Do you want to learn how to leverage 1031's and/or syndications to grow your wealth? Kathryn Schmeltz worked for a large apartment owner. She also worked for a large multifamily due diligence company. She’s walked over 5,000 units as an employee, then she decided she wanted to be on the other side of the table as an owner. Kathryn and her partner, Jimmy Edwards, who was on the show episode 52, have now syndicated three multifamily deals for 400 units. Listen as she shares some fantastic growth mindset examples!
Table of Contents:
- Where To Listen To The Podcast
- From Single Family to Multifamily
- What It Takes to Understand the Different Growth Mindset Examples
- The Upfront Conversations You Need to Have
- Different Markets Showcasing Different Growth Mindset Examples
- Growth Mindset Examples That Can Double People’s Money
- Growth Mindset Examples of a Full-Time Real Estate Professional
- How to Reach Kathryn Schmeltz
From Single Family to Multifamily
Darin: Kathryn Schmeltz lives in the DFW area with her family. She started with single family fix and flips, then did a 16-unit multifamily deal, and has since closed on three syndication deals for 400 units. This girl just keeps pushing the envelope. For this year, they're looking to do 100 million in new assets in 2022.
If you've listened to prior episodes, you've heard me say that I'm part of a multifamily mentorship group in the Dallas area, the Brad Sumrok group. I joined about four years ago. It was probably the first happy hour networking event that I went to. Shortly after being there, I ended up meeting Kathryn and her partner, Jimmy Edwards who was actually on the show, episode 52. I just met them and we shared a beer and had a good time. We've been friends ever since.
First question I typically ask is how many properties and how many units are you invested in?
Kathryn: I'm a GP on three deals, about 400 units, a little bit more. Then I'm an LP on another three properties with a total of about 750 units. Actually, one of our LP deals just closed last week. I got a check yesterday. It's the first deal I invested in as an LP and it just went full cycle. It’s pretty exciting to get a large check.
Darin: That's nice to invest and then pretty much not do anything other than read the emails that come out every month. Then all of a sudden come down the road and you get your money back plus the big check and that's a nice thing.
Growth Mindset Examples in Multifamily
Kathryn: Yes, it's fun just watching it go through every month.
Darin: Before you got involved with real estate investing, what was your background?
Kathryn: My background is a little bit different than most syndicators. Most indicators seem to have an IT and engineering background. My background is actually in multifamily. When I graduated from college, I got a job with a company that owned about 5,000 units, about 26 apartment complexes. At that time when I was hired, the owner was transitioning from the corporate office being in St. Louis and down in Dallas. He hired a bunch of younger folks to start heading up that office.
When we were there, there's about five of us. He taught us everything about multifamily, property management, vision, the 101 of multifamily. That was super important for the foundation of multifamily. From there, I worked with the sister company, the same company that imported light fixtures, sinks, faucets, and granite from China to put into their properties.
Then we also sold to other syndicators or investors, and owners. So I did that for a while then I transitioned to the construction arm of that same apartment company. I did all the rehabs and all the purchasing for them for construction. Then I worked with the construction team and different rehabs. I’ve put in the orders of what they needed from lumber to some of the products that we imported from China.
I put together different layouts of how to put the cabinets together and granite. I've got a pretty good knowledge of the construction aspect from multifamily. Then from there, I worked with a company called Omni Group, Brian Amos. A lot of people in Dallas and Texas know about him.
Growth Mindset Examples in Different Trades
Kathryn: He does a lot of the physical due diligence for different investors and syndicators in the due diligence phase buying apartments. I walked probably 5,000 units and analyzed over a hundred apartment complexes for investors. I’ve worked with the different trades, all the way from plumbing to electrical, to roof systems, things like that. So I really got a good knowledge on the due diligence side. At that same time when I was doing that, that's when me and Jimmy were getting together and flipping houses.
This was probably 2013 or so, and I was still working with Brian Amos at my day job. He came to me and my husband, Andrew and asked if he was flipping houses. So he needed more money for the down payment to buy more houses. He wanted to get bigger and scale his flipping business. We gave him the down payment and we flipped a few houses.
I was like, "Jimmy, I'm doing this on a larger scale doing the CapEx renovations for multifamily. How about we partner together and do rehabs and flips?" That's when I phased over to start working with Jimmy. We flipped a hundred houses. One year we did like 50 houses. I say all that because my background is in apartments and in construction in the multifamily space. It's a little bit longer than your average person's background, but it's pretty important.
Darin: It is. I knew you had a multifamily background and that you worked for Omni, but I didn't know what happened prior. Typically, I'm like, "You don't have to have a multifamily background to get into this. Listen to this guest. He or she didn't know what they were doing and they got in."
