Multifamily real estate investors almost always raise money for their deals, right? Some would call it almost impossible to try and build a huge real estate portfolio without borrowing money or partnering up to take down bigger properties. Sofia Castro, along with her husband, not only built a multifamily portfolio using their own money, but did so starting with a severe disadvantage.

Both Sofia and her husband were high school dropouts, living without much money, and practically no experience. A local entrepreneur took Sofia and her husband under his wing, teaching them both how to become leasing brokers. From there, they started building their entrepreneurial endeavor, eventually selling their business a couple of decades later for a whopping billion dollars.

With cash in hand and real estate experience under their belt, they began buying apartment complexes to flip them as condos. Once the recession hit, Sofia knew this was the wrong business to be in, so she pivoted heavily towards multifamily rental investing, specifically investing in “core deals”. Now, she has a streamlined process for finding deals, buying deals, and screening tenants. She gives some out-of-the-box, but highly useful tips on tenant screening, property management, and why “value-add” real estate isn’t all it’s chopped up to be.

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David:
This is the Bigger Pockets Podcast Show 623.

Sofia:
We know exactly how our properties are being managed. We are the ones that are making the decision on when the rents are increasing, how much the rents are going to increase, when we’re going to do a CapEx, when we’re going to replace our conditionings, whatever the case may be, we have to be involved with that. We do not allow the property management to make those decisions. We have to come together, we have a meeting about it, and then we collaborate and then it gets executed. So that’s the best way to do it, but how do you do that if you didn’t manage before?

David:
What’s going on everyone, this is David Greene, your host of the Bigger Pockets podcast here with a banger for you today. I’m going to get right into it. Today’s guest is incredibly impressive, fantastic, and still seemed pretty humble as we went through the interview. Rob and I will be interviewing Sofia Castro who is in the multi-family space and has created an empire, I don’t know any other way to say, it based off of a business that she and her husband built and sold and then reinvested into real estate. So if you’re somebody who has goals to turn active income into passive income, maybe you listen to the episode that we just did with Cody Sanchez. And you’re interested in how to create a business. Well, this is a great exit strategy where you could take that money and put it into real estate. And Sofia tells us just how she did it. Frankly, I’m still a little shell shocked. Rob, what are you feeling?

Rob:
All of it was just really nuts. You know what I mean? She was so casual about it. And again, like you said, very humble. She talked about how she sold her company for a billion dollar valuation and it’s like, oh, okay. I don’t think I’ve ever met anyone that sold a company for that much. And then she’s got a portfolio worth $750 million or something like that. So really just all around a true masterclass in what it is to be a multifamily investor.

David:
Yeah. In today’s show, we kind of break into how people typically start off building wealth in the multifamily space and then what you can transition into later so that, what she says, it’s not as much of a heavy lift. You can actually enjoy it more. And my favorite part, why you want to listen all the way to the end is we get into a very good discussion about how to handle property management. We kind of break down the fallacy that it’s either self-management or it’s leverage, that there’s actually a path to get along that process. And you don’t want to miss this out because this can save you a ton of time, energy and headache once you actually do start making momentum. Rob, what were your favorite parts of the show?

Rob:
I think one of the things that she talked about, she’s at this point had thousands, if not tens of thousands of tenants. So she gives us her very proprietary secret sauce on how to screen tenants, and how that looks on the property management side of things too. She gives us an inside look at how she went from self-managing her whole portfolio to then handing it off to another property management company and how she trained them to think like her.

David:
Yeah, that was really, really good. Frankly, there was more information than we could get to in today’s show. And this interview was fantastic. So I’m excited for you to hear it. Today’s quick tip is go to biggerpockets.com/scam. Look, we love that you trust us here. We work very hard to build the trust and build the relationship with you so that you will take the information that we are giving you and have what it takes to put into action, but there are bad people in the world that are taking advantage of that trust and scamming Bigger Pockets listeners.
So different personalities on Bigger Pockets like Rob and I have fake profiles made that are not us. The screen name is different. And then they reach out to people that follow us and they try to get them to send money. And many people are falling for this. So please check out biggerpockets.com/scam, and learn more about what is going on in that world. And know if Rob and I reach out to you or start a conversation, it’s never going to be to ask for your money via DM.

Rob:
Well, yeah, on that note, I actually want to say more than likely it is possible, but let’s just assume that it’s not going to happen, David and I will never reach out first. And I think that’s where a lot of people kind of get hit with this because they’ll follow us. And then these bots will follow them back immediately and send them a message. And so people are like, oh man, yeah, hey, how’s it going? And then they go really far into it. And then they’ll talk about real estate for a long time. And then finally they’ll be like, hey, how’s your crypto portfolio looking? And we’ve had people fall for it and it’s not fun. So please, please, please, please as much as we would love to reach out first, it’s probably a bot. So just make sure to pay attention to the spelling of our handle.

David:
That’s it. Look at the spelling of the handle and if you’re still not sure, ask the person, if you think it’s me or Rob, to send you a voice note, you know what our voices sound like. It can be very, very difficult to replicate that. So that’s something I’ve done when I’ve had high profile people reach out to me and I want to make sure it’s legit is if I know their voice, I have them send a voice message via Instagram or whatever, and I can verify it there. So please be careful because you work very hard for your money. You work very hard to keep your money and we want to see you put that money into something that makes it grow, not the hands of some scamalicious scam bot. All right. With that being said, let’s bring in Sofia. Sofia Castro, welcome to the Bigger Pockets podcast.

Sofia:
Hello there. Thank you so much. So excited for the invite to this podcast. Looking forward to giving all my knowledge and value to your audience. Really, really excited.

David:
Yeah. So are we. Let’s get started by giving our audience an idea of what your overall portfolio looks like. Can you tell us what type of assets you invest in and what your portfolio looks like today?

