797 » How Rob Made Over a Million on 3 Lease Option Deals with Rob Gaither

Joe: Hey everybody, welcome. This is the Real Estate Investing Mastery podcast. Glad you’re here. You’re in for a good treat today. I’m going to be interviewing a gentleman named Rob Gaither from California, and I believe he’s in Monterey County, which is a Northern California, right, Rob?

Rob: That’s right. Yeah.

Joe: Cool. So, uh, about a month ago, I believe, no, no, just less than that. 20 days ago, 20 days ago, I sent out an email to my list saying, Hey, who wants to be on my podcast? I’m looking for some people to interview who are doing lease options. If that’s you, reply to this message and let me know. And Rob responded to me and, I said, this is fantastic. I’d love to talk with you about these deals that you’ve done. And Rob is in Northern California. I’m gonna interview him here and ask him some questions about these deals here that he, that he did.

Joe: I just want to first let you guys know this podcast is brought to you by my new book, my new book, REI Secrets: Daily nuggets of real estate investing wisdom. And in this book… I talk about a lot of different things and it’s, you know, you’ve been listening to my podcast, you’ve heard me on the REI In Your Car series where I’m just driving and I talk about whatever has been kind of going on for the day and I’m teaching some kind of lesson and I’ve taken the best of those and I’ve turned them into articles and I’ve put them into a book. And so this book is designed where you can read just a chapter a day; each chapter may be two to three pages long. And, you know, I’m just thumbing through it right now. And one of them is called Bomb Bombs Away and it’s a little chapter that I wrote about technology and there’s a video platform called BombBomb where you can send videos to sellers after you talk to them. And just little things like that that you can read.

Joe: If you want this book, you can get it for free. Just pay shipping and handling; it’s about an inch thick. It’s the biggest book I’ve ever done. I was kind of shocked at how thick it was, but you can get it at REISecrets.com. REISecrets.com. And also if you’re listening to this and you like the show, please leave a review on iTunes, subscribe to the show, leave a review in iTunes. I really appreciate it. It helps with the rankings and stuff like that. And pretty soon as well, I don’t know if y’all knew this, but I’m moving to a new podcast hosting service and they’re going to be releasing, re-releasing to the podcasting world, my previous 600 episodes. If you are a little bored and you want something to listen to, no, seriously, I have about 600 episodes that iTunes does not show anymore because there’s just too many of them, I guess. So, we’re releasing previous episodes as a volume one, two and three of the Real Estate Investing Mastery podcast. And you can get that all on iTunes. Cool.

Joe: So, Rob, how are you sir?

Rob: I’m great. How are you, Joe?

Joe: Excellent, thanks for being here. Can I read this email you sent me? Would that be all right? Okay?

Rob: Yeah, absolutely.

Joe: Rob responded back: “Hey, I’ve done three lease option deals to date. The first was many years ago for my private residence, which I subsequently purchased.” And I was really excited to hear this because not a lot of people know about this, Rob, that you can do lease options to buy your own personal residence, which I have done. And then the rest of the email says here, “The second was for an $850,000 commercial property, which I subleased to an auto dealer for—get this, guys—$12,000 monthly cashflow”. I love it. He says, then Rob, you said here: “Later, I sold that property for $1.825 million. I did a 10/32 exchange”, 10/31 exchange maybe…

Rob: Yeah, probably a typo.

Joe: And then you bought a fourplex for $1.15 million and used what was left over after taxes to improve the property and pay down another property. “The third lease option I subleased to a third party who subsequently purchased the property netting me—get this guys—about $150,000. So, do you see why I wanted Rob on the podcast? So, thanks for being here, Rob. Can you tell us a little bit about you? You’re living, I’m assuming in Monterey County is near Monterey, California, right?

Rob: It is, yeah. I live in the Northern part of the County. It’s kind of a rural area in the mountains. It’s beautiful. It’s beautiful here. I love it. Yeah. I’m originally from Chicago, so I’m more familiar with weather you have there today… but just couldn’t take it anymore. I had to make a move.

Joe: Are you still a Cubs fan?

Rob: I was never a Cubs fan. In Chicago, you have to be a masochist, you know… Though not so true anymore now that they actually won the World Series.