The Due Diligence Phase
Darin: You spent quite a bit of time in different aspects of the business before you actually came over. So for you, it was more like, "I want to get on the other side of the table."
Kathryn: I saw a lot of people in the due diligence phase were walking units. I realized that a lot of people didn't know what they were looking for. Some people didn't even know what a clean-out was. They were like, "What is that circle on the ground that they're putting a camera into?" It's crazy and they're owning multimillion-dollar properties and don't even know a clean-out.
I worked for that, but I knew when I was working with Omni and with these investors and seeing what they knew. That was super lucrative, I knew I wanted to come back. But at the time, me and Jimmy flipped houses to build up enough capital to really go all in, in multifamily and have more money to move around.
Darin: So you said super lucrative. Here, you got all this knowledge and all these other people that are investing in it. They're leveraging the knowledge that you have, that's the whole point. Once you get into the ownership standpoint everybody brings their different experiences. But you also leverage vendors that do this day in and day out. So you're flipping houses. That's a lot of houses you did, over a hundred homes. Then your first multifamily deal, how big was that?
Kathryn: So our first one was 16 units. It was pretty interesting. One of the guys that I helped do the CapEx, I guess, implementation on his apartment, we were looking at a property. It was 26 units.
What It Takes to Understand the Different Growth Mindset Examples
Kathryn: Jimmy knew the guy. It was our first deal that we're looking at. He said, "Jimmy, it's off-market. You could buy this property." So we went through all the comps and really tried to understand it. This was before I did the mentoring program with Brad Sumrok. We didn't know what we were doing and took us six months to analyze this deal. But at the time, we're looking at comps and at CoStar.
We realized that one of the guys I used to work with, Mac, owned the comp. So I called him, said, "We're looking up buying apartments now. I realized this is a comp. We're trying to underwrite it." Well, a few months later, he called me and said, "Hey, Kathryn. I found a deal. It's 16 units. I found it. You can run it, you can manage it, you could do everything. I don't really want to do that, but I have a deal. Are you in?"
So I said, "Let me get Jimmy involved." That's how we got our first deal. It was just organically with the partners. Then our other partner, Tim, came in. Mac invited him into the deal as well. So it's the four of us, 16 units in Grand Prairie. It was a C minus, maybe a D plus. It was a rough first deal, completely re-tenant it. There's a beautiful park across the street that nobody could use ever because there's drug deals going on in the park. They were drinking 40s at 10:00 in the morning. It was crazy. It’s interesting to say the least.
Why You Need to Tell People about What You’re Doing
Darin: I'm guessing you told people that you and Jimmy were looking for multifamily. That's what prompted the guy to say, "I've got this deal." That is important for the listener's perspective. Even if you're new in the business and you're trying to get your first deal, you need to tell as many people as possible what you're looking for. Somebody may have somebody that they're talking to. If you don't tell them what you're looking for, you're not going to be on top of their mind.
I had another guest that was talking to a bank president and told him what he was looking for. The next thing you know, he got a call from some broker that he didn't even have a relationship with. The president of the bank told the broker and that broker called him. The next thing you know, he picked up a 50 or 60 unit deal.
Kathryn: I really believe in that, tell the universe what you want and the universe will come back. That's what we had to do with flip houses. A lot of the houses that we bought were because of referrals. It was because we told everybody we know that we're flipping houses. That random person you to talk to at this random meetup or a friend of a friend had some person that didn't want their house. We saw that so much in single family. We knew that's part of it is to put everything out there and share what you're doing.
Darin: You have that 16 unit and then from there, you guys go out and buy a deal outside of the Dallas market. Talk about that second deal.
From 16 Units to 103 Units
Kathryn: The next deal was 103 units in Lubbock.
Darin: So you went from 16 units to 103 units. Going from a single family to 16 units probably felt big.
Kathryn: Yes, it was big and the 103 felt huge.
Darin: Going from 16 to 103 felt big too. But probably the one to 16 probably even felt bigger.
Kathryn: It did. But it was different because, even though they were 16 units, they were townhouses. It almost felt like 16 little houses all next door to each other. So it felt big, but the 103 was like an apartment complex. That felt like, "Oh my gosh, we're actually owning a bigger deal." Then we syndicated that, the 16 units just the four of us, we bought them ourselves.
We didn't have any investors, but the 103 unit we syndicated was our first syndication. It was in Lubbock. Jimmy and I both went to Texas Tech. The reason why I know Jimmy is, my husband and Jimmy actually went to Tech together and met in the dorms. I knew Jimmy through my husband actually. We knew Lubbock, we lived there for four or five years, so we knew the market. It wasn't like we just bought a deal in Mineral Wells or something like that.
