TGCI 211: Emigrating from USSR 11 Days After Disintegration and Becoming a Successful CRE Investor

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Episode 211: Emigrating from USSR 11 days after disintegration and becoming a successful CRE investor

Copy of EP #18 - 2 Guests

Summary

In today’s show, Pancham interviews Arthur Drozd – president at SDS Realty Corp & ReadyLendGo.Com

Having experience in commercial real estate for over 13 years, he now knows the ins and outs of the business and how to analyze deals in order to gain passive income streams! Today, he continues to revitalize neighborhoods, and provide value-added properties by operating his real estate investment firm.

In this episode, learn from his experience as he reveals the properties and markets he has invested in. You certainly don’t want to miss out on this episode as he shares investment strategies, focusing on affordable markets, finding the best financing available for them through an online commercial lending aggregator, and more!

PanchamHeadshotTGCI
Pancham Gupta
Screen Shot 2022-10-25 at 9.48.21 AM
Arthur Drozd

Tune in to this show and enjoy!

Copy of Quote #00 - 1 Guest

Timestamped Shownotes:

  • 0:39 – Pancham introduces Arthur to the show
  • 6:25 – On pursuing real estate investing and understanding rental markets
  • 13:51 – Using 1031 exchange in three states and four different cities
  • 22:57 – His current investing strategy and markets that he’s investing in
  • 24:43 – Automating real estate financing systems by creating his own aggregator
  • 27:45 – The right time to buy an investment property and using no prepayment penalty loans
  • 34:14 – Taking the Leap Round
  • 34:14 – Auctions as his first investments outside of Wall Street
  • 42:17 – Overcoming his fears through starting and learning from mistakes
  • 46:03 – Investment deals that didn’t work out as expected
  • 48:33 – Why you should start taking the first step in investing
  • 49:24 – How you can connect with Arthur

3 Key Points:

  1. When you first want to get started in real estate investing, always start with small investment properties and then grow and invest in larger properties from there.
  2. ReadyLendGo helps with your commercial real estate financing as the platform provides you with financing options that you can work with based on the provided data.
  3. Every single deal is different, so if the property is in the right market and has the potential to increase in rent then you should go ahead and invest in it.

Get in Touch:

Read Full Transcript

(intro)

 

Welcome to The Gold Collar Investor Podcast, with your host Pancham Gupta. This podcast is dedicated to helping the high-paid professionals to break out of the Wall Street investments and create multiple income streams. Here’s your host, Pancham Gupta.

 

Dave Zook

Hey, this is Dave Zook. I listen to Pancham at The Gold Collar Investor Podcast, and so should you.

 

(interview)

 

Pancham Gupta

Welcome to The Gold Collar Investor Podcast. This is your host, Pancham. I really appreciate you for tuning in today. My guest is Arthur Drozd on the show. He was born in the space exploration hub suburb of Moscow, named Korolev, in Soviet Union. After graduating from high school, he served in Soviet Army in West Ukraine. He emigrated from Soviet Union 11 days after Soviet Union collapsed in the August of 1991. He became a US citizen in 2000. Now he is an experienced owner and operator of commercial real estate, with a background in automotive management and finance, with education in TV and Radio Journalism from Moscow State University and Real Estate Management from Century 21 Real Estate School.

 

He owns and operates his real estate investment firm SDS Realty Corp out of Fairfax, California, with management teams in five different states. He has been in commercial real estate for over 13 years. Prior to that, he was a general manager of an Award of Excellence winning Infiniti Marin marine car dealership in San Francisco, Bay Area for seven years. During the financial crisis of 2009, he started purchasing, remodeling, selling, and renting dozens of properties in then bankrupt Bay Area city, city of Vallejo, California, revitalizing neighborhoods, forming safe and stable communities again. In the process, creating a foundation of his future holdings that later were 1031 exchanged into larger properties in Sacramento, California, Las Vegas, Oklahoma and Indiana. He has around $82 million of assets under management and control 17 multi-family complexes. In 2021, he started an online commercial lending aggregator called ReadyLendGo.Com, that helps commercial property owners to find the best financing available to them. Hey, Arthur, welcome to the show.

 

Arthur Drozd

Hi, Pancham. How are you?

 

Pancham Gupta

Good. Well, thank you for your time.

 

Arthur Drozd

Thank you for having me.

 

Pancham Gupta

Yeah, sure. Before we get started, are you ready to fire up my listeners breakout of Wall Street investments?

 

Arthur Drozd

Yes, I’m totally ready.

 

Pancham Gupta

Awesome. Let’s get to it. So, why don’t we start with your background on how you got started into this business and, more importantly, the person behind that background?

