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Publications

Future Millionaires (Published in CCAA Newsletter 2/02 and Danville Area Landlord's Association News 2/02)

by: John Smith, owner of John Smith Property Management

Last month, I read an article in CNN Money about two brothers who were well on their way to the coveted “millionaire” status through real estate investment. Amazing especially for their ages, Jarrod and John Brown, the article reported, are now twenty-seven and thirty years old with nets worth of five hundred fifty-two thousand dollars and eight hundred six thousand dollars, respectively. I read the entire article and was pleased to find out that the Brown brothers live in Bloomington, IL. There they own properties on the Illinois State University campus.

After a search on Yahoo for their telephone numbers, I was able to catch Jarrod at his office and he agreed to be interviewed for the Champaign County Apartment Association newsletter.

Jarrod said that his first real estate deal was a “flip”. In contrast to “buy and hold”, a “flip” is where an investor buys a property and then shortly thereafter sells it for a profit. That first property was a four unit that he purchased for one hundred thirteen thousand dollars. He and his brother, John, put new mailboxes on it, new lights, and a fresh coat of paint, and made seventeen thousand dollars on the sale eight months later.

Jarrod and John then used the proceeds from that first flip and continued buying properties and making profits without pulling any money out of the business for five years. While they now each draw a salary, initially they only used profits to improve their buildings and to finance new purchases. To date, they own seven apartment buildings for a total of fifty-one units. Investing together, they would like to be in a position to retire within the next ten years.

While Jarrod believes that campus is the “right place” to buy apartment buildings, he is also willing to invest in property that is off campus. He owns a building off of campus and finds that it has much lower turn-over than his campus units.

On their campus buildings, Jarrod stressed that the main focus of the management of their campus units is to keep and maintain very quiet buildings. From the first time a prospective tenant calls, he sells them on how peaceful and conducive to study the Brown buildings are. He believes that this is a way that tenants also pre-screen themselves so that the more raucous ones don’t even schedule an appointment. This is also a special niche that he and his brother have carved out that gives them a competitive edge with other larger management companies. Jarrod believes that there is a small but definite demand for quiet buildings in the campus area. Due to the small size of the student population that actively pursues a quieter environment, Jarrod doesn’t believe that this approach would work in a management company that was too big. This is why the approach is especially suited to a small management company like Brown Enterprises. With more than enough demand to keep every one of his units filled, Jarrod bragged that in over five years, they’ve still never had a vacancy. Plus, as a testament to their customer satisfaction, Brown Enterprises has got approximately a fifty percent renewal rate with their tenants.

As far as filling that fifty percent that turns over, in the campus area, timing is key. Jarrod said that the season starts in Bloomington/Normal very early. They start getting calls and signing leases in September every year for the following school year. Four bedroom apartments go especially early, but the demand for these also dries up as quickly as it started. Jarrod reported that if you don’t get the four bedroom apartments rented in the first month of the rush, you wouldn’t be able to rent them out at four bedroom prices.

On the analysis side, Jarrod and John look for buildings that are selling at a five gross rent multiplier (GRM), which, Jarrod quickly pointed out, is a little less that what properties sell for in Champaign and Urbana. Ideally, they like to look for buildings that they believe have been under rented. This way, they can bring the buildings up to their potential while paying for them based on their current rents. They seem especially partial to four bedroom units as these are often poorly managed and under rented. That combination of poor management and lower income can add up to a large profit potential under the careful management of this team.

After generously speaking with me for much longer than he had originally planned, I thanked Jarrod for sharing so much of his business approach.

I was very glad to have had the chance to speak with this CNN Money’s future millionaire. His approaches and philosophy are treating him very well and I know that I took a lot away from our conversation.

Hope you enjoy the perspective.

Good luck, and happy renting.

John Smith has a Master's Degree in Education, is a real estate investment and management consultant and trainer throughout the state of Illinois, and has been a real estate investor and manager for over seven years in Champaign-Urbana. To contact John Smith, email him at john@johnsmithproperties.com or call (518) 851-7820.