We felt comfortable with the market, even though it wasn't Dallas or Austin or Houston. Honestly, when it came out and the broker told us about it, we thought it would actually be fun going to Lubbock and checking it out. We haven't been in a while, but the 103 unit was a C class. So we bought it at 50% occupied. It was a harrier deal that most people are used to in the Brad Sumrok ecosystem.
Not Your Typical Growth Mindset Examples
Darin: 50% occupied is low.
Kathryn: It's not typical. The other person ran out of money and the chiller broke down in the middle of the summer. He lost a lot of residents and he was just tired of it and just wanted out. We came in, saved the day, bought it at 50% occupancy. He was leasing it to people that weren't the best tenants in the world. Then it went down to 39% occupancy, which we knew was going to dip. It wasn't a surprise. We had to raise extra money to cover pretty much the operating costs.
But we were in it for three years, then we sold it. We over doubled our investors' money in less than three years. It was a great learning experience. You had to learn a lot. For our first deal, a rough deal, a deal not where we live, and I wouldn't trade it for the world, but we learned a lot. There was blood, sweat, and tears the whole three years.
Darin: Talk about some of the learning lessons.
Kathryn: One of the biggest lessons we learned is, we flipped houses so we know how it is. We knew what we’re getting ourselves into. Nothing really was like, "Oh my gosh, we didn't see that coming." But one of the main things we learned is having the right management company at the property.
We hired a management company that somebody else referred us to, and we were just going through all the motions. We had so many things on our list that we hired someone that we thought we would like. But we actually had to fire them maybe nine months into owning the property.
How Letting Go and Changing Managements Can Be Growth Mindset Examples
Kathryn: They didn't share our vision, they didn't understand what we were doing, why we were doing it. If we would've started out with the right management company from day one, we would've even exceeded expectations even more.
Darin: Talk about that decision of, okay, you're six, seven, eight, nine months. You're seeing that their property management company for one reason or another is not doing what you're looking to do. To make that decision to bring somebody new in, it's a big complex decision. You're not there every day, you're in Dallas and that's in Lubbock. Was that a difficult decision or an easy decision? Was the transition easy or did it have some bumps along the way?
Kathryn: It was a hard decision. We kept talking about it, and we knew it wasn't the right fit. But we didn't know how bad it would impact changing. We thought it would be another dip before it got better. Finally, one of our other friends who used the same management company fired them. They started using a different management company and that was like, "Okay, it's not just us. We just don't have different expectations."
So we fired them, got on a new management company. We don't take that lightly. It was a big deal, but they took it and ran with it and understood. It’s so much different, the way that they manage the conversations and getting things done. It was hard at first. We had to do everything all over again. But in the long run, it was way better.
The Upfront Conversations You Need to Have
Kathryn: It taught me to have a lot of conversations with them upfront, make sure they understand your vision. Make sure that you're aligned, ethics, all the things are just completely aligned before you take on the management company.
Darin: Those are great lessons to learn. Also if you were to go into another deal where you've ran into that problem, now that you've gone through that process, you probably would pull that trigger a little earlier if it's not going right. I went through the same thing. It was a hard decision to change property management companies. It was talking to other syndicators and me asking, "How tough is it?"
That transition, how difficult is that? It's just like when you were younger and you're going through a breakup. You got to pull off the Band-Aid. It's not an easy thing to do, having that conversation. But once you have it and then the new people are in, you're like, "Thank goodness."
Kathryn: At the time, obviously, we bought a harry deal, 50% occupied and went down. It's like, "Well, this is our first deal and this isn't typical." Are they doing a regular job or not doing a good enough job for our expectation? It's like, "Do we have way higher expectations?" It was like just trying to understand where we were. But once we did it, there was no looking back. That made us want to stay with the same management company. Just have more upfront conversations and really get to know them, and do our homework a little bit better.
Multifamily Is a Team Sport and One of the Growth Mindset Examples
Darin: That's a big lesson. Everyone says that multifamily is a team sport. The property management company is a big part of that team, especially the onsite management whether it's the leasing manager and maintenance person. How good are they and how are they managing the units and fixing problems and communicating with tenants? All of that is so important. If you're in Dallas and they're in Lubbock, you want to make sure you have the right people there.
Kathryn: Another thing too is, since this property was in Lubbock, you have to have your ear to the ground. If you're just a new person in this space and don't have the connections, these people did work in Lubbock. Just in general, they need to know the contractors and know all the employees. If they lose a manager, then they have a pool to work from, and that's a big important thing as well.