 

Arthur Drozd

Okay. Well, I immigrated into United States in the end of 1993. So, I came from Belgium. I was living in Belgium for a few years after the collapse of the Soviet Union. In 1991, Soviet Union exploded really quickly leaving 15 Republics all separate. The economy was disintegrating. The country needed, basically, everything because all the supply chains were broken. So, I went to Belgium. I was exporting a lot of stuff to Russia at the time. That’s where I met my future wife — at the youth hostel. She told me that there’s a beautiful place where people speak English and never snows, and if we can please go there. That turned out to be California. That’s basically how we end up in California. I’ve been there for a long time. I am in Vermont right now. We just bought a second home in Vermont, to get away from the fallout from the fires and the lack of water in the Bay Area.

 

Pancham Gupta

Wow. Quite interesting journey. I like your short background there. I read your bio. You were born in the space exploration hub of suburb of Moscow, right?

 

Arthur Drozd

Yes.

 

Pancham Gupta

Then you moved away from that.

 

Arthur Drozd

Yeah, my dad was a rocket engineer, and so I grew up in a town that basically manufactured rockets. In front of the entrance to the town, there is still a rocket that was first tested by Sergei Korolev, the father of the Russian space industry. It’s an exact replica of a German U-2 that they were shooting towards Great Britain at the end of World War II. It, basically, was stolen from them and then reengineered. That was one of the first rockets that started there.

 

But long story short, yes, the whole town was about space exploration and, still, is the center of the hub of Russian space industry. It’s located there. The rockets were manufactured. My first summer job was at a rocket manufacturing facility. It wasn’t obviously in a secret place where the grownups work. I was 14-, 15-year-old. We did some auxiliary work in a non-secret department. Sometimes you make parts, and you don’t know what it is.

 

Pancham Gupta

Back when you’re 14 or 15.

 

Arthur Drozd

Yes, that was my first job. But yes, it was a very interesting time. It still is.

 

Pancham Gupta

Right. Yeah, I know. It’s coincidental that we’re recording this now. You moved away from the disintegration of Soviet Union and it’s—

 

Arthur Drozd

Yeah, there’s another disintegration probably coming, unfortunately.

 

Pancham Gupta

Well, great. So, you moved here in 1993. You moved to California. Tell us about what happened next. What did you get into? What did you do next, and how did you get into real estate?

 

Arthur Drozd

So, I was in the car business for probably 15 years. I didn’t have much capital when I got into real estate. I really always wanted to be in commercial and multi-family real estate. Because it really sounds to me like it could be a great way to live if you have a passive income. That was my dream. Like, okay, what if you can do almost nothing, and tenants pay your mortgages? When you listen to a lot of those late-night TV commercials, like, “You can do that, too,” and all this stuff, you’re like, “Why do I work six days a week at a car dealership on a car lot selling cars?”

 

Because I have a background of Television and Radio Journalism from Moscow State University. But obviously, nobody would hire you with that in the United States. With that degree from Moscow State University, with a broken English, on top of everything, I came in. My English was really bad when I came to America. So, I always had that. Then I didn’t have a chance to get into Bay Area and Bay Area’s real estate market up until 2008, 2009 when the financial crisis started. That was just not possible to do. Because the entry level is so expensive. Bay Area always have been. It’s always been very, very, very expensive to get onto multi-family or commercial real estate in Bay Area.

 

My first opportunity came up in 2009 during the financial crisis. I started buying homes in a town called Vallejo. You probably know it. That’s on on the East Bay. The city was going through a bankruptcy at the time. A lot of banks were selling everything pennies on the dollar. Nobody knew it was going to be a complete depression. So, I started with buying homes and then fixing them and flipping them. Then I realized about 2010-11 that it’s better to keep at least multi-family stuff, duplexes and fourplexes, and rent them out. By the time 2012 came in — when the web 2.0 exploded in Bay Area and the rents start going up through the roof — the valuations of everything I bought for $50, $60, $70,000 per property turned 10x, 12x in a lot of instances. The rent started exploding, and the rental market started moving up.

 

I decided what would be the next place where the rents are under appreciated right now, but where people are going to start moving away from Bay Area, where the rents are going to go up and increase capitalization of those multifamily buildings. I realized it’s probably going to be Sacramento. A lot of people are moving into Sacramento at the time. So, I bought several multi-family buildings in Sacramento. Then, literally, a year later, the Sacramento multi-family real estate market started going up exponentially so I couldn’t buy any more. So, I only end up with three there.