Joe: Well, I’ll still let you on my podcast.

Rob: I love the Cubs, don’t get me wrong, I just can’t follow them it’s too much. Too much pain.

Joe: Oh, I know. Oh, I’m so, I feel so bad for you. I’m just kidding. Those of you that don’t know what we’re talking about. I’m from St Louis and I’m not a Cubs fan. You know, I’m a St Louis Cardinals fan for good reasons, but the Cardinals just swept the Cubs in a four-game series, which was crazy. Each game was won by one run. Man, it was hard to feel… I feel for my Cubs fans. Anyway, Rob, sorry about that. So, had you, how long have you been in the business? It sounds like you’ve been in it for a long time.

Rob: Yeah, I’m really old. I mean, I guess you’d say I’m in the business… It’s what I do now full time when I do anything at all. Yeah. But I’m really, I was never really in the business. I mean, I was a car dealer for a number of years and that’s why, that’s how I wound up buying that commercial property… I did a lease option on that. And then when I closed my car dealership, I leased it to someone else and subsequently sold it. But I, that’s been about, gosh, that was 2003 when I closed my dealership. I sold it many years later. But so, I guess you’d say I’ve been actively an investor for 20 years or something like that.

Joe: Now my son who’s 15, is really loving cars and I don’t know why, but anyway, no, he turns 16 in like two weeks. He really loves cars and he wants to flip cars. And is that… I mean, what would advice would you give him right now? Is it better to flip cars or houses? What would you say to him?

Rob: Well, when I was starting out, I started out as a car guy obviously, but I looked and said, where’s all the money? You know, who’s making all the money? And I realized it was either car sales or home sales. In many ways I wish I had done homes instead, real estate instead of cars. Cars were great for a long time, but it was retail and it’s, that’s a tough, tough business. Being a car dealer is really hard. It’s cashflow is horrible. So, I mean it’s just a major challenge to be a dealer for flipping cars on the side, what they call curb stoning. You can make some money that way. That’s not a bad hobby. You can make a few thousand dollars a month doing that if you know what you’re doing. He could also lose money just like everything else. But my advice would be get into real estate.

Joe: Thank you. Hopefully I’m going to, I’m recording this so I’ll let him listen to it. But you know what did it for him was he’s watching this show, Undercover Billionaire and it’s this, have you heard of the show or seen it?

Rob: No, I haven’t. Sounds good though.

Joe: It is fascinating. It’s this guy who owns a huge mortgage business and he wants to prove that the American dream is still alive and well. So, he basically for 90 days strips himself of anything and everything except a cell phone and an old beat up truck and I think $500… Goes into a, a random city, I think the producers picked for him, which was turned out to be Eerie, Pennsylvania. And he had, his goal was to build a business that would be worth $1 million in 90 days and it’s on Discovery channel maybe. And it’s pretty fascinating. We’ve watched the first three or four episodes, I’m a little behind now, but one of the first things he did was took a few hundred dollars that he had and bought a car and sold it and made a few thousand dollars and did that again to make a few thousand more just to get living expenses, which is fascinating. My son was watching that anyway.

Rob: That’s what I did, I mean I started out with nothing and that’s how I got something.

Joe: That’s interesting. Okay. So, Rob, you’ve been doing this, you’ve been in business for a long time. Sounds like you’ve been pretty successful. When did you get started in business, doing business for yourself?

Rob: I pretty much, well, when I got out of college, I went to work in a chemistry laboratory and worked there a couple of years, but that was the last job. Then kind of working for a car dealer temporary as a salesperson. So that was, oh gosh, I hate to admit it, but that was 1979. Yeah. And I subsequently opened an energy store. We sold wood burning stoves and solar energy equipment way back then during the Carter administration when the gas prices were through the roof. And primary, it was like 18%. Things were pretty tough in real estate, as you can imagine. I’m sure you’re not old enough to remember, but…

Joe: Well, you, which is fascinating to me, Rob, because you’ve been through several market cycles. I mean if you’re talking mid-seventies, now you, how many market cycles have you been through? I’m going to guess at least three or four.

Rob: Yeah, I’d say that’s true. Yeah.