Darin: I remember talking to you and Jimmy. You guys were like, it was different being out in a different market because you had to find all your vendors. Here in Dallas, we might be able to ask other syndicators, "Who do you use for this? Who do you use for that?" and get referrals. You guys had to go find that yourself.
Talk about upgrades in a tertiary market. I remember hearing from both you and Jimmy, that it's a little different than being in Dallas. You see something down the street and you're just going to take a classic unit and you're going to upgrade it. You're going to get whatever bump in rent, but in certain markets they may not pay up for that.
Lubbock versus Dallas
Kathryn: That's another difficult thing in Lubbock compared to San Antonio or Dallas. They're a little bit behind on the upgrades, so they don't value it as much as Dallas people do. There's a bunch of apartments in Dallas and they have different levels of upgrades. But in Lubbock, it's just behind. Another thing is in Lubbock, houses are a lot cheaper than in the Dallas market.
You can't just come in and put in an awesome upgrade and think that you're going to get $200 in rent or something like that. Once you get to a certain threshold, they're like, "Well, I could just buy a house for that." It's a little bit different. Also, another thing with the upgrades is, especially after COVID was labor shortages. We have it in Dallas and there's tons of people here. Imagine being in a smaller market where there's not that many contractors.
Even in Lubbock right now at our other property, we have a contract to do landscaping. The owner of the landscaping company can't get people to mow the grass. Last time we were in Lubbock, he was out there riding a lawnmower, mowing the grass. He’s the owner of the company. It's insane. It is a different market, especially in Lubbock.
Darin: It’s very important to know the market. Know what upgrades are going to result in an increase in rent, know that you have to be careful of labor shortages. Know that you’re going to have to find different vendors, and you may have to be careful about pulling the plug on somebody. If you don't have somebody else lined up, you don't want to be stuck.
Growth Mindset Examples in Rental Increase Scenarios
Darin: And then rental increases in your proforma. I have to imagine that from being in a tertiary market versus in a major market, you build in less increases in rent bumps over the life of your business plan.
Kathryn: Definitely. At Courtyards on the Park when we did the pro forma, we didn't even have an increase in rent at all.
Darin: No rent increase. So your business plan was take it from 50% to what percent?
Kathryn: To 90% to sell.
Darin: But keep the same rent?
Kathryn: Yes, then in our other apartment in Lubbock Lakeway that we own currently. I don't remember the proforma off the top of my head, but we obviously own the courtyards. We knew what was happening. There's very little increase in rent. We bought it from a 20-year owner. It was just a management play pretty much and doing a little bit of CapEx, a little bit of amenities. We added a few minor amenities there, made it prettier, painted the exterior. Just getting professional management and that's our play. It wasn't an increased rent by $200 or anything like that. You can't do that. There's a lot of people that are getting into Lubbock that may or may not know that you can't do the Dallas thing in Lubbock.
Darin: Did you buy another complex in Lubbock? So you had the 103 unit and then you bought another one?
Kathryn: Yes. With the 16 unit, the four of us, me, Mac, Tim, and Jimmy, we did a 1031. So we sold 16 units and then we rolled that into 120 units.
Darin: Just the four of you bought that and rolled from a 16-unit to 120-unit?
The Benefit of Rolling Up and Modeling the Growth Mindset Examples
Kathryn: In Lubbock, yes. It's just the four of us that own it. A lot of people don't know about that property because we didn't syndicate.
Darin: I didn't know about that one. Now, most people listening probably know what a 1031 exchange is. Briefly talk about what is a 1031 exchange and why did you guys do that? Then most importantly, "All right. How much cash flow has the 16-unit kicking off versus now, you guys are in a 120 unit deal?" Because that's the benefit of rolling up and going bigger.
Kathryn: The 16-unit, it was a harrier deal. We had to re-tenant the whole property. So we didn't technically make any cash flow. It was more just get in and get out and sell that. We made about 400,000 in equity on that deal. Then we rolled that 400,000 into the down payment for the 120 unit apartment complex. The 1031 is a tax benefit, but you don't make any money off of selling the property. You just roll the money into the next deal. So that's what we did.
Darin: You have no tax consequence on that gain. It rolls in tax-free into the next deal, that's what you guys did. Now you're in this 120-unit. What is that looking like?
Kathryn: We're actually considering selling that deal pretty soon. Again, we're all more focused on the 1031, we're not really focused on cash flow. We're making cash flow on all of our other deals. We technically aren't making a ton of money. We're making something, but we're just transitioning to keep rolling it. Then when we sell that deal, we're looking at buying an apartment, probably in Dallas.