Sofia:
Sure. So you want the most recent one? Because I’ve been in the industry for quite a while and I’ve changed our portfolio probably about four or five times now. But today we have a complete different portfolio than what I started with. So today’s portfolio, we have about 750 million in our portfolio of core deals. And if you don’t know what core deals are, these are more A assets where they’re vintage is newer and needs no value adds. They’re probably 10 years the oldest that I have in the portfolio right now, and our newest is something that has just been built only three months ago. And we actually have one that’s being built from ground up, which is our first development ever. And that one should be done probably in the next 12 months.

David:
So how many properties do you currently own and then how many units in those?

Sofia:
So right now we have about 12 properties. Each of them carry, probably the smallest one that we have at the moment is about 163 units. All the other ones are in the 300s, 400s. The largest one is 422 units in one property. We have right now about 2,500 units, more or less in total.

David:
Okay, wonderful. And are you using a syndication model to acquire these?

Sofia:
Not at all. At the moment we have never used syndication. We’ve used our own money. We’ve been very blessed that we have created our wealth in a different business. And we were able to carry that on into real estate at the same time as having another business. So this business that we had that we’ve sold and I’m sure we’ll get into it, we were able to get the cash flow from that business and put it into real estate instead of spending it, we’ve decided to open a different brand from the other business and just invest all of our money into multifamily. And now we’ve been doing this for since 2003.

Rob:
That is incredibly impressive. So I kind of wanted to ask here, just kind of curious. So you mentioned right now that a large portion of your portfolio, I believe you call them core properties and you said that they’re not really value adds. They’re a little bit more on the premium side. Can you help me understand, I guess the benefit of doing that versus going in and grabbing a value add property? Because I imagine on something like that, do the returns differ greatly because you’re sort of buying it already fixed up and ready to go?

Sofia:
Yes, definitely. So the core value deals, these are A asset class, very new vintage. So you come in not needing to do much, so what is the difference? In today’s market is completely different than it was many years ago. And the reason why we got into core deals, is because of the market. So what happened was we used to love value adds because value add, you would come in, you knew that you would put in CapEx and that you would increase the valuation of the property immediately and also your cap rate would increase. But in this market that we went through after COVID, those value adds typically are your workforce housing and those tenant base was the ones that got hurt the most when it came down to this market that was unpredictable and this black swan that we didn’t know we were going through.
So when you wanted to increase rent after COVID, which the market was extremely healthy to increase rent across the board. It didn’t matter if you were in an A asset or if you were in a D asset, it didn’t matter. Rent were increasing across the board at the same exact speed. And it didn’t matter your income that you were bringing in. So what we were finding was that when we were increasing these rents to the value add deals, these tenants couldn’t afford it. They wanted to, they didn’t mind paying it, their income just didn’t match with the increase of rent. So what we were finding was that when we would underwrite these deal, they couldn’t meet the three times income that we underwrite at. So we decided, hold on a minute, we didn’t like the core deals before, because you would buy these core deals at a 3% cap.
Normally that’s where you would buy value adds at 6, 8% cap, so we’re like, oh wait a minute. And also price levels, they’re completely different, but in today’s market, it doesn’t matter again, if you buy at A or a D asset you’re still buying at a 3% cap. So we’re like, what are we doing? 3% cap. And you buy a deal that you put zero CapEx or you buy at a 3 cap where you know that you have a heavy lifting to improve the property. Core value, your tenants, they’re making a good amount of money on a constant basis. They’re not having problems with their income, B, C, D asset tenants, they’re not getting income increases and they can’t afford to accept the increase in rents.
So we started evaluating our portfolio and we’re like, wait a minute. We need to change our core values here. We’re going to switch out from value adds to core deals because of those things. And one of the main reasons is that when we underwrite our deals and we always underwrite our tenants if we’re lending them alone for 12 months. So not a lot of people like to underwrite their deals once they’re renewing those leases.
So you get a lot of evictions or late pays. And it’s a lot of work when you have to do all those things. So because of that reason, we started looking into core deals. Now, not a lot of people when they’re in multi-family, they can’t afford to move up to core deals just because it’s of course more expensive, but the rate of return on your money are the same in this market today is the same. So we did the stretch, we sold out some of the apartments that we had that didn’t fit that core values. And we disposed of those and purchased new deals that fit the new core value that we have in our portfolio.

Rob:
So if I’m hearing this correctly, obviously it’s very nuanced, but A with the core deals, very stable, secure, and just an easier demographic where you can increase rents and they do it because they have their better professions or whatever it may be, a better livelihood, whereas on the value add side of things, because of the amount of rent increases that were happening during the last year and a couple years ago, when you go an add value, they can’t necessarily keep up with the “inflation” of the new market rent. Is that about right?

Sofia:
Correct. Exactly. Yes, exactly the scenario.

Rob:
Okay, great. And so one of the things you talked about that I just wanted to get some clarity on, because I know there are a lot of people listening here. We do talk about cap rates quite a bit. So do you think you could just give us a quick rundown of the concept behind a cap rate and why a 3% cap would be significant in one of the deals that you were talking about?

Sofia:
Yeah. So cap rate, I’m sure most of your audience knows it’s the return on your cash money. You’re not putting debt on the deal. This is if you’re going in purchasing the property with no debt, that’s what your cap rate return is. A 3% return is if you invest a thousand dollars, which you have to buy the property in full with no debt, you’re making 3% on that thousand dollars. Of course you’re not buying no deal at a thousand dollars, but I just want to make it easy for people out there to do their maths.
So when you’re buying a deal, your return of 3%, and you’re saying, if I have to put in this much work and it’s going to be a heavy lift and I’m going to make a 3% on my money, or do I want to buy something a little bit more expensive, still making 3%, but I’m not putting in that heavy lift of having to improve your tenant base, the whole nine yards, which one are you going to pick?
So that based on cap rates is your return on your investment. So you want to be as smart as possible. You want to try to work smarter than harder when you invest in a property. So if you’re going to get your same return, where would you go? Heavy lift or easier lift than… So that’s how we evaluate when we look at our cap rate is the heavy lift that you’re going to put into it to get the same return.

