Wednesday, March 5, 2014

Informational Interview with Randy McAtee of Lazarus Realty

Randy “Lazarus” McAtee, owner of Lazarus Realty in Fresno, CA, has a wide range of experience in many aspects of the real estate, building, and investing industries. After dropping out of college, Randy became a construction worker and eventually obtained his General Contractors License in 1988. As a General Contractor he specialized in Insulation and Acoustics, as well as Weatherization and Energy Conservation. In 2002 Randy became a realtor. He eventually opened his own brokerage, Lazarus Realty, in 2007. I interviewed Randy with the intentions to learn more about how a sole proprietor runs a small real-estate firm and the decisions that are made when considering a potential investment.

Q: Why did you get started in the real estate industry?

A: Well, prior to being in the real estate business I was an investor in real estate. Not a big investor but I had bought some homes, had some rentals, sold some homes, and made some money on them. I know real estate is a good investment. My uncle, who was a cabinet maker, just made a basic living making cabinets but all the money he made was through investing. He worked himself to an early grave in his regular job but he did leave my aunt an estate that turned out to be worth millions through investing. I only ended up going into real estate as a default of not doing anything. Because I was making my money as an investor trader since 1998, but in order to have something to do that was work I got my real-estate license. 

Q: What is your approach to real estate?

A: For me, I approach it as an investor. I’m a real estate broker and it think if you check the statistics, less than 3% of the realtors are brokers. Mainly because to be a broker you have to be in “x” amount of years, then you have to take the broker test. But still I approach it as an avocation 

Q: What types of properties do you deal with?

A: I sell any kind of real estate because a lot of times the people I am dealing with are people that have money and they may want to have an investment in agriculture, land, or homes. Whenever they come to me and say “this is what I want to do,” I will seek to help them achieve their goals. I am probably the lowest sales of anybody in Fresno. Maybe that’s an exaggeration, but what I do, when I do it, I do well                

Q: Do you manage properties as well?

A: I do property management, some. I only manage a couple properties and I’m not out actively looking to manage properties, but if somebody comes to me, I can manage their property.

Q: What is you process for guiding a client in the investment process?

A: If people are coming to me wanting to invest in real estate, I go over their goals, see how much money they have, and determine what they want to achieve. 

Q: What kind of ROI do you clients tend to see on their investments?

A: [Runs Calculation] After running the numbers on one particular property, to be really precise, the return on their investment, when buying the property with cash and after paying taxes, fees, and whatnot, is 6.7%. Assuming no major deferred maintenance or repairs. Since this is a nice property they don’t have that, but if you make an allocation for repairs, which you should, I would safely say 6%. So the range of 5-7% has been pretty common, and that’s for really good homes. I find, in general terms of a return, more money is made when purchasing lower priced properties, but then there are more problems that go with it. In other words, if you buy a property for $65,000 and you can go in and do $10,000 in repairs and you’re in it for $75,000, still in Fresno anything decent is going to rent for about $800 or $900 dollars. So if you can rent that property following the 1% rule than that is a good deal.

Q: Can you explain the 1% rule?

A: The 1% rule, a rule I remember from my parents, is that your rent should equal the purchasing price of the property. That’s why a lot of times in California renting doesn’t work in terms of an investment very well, unless you’re looking to get capital gains. If you go in 93720 and you buy a house for $300,000 and you rent it on the 1% rule, you would want to make $3,000 rent. Chances are you will be getting closer to $1,500 to $2,000, far below the 1%. I’ve had properties that I bought for $30,000 and rented for $600, resulting in a lot of cash flow, but you can easily run into problems with those low income tenants that can end up costing you. In general the higher priced properties bring a lower rate of return. You pay a lot of money and you are not going to be able to recoup it through rent.

Q: How do you evaluate a property to invest in?

A: I would probably do the same as everybody else except I’m so conservative that somebody else is usually buying. Maybe it’s a function of my age and stage too. Maybe if I was younger I would just jump on it. I look at the comps and see how much houses in that specific neighborhood are going for. If you’re going to make money in real-estate, it’s not unlike stocks. You’re going to make it because you bought it at the right price. So when evaluating a property that I am going to flip, I factor in repairs, financing costs, carrying costs, and then look at the bottom line and say, “if I do this deal how much am I going to make in the end, and is it worth the blood sweat and tears.” If it’s just an investment, that’s a lot easier for me, it just has to carry itself. 

Q: How does location factor in when evaluating a property?

A:  It really is location, location, location. But there is a price at which anything is a bargain. 

Q: What do you look for in a location?

A: Well there are properties out there that I call penny properties. Properties that you can find and make good money off of. There are a lot of penny properties out there that you can make money off of, but finding them is like finding a good penny stock. You have to be a treasure hunter. You look and scout, and sometimes there’s good fortune and people bring it to you and you buy it.

Q: What advice would you give to someone interested in investing in real estate?

A:  I have a saying, “watch your downside.” Protect your downside. I don’t care whether its real estate or stocks, just manage your risk on the downside and the upside takes care of itself. You buy the real estate at the right price, it goes up, and you don’t have to worry about it. You don’t make money on every one of your properties but I look at your investments as a whole. Too many people look at one thing and they’re afraid to take losses. You have to look at the whole basket and say “you know what? The best thing for me right now is to take this loss and move on.” I’ve seen people loose huge amounts of money because they were too focused, too afraid, or too proud to take small losses, and then they see the market crash right under them.

Q: What is your evaluation of the current local real estate market?

A: The current market has firmed up and is pretty good. God help us with rain though. With no water for the farmers there could be a reverse dust bowl and we all go back to Oklahoma [laughter]. I see water as being a big factor for the Fresno Market. In other words, you just don’t know what the future holds. If the extreme worst case scenarios happen, it isn’t going to be good. The market in general depends upon a lot of monetary factors within our economy, things that can change over time, but I’ve been telling people over the last couple of years that the market has bottomed out.

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