 

I’ve realized, okay, maybe it’s time to go into a different market. What will be the next market? Next market by my calculations was — I did all the metrics. The rents were really low. The cap rates were pretty high for multi-families. I thought, “Okay. You know what? Las Vegas is probably the next one.” So, I bought one property first in Las Vegas. It’s proven to be really good. Then within a matter of a year, I bought another few. Then by the time I wanted to do more Vegas properties, they were already so hot that it was untouchable.

 

So, the next market I went to was even further. That’s turned out to be Oklahoma. Oklahoma has been really, really good for me. It’s not as hot as Texas, but it’s much more stable. The rents are still rising, and it’s mainly a new product for me. Then from there, I bought stuff in Indiana and Texas, and New York, upstate New York. So, that’s basically the geography of my multi-family project.

 

Pancham Gupta

Wow. It’s a pretty amazing story. It’s amazing that you moved out of the market. You knew when to move out, and you knew where to go. That’s pretty amazing. When you said that you basically started buying multi-family, what kind of multi-family was it?

 

Arthur Drozd

I started small in the car business. I had a mentor many years ago. I started car dealerships for a group at the time. He taught me a very good lesson. Always start small and grow from there. So, I started with single-family homes. Then I realized that there’s much better return on investment and synergies if you have a multi-family. So, I went into duplexes. Then from duplexes to fourplexes, and from fourplexes to a seven-unit building. Then after that, to 14-unit buildings. Then after that, to 32-unit buildings. Exponentially, it goes like that.

 

But if you start right away with a 20- or 30-unit, you would not know how to run it, and you will run into a lot of problems. For those who are trying to break into this doing it by themselves, rule number one, there is no such a thing as passive income — unless you put your money into some managed fund, or somebody else is managing it for you. You’re just passively receiving the check. But then, you’re leaving a lot of it on the table — the property management fees that comes from GPs, and then a lot of other stuff that you don’t see. They go to somebody else, obviously.

 

But if you do it yourself, if you want to try to get into that yourself, my advice is start small. Start with a couple of single family, couple of tenants. Start to see if it’s even for you. If it’s for you, then you will realize, can you deal with tenants? What kind of problems you’ll be dealing with? Then you can multiply that. You can go to a fourplex or tenplex, and see if you can manage that. Then you can go for larger properties from there.

 

Pancham Gupta

That’s great advice. I started exactly like the way you started. Although, I know people who have done bigger stuff directly. Then anyone who started in the last 10 years has done okay, given the market has been going up until now. So, we’ll see how the things go. So, what do you do now, Arthur? Are you focusing still with the same strategy? Which market are you focused in now? What kind of product are you buying now?

 

Arthur Drozd

So, my last four deals — I sold one of the bigger properties in Las Vegas in June.

 

Pancham Gupta

Great timing.

 

Arthur Drozd

Yeah, it was a great timing. It was a property that I only held for about 15 months. It was a 6x return. So, I put a lot of effort into remodeling and raising rents to market, and turning the property into a more successful — a building — from where I got it from obviously. But that was a good timing as well. It helped that interest rates were low. I 1031 all, exchanged 1031 exchanged into four properties out of that. A total of about 22 million in total between the four. The three deals are closed. It was a struggle on the last one because the rates were just going crazy right a week before it’s supposed to close.

 

Pancham Gupta

Those four are in Vegas?

 

Arthur Drozd

No, I’m trying to get out of Vegas right now. The two properties I still have in Vegas, I’m probably going to be selling fairly soon. I have some issues, environmental issues. The water is a main of them. That’s coming down the pipe for Vegas. That is an unsolved problem, and nobody’s trying to solve it right now. Everybody, all the politicians are kicking the can down the road. But it’s going to hit Vegas fairly quick. Lake Mead — that supplies all the water to Vegas — is almost empty. So, Colorado River is not reaching the basin anymore so there’s going to be a lot of problems in the West. So, I’m trying to stay away from that.

 

The market that I’m getting into, out of four deals that I did right now, two are in Oklahoma. One is in upstate New York, in Rochester, and one is in West Texas. The deal in upstate New York that I purchased is a historic academy. It was built in 1873. It’s one of the first co-ed high schools in America. City of Rochester, New York was, at the time, one of the biggest industrial hubs. So, it’s a beautiful architecture. It’s a 28-loft and a restaurant. It has a basement that used to be a speakeasy, but’s vacant right now. If anybody of your listeners want to start a speakeasy, they can have it on the cheap, and it’s a historic building. Rochester is a college town, so there’s a lot of people there. There’s revitalization project, too. It was a redevelopment. The city county and the developer put 9.1 million into it. So, it was brought up to standards. It’s just a magnificent building right now. That was one of the deals.