David:
I think a lot of people asked the question, why would you ever buy something at a 3 cap or a 3% return if there was no financing versus a six cap where you could get twice as much, especially new investors. This is the question they’re all looking at is how do I get the highest return on my money possible? And I’ve always understood cap rate to be the desirability of the cash flow. So the more desirable the cash flow is the lower the cap rate’s going to be because the more competition there will be for that asset. And like you’re mentioning, a really nice core, maybe we call it luxury property where you’re getting the best tenants and the rents go up the most and you have the least headaches and you can run it with the least what you called heavy lift.
The lower the cap rate will be because that is a more desirable cash flow than if you get a higher cap, but it’s a lot more work to do. And I’d like to differentiate here because what you’re doing is the goal of every investor. It’s you started off grinding and adding value and what you’re talking about with apartment complex’s, improving the units, raising the rent, and then probably refinancing at some point is sort of the BRRRR method for multi-family.

Sofia:
Correct.

David:
We would use that in the single family space with a rehab, but it’s work that you’re doing. When you get to the point where you can put your money into properties that don’t take as much work, but that maybe have a lower return, that’s actually where most investors are trying to get to. And then I’m curious to get your opinion on your experience when you do get something at a lower cap, that’s a nicer property, do you find that over a five or 10 year period, it catches up to and passes what would’ve looked like a better return on a value add property in the beginning?

Sofia:
Yes, you do find that, that later on it does increase more, but for those beginners out there that want to get the… Cash flow for us is our number one. That’s all we look at the same way as when we first started. When we got into investing in multifamily, our number one was what is going to be the cash flow for this property? And that should be everyone’s number one. So when we used to buy at the very beginning, we were buying very small duplexes because we had the mentality that we wanted to buy the properties cash. That was just a mindset that you’re going to get more return on your money than leveraging it with the bank. As we went on, we understood that leveraging the proper way, because you could leverage wrong and a disaster could happen.
But when you leverage correctly, your cash flow and later on the value to the property is going to be way better if you do leverage yourself than buying all cash and trying to go after the cap rate. So cash on cash return is really what we look at also because we don’t buy all of our properties free and clear. We definitely leverage across the board just because we could be buying more property and having more cash flow when you leverage. But yes, so when you do buy say value adds and you do improve these property the proper way, and don’t over improve them, you do get a better return on the long run, because you’re able to improve that property, you’re buying it at a lower valuation where they’re missing out what that CapEx that you’re going to put into it.
And then you could quadruple the value if you do it correctly. So yes, value adds do give you better returns on the long run, but the core deals, you’re able to have a more steady return and it is favorable on the value increasing also. So it really depends on what market you’re in and what you’re investing for. So many different core values for investing that could… Value adds are great. Core deals are great. What are you in it for? Long term, short term? Are you wanting to do those value adds so that you can increase the property value and get a nice chunk of return in the next two to three years? Value adds your deal. When you buy core deals, your values are not going to increase as rapid as your value adds because of course you just bought a property that it was below value and you’re increasing it. So again, it’s a hard question to answer because there’s just different core values that you’re investing for, but they’re all great.

Rob:
Yeah. That all makes a hundred percent sense. Very relevant for me because we just went into escrow on a hotel in New York and it needs a lot of work and they were trying to sell it to us at a 3 cap. And we’re like, well, no, I don’t think so. This is going to need a significant remodel. So we’ve been going back and forth and we finally landed on a price, but if we pull it off, then it’ll increase substantially over the next couple of years. So very cool. Thank you for the masterclass there on cap rates. I think a lot of people are going to appreciate that at home. I wanted to kind of jump back a little bit here and discuss you mentioned that you sold one of your businesses and that is sort of what propelled you into this massive portfolio. Very impressive portfolio that you have. Can you tell us a little bit about that business? Was it in real estate? Was it in the same world?

Sofia:
No, it was not at all. So my husband and myself, we met when I was 18 and he was 22 years old. We both come from very humble beginnings. My husband’s a ninth grade dropout. I was a 10th grade dropout, no college degree. And when we met, for some reason, he was a very strong entrepreneur mindset, very positive thinker, never allowed negativity to get in his life. And he was just determined that he was not going to live that humble life that his family comes from. And so when we met, I just completely fell into his mindset. And I said, hey, let’s do this together. We could create a business. I don’t know how. We don’t have the money, we don’t have the knowledge, but if you think that we could do it, let’s go for it. So we started going into businesses and really didn’t know anything about it.
And we came across an ad on the USA today on leasing broker manual. It was a manual, not a franchise, not nothing. It was just a manual how to become a leasing equipment broker. And we said, you know what? This is interesting. My husband loved finance. We were looking for a business that was going to give us enough freedom to have our own business, to be able to create financial freedom with being to get into real estate, but getting into real estate, you needed funds. So we tried this business and the owner of the business fell in love with my husband and really mentored him into this business. And when we got in it, we just knew that we needed to take it to the next level. And we just kept on perseverance to this business. And we created a business that we were able to sell 25 years later. We started in ’95, I believe and in 2019 we sold it for a $1 billion evaluation. Yeah.

Rob:
That’s a first for me. I don’t think I’ve ever met anyone in real life that has sold a business for a billion dollars. Congratulations.

Sofia:
Yeah. I would have to go into really a lot of details because it went from leasing to medical finance. We started lending doctors working capital. So we pivoted with that business throughout the years and just kept on stepping it up and stepping it up and the business today is still running, still doing amazing today. It’s evaluated at $6 billion. So they’re doing amazing and it’s going to continue to do amazing. So yes, but we decided that we really wanted to get full time into real estate investing and it was just our passion. We love it. We know it really well. And we just felt that it was our time to have our financial freedom, the way that we really wanted it.

David:
So can you tell us maybe a summary of what that business was, how it operated and then why you wanted to get out of that and into real estate?