Different Markets Showcasing Different Growth Mindset Examples
Kathryn: We're looking at a bunch of different markets, but we have about 4 million in equity currently on that deal. That would buy us about a 12 to 15 million deal, let's say in Dallas.
Darin: You started with a 16-unit, it ended up with a $400,000 gain. You did a 1031 exchange so, no tax consequence. Bought 120-unit out in Lubbock, now you have a $4 million gain on that 120-unit.
Darin: This is the thing about real estate. Think about how much money you would have. How long would it take the four of you to save your way to $4 million in equity, and it was rolled tax free. Now that $4 million is going to roll into another large property and then that gain, that equity, it really is bananas.
Kathryn: Technically if you double it, every, let's say three to five years, if we roll the 4 million equity into another deal for 15 million, you would hope to be able to sell that and double it. That'd be 8 million, then roll it every three to five years. That's like our baby, this 1031 we have going on. The syndications are awesome as well. It's a different game, but all four of us are all about just rolling it. We’re not really worrying too much about cash flow and all the things. It's all about just selling it higher and rolling it.
Darin: There's a play for the 1031 and doing it with just a few partners and then there's a play for the syndication. Where did the syndication deals play in your strategy with you and Jimmy?
Growth Mindset Examples for Those with Pretty Big Goals
Kathryn: We have pretty big goals this year where we want to buy a deal every quarter between 20 and 40 million. At the end of the year, I'd like to have over a hundred million in assets under management. B class, Dallas, Houston, San Antonio, 35 corridor, that's where we're looking. Again, we have this 1031. We're always looking for a 12 to $15 million good asset B class, Dallas, something like that.
We have two buckets we're looking for. Obviously, we've seen how rapidly the 1031s move. We're always looking for another little guy. Create a small partnership with a few people that we can actually buy ourselves, not syndicate, and then keep rolling that as well.
Darin: What do you mean by 1031s moving fast?
Kathryn: Just like how we bought the 16-unit for less than a million dollars and then we got in. I don't remember how much we had to put into that. Probably, 200,000, 300,000. Then that rolled into 4 million in four years. We're always looking for another type of deal to create another 1031 opportunity to buy with a few people.
Darin: I'll partner with you.
Kathryn: Yes. We have a few different buckets, but our main focus is definitely syndication. 20 to 40 million in the big markets like Dallas and Houston, San Antonio.
Darin: Now you got the other deal in Lubbock and you've done a few deals in San Antonio as well.
Kathryn: We have two more deals in San Antonio, we have 116 units C class deal. We just bought in October a 168-unit apartment complex in San Antonio, C class in a B area, which we're super excited about.
Your Biggest Deals Just Get Bigger
Darin: That was your biggest deal?
Kathryn: That one's our biggest deal to date. We bought it for 16.75 million and we raised about $6 million on that deal. It was a syndication. It's a hell of a deal. We're super excited about this one. We've owned it for about three months or so. We're already going over projected rents. We bought it at a really good time at a really good price.
Darin: Your journey, you were in single family. Flip, flip, flip, flip, flip. There's a lot of people out there that do that. They want to get into multifamily and they think, "Maybe I'm going to do duplexes and triplexes and fourplexes. Maybe in a few years I'll go to an eight plex." All of a sudden, I hear your story. It's like single family flips, 16-unit, then a hundred units, then 116, then 168. You just talked there like, "Oh, we bought 16.75 million. We raised 6 million like it was easy." But three or four years ago, you probably would've been scared to do something like that.
So how does that change over time? How does it go from, "Oh my gosh, that seems so out of the possibilities," to, "We did that. Now, let's put on another hundred million this year." How do you get there?
Kathryn: It’s crazy when I think back of all the things we've done.
Getting comfortable being uncomfortable is the main motto, it’s just putting yourself out there. I read a lot of books, probably 12 books a year of just all personal development, mindset. You have to keep growing. It's interesting because we just closed a $16.75 million deal in October and we're touring.
Limited Mindset and Growth Mindset Examples
Kathryn: Jimmy and I toured three properties last week, three properties for 50 million. It's like, wow, that 16-unit was so small. We just closed it.
Darin: That was big at the time.
Mindset is everything. Sometimes, people hold themselves back and they don't realize it's them. It's not what they can do, it's just a limited mindset.
Darin: Mindset is so huge. What do we mean by mindset? It just means that you believe you can do it versus telling yourself you can't. But the other thing is, taking action and doing something leads to growth. At the time, 16 units seemed like a big deal. But if you didn't do that 16-unit, you probably would never have been thinking about 106 unit. Then it just, "All right. What's next?"