 

The reason why Rochester is because for the same reason why Oklahoma, the targets for me. Because if you look in the affordability list, there’s probably an index you can google. Rochester, New York and Oklahoma City and the suburbs of Oklahoma like Edmond and Chickasha and Duncan, Seminole, stuff like that — those are the affordable towns. There’s still a very few affordable cities where quality of life is very high, but the affordability is still pretty good. A lot of other markets you start hitting already affordability ceiling. That’s a big problem. You probably know Florida right now is so unaffordable, because so many people moved in there. Lauderdale, I think, is introducing — in November, they have it on the ballot. They have a citywide rent control. In Florida, right?

 

Pancham Gupta

Which is a business friendly—

 

Arthur Drozd

It’s a red state, right?

 

Pancham Gupta

Red state, yeah.

 

Arthur Drozd

So, if we start seeing that in red states, you can only imagine what’s coming down the pipeline in the blue states like New York, California, and Nevada.

 

Pancham Gupta

Yeah, even Orlando, I heard, has it on the ballot — the rent control. It’s something related to that. I don’t know exactly. But yeah, something.

 

Arthur Drozd

Miami is probably going to hit that same way, too, because the rents went up by 30%. That’s unsustainable. That’s why you want to go into — if you want to go. That’s where I go. I go to markets that are affordable, they don’t have a pressure of affordability, markets that have water like Rochester that sits on Lake Ontario or Oklahoma that has thousands of lakes, and they don’t have too much of a severe weather event. Oklahoma sometimes will have a tornado, but it’s not as bad. So, I like those markets. I like West Texas — it’s still affordable — San Antonio, and midway stuff like that. Obviously, smaller communities in Oklahoma is pretty good, too. Because they’re very underserved for a new product.




Right now, builders are building for me a few brand-new subdivisions. Those are single-family homes. So, they were building originally to sell, but they turn out that these rates were rising. So, now they can’t sell them as easily, so I am buying them in the subdivisions 30 at a time. Fenced, gated, basically built to rent communities. This way, you know which houses you want there, and you can pre-rent them by the time you close.

 

I did two of those deals last year in Oklahoma — one in Edmond and Chickasha. It worked out perfectly. The banks really liked that in Oklahoma. Local banks, they will land and they will end at 80% LTV. So, it’s a good market for that. America is becoming a renter nation. The amount of people who are going from ownership to renters is going higher and higher every year. So, I think it could be a good market for that type of product — single-family homes, rental home communities.

 

Pancham Gupta

Yeah, I know it’s pretty amazing that you were able to 1031 into four different markets, like three different markets.

 

Arthur Drozd

Three states, four different cities, yes.

 

Pancham Gupta

Because let alone one property, it’s very hard to achieve that. So, I’m sure you spend a lot of brain cycles to get that going and make that happen.

 

Arthur Drozd

It was a lot of hustle, yes, especially with the banks.

 

Pancham Gupta

Yeah, and given the rate environment and all that taken into account.

 

Arthur Drozd

I’ll tell you, Pancham, looking through all those banks and looking through all those options, since last year, I did a similar deal. I sold a property in Vegas, and I ended up buying also four replacements. I bought another three deals. So, four deals on top of those replacements. So, in total, I did eight deals last year. This year, it’s, so far, five.

 

Throughout all that, I realized that getting the right banking connections, the right rates, and the right structure is actually one of the most important parts. Buying the right property in the right market, at the right price is important. But how you structure your finances and how you structure your deal is also very important. Because if your rate is not as good, and if your LTV is much lower, that means you’re putting more money down. That means you can make less deals.

 

Most of the deals I did in the last two years were around 80% LTV. It takes a lot of time to look through data and look through what banks and what credit unions would do such deals. Then I realized that, you know what, maybe I should put it somewhere on the website and make an aggregator out of it. So, I’ve done this.

 

Pancham Gupta

I would love to talk about that in just a second, what you’ve done there and all the problems that you were going through and solving that through your aggregator. Quick question on your overall strategy right now. So, you are doing all of this with your own capital, or are you raising funds for some of these projects? That’s question one. Second, which market are you looking at now? Is it still Rochester and the one in Oklahoma that you mentioned?

 

Arthur Drozd

I’m not trying to raise any funds right now. I’m using the investment vehicle that I have currently, my own investment vehicle. So, I’m trying to stay within markets, grow markets that I have presence already, that gives me synergy, that management and maintenance people. Because it’s really, really hard to find trades people and management. So, if you have people working for you that work well, and they’re well-motivated, then you grow that market.