Sofia:
Again, it’s because it was our passion. That business required a lot of our physical time in there. My husband’s time was really, really involved. Seven days a week, 24 hours a day, really to get that business running the way it was. So we just had already a portfolio at that time, we already had a portfolio of property about a hundred million dollars. And we just knew that we could grow multifamily and have financial freedom and be able to travel, be able to do what we wanted to do from wherever we’re at. We didn’t physically need to be in the properties or at an office. We could be traveling the world and still have that mailbox money that we call monthly and not have to be there, not struggling of running a business, employees. So it was just something that we really love. We just love real estate. We think it’s the best thing ever.

Rob:
Yeah. All right, I guess I thought you sold and then you kind of snowballed into sort of what your portfolio is, but you mentioned you had a hundred million dollar portfolio already. So can you tell us like a little bit about that trajectory? What was the first property that kicked off the portfolio and then maybe jus how did that progression look?

Sofia:
Yeah. So in 2004, 2005, something like that, we got approached by some friends that we knew that said, hey, we have an opportunity. We need an equity partner to go into condo conversions. And like I said, we were dying to get into real estate. We had done a couple of fix and flips, little single family homes, but nothing major. And in that time we had enough savings that we said, yeah, we could go in and being that we had our business, that we had all the banks on our side and we were able to get debt very easily. We are like, yeah, we’ll come in. We’re dying to get into real estate. We really know zero about condo conversion, but we’re willing to go in and partnership with you guys. Well, we did that and we bought over $81 million, I believe in the portfolio of condo conversions.
We had bought apartment buildings, taken out all the tenants, and then we were [inaudible 00:26:24] each door to sell them as condos. And back then, I’m not sure if you guys were in the market, but that was like the hottest thing in real estate to do. Well, what happened was during the time that we started converting all these units into condos, the financial crisis came around and kind of almost made us go into bankruptcy because nobody wanted to buy, we didn’t have any cash flow on these buildings, because we had evacuated everyone out because we were doing condo conversions and we were like, what do we do now? We had our business that was still doing really well, thank God, but we had put our business as a guarantor to all this debt. We had our personal guarantee and we were like, what do we do now? We can’t lose everything that we have just saved for and worked so hard to lose it in one day because of this whole crisis.
So in that moment, we, for some reason clicked in and said, okay, we’re going to get tenants back into these properties. And we need to rent and get some cash flow to at least help us out. My husband went back into our business. He never left it, but went into the business and really focused on growing that business to continue giving us more cash flow so we could afford the debt that we got into in with all the condo conversion. So in that time I went into the management side, alongside our other partners and we started learning what multi-family rental income properties were all about. And we’re like, oh my God, what are we doing? This is where we need to focus and is buying rental properties, not buying condo conversions. So in that time we waited from 2008, all the way to 2011, we had to work our way out of the problems that we were in with those condo conversions.
We sold them all as apartment buildings. We actually kept two that were cash flowing and we sold all the other ones. We would come to the table with money. Instead of getting money, we were coming to the table with money. Got rid of all the bad ones and we stayed with the ones that were making us some cash flow. Very little because we had bought with the wrong money, we bought it too high back then. So it wasn’t really cash flowing, but it was giving us enough that we understood what cash flow was all about. So in 2011, myself and my husband decided that we were going to go into real estate heavily on rental properties. And my daughter had dropped out of college because she wanted to be an entrepreneur. So I said, come along. Me and her went and we started buying up all these foreclosures, small little townhouses, we bought 16 homes and we said, what are we doing?
Every time a tenant will leave, we kind of stayed with no rent. So we said, we have these other multi-families, why don’t we just go straight to multi-family? And we started in 2013 only buying five doors up. Then we got a portfolio from 2011 to 2017 we were able to acquire probably about, I don’t know, that’s when we had about 300 and something doors. We sold that portfolio because again, it was really value add, very heavy value ads, and we had already converted all of them. They didn’t need no work. We had already done all the CapEx and we sold that portfolio and was able to make $18 million profit on that portfolio.
So from there we went on to only buying hundred plus apartment buildings and we used to manage all of our properties. We had our management company in house and in 2019 when we sold the business, we decided that we were going to give up management also, turn it over to a third party management and now do asset management to the management company and really scale the business to the next level, which is where we’re at today. And we’re nowhere near done buying or acquiring apartment buildings. We’ll keep on doing that for a long time. So that’s how that portfolio started and where we’re at today with the business.

Rob:
That’s really great. So if I kind of extrapolate here, it sounds like you’ve had thousands of tenants, maybe even tens of thousands at this point over the course of your real estate portfolio, so I got to imagine that a really big component of your business is actually the tenant screening and getting the right tenants in there in that piece of it, because obviously the tenants, they pay you rent and the rent pays the bills. So is there a process that you’ve sort of developed over the years on how you approach filling vacancies with the correct tenants?

Sofia:
Yes. I’m going to give you our number one… We have a few steps, but our number one is like what I had told you before, we were in the finance business. So we understand what it is to have a tenant that has to pay you on a monthly basis. So the way that we approach our tenants is that when we look at that tenant, we underwrite them like if we were giving them a loan for 12 months, because in all actuality, you’re allowing them to live in your apartment building or your single family rental, whichever one it is for 12 months and if they don’t pay you still have to pay your debt. You still have expenses on the property no matter what. So we make sure for us not to have a lot of evictions or late pays, we underwrite our tenant as that 12 month loan.
And we make sure that they have three times the income. And that’s hard. It’s hard in a lot of markets because due to the income that they’re receiving, or if you have a vacancy you’re desperate to fill it. And you’re like, oh my God, I’m going to make an exception. I’m just going to let them in. They only made two times the income for the rent, but it’s okay. I need to fill my unit. Well guess what, two months later, you’re going to have a vacancy. You’re going to have an eviction and they’re going to live in your unit for three months or as long as it takes to get an eviction or to get them to pay up. So I try to explain this to a lot of newbies. When you have a vacancy, don’t go desperate because when you go desperate, you’re going to still have it vacant but at the beginning, when you have it vacant, you don’t have nobody destroying your unit or living there for free.
So make sure you underwrite them. Number one is their three time income that could afford the rent. Number one, everything else, we do the criminal background check, we make sure that they’ve been in their employment for two years plus or in the same industry for long period of time. So we have different criteria, but I tell you the number one that you need to worry about to everyone listening, underwrite your tenant as if you were giving them a 12 month loan and you will be in good shape.