Joe: Wow. And I’d be really curious to ask you, later on, because I want you to finish your story, but I’d love to hear from you some of the lessons you’ve learned as the market cycles have been going up and down. But…

Rob: Well that was the end of my story.

Joe: Oh, okay. Well, when did you start doing real estate then?

Rob: Well, really I guess when I bought my first house, which was the lease option which I told you about, which was, that was in 1979 or ’80. I was just a kid, still in school.

Joe: How did you learn about lease option? Was this somebody teaching it back then?

Rob: Well, no, someone just wanted to lease their house and they were willing to give an option and some inducement. So it wasn’t, I wasn’t, I didn’t actively pursue it. It would just kind of landed on the table the first time as an option. I said absolutely. You know, I had nothing. And no down payment or any prospects and I was self-employed besides, I mean, not making very much money. It really was the only way I would ever gotten into a property. So, we leased it. My young wife and I leased it for a couple of years and then bought it. She wound up with it and I moved to California. But that’s another story.

Joe: Okay. All right. So, it was a, you leased a property with an option to buy it. Do you remember the numbers? Like how many years did you, did it take you to buy it?

Rob: Yeah, I think it was actually, I think it was actually, I can’t remember if it was a land contract. I think the ultimate purchase was on land contract. I’m trying to remember because it’s been a really long time obviously, but I think we, I think it was a five-year agreement and I don’t think they credited anything. I don’t remember him crediting any of the rent towards a down payment. But he did subsequently carry the paper for a couple more years after we exercised the option. And then, and then I refinanced it. By that time, you had and in effect a tiny little price compared to today’s numbers, I think it was $40,000 or something like that.

Joe: Oh wow. What interest rates back then when you did that?

Rob: Really high. Yes. 10%… it was 10%, I think, or maybe it was 12%. Yeah, it was really… Yeah, that was a peak of the crazy interest rates when the primary was 18% so I thought 10% was a deal.

Joe: Wow. Do you think we’re ever going to get back to those interest rates?

Rob: God, I hope not.

Joe: Isn’t that something though?

Rob: It’s unbelievable. I mean, running a business when you’re borrowing money at that kind of a rate, to me it’s, it’s almost impossible. I don’t know. I don’t know how we did it, but it was fairly easy to get the money though.

Joe: Well, people still bought homes when the interest rates were 10%-12%, 15%. They just, you know, they bought what they could afford. Right? I mean, people didn’t go nuts, they were a lot more conservative. I’d imagine people put larger down payments on homes back then.

Rob: I don’t know. You know, I was in Illinois and things are really different in California now. I can’t, I don’t really have any basis for comparison when prices were so much lower than they are here now. I mean there’s no way you buy a house in California at 18% or even at 10%.

Joe: So, you leased the property with an option to buy it and then later you converted it into more of an owner financing deal or a, you know, a land contract for a couple of years and then you actually got a traditional mortgage with the bank.

Rob: That’s right. Yeah. He was willing to give me 10 years on that land contract, but we needed to move it cause again, he wanted 10% but able to get a little bit better rate than that. Finally, someone went 8%, I think.

Joe: So. Do you remember when you were lease optioning the property, were you responsible for maintenance and repairs? It wasn’t like a regular rental, right?

Rob: Well in this case, no it was, it was definitely part of the deal. If it was, he was sort of a part time… This was sort of going to be as vacation homes on the lake. It was like a 2,500 square foot house. It had been a cottage. He razed it and they put a foundation under it and started the renovations. But he really, when he came out from Chicago to this vacation home, which was in McHenry, Illinois on a little lake, he would prefer to drink. That was his entertainment. So, he didn’t get very far on his property and finally he decided to sell it. So, part of the deal was I would take over the renovations and we would, you know, turn it into a real house as part of, whether we stayed there or not, that I would be doing some work on the house to improve it.

Joe: Nice. Nice

Rob: It worked out in our favor since we were able to exercise the option, not only did we get some sweat equity but we’ve got some great lease option terms. So, I mean it was really the perfect opportunity for as far as some stupid young guy who had nothing, nothing but dreams, you know.

Joe: Yes. Well, you know what, I’m looking, this is so great. Are you familiar, I’m changing the subject here because I’m looking at a map of Monterey, California and you are real close to one of my favorite restaurants on the coast? It’s called Nepenthe, Nepenthe… does that ring a bell?