I don't know if you're like me, but I love it when I'm doing something that I haven't done before. That's when all the juices are flowing like, "All right. Can we make this happen?" Versus, "Look, you guys said you did over a hundred house flips." After a while, I have to imagine that that got repetition. You were like, "All right, what's next?"
Kathryn: It's on autopilot at this point, the flips. We’re not even looking to buy flip houses, but we had one fall in our laps. We took a look at it, made an offer, and just got the contract signed yesterday. So we have another flip all of a sudden. We had a conversation, "Is it worth our time?" But it's so automated and it's so easy. It's like, "Why not? Why not just make a little bit of money?"
Kathryn: It's so interesting because back in the day, even the flip houses were hard. I was over there all the time, second-guessing my design thoughts. Now it's just, "All right, go."
Darin: I've mentioned this in the last few episodes, it's a ripple effect. It's not just about Kathryn and Jimmy anymore. You end up going from a 16-unit up to a hundred units. All of a sudden, I have to believe that you guys have other people in your network that are like, "How are you guys doing this? How did you go from flipping houses to being in these large multifamily deals?" Then if you counsel one, two, or three other people, that ends up getting them involved. All of a sudden they've got people that they teach and it's a ripple effect.
Kathryn: We were pretty heavily in the single family space and all of our friends are in single family. A lot of them are investing with us because they don't really understand multifamily, but they want to be a part of it. It's pretty cool just saying, "We want to watch the updates and we want to understand it. We don't want to do it, but we're so curious on how you're doing this and what you're doing." Eventually I want to do it. But some people are like, "Well, I'm still doing a single family or doing this over here. But I want to watch on the sidelines and pick your brain and put something with you guys.
Darin: Watch on the sidelines, but also some of them are stepping up and investing as a limited partner. Your first deal went full cycle.
Growth Mindset Examples That Can Double People’s Money
Darin: You more than doubled people's money and investors' money in a little over three years. Think about that. If somebody invests 100,000 and then all of a sudden three years later, they get their 100,000 plus another 100,000. It's like, "Let's do that again."
Kathryn: It was great. When we sold Courtyards on the Park in April, we were raising money. A few months later, and a lot of people were, "All right. I'm in again. Let's keep rolling this money." It’s just a good feeling. We had a party. It's fun because you get to partner with your friends. You get to have your friends involved in what you do rather than some people saying, "I don't understand," and asking a bunch of questions. Just come on with us even if you want to put a little bit of money in it.
I have a friend that put barely any money in our deal, but they really wanted to go along for the ride and couldn't put too much. It's super cool having conversations at dinner about how our property is doing even though they didn't really invest a lot. It is cool seeing people super excited about what you're doing and having some money in it to even get more excited and more.
Darin: A few things on that. One, I envisioned somebody doing a pretty cool thing. It actually was one of the investors that had a lot of money who came up with the idea to form an LLC and then give all the employees of that company the ability to invest in that LLC. The LLC then was the investor in the deal.
Different Ways to Serve
Darin: That gave all the employees, even though they didn't have the money to put down 50,000 or 75,000 or 100,000, that they were able to invest something into that LLC. They had an interest in the property doing well. Not just from getting a W2, but also having some equity ownership, which was pretty cool.
Another thing you said was feel-good business. Everybody comes at it a little differently. I've met some syndicators that just have a heart for the tenants. Having charities come on and maybe giving backpacks to the kids going back to school and creating community. I'm sitting in church and I've heard for years like serve, serve, serve. I'm more of a business guy, a numbers guy. That's where I get charged up like you just did for all those people. I get charged up by helping grow the wealth of all the limited partners. It's so different. I have another business. My wife and I own the business and all the profit comes to our family.
But in the syndication space, it's like people provide, share in that ownership and then you're managing that deal. Then if you double somebody's money, how great of a way of serving is that? They all have different needs for it. Some might buy a car or some might have college education or retirement, or just want to roll it into the next deal. But it's a way of serving also.
Kathryn: I love building communities through our apartments as well. That really gets me charged up. I'll never forget I was working with Aaron Katz on a property when I was working with Brian Amos. He hired us to help facilitate the CapEx budget.
A Big Deal for People
Kathryn: Anyways, he was putting a playground. This was probably back in 2013 or something. But I was out with a measuring tape and all these kids were playing soccer in the dirt field. I was like, "Hey, kids. Can you help me do this measuring tape?" Because I had to keep moving it down the road because it was like a big area.
Darin: It wasn't long enough.
Kathryn: Yes. I got the kids involved in helping me hold the thing. They were like, "What are you doing?" I was like, "Oh, I'm measuring the space to put in a playground." I'll never forget those kids just screamed. They're literally kicking a ball in dirt. That was like my first, "Oh my gosh. This is a big deal for people."
