocketing one of the things. It was something you put out there. Well, anyways, I'll link that in the notes.

Guest: Twitter presence is kind of underwhelming as of late. I just, I don't know, last 6 to 12 months I've faded a little bit. So yeah, I unpinned that from my profile and then nobody liked me anymore, so I faded away, I guess.

Host: Well, maybe we'll juice your profile a little bit by linking to it in the notes.

Guest: There we go.

Host: Brandon Lofrich, thanks for giving me so much your time and being so transparent. Fascinating to learn about property management, real estate, ETA and how they all work together.

Guest: Thank you. I appreciate the opportunity. I love love the podcasts.

Host: Thank you.