Rob: Oh yeah. That is a very gorgeous spot. One of the most beautiful places on earth, I think.

Joe: How far away are you from that place?

Rob: Probably an hour, maybe a little bit more than that. It’s down into Big Sur… Pretty, pretty well in the Big Sur and maybe I might be as much as an hour and a half. I’m actually probably about 30 minutes from Monterey where I live. I live midway between Santa Cruz and Monterrey.

Joe: Oh, this place is incredible. It’s called Nepenthe. We found it by accident one time. It’s on the cliffs overlooking the coast surrounded by evergreen trees and other Oak trees.

Rob: It’s astonishing what you can do.

Joe: Oh, nice. Okay. So, it’s been probably 20 years since we’ve been there. If anybody is in the Big Sur area, you just go to this restaurant called Nepenthe. I had it before kids when… I don’t know if I would take my kids there today, but it’s, well, it’s expensive. Like they wouldn’t appreciate…

Rob: They want a corndog or hamburger.

Joe: Well, they wouldn’t appreciate the food. Oh, beautiful area. What brought you to that part of the California?

Rob: My uncle actually lived out here and when I was a soul searching and looking around for a way to change my life after my first one didn’t work out so well, I had an opportunity to come out and stay with him. And once I did, I was up in Danville, California, which is a really beautiful place as well. But I came out to visit him and walked up to the top of the hill across the street from him. And I looked out and said, wow, I’m going to get a house like this on top of a hill in California. And a year later I did.

Joe: Nice. Good for you. Good for you. Alright, now back to real estate. The second lease option you did was for commercial property. Now you’re in the auto business, but how did you find this property and how did you approach the previous owners?

Rob: Well, it was actually listed for sale and it had been listed for sale for quite a while. It was a, it was a product of a broken marriage, I guess you’d say that really, I mean, broken partnership. There was a Jaguar Saab Subaru dealer on the property and it ran into some management problems and closed down. So, the property had been available for couple of years at least. I had already started my little used car dealership in town and I was looking for a place to expand to. And, I thought, you know, what the hell, what have I got to lose? It was a million-dollar piece of property or something like that, which to me was crazy number. And I thought, what do I have to lose? So, then I called the realtor and talked with him, made him an offer and he believed me and he, most of a lot of what I told him wasn’t strictly true in terms of what I was willing to do or what I was able to do.

Rob: But he got it done. I said we’ll do it, but we need a lease option and here are the terms of the lease option that we’re looking forward. And he went and got it done, which is, that’s really pretty uncommon as far as I can tell. Cause realtors don’t likely use options. They have a hard time figuring out how to get paid. Yeah. But in this case, it was an expensive piece of property. It had been empty for a while. The sellers were motivated. It was a conglomerate of a bunch of guys who owned a lot of properties, but this was the only one in this county that they owned. And they really want to get out of it to focus on the other parts of their business. So, they were willing to give us pretty reasonable terms. In fact, we paid no rent for the first three months. And then we had, we had like 50% rent for the next two years. I mean the terms were extremely advantageous to us. Wouldn’t be able to do it any other way.

Joe: Well how did you, how did you negotiate those kinds of terms? Was it just back and forth?

Rob: Yeah. Not with the seller, with the realtor. But the realtor was really good and he’s a commercial realtor and he goes, he was really good. And I think, you know, he looked at me and thought this guy’s a little crummy little used car lot and it doesn’t look like he’s making any money. And you know, we were actually, we’re doing quite well, but he doesn’t know it and I didn’t tell him. So, I’m sure he thought what the hell? He had nothing to lose either because he wasn’t getting any other fish… there was a lull in the retail car business. So, I knew cars are slow. That’s why the property was sitting empty. Yeah. And so, he figured he had nothing to lose as well and we just stood out there and I said, yeah, okay, we’ll do it. They had nothing to lose either because they weren’t, they weren’t collecting any rent. It was just sitting there empty. Worst case is I came in and you know, we went belly up. Well they had a few more thousand in the bank than they had before. So, it was really a win win.