Rob:
Are you turning away just an incredible amount of applicants compared to the standard multi-family owner?

Sofia:
Yes, I would say so. I would say that we probably are very strict with that because we’ve had our rodeos already where we have been lenient on accepting that and at the long run you fail anyways. So what are you doing? So that’s been our number one. Do we turn down a lot? Yes. And we rather have that unit vacant for an extra week or so and find that right tenant than having it filled a week earlier and having the wrong tenant in your unit.

David:
This highlights one of the principles that I live by in my investing career that you don’t want real estate to be your financial savior. You don’t want to rely on income from real estate to live your life and pay your day to day bills, especially in the beginning because when you’re doing that and you have a vacancy, the emotions that you experience are horrible, it’s a panic, it’s I have to get it filled or I can’t make my rent payment. When you’re living that close to the bottom, you don’t make good decisions when you’re that afraid.
The right way to look at it is a very long term thing. Yes, I have vacancy now, but that’s a better problem than a wrong tenant, than an eviction, than a trash unit. And you hold out, you get the right person and you learn what you’re looking for and you do better on the next round. So I just want to sort of highlight that element of what you’re talking about here. And that’s one of the reasons that I tell people you should be investing from a position of financial strength. You should have reserves, you should have money set aside. That’s when real estate works the best, because you avoid those emotions of panic. Rob, would you say in your career that have you ever made a bad decision because you thought I have to get something filled or have you avoided that?

Rob:
Oh yeah. Very early on in my Airbnb career. Obviously vacancy is a big thing. You want to book your Airbnb so you can make money. It’s the point of all real estate really. But a lot of the times what we were doing is we were just lowering the rates because we’re like, yeah, you know what, I’d rather make 50 bucks than nothing at all or I’d rather make 75 bucks than nothing at all. And like clockwork, every time we did that, the type of guests that brought into the units just never really panned out in my favor at all. And it really is one of those things that I’ve just learned the hard way so many times to the point where now it’s kind of just like a you know what, I don’t want to make the 200 bucks.
It really depends on the properties. Some properties that bare minimum I’ll take, might be 150 bucks a night. On properties like our Scottsdale property, where the average is $2,000 a night, the minimum I’m probably going to take on that is 1200 bucks because at the end of the day, you kind of have to evaluate what’s worth it and when that trouble pricing comes into play. So for us, this is obviously something that you figure out with every new property, especially in Airbnb, because you’re always adjusting the pricing strategy, but you learn very quickly to just go for the premium and accept that you’ll have vacancy every so often.

Sofia:
Yep. I think that’s such an extreme important piece when you’re going to start investing in multi-family, in rental property, in real estate in general and David you’re so right with what you said. If everyone just follows that, you would be so successful, at the end of your investment, you’re going to be so happy and you’re not going to have those negative outcomes that people say, oh my God, I hate being a landlord. It was so much work. And I failed and I didn’t make the return that I thought because they do all those mistakes. But if you do exactly what David said and follow those rules and stick to them, you have to stick to them. You would love being a real estate investor for a lifetime.

David:
So when you’re screening for tenants, what are some things that in your experience Sofia you’ve learned are really good to look for? Any tips that you can offer for how to do a good job with this element of the business?

Sofia:
Time in their employment and the industry that they’re in was something that we also noticed that was a very steady tenant was if that tenant has been in the same job or industry for a long period of time, we found that those were very steady tenants. Now you see a tenant that comes in and has been in his job for one year and it’s an electrician, but the prior job, he was a plumber and stayed in it for six months and the other one he was there for two months and he was a janitor.
So those type of things, you see that they’re inconsistent, they’re going to be an inconsistent tenant. So I really, really nail down on income, on their steadiness of their employment or they could be entrepreneurs and have their own business. But those two things, they just go hand in hand and you’re going to see the consistency of a good tenant when it comes down to checking those two items. Number one, though, like I said, stick with the three time income for rent, it’s going to be the number one best thing that you ever do. If that’s anything I ever have to tell somebody, is that’s my number one. But the second one is the consistency of their employment.

Rob:
Sure. Makes a lot of sense. I wanted to ask a little bit on the property management side too. You self-manage for a large portion of it. Now you have property managers, do you own that property management company? Because it seems at your level with the amount of units you have bringing that in house might start making sense. Have you gone down that route before?

Sofia:
So I started with my own property management. That’s the way we started, but we had smaller units. I had my own ma maintenance employees, property manager, assistant property manager. I had the accountant project managers all in house, my own property management. And what I noticed as I started growing was that we were spending so much time on management with the employees that it was taking away from being investors, looking at the asset management, making sure what type of assets were really making sense in investing in. Even though I tell everyone, you need to manage your own properties for a period of time, because the heartbeat of being a multi-family or a real estate investor in rental properties, you have to know how to manage because management is the heartbeat of it. If you don’t manage your properties properly, you’re not going to succeed.
So I definitely believe that you have to manage so that when you do bring in that third party management, you know how to manage them so that they can manage the properties the way you want them manage, not the way that the management property wants to manage them. But if you don’t manage your own property, how can you tell them how you want it?
And having our own property management at this point in time, yeah, it could make sense, but I’m not in the property management business and I don’t want to be in it. So at that time it just doesn’t make sense for me or myself or my husband to own a property management, because then we’re going to have to gear ourselves and concentrate on running the management company again. And that’s not what we’re in this for. We’re in this to invest in multi-family rental properties, to have financial freedom and create generational wealth with these properties, not property management. But a lot of people do love property management. And if you have that insight or if you have that passion that you want to own your property management, because you do enjoy having a property management alongside your investment, perfect, but for us it just made no sense because that’s not the career we wanted.