 

I was extremely lucky in Las Vegas with a group of people who ended up working for me there. I was extremely lucky in Oklahoma. The lady that works for me there brought all her expertise, and she brought all her tradesmen with her because she has been in the market for years. It’s much easier once you have somebody like that working for you. You build out the round down.

 

Rochester is the next market that I’m thinking of getting more involved in. I looked at a couple of deals there already. There are a few deals, brand new construction, that has been completed this year that I’m looking at right now. But the financing there is tough right now. So, it might be something that I have to come back to, maybe in the spring.

 

Pancham Gupta

Got it. So, let’s talk about your aggregator. What is it? You said that you were having so much difficulty talking to so many different people in banks and figuring out who would land in certain market. So, you came up with an idea.

 

Arthur Drozd

Yeah, so, it’s called Ready Lend Go. That’s www.ReadyLendGo.com. They’re easy to remember. Basically, when I realized that it’s really, really hard to get a good financing option — because by the time you get one or two offers from the banks, you need to remove your financing contingencies. Then by the time you get to closing, that one bank that you are banking with, they are going to be your bank, that lender, they can pull something on you. They can say, “Okay. We’re not going to do this. Now, our loan committee is going to do that. We change this, and we change that.” It’s always good to have maybe a couple of lenders that you work with parallel. So, when you have somebody says, “Oh, you know what? My loan committee is not going to do 75% LTV. We’re going to 65% LTV.” If it’s a $4 million deal, now you have to come up with $400,000 somewhere out of your left pocket. You’re not planning on that. So, they’re just trying to protect themselves, obviously. But then, you can go and say, “I have another bank that is willing to stay with 75% LTV. If you don’t want the deal, that’s okay. But I’ll go with them.” In order to do that, you have to have those relationships, and you have to have those banks.

 

In over the last few years, I realized that I have already a list of banks and credit unions in certain markets that will do deals, that even brokers haven’t heard about. So, I thought, “You know what? Why don’t I automate that?” So, I put together a website. It’s called Ready Lend Go. You put your information in, what kind of product you’re interested in. You can even use a calculator there, like how much money down you need to put to be at what rate, at what payment. Then you just submit it, and it comes to us. We could send it to the right banks. Then within 24 hours, you have a red bank or a credit union or an insurance company. That life insurance company will lend money as well. Then you’ll have at least somebody talking to you about the deal, or somebody who is giving you already a letter of intent on the certain loan.

 

Obviously, it’s much more complicated going from there, because it will depend on your credit history, your finances, and all that stuff. But at least, you get a quick response. You know that it’s a real deal that the bank is interested in it. You know what options you have to work with.

 

Pancham Gupta

Right. Great. That’s a great idea. Anyone listening who is looking for loan, definitely check it out. Arthur, I have one last question before we move on to the last part of my second part of the show. Now the rates are rising, right? People think that Fed would pivot. They may, they may not. Rates have been rising. It’s putting a lot of pressure on the prices and overall liquidity of this real estate market. To anyone listening who is wondering whether it’s right time to buy or not an investment property, what is your advice to them?

 

Arthur Drozd

We’re living in an unprecedented time right now, obviously. Nothing like that ever happened before — when the rates went down so quick, and then they went up so quick, and even quicker went up. To answer your question, every single deal is different. So, obviously, if you buy a deal right and it’s in the right market, and it has a potential for increase in rents, then go for it. The only thing I would suggest, try to get a no pre-payment penalty loan. If you get a loan that is like Freddie Mac or Fannie Mae and it’s a 7- to 10-year deal, they’ll come with a pre-payment penalty. As long as the rates are rising, you’re going to be okay. But you still have a one year locked in and you cannot prepare that.

 

If the rates drop within after a year or two years — you’re paying right now in 6.5%, 7% interest rate. The rates are back to 4, you cannot sell because your pre-payment penalty is huge. You’re going to be upside down and the property. So, you’re stuck with that. Even if you think you bought the property right, you’re overpaying and your cash flow is really, really, really jeopardized. So, the best way to do that is to get a no pre-payment penalty, low origination fee or no origination fee loan on a five-year fixed.

 

Because my gut feeling is, the way America is structured, the way the world is structured, debt-wise, I don’t think we can sustain interest rates in 7 and 8 for very much longer. It might cool off the inflation a little bit. It will probably force the country into recession. But after that, everybody wants growth again. For that to happen, you cannot be in an environment of 7% or 8% interest rates or maybe even 10%.