Joe: I’ve heard the whole lease option concept kind of originated in the commercial space. You know, that’s where people kind of were more familiar with doing lease options before it came to residential. Would you agree with that?

Rob: Yeah, I think so. I mean the terms for commercial properties are a lot different than they are for residential nominally. I mean the bankers are very conservative guys, guys who do mostly home loans are not as flexible, let’s say.

Joe: So, you subleased this commercial property and were getting $12,000 a month cashflow?

Rob: Yeah, no, that was a net cash flow. Don’t misunderstand me. I didn’t make myself clear, but we didn’t, you know, we had to pay part of that back to the seller. But yeah, when I closed my dealership, I picked up the phone and called some local dealers, said, Hey, we’re moving out of here. You need a new spot? And the third one I called said, yes, I’ll take it. Just give me the keys. You can leave everything there. That’s the desks, that’s computer systems, our file cabinets, pictures on the wall, whatever. I’ll take it and I’ll buy all of your inventory.

Rob: I mean it sounds like I live a charmed life. Right? It’s crazy really, how many times I’ve been lucky like this, but it wasn’t from lack of trying. We worked our butts off in that business. And so, yeah, there’s this opportunity…. I mean we had what he needed. So we got it leased to him for probably more than it was worth because I recognized the fact that he had a need that he was doing great too, he was a Honda dealer and he was flying high and they were building a brand new building, which was not going to be finished for like five years, cause it had to go through the permit process and all that stuff. So, he leases this property from us while he was building his own property. Then I think I remember I actually purchased the property while it was, while I was leasing it to him. So, I didn’t own it when I originally…

Joe: So, then you sold it to him also as well then later?

Rob: No, I sold to someone else. He moved out of there and into his new facilities. And so, then we sold that property to a local tool rental company that has a number of locations. Giant tool company came there. This became their headquarters.

Joe: So, you, you made almost a million-dollar profit when you sold that.

Rob: If you don’t count the tax man.

Joe: That silly tax guy. But you did a 10/31 exchange.

Rob: That’s right. Yeah. Yeah. And that, that turned out to be a great deal for us as well. They found a fourplex down in Monterey two, three blocks up the hill from the Monterey Bay Aquarium so it has absolutely gorgeous ocean view. Very nice piece of property. It’s like 4,500 square feet. The property had a… At the top floor apartment, it’s 2,400 square feet. That’s a really, really nice piece of property.

Joe: Do you still own that?

Rob: I do.

Joe: Nice. Good for you. And so, what year did you buy that property?

Rob: Hmm, let’s see. I think it was 2015. So just a few years ago.

Joe: Very nice. Yeah. You bought it for $1.15 million. Good. Was it, um, did you need some improvements? Was that a good deal?

Rob: It did. It was undervalued. I mean, the fact is that it was built by a local businessman as a fourplex, but he really used that as sort of a family compound. I mean, dad lived up there, his son and the daughter lived in two apartments downstairs and they converted, the son converted two of apartments into one apartment, which was a huge mistake in terms of value. He took out a bathroom, removed the kitchen and all the things that you’d never want to do. And he did it all without permits, which was great. So, when I came in, I went to the County, I got the plans, I looked, I said, Whoa, what’s going on here? This isn’t good. It was advertised as a triplex. I said, this isn’t a triplex, it’s a fourplex. What did he do here? Once I realized what had been done, well, it was priced as a triplex too, so yeah, I bought it, put it back just the way it was on the plans. So, the county city couldn’t say anything to me about permits or anything else because you don’t need a permit to do something that’s theoretically already been done. Yeah. So, I put it back to the way it was. And a fourplex

Joe: Good for you. And you still own that? So, it’s still giving you good cash flow?

New Speaker: Yeah, I do. That one’s my retirement.

Joe: Nice. Now you’ve done a third lease option and you sub leased it to a third party who subsequently also purchased it. And you say here you netted you about $150,000. What was that deal?