David:
Something I noticed is the question people ask is the wrong one and you made a point that highlights the right question. What I typically hear people say is do you self-manage or do you hire a property manager? Which sounds innocent enough when you’re first asking it. Here’s the problem. If you self-manage, you got yourself a job… Well, more of a job. There’s always something that you have to do with real estate. It’s never completely passive, but yes, it’s a job. And in my subjective opinion, it’s the worst job of the whole thing. Property management is just like the first thing that you want to get systemized and taken care of. Yeah. I always say it’s like the lymph node of real estate. They just have to absorb all of the worst parts of it and make it work. So God bless the good property managers out there.

Sofia:
Yeah. And I think that a lot of people stop being landlords or purchase properties because they do a bad job in property management and they get turned off and makes you hate it. Yeah.

David:
Yeah. You have to protect your emotions when it comes to this because if you get a bad experience or you get a bad taste in your mouth, you won’t do it and you’ll lose a lot of money just because you let yourself start to hate the job. But the other option is I’m going to hire a property manager and they’re the experts I’m going to let them do their job is usually a mistake too.

Rob:
I think so.

David:
Because they’re looking to do this with as minimal time, effort and energy as they possibly can because they run on thin margins and they’re not going to do it well. So what happens is you can lose money from the poor job they’re doing. Your vacancies are higher. I just found out I had to replaced a few people. I won’t go too deep into my own tangent, but I have a property in California that nobody was checking the property manager on. The rent was 1800, market rate was $2,600. That’s how far it went because nobody was managing the manager.
And I know this is true. It doesn’t mean that I’m perfect about doing it. I have to hire people to manage my investments and the last couple I’ve had to fire. So that’s just an example of that’s $700 a month that I’m losing for years because nobody was looking at property management and that’s an example. The right question, the right way to approach it is what you said. I will learn it. And then I will teach someone else how to do it the way that I want it done. And you end up having leveraged it out.
But when you skip that middle step and you just jump to a property manager like, hey you do this, if they’re not really good, which most of them are not really good, you’re not going to get a good result, you’re going to lose money. And the way you mention it is what I wish every listener would do is start off doing it, learn what works, give very clear expectations and standards to the company, oversee to make sure that they are doing that and then you end up getting the best of both worlds. Is that in line with how you’ve experienced it?

Sofia:
A hundred percent, yes. So actually, when we did give up property management, we interviewed probably about six property management companies, third party management. And we sat with them actually and told them, listen, we have been managing our own property, we’re very experienced, we just don’t want to be property managers, but we want to be very involved with you at a high level. We only want to deal with your regionals and your regionals need to communicate with us on a weekly basis. We want to be very involved. All of the CapEx projects we will be involved with, the ones running those projects. And a lot of companies told us, oh, I’m so sorry. We can’t manage that way. And we were like, that’s fine. We’ll find somebody that will. And luckily enough, we did find that company and we have been extremely happy with them.
Institutions don’t like to carry only one property management for all of their properties. They like to spread it around. In our case, we have stuck with two property management companies only because they have been working with us extremely well. They do exactly what we communicate with them and we collaborate. We give them our opinion. They give us there’s. We come to the middle if we need to, and we collaborate with one another and we have meetings on a weekly basis on one subject. And on the other week we have it on other subjects. So we asset manage the management company and it’s worked out beautiful because we don’t have to deal with all the headaches of employees, of all the property management, things that you have to implement and everything else.
But we know exactly how our properties are being managed. We are the ones that are making the decision on when the rents are increasing, how much the rents are going to increase, when we’re going to do a CapEx, when we’re going to replace our conditionings, whatever the case may be, we have to be involved with that. We do not allow the property management to make those decisions. We have to come together, we have a meeting about it and then we collaborate and then it gets executed. So that’s the best way to do it. But how do you do that if you didn’t manage before?

David:
That’s exactly right. And additionally, doing it that way will keep you involved. It will reduce your anxiety, but it won’t make you hate real estate. So what I typically find is I don’t mind making the decision. If [inaudible 00:47:31] was like, hey, are we going to do A or B? Are we going to replace an air conditioner or not? I’ll ask a couple questions. I’ll figure out what I want and I’ll make a decision. That is not draining to me. And I think most investors, they actually enjoy that. What is draining is calling three different HVAC companies to get quotes on the air conditioner and scheduling with the tenant to make sure that they can actually… That’s the part that makes you hate real estate. So if you can make the decision and then leverage off the execution of it, you get sort of the best of both worlds.

Sofia:
Yes. And dealing with the employees. Oh my God. At that property level, it’s difficult too. A lot of people hate that, but yes, exactly what you said, it’s the best of both worlds. I love being involved when it comes down to, like what you said, making decisions, knowing what’s going on with the property, seeing what’s going to move that needle in the property and it’s fun. It’s interesting. You’re seeing that you’re able to move the needles by making different little moves but you’re not there. You don’t need to be at the actual property physically or worry about being there every single day. So it’s fun. It’s actually an enjoyment to manage your management company.

David:
Yeah. So shameless plug here, Rob and I are looking to hire someone that can execute the stuff that we need for the Airbnbs that we are buying. Because I see Rob in his element, he’s very good with seeing, has the vision, he sees the details, he knows how things need to look, but then I watch as he actually has to go execute it and I just see like his energy levels just ugh as his anxiety levels go like this.

Rob:
[crosstalk 00:49:02] But you know what? I am very much an extreme version of I like to learn it and master it before I give it away because I think it’s master and then delegate because then I can actually teach and give some insight on how to do it the way that I want to, you know what I mean?

Sofia:
Yeah. And exactly what we did. That’s exactly what I advise all newbies. And even when you’re scaling and you’re making that decision of like what we did, you need to know what you’re going to be handing off. You have to be involved because that’s your investment. Nobody else is going to care for that investment as much as you’re going to care for it. So in order to really get the maximum amount of your investment to get your returns, you have to be involved. You’re the only one that has that investment in there and you’re the only one that wants it to grow. Everybody else is just working. They’re just employees. But yes, being involved with a management company though, is the best of both worlds. Being able to just say, hey, this is what I want, now you go out there and you delegate that work.