Darin: Yes, think about the kid. The kid is like, he sees his parents and maybe his parents can't afford it. All of a sudden, he sees the apartment complex putting it in for their benefit. That's pretty awesome.
Kathryn: After that, I was like, all right, this is community. People actually live here. You're making money and you're implementing business plans. At the same time, I like to think about it from the resident's standpoint on what they would actually want.
What would make their lives better if it's just having someone dress up as Santa Claus for the kids to go tell Santa what they want for Christmas. That's a huge deal for them even though it costs us $50 for Santa's suit. It's just little things that's of huge impact, it doesn't have to be a big whole ordeal.
The Growth Mindset Examples of a Woman in Real Estate
Darin: Talk about being a woman in the industry. There's more and more women in the industry, but it could be intimidating for somebody that's listening that wants to get in. Give some inspiration to the women out there to get involved.
Kathryn: It's definitely intimidating. When you go to a conference or something like that, a lot of the girls are the wives just trying to see what's going on. Sometimes, back in the earlier years when it was me and Jimmy, a lot of people thought I was Jimmy's wife. I was just there hanging out and wasn't really there being part of the industry.
Darin: Well, the combination of that, and also Jimmy can be pretty outspoken. Kathryn could be a little bit quiet at times. I could see that playing out like that.
Kathryn: It took a little bit of time being like, "No, I'm actually a partner. I'm not just a wife." Once you are around enough times, people actually enjoy hearing from the women's side on their take. I'm in the construction side and doing the design and stuff. A lot of people like talking to me about amenities and different design aspects of multifamily. It takes a little bit of time, but the more podcasts you get on and the more just being a part of the meetups and conferences and stuff like that, you get a lot of respect pretty quickly because you are one of the only girls that are actually involved.
Darin: I asked that question to one other woman and she said, "I go to conferences, and who do the guys want to talk to? Another guy or talk to me?" She's pretty confident about it.
What Is Scary
Darin: But the thing is, whether you're a guy or a girl, going to your first meetup, going to your first conference is scary. You don't know who you're going to meet and what they're going to ask you and you don't want to feel dumb. But you have to do it. You have to push yourself to get uncomfortable and you learn something. And you realize that, "Look, we all started with zero properties." Everybody has to have their first multifamily property.
Then it builds off of that. Everybody doesn't start out with a thousand units. We interview a lot of people that have thousands of units, but they all started with one. They started their education the same way, books, podcasts, meet-up groups, conferences. So you got to get out there and do that.
Kathryn: Even just going to conferences and learning the lingo so you could actually have a real conversation. It’s very helpful just to understand what the cap rate means and not just say, "Wait, what is that?" Because then if you just say, "I don't know what cap rate is," some people might not think what you're even talking about. It's good just to go to conferences to learn the lingo and know the basics, so then you could have real conversations and start learning. Better than going home and Googling it, or figuring out what exactly you're saying, it probably went over your head for the first few times that you had conversations.
Darin: You're not going to know everything all at once. It's going to happen over time. So now your husband is not in the multifamily business. Is he happy that you are?
Kathryn: He likes it. It works out.
Growth Mindset Examples of a Full-Time Real Estate Professional
Darin: That's a pretty easy answer after the gains. In the beginning it's like, "What are you doing?" Now it's like, "Get out there. That's pretty good."
Kathryn: For the first few years, we were just living off of his income. Everything that I was making was just going back into the business. It was a little bit of a sacrifice at the beginning. We're still creating wealth. He enjoys it. Eventually, I'd like for him to be a little bit more active. Right now he sells wine and he's like a really good conversationalist. He's good at meeting people and talking to people and he's in sales. I'd like for him to get a little bit more into multifamily, but right now, he's just focused on his job.
Darin: Does he work for somebody else in the wine business?
Darin: Talk a little bit about the benefit of you being a full-time real estate professional and how that's helped you collectively from a tax standpoint.
Kathryn: Right now, they have bonus depreciation, which is a huge tax advantage. Every year, I have enough depreciation to offset his income. Together we make $0 and we have two kids. We have the dependents.
Darin: You make more than $0, but you don't pay tax?
Kathryn: Yes. They think we make $0 on paper. Then every year, we get a sizable check from the IRS because he was paying taxes throughout the year. We pretty much get those taxes back through a check from the IRS. So it's great.
Darin: A lot of people that are in the business, they understand that. But then, there are people that are completely foreign to it.
Why Get Involved in Taxes
Darin: For me, I didn't know it until I got into the business. But if you're a husband and a wife, if one or the other is classified as a full-time real estate professional and say, "The other person is a W2 employee." The person that is a full-time real estate professional may be involved in a lot of real estate transactions where they actually show paper losses based on the depreciation.