 

I mean, if you do the math here, and the fed the ways they’re talking right now, they want to raise it to a prime of about — they want to do another three raises, three quarters, half a point, and another quarter. So, one and a half. We’re probably going to be close to seven and three quarters to 8% prime. The banks want a little bit on top of that, so you’re going to have to spread another couple of points there. So, by spring, you’re going to be in a 9.5% to 10% interest rate. I don’t think the rents are going to rise any more than they are rising already, because they’re already hitting affordability ceiling. For that reason, it’s going to be really hard to collect from people. Because the recession is going to start hitting, and people are going to start losing jobs. They’re going to have excuses why they’re not paying rent and a buying on top of the market. Then the interest rates are going to really hurt you.

 

So, the idea here is, probably, if you have a good deal in hand, then you’re going to see some good deals right now. A lot of people are going to start unloading projects that they can’t sustain. You probably can get into really good deals in a few months. But if you are, then get a fixed loan — five year or seven year fixed, no pre-payment deals. I would suggest against arm, because God knows what will happen. But at least, if you’re going to do deals, do that. But my gut feeling is, the best way is probably wait until the situation stabilizes in the world. Do the deals maybe sometime in spring to see where it’s all going.

 

Pancham Gupta

Great. Thank you for that advice. And we’ll be back after this short message.

 

(break)

 

Do you ever feel overwhelmed by the thought that you have no time after work and found no time to learn about investing? Do you feel left behind that you are not putting your money to work for you? Do you want to create passive income, but you do not know where to start? If so, I have good news for you. I have created an investor club which I call the Gold Collar Investor Club for Accredited Investors. I will be putting together investing opportunities exclusively for this group. These are the opportunities where I have done my part of the due diligence for you and will be investing my own money alongside you.

 

If you are interested, please sign up on thegoldcollarinvestor.com/club. I repeat, thegoldcollarinvestor.com/club. I will reach out to schedule a 30-minute phone conversation to discuss your investing goals once you sign up. This can be a good opportunity to diversify and take some chips off the hands of Wall Street to produce some cash flow. In case you are wondering what is an accredited investor, accredited investor is someone who has earned more than $200,000 as filing single or more than $300,000 filing jointly for the last two years. Another way to qualify as an accredited investor is if your total net worth is more than $1 million, excluding your personal home. It includes your stocks, 401Ks, IRAs, cars, et cetera—just not the equity in your personal home. If this is you, I would highly encourage you to sign up.

 

(interview)

 

Pancham Gupta

Arthur, let’s move on to the second part of the show which I call Taking the Leap Round. I ask these four questions to every guest on my show. My first question for you is, when was the first time you invested outside of Wall Street?

 

Arthur Drozd

First time I invested outside of Wall Street? I’ll tell you when. It was 2008. I was a general manager of an Infiniti dealership in Bay Area, Marin County. I was going to auctions, the bank auctions that were selling homes that the banks were trying to unload — Washington Mutual, if you remember Countrywide. Remember those banks?

 

Pancham Gupta

Yes.

 

Arthur Drozd

Then in the brochures, it would say loan amount $500,000. Then a bidding price for the home, $100,000. So, they’re going to lose 75% of value if they sell it at that. So, I didn’t obviously buy in the first auction. I went in the second auction. We’re talking about summer of 2008. The second were the same properties. They were already selling for 75,000. It’s still the same loan amount. Half a million, right? Then they start selling at those numbers. I’m thinking to myself, “Interesting. What will happen if all those banks write down all this equity? What will happen to those banks?” My conclusion was that those Wall Street banks are going to go belly up. Around July of 2008, I had all my savings in Dean Witter, Morgan Stanley. I sold everything. I put everything in cash. Because I was getting prepared to see there’s going to be a lot of opportunities in real estate. Sure enough, in 2009, there was a height of collapses of banks and acquisitions of banks and mergers of banks. A lot of banks failed. All those Washington Mutual and Countrywide and tons and tons of other banks, they were either bankrupted or sold to other banks. They lost hundreds and hundreds and hundreds of billions of dollars.

 

At that time, 2009, I started buying the foreclosed properties from those banks on pennies on the dollar. Because I saw that the value of the land that the buildings are standing on, I was paying more for them with buildings on. So, the value of the land alone — before we even get permits to build anything or put sewer pipelines in anything — it was already exceeding that. So, to me, it was a deal. Obviously, I fixed it up and rent them out. It was a 100% return on investment while the stock market was going down. March of 2009 was probably the lowest.

 

Pancham Gupta

Let me ask you these two questions here. One, when you were going on to those auctions in 2008, summer, how many people were there with you bidding in those auctions?