David:
So let’s kind of wrap up with this last line of questions. Obviously, if what you’re saying is it’s all about finding the right tenant and that’s about finding someone who has stable employment that makes good wages. If you continue this reverse engineering process, the next question is, well, how do you buy in an area where those companies are and they’re hiring those people where they want to live? So what advice do you have when it comes to choosing the location, you want, to get the tenant you want, to get the result you want?

Sofia:
So that part there, my husband is the one that really takes on that part. He does all the acquisitions of our company. But what we do is that we try to look at a market that is trending very high in rental, that it’s favorable. People are wanting to move there because of employment, because of schools, the hospitals, location, and we go five mile radius and we kind of study the locations. Right now, we’re very heavily invested in Florida. We live in Florida, I was born and raised. My husband was raised in Florida since he was seven years old. So we know Florida extremely well, but the sun belt area is where we go. We also follow landlord laws. What’s going on with the landlord laws? Is it a favorable to the landlord?
Also taxes are a big thing for us. So we kind of stay in the sun belt area, because of all those little details that I just told you just really match our investment core values. So, hospital schools, employment, how the market is performing in rental. We like to go obviously to where market rents are at its peak because they’re okay paying higher rents than in the other suburbs or areas that rents are not as high. So for us it’s cash flow. So those are the things that we look for in particular when we’re going to invest.

David:
Rob, what do you think?

Rob:
Yeah, just one final thread I want to pull out here with kind of the property management side of things. And then now you’re kind of talked about how you’re scouting everything. At one point, do you feel like you’re ever done developing systems, especially whenever you’re working with this new property management company that you’ve been working with for a while, I guess they’re not new, but did that force a level of organization that you didn’t have or was it pretty seamless to move your processes and your systems from your original property management company to this or do you feel like you’ve figured it out and you’ve just got a very well oiled machine at this point?

Sofia:
Well, at this point we have it pretty figured out. So both do we implement new strategies and come up with new things? All the time. If you don’t continue to evolve with the environment, with the market, you’re going to stay behind and it’s going to be like the Kodak. Kodak stayed behind and all the new technology took over. So we’re always evolving and learning new technologies or new techniques to implement into our strategies of investments. But at this moment, we’ve been in it for a long time. It’s already like an oil machine for us, but like I just said, we always learn, we’re always growing, we never stop getting information, doing research and learning what’s happening in the markets. Right now, if we didn’t do all these new changes, we would stay behind and we probably wouldn’t be where we’re at today and continue to grow because right now we’re implementing new strategies.
We’re learning about development. We’ve never done a development deal and now we’re one ground up. And now we have another lot that we just purchased. And we’re looking now for new land to start doing ground up deals, learning new techniques about it. We are starting to do more research on how it works and moving on with the time, because before, you would buy a property and the replacement cost was way cheaper to buy an existing building than to do a ground up. In today’s environment, regardless that the materials cost, the labor cost, everything is extremely higher, it’s still cheaper to develop from ground up than it is to purchase an existing building. So those are things that we didn’t really know much about and we’re learning. And we’re seeing that we really do like this whole new development thing. So always learning, never stop learning because if you stop, you’re going to stay stunt.

David:
That’s awesome. All right. Well thank you for sharing that. And I’m going to highlight another thing you said, because you’re giving us so many nuggets here today. Everyone sort of understands when you say, yeah, you need to grow with the times like yeah, yeah, yeah, blockbuster, Netflix. I hear it all the time, Kodak. but with real estate specifically, there’s this enchantment that comes along with you get a couple properties, you’re done. You just get easy money, you go to the beach, you drink mai tai’s, you watch Dancing with the Stars, you pat yourself on the back for three years of hard work and you’re done. And it is not that way. Things change. Tenants are looking for different stuff. Your properties can fall apart. What you’re saying is exactly right. You have to be willing to continue evolving.
Now it’s better, and it’s less work than work in a W2 job where you’re having to evolve much more, but real estate is not isolated from this reality of life that things change and you have to keep up. It’s so refreshing to see a person that has sold a property for a billion dollars and now has 12 properties that have over a hundred units, each one. And didn’t do it with syndication. Frankly. I don’t know if I’ve even interviewed somebody who didn’t use the syndication road to get to where you’re at. That is at the pinnacle of where we all want to be and is saying, at this point we have to keep evolving. It doesn’t ever end. You’re always going to be doing this. When you’re 90 years old, the world’s going to be changing and you have to be doing your best to try to keep up with it just so you can stay relevant.
So thank you for having the humility to acknowledge that and kind of putting an arrow right through the lie that so many gurus put out there where they say, hey, take my course, spend a hundred thousand dollars. I’ll teach you how to work hard for a year and then you’ll never have to work again. And so many people I see get crushed by that. So appreciate that. All right, we’re going to move into the last segment of our show. It is the world famous, famous four. Sofia in this segment of the show, Rob and I will take turns asking you questions to get to know you a little bit better and hopefully pull even more nuggets out of that beautiful mind of yours. Question number one. What is your favorite real estate book?

Sofia:
You know that one’s a tough one because I have a few, but my number one that I always love to give, especially people that are beginning is The ABCs of Real Estate Investing from Ken McElroy-

David:
Good ole Kenny Mac.

Sofia:
… and Robert Kiyosaki. Yeah, I love that book because it gives you the details exactly what you need to know to really start investing and understanding the terms, which is one of the most important things when you go out there to start investing and it just gives you so much knowledge that you’re able to say, okay, I understand a little bit, let me start doing it. So I would have to say that’s my number one to give to new beginners.

Rob:
Awesome. What about your favorite business book?

Sofia:
So my favorite business book is Think and Grow Rich. That book for me at the-

Rob:
Napoleon Hill.

Sofia:
… very beginning when I was going into… Yeah, Napoleon Hill. I love it. I’ve read it maybe three, four times now. I still sometimes get in my car and put the audio, because it just gives you that mindset of being able to do things without… Learn from your failures. And I really think that book is great for people that are getting into business or in business.