As a married couple, you can take those losses and cover the income that the spouse is making in their W2. I remember my grandfather told me a long time ago, "You should get involved in taxes because that's the biggest expense." I always let it fly off my shoulders and not think about it.
Kathryn: It's super boring too.
Darin: Yes. I've written some massive checks to the government. All of a sudden, when I got involved in real estate and I didn't have to write those checks anymore, that's huge. The compounding impact of putting that money back into the real estate market can be massive.
Kathryn: Even if you just take the money that you're going to pay to the IRS and put it back into an apartment complex. Depending on the deal, not only are you going to double your money, you could use that to just build wealth by putting up an apartment for three to five years. Doubling your money and then just building wealth on that money, you're going to pay the IRS.
Darin: I'm 51. I have people that are in their 20s or early 30s, and they contact me off Instagram or whatever. I'm like, "I wish I started doing this 20, 30 years ago." The compounding impact is just massive.
Growth Mindset Examples and Advice for Women and First-Timers in Passive Deals
Darin: What would be your advice not just for women, but first timers that want to get involved maybe in their first passive deal? What should they do?
Kathryn: Like me and you, we got a mentor. Just get a mentor to understand the basics and hold your hand to know what's a good deal, what's not a good deal. The last thing you want to do is just get into a passive deal without understanding. You really want to do your homework, get a mentor, go to conferences, just go to meetups. Even if you meet one person that you hit it off with, and just can bounce ideas off of, would be super helpful.
Just get involved, do as much as you can. I would tell anyone that's looking into getting into real estate to read Rich Dad, Poor Dad. The more that you're involved, the more the fear goes away. It's super scary getting into a passive deal if you're not in real estate. So just reading the books, going to the seminars, being around people that are making a lot of money and being able to maybe send them an email and say, "Hey, is this a good deal?" It would really help make it a little easier.
Darin: Those are great suggestions. It’s different from the way most of us are brought up and trained. You have to be accountable for your investment dollars. I know I was guilty of, "All right, put 10, 20% over in the stock market and then just hope that it's going to grow." But what I've learned is "No, that's your money. You need to understand where you're putting that money and where you're investing it."
The Best Place to Learn
Darin: Are you allocating that capital in the best possible places? Real estate could be a place where you should start to learn and possibly diversify into versus just putting all your eggs into the stock market. That's the first thing. Once you make that decision, then like you said, "Read books, listen to podcasts, go to conferences, meet people."
I love your response that if you meet one person that you click with, that becomes a resource. You can just be like, "I don't understand this. Why are you doing this? What are your returns? Is it real?" That was one of the things that when I got involved. I was like, "Is this real? Are people really making this money or is this some kind of scheme?"
Kathryn: It seems schemey, but it's real.
Darin: People are actually making this money. It's crazy. I was going to ask about your next big stretch goal, but you and Jimmy want 100 million in assets in 2022?
Kathryn: Yes, one a quarter.
Darin: What did you do in 2021?
Kathryn: In 2021, we bought our $16 million deal.
Darin: So you're going to go from 16 million to a hundred million. That's mindset. I had breakfast with you and Jimmy the other day and both of you believe that you're going to do it. I can see it. 16 million to a hundred million and you guys wholeheartedly believe that you can do it. I hope that you do. What do you like to do outside of work for fun?
Kathryn: I have two kids.
Darin: How old?
A Napa Weekend
Kathryn: My boy is six and my girl is three. So really just hanging out with family. I like to go on hikes, biking, just being outside, nature, doing family stuff, traveling. If you could see behind me, I have my world map over here. I love to travel.
Darin: Where's the next place you guys are going to go?
Kathryn: We're going to Napa next weekend.
Darin: Have a little wine. It's nice when your husband works in the wine industry. He knows where to go and he knows what they're talking about. Whenever I go for wine tasting, they're like, "This has a little bit of this in it and a little bit of that." I'm like, "All right, let me just taste it." It tastes good to me.
Kathryn: Just give me the wine.
Darin: If listeners want to reach out to you, what's the best way for them to do that?
Kathryn: You could go to our website, highfivemultifamily.com. Or if you want to just email me directly, my email is KatSchmeltz@gmail.com. If you have any questions, please reach out. I'd love to help.
Darin: You're a breath of fresh air. I know that the podcast thing isn't always your thing, but I really appreciate you taking the time and sharing your knowledge with all the listeners. Listeners, I hope that you enjoyed that one. Both Kathryn and Jimmy are great people. Definitely reach out and get to know her better. I appreciate it. Until next week, signing off.