 

Arthur Drozd

It started not a lot. But then with every auction, there would be more and more and more people. I remember going to Cow Palace. Auction.com had an auction of homes in Cow Palace, in San Francisco. It was by the end of 2008 already. There were a lot of people by then, mostly foreigners — Russians and Israelis, Indians, Chinese. That was very interesting to me. Like, wow.

 

Pancham Gupta

Yeah, U.S. was on sale at that time. I just couldn’t imagine that time. I started going to auctions in 2013, I believe, and 14. There were a lot of people. I was in New York. New York is one of those states where if you are getting stuff in 2008, it takes three years for the foreclosure. So, the 2009 that you would see in some other state would be 2012 in New York. That’s when I started going. It was crazy even then, a lot of it. I was outbid every single time.

 

Arthur Drozd

Yeah, that’s why I didn’t buy anything at auctions. I didn’t buy anything from the auctions. My strategy was, I would buy it from a listing agent who was representing banks. I will call him up and say, “Would you mind representing me on this deal?” It’d be a dealer presentation. Obviously, for them to get double commission, for them, it was much more interesting to represent both me and the bank to get paid double commission. So, that’s how I started getting a lot of deals, buying a lot of deals.

 

Pancham Gupta

I’m digressing here. I want to go to the next question, but one quick thing. Do you see that happening now?

 

Arthur Drozd

On this cycle? I don’t think so. Main reason is because the market is well capitalized right now. You don’t have a scenario that you had in 2006, 2007 when most of the loans were originating on no income or no proof of income, no credit history, and 5% down payment or no down payment. Remember all those stories? The strippers in Las Vegas who are buying condos just because somebody told them they’re going to go crazy up in price, and they’re going to be millionaires. But it’s just not the same scenario right now.




Banks learned their lesson. A lot of laws were put into place, a lot of backstops for this to never happen again. The down payments were much larger, quality of credits and cross-collateral. A lot of people who knew what they were doing are getting into real estate — from syndicators to individual investors who had already experienced doing that. So, it’s a totally different situation. I don’t think we’ll have a wholesale of America right now. I don’t think that will happen, specifically in real estate. But I do think that there are going to be some deals, especially in older properties. Those are the value add properties where you want to get into if you’re starting. Because you can add value to that by fixing them up, raising rents to market. There’s going to be lot of deals where people cannot afford to maintain them. The insurance rates are going up. But some of my insurance rates doubled this year. The reason why is because, one or two insurance carriers that were in that segment — for the older properties — they got out of it. So, the rates doubled.




There’s going to be a lot of people that are going to look at their financials and say, “Wait a minute. I’m not making any money, ” specifically people who thought that it’s going to be a passive income for them, or they inherited the property, or it’s a probate sale. It’s going to be a lot of other situations like that. They would want to get out of it. That is an opportunity for people who want to get in and fix them up, and then carry them over and market them to make sure that that property is full with right tenants, good tenants. So that’s work. There’s going to be opportunities like that. But it’s not going to be pennies on the dollar, to answer your question.

 

Pancham Gupta

Got it. Cool. Well, thank you for answering that. My next question for you is, did you have any fear that you had to overcome when you bought that first property in 2009?

 

Arthur Drozd

Oh, of course. Of course. There was a huge fear. That first property was a foreclosure, a foreclosed townhome in Vallejo. I bought it for $52,000. The first tenant I put in there, within a month, stopped paying rent. I’m like, I’m going to carry this. It doesn’t make any sense. But the key here is not to give up, not to tell yourself, “I’m in the wrong market. I am doing the wrong thing. I’m with the wrong product, whatever.” No, you just learn from your mistakes and move on.

 

So, I really quickly evicted the tenant. I put the townhome on the market, sold it to FHA buyer, made some quick couple of dollars, and moved on to the next property. But I learned. With every deal you make, you learn.

 

Pancham Gupta

Exactly.

 

Arthur Drozd

The key is to start, obviously, and to overcoming your fear. You do one deal, and then you overcome that fear and then you go into a bigger deal. Then oh, my god. Sometimes a deal was a $90,000, a single-family home. It was a three-bedroom, one bath. It was in Vallejo in this sketchy area. We just finished remodeling it. We came in, and the windows were broken and there’s graffiti on the walls. I walked out the door and there was, on the corner of 7-Eleven, I see there’s a police cruiser there. I go there to the policeman. I tell him, “Excuse me, officer. We have a break in here. Somebody broke in into our house. We just finished remodeling.” An officer looked at me. He’s a uniformed officer. Next to him sitting was a civilian on the front seat. He opened the window and he said, “Well, let me introduce you to my volunteer helper here. His name is whatever. You know what we’re doing here?” I said no. He said, “There was a murder here on this parking lot at 7-Eleven last night. So, we’re investigating that right now.” He’s a volunteer for a police department. “So, if you have an issue with your graffiti and break in, you go online and file an online police report.”