Rob: That was a friend of mine actually who needed a house. He had nine kids, has nine kids, and he needed as many bedrooms as he could find. He worked for me at the time and he couldn’t find, he couldn’t even find one to rent. So, I started poking around and found one in a town called Los Gatos, which is a kind of a she-she suburb of San Francisco, San Jose in that area. It’s mountainous in a very, very nice area. And this fellow had owned the property for many years, decades, I think. And he was one of the, you know, kind of a do it yourself sort of a guy who had been remodeling and revamping the project for decades I think and never finished it. A lot of stuff going on, but nothing done. And I saw it and I thought, well maybe this’ll work and grabbed my friend to go out and look at it. It was big enough and one of the very few five-bedroom homes we found. But he didn’t, he knew nothing about construction, didn’t want to take on a project like that and just wasn’t sure about the money that it was just going to be too much money and you know, and all kinds of reasons why he didn’t want to pull the trigger. And I said, well I will.

Rob: And I said, we’ll figure out the terms now that you think you can live with. And then, you know, that’s what I’ll keep in mind as I’m making the place ready. Well they moved in before it was done. I mean, they did a lot of construction while they were living there without… Well, that was the only part that really wasn’t that much fun for either of us, but we did eventually get through it. At that point in time he was very happy to just exercise his option on the property at the price that we talked about. Turned out to be a nice profit for me and you know, it was a worthwhile project. That was… There’s, I see there’s not a lot, but there’s, yeah, as you well know, there are properties out there. It’s weird. They all have a little bit different story, but yes, if you look and if you just don’t take no for an answer, you’ll get one.

Joe: Oh, that’s good. Great advice because you can always just say, listen, is there any way we could make this work? And sometimes you get, you get a no, but the worst thing you can do is just walk away and never follow up.

Rob: Yeah. I guess the one piece of advice I’d give to anybody is it’s like a Nike slogan… do it… Just do it, do something, whatever it is, just do it, you know, don’t sit on the edge of the seat around the fence. No, you can’t win that way. You can lose for sure, but you can win. Like trying to win the lottery without buying a ticket.

Joe: Well Rob, I sure appreciate you taking the time. Let me ask you one more question. What are you doing these days? Are you still looking for deals, looking for places to invest?

Rob: I am. Yeah. I’m not, you know, I don’t do it full time. I’ve never really had that much love for money. I just wanted to get enough money I didn’t have to work anymore. So now I take care of the properties because I like doing that kind of work. So, I do maintenance and that sort of thing. I don’t like the maintenance much. But I like the remodeling and that sort of thing. So, I’m always looking and I’m not, I’m not looking to make a killing or looking to build my retirement portfolio, but I liked them because I like to find a diamond in the rough and shine it.

Joe: Nice. And you live in a beautiful area of the country, so I can’t imagine you’d ever be bored out there.

Rob: No, no, no. I’m not bored. I just finished a canoe and before that I built a tree house. Yeah, I like to stay busy.

Joe: Well, if you go to Nepenthe anytime soon, have a nice glass of wine for me. Okay?

Rob: I sure will. Yeah, I should go down there. Almost anywhere along that coast between Monterey or between Santa Cruz and Santa Barbara is just stunningly beautiful.

Joe: Well Rob, if somebody wants to get ahold of you, are you on social media, Facebook or anything like that?

Rob: I’m on LinkedIn.

Joe: Okay. So, they can look you up on LinkedIn, Rob Gaither.

Rob: And my personal email is fine too. And for whatever reason… I’m not shy.

Joe: I see a couple of, okay. I’m sorry. Say it again, Rob.

Rob: It’s RobGaither@gmail.com.

Joe: Cool. I’m looking at LinkedIn here and there’s a couple of different, Rob Gaithers… One is a senior marketing manager. Is that you?

Rob: Nope. I’m the guy who was the president of the national vehicle certification program in DCP.

Joe: Okay. So, then you’re also, there’s also here a project manager for DPR construction.

Rob: There’s a few guys with my name. I’m like renting it to them.

Joe: All right, well, good. Thank you again, Rob, for your time. Really appreciate it and have a have a beautiful day there. And maybe next year the Cubs can maybe make it into a first spot.

Rob: I hope so. You know, for all those Cubs fans. But personally, I gave up being a sports fan of any kind of thing… Living in Chicago and we had, well, you know, the Bears, the Cubs, you name it, the perennial losers. They have great years for a while, but then you just hit the bar. Can’t take it. Rollercoaster.

Joe: All right. Thank you, sir. Have a good one. Bye. Bye.