Rob:
Okay, awesome. So aside from building one of the biggest real estate empires we’ve ever seen on this show, what are some of your favorite hobbies Sofia?

Sofia:
So my favorite hobbies, I love boating. We live in south Florida, but going out on a boat on the weekend or even on my days if I have a couple of days off going out there and just enjoying the water and the scenery and being on a boat is one of my favorite hobbies of all times. The ocean.

David:
That’s awesome. All right. In your opinion, what sets apart successful investors from those who give up and fail or never get started?

Sofia:
Oh, so those are people that don’t believe in themselves and can’t learn from failure. They don’t have the tenacity to be able to fail, learn from it, pick up and keep on going, are the ones that succeed. The ones that don’t are the ones that fail, don’t learn from their mistakes, and they kind of like throw that sand over their head and they dig that whole deeper. And they just think that the world is over because they made one mistake or one failure came across their front of their journey. So, the tenacity, being positive, we have a saying that is PMA, positive mental attitude and learn from your mistakes. Failures are one of your biggest attributes in life is learning what did I do wrong so that now I could do it even better?

Rob:
It’s amazing. Yep. I think the greatest factor of success is failure, but we’re all too scared to do it. So we all got to fail sometimes. Very, very strong note to end here. Lastly, Sofia, can you tell us where people can find out more about you on the internet or where can they learn more about who Sofia is?

Sofia:
Yes. I would love that. So on Instagram, my handle is @officiasofiacastro and Sofia is spelled S-O-F-I-A. In LinkedIn, they could find me under Sofia Castro, and Facebook it’s also officialsofiacasto. I also have my website that they could go to that is officialsofiacastro.com and they will be able to reach out to me on any of the handles social media. Send me a message and I’ll get back to you, but I would love for you guys to follow. And I always love to empower women to get into multifamily. And I know you men are here. Nothing against men, but being a woman, a Latin woman, the women sit back and either become a housewife, which there’s nothing wrong with that, that’s a bigger job than anything else, but it’s not for me, but I love to encourage women to get into real estate investing, even if it’s in a small scale just because it’s such a great way to create generational wealth to leave to your family for many years to come that continues to just give cash flow.
So women out there, if you’re out there follow me. Men, I also love to speak to men that want to get into real estate and want their wives to get involved and they don’t want to, but any anybody that’s into multi-family investing, please follow me. I love to be able to give you any kind of knowledge that I have gone through and that I have in my little pocket here that I could give you guys.

David:
Well, thank you for that, Rob. If people want to find out more about you, where can they go?

Rob:
They can find me on the YouTubes over at Robuilt. That’s R-O-B-U-I-L-T. You can also find me on Instagram, over @robuilt as well, spelled the same way. And if you want to just change that spelling a little bit over on TikTok, my handle is @robuilto. Add a little O at the end because someone snagged my handle.

Sofia:
Ooh.

Rob:
Though everyone at Bigger Pockets knows that now because we’ve said it like a hundred times, but that’s all right.

David:
Thank you for that, Rob. You could find me online. I’m @davidgreene24. I also have a YouTube, it’s David Greene Real Estate. Pretty easy to know. I’ve hired a social media company to manage my Instagram, my YouTube, and some other things. So check those out, leave me a comment. Tell me what you think, if this is money well spent or if I need to replace them with somebody else. And then if you’d like to make some passive income, you can go to investwithdavidgreene.com, fill out the registration form there, and you can learn how you can be a partner with Rob and I in our real estate. Lastly, I will just say this public service announcement. I know that I have fake accounts on Instagram. So does Rob, so does Sofia, lots of people have these look very closely at the screen name of anybody that requests to follow you or messages you, because it’s usually not the real person.
And then we will never ask you for your money via Instagram in crypto, in FOURX, in NFTs, in whatever the new flavor of the month is. There’s a lot of scammers going out there. So please be careful, protect yourself and look very closely. I applied for that blue check mark for the 20th time and was denied again. And so this is just going to keep happening till that goes down. Sofia, this has been a fantastic interview. Really appreciate you sharing what you have. Do you have any final words you want to leave us with before we let you go?

Sofia:
Well, I just want to tell your followers, thank you so much. I love your website, your Bigger Pocket. It just has so much information that I’m a huge fan. Even though that I’ve been in the business for so long, I still go in there to read all your information. It’s awesome. Thank you so much for providing this. And I want to just tell everybody, really look into becoming a passive investor. If you don’t want to be a full-time investor, because it’s an asset that’s going to be around for lifetime and it’s going to create generational wealth for your families for years to come. Nothing can replace real estate, no technology, no nothing. Roof over your head is always going to be needed. So don’t get scared. Try it. It’s amazing. It’s changed my life, my whole family’s life. So I really want all of you to go out there and do the same because if we did it, you can too

David:
Awesome. Robbie, that words from you?

Rob:
You always ask me this after someone gives a very profound-

David:
I do that on purpose.

Rob:
No, thank you. I know I’m always like, dang it, what do you want from me? That was so cool. Sofia, thank you so much. This was a really great episode. And I had, towards the end there, 20 more questions, I was just like, oh, I wish I could ask this, but we’ll have you on again someday. Once you decide to discard this portfolio and rebuy another one.

Sofia:
Well, love, anytime you invite me, I will say yes.

David:
All right. We’ll let you get out of here. Sofia. Really appreciate your time. This is David Greene for Rob the detail diva [inaudible 01:05:29] signing off. I made Rob laugh today. I can check that box off.

Rob:
Scamalicious baby.

Watch the Episode Here

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In This Episode We Cover:

  • “Core deals” explained and why they often beat value-add properties
  • What are cap rates and why understanding them is crucial when buying multifamily
  • Condo conversions and the risk of flipping during downtimes in the economy
  • Tenant screening tips that will get you the best tenants who pay on time, every month
  • The right way to do property management and why you shouldn’t immediately outsource
  • How to buy in the right real estate markets, plus the metrics Sofia looks for when investing
  • And So Much More!

Links from the Show

Books Mentioned in the Show

Connect with Sofia

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