The city of Vallejo at the time was going through bankruptcy. So, there was literally blood on the streets. I think Rothschild said that that’s when you buy — you buy when there’s blood in the streets. There, literally, was blood on the streets. It was scary. It’s a scary time. But you overcome that. The city exited the bankruptcy a year after that. The rents start stabilizing, and then the Bay Area rents start going up with Facebook, going public. Airbnb, LinkedIn, and all those other companies are getting in, and a lot of employees getting there. So, the rents start exploding further and further away from the city. East Bay rental markets start going up. So, it lifted all the boats there. They’re with my boat as well. But you just have to understand that nothing is forever. It’s something that’s going to pass. If it’s a problem, you just keep going.

 

Pancham Gupta

Cool. I love that. Third question, actually, is that, can you share with us one investment that did not go as expected? It sounds like the first one, but is there anything that you want to share?

 

Arthur Drozd

All my real estate investments, everything, so far, was profitable. Just because the good thing about real estate, if it’s not profitable, just hold on to it long enough as it is as long as it’s cash flowing. If it’s cash flowing, it’s okay. The last deal I just showed you, the one that’s in—

 

Pancham Gupta

Vegas

 

Arthur Drozd

No, the one that’s in Rochester. I ended up buying it at the right price. But the problem, of course, was the loan. I didn’t expect to pay — it was probably the cheapest loan I could get at the time. But in the last minutes, I ended up paying a lot more down payment because it was tied up to a 10 year US Treasury. It was going up.

 

Pancham Gupta

It was still going up.

 

Arthur Drozd

At the time I was underwriting the deal, it was at a two and a half. At the time I ended up looking the rate, it’s at 3.88.

 

Pancham Gupta

It’s 4.2 right now.

 

Arthur Drozd

Almost 4.3 today, yes.

 

Pancham Gupta: 

4.22 as of right now.

 

Arthur Drozd

Yeah, when I was doing a 3.88 rate, I thought it was crazy, but it’s going even higher. So, you have to understand. You have to add a couple of points on top of that for the bank, right? But I had to close on this deal. I signed up paying a little bit more down payment and a little bit more in the rate. But I think in the long term, this is a beautiful property. It’s going to work out just fine because I have a three-year interest. I have a 10 year — well, one with a three-year interest only.

 

But the only other investments that didn’t work as I expect it was my first deal in Oklahoma. I still ended up making a pretty good return on that. I bought it for a million and sold it for 1.85 million about a year and a half later. I learned a lot from that. Because I shouldn’t have put all my money into remodels in there. I should have probably got a loan and do it much faster, and accomplish a lot more. My returns were not as good as expected. So, that was probably a lesson there.

 

Pancham Gupta

Got it. My last question is, what is one piece of advice would you give to people who are thinking of investing in Main Street that is outside of Wall Street?

 

Arthur Drozd

My main advice is just do it.

 

Pancham Gupta

I love that. Exactly. Take action.

 

Arthur Drozd

Yeah, you just make the first step. You will learn from your mistakes, obviously. Everybody makes mistakes, but you will learn from them.

 

Pancham Gupta

Awesome.

 

Arthur Drozd

Yeah, the fool is not the one who doesn’t make mistakes. Everybody makes mistakes. The fool is the one who makes the same mistake over and over again, right?

 

Pancham Gupta

Right.

 

Arthur Drozd

So, you’re not going to be a fool as long as you learn from mistakes. Just do it, and you’re going to be fine.

 

Pancham Gupta

Awesome. This has been great. I know we ran over time. Thank you so much, Arthur. How can listeners connect with you if they want to find out more about you and what you’re doing? How do they connect with you?

 

Arthur Drozd

I’m on LinkedIn. Arthur Drozd. A-R-T-H-U-R D-R-O-Z-D on LinkedIn. So, that’s the best way. That’s the only place that I could probably go to. I don’t have any other social media.

 

Pancham Gupta

Got it. Great. Thank you, Arthur, for your time.

 

Arthur Drozd

Thanks, Pancham.

 

(outro)

 

Thank you for listening to The Gold Collar Investor Podcast. If you love what you’ve heard and you want more of Pancham Gupta, visit us at www.thegoldcollarinvestor.com and follow us on Facebook @thegoldcollarinvestor. The information on this podcast are opinions. As always, please consult your own financial team before investing.

Copy of EP #18 - 2 Guests

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