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Show Summary
In this conversation, Paul Novak shares his insights on real estate investing in Sheboygan Falls, Wisconsin. He discusses the local manufacturing industry’s impact on the rental market, his acquisition strategies, and the balance between cash flow and property appreciation. Paul emphasizes the importance of tenant management and retention, as well as his future plans to reduce debt while maintaining a successful investment portfolio.
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Investor Fuel Show Transcript:
Paul Novak (00:00)
Yeah, yeah, do not do that. So we, we’ve been lucky, we found that out the hard way with the first tenant that we ever placed. We, to make a long story short, there were red flags on the front side, we ended up getting lucky four months in, we were able to move on, they were able to move out, we had limited damage, excess cleaning to do. But I think since then, like, that’s one of the core things that we do.Dylan Silver (01:58)
Hey, folks, welcome back to the show. Today’s guest, Paul Novak, is an investor in Sheboygan Falls, Wisconsin. He’s very active in the BiggerPockets community. You can find him in the BiggerPockets forums. Paul, thanks for taking the time today.Paul Novak (02:14)
Yeah, I’m excited to be on the show.Dylan Silver (02:16)
When we talk about single family investing, think I’ve spoken with investors really throughout so much of the country, but I was mentioning to you before hopping on here, Wisconsin, I know very little about, shame on me. Is there a big investor community out there where you’re at?Paul Novak (02:32)
Yeah, I kind of got lucky. ⁓ Very good for investing ⁓ in residential real estate. We’ve got a big manufacturing presence here in Sheboygan. So one of the things I was lucky that I was born and raised here, right? So it helps when you’ve got a good market right in your backyard. But with all the manufacturing and we’ve got a lot of just private industry as well. Right? So private ownership, people that have grown up in the areas, businesses that have been around for a lot of years.So it makes the job market really strong. Probably the biggest employer that we have in the area is Kohler Company, which is a huge company. So all of that helps keep jobs and wage growth growing in this area, which really helps support the rental market.
Dylan Silver (03:17)
Now, when we talk about you mentioned, you know, was it manufacturing that came in was manufacturing big manufacturing. When we talk about that type of influence on rentals on investment in the area, this can be like the driver for real estate in a market like that. Are you and do people out there are they constantly tracking like, hey, what’s the conditions of manufacturing?Paul Novak (03:24)
Yeah.Dylan Silver (03:45)
Like, hey, if that goes or if they go somewhere else, then this is going to completely change the demographic of where we’re at.Paul Novak (03:51)
Yeah, good question. So I do kind of keep a pulse on the job market. And I think it also comes with what I do within my W2 job. But I mean, we, we continue to expand. one of the big things that’s actually come to Sheboygan, it just got announced is we’re getting like an Amazon distribution center here. So that’ll be again, more jobs, more influx into the area. So what I like is, like I said too, about all the private industry, right? We’ve got companies thatDylan Silver (04:10)
wow.Paul Novak (04:21)
They grew up in this area. This is where they want to stay family owned privately held businesses. So I think, you know, I even look for the company that I work at. We’re not always, you know, being a publicly traded company where you’ve got to chase profits, you know, maybe a little bit more short-term thinking to try and keep shareholders happy. We can take kind of more long-term strategic approaches, which I think just makes that job market less volatile and a little bit more safe.Dylan Silver (04:50)
Now, when we talk about acquisitions, and we were talking before the show, you’ve bought some duplexes, you’re involved in single family. There’s so many ways for folks to get into single family home investing, but when you’re in maybe a smaller market like where you’re at, is there one preferred strategy that you have, whether it’s off market, on market, foreclosures, your sphere of influence, what’s your primary acquisition strategy?Paul Novak (06:03)
Yeah, so for us, our strategy has been relatively boring, right? I don’t have a bunch of sexy strategies for how we’ve got in or got a ton of off market deals. I will say our first two properties came off market, not necessarily that we were looking that way, but it just worked out that way. What I think is really important is to understand kind of who you are, what your strengths are, and then play to those strengths. So, you know, what works for us might not work for somebody else. I’ve gotother friends that we’ve kind of made in the area that are doing things completely different than what we’re doing, still going after single family properties and being really successful. I think my wife and I are lucky to have a really high savings rate, have fairly solid careers that we’ve grown and a decent amount of money. So we’ve been able to kind of go into some of these properties as a long-term play and putting down, you know,
25, 30, 35, 40 % into these properties, especially as the interest rates have gone up, just to make sure that we still have cashflow left in the business to kind of protect us long-term. Now, if you’re somebody that’s just starting out, right, you don’t have that type of capital to put down. You might have to go after maybe properties that aren’t in as good of shape or, you know, try to find different deals to be able to get into the market. And I don’t think…
Dylan Silver (07:11)
Yeah, I am.Paul Novak (07:25)
One way is right over the other. think it’s just really important to understand kind of who you are and what you can bring to the table.Dylan Silver (07:32)
Now, when you’re making these acquisitions and you’re purchasing these properties, how much of a factor is appreciation playing out there? Because I’m a Texas licensed realtor, so there’s some areas which seem to be very much speculative, like, for instance, Austin, Texas. But then you have areas of the country where it’s ⁓ slow growth, but that’s maybe the preferred way because you’re not dealing with so much volatility. I’ve heard like the Carolinas are great for that. How much does appreciation come?come into play when you’re looking at underwriting deals.
Paul Novak (08:06)
Yeah, I think that it’s probably the biggest play for where we’re at right now. So I think going into it, right, we didn’t know, we didn’t know, we were just trying to find a property. And, you know, I think we got lucky kind of in our first two properties, when we got our third property and coming into this, it was all about cashflow. Like that’s what we were looking for. I think as you mature as an investor, you kind of understand what’s important and having a little bit of a balance of both is key.But I think, you know, our third property that we bought, really good property, not in the best location. So the appreciation isn’t as high there. And we’ve ran into some issues just from an investing standpoint that, you know, if anything goes wrong with a property, while it stinks to shell out the cash, I can fix it. I’m in control. When you start running into issues with the neighbors or the neighborhood, there’s only so much you can do. So, you know, I think.
since kind of learning from that where that property hasn’t appreciated as much. We’ve kind of pivoted to buying nicer properties and nicer areas that yeah, our cashflow might be tighter, but I think long term we’re going to be better off and we get more stable tenants than in those areas.
Dylan Silver (09:18)
Now, there’s a lot of, you I would say interest in fix and flip and in short term rentals. But from my money’s worth, you know, year to year annual leases are really gonna be your bread and butter if you’re trying to build a stable, secure portfolio. And here’s why.Fix and flip over the past couple years has been very challenging in the market that I’m active in in Texas. You’re competing with new builds that can be $240,000, the bottom line on a HUD, and you can’t then flip a home for 240 or 230 if you’re competing with a brand new. And then in the short term space, you could have legislation that can change. But then also too, you’re kind of at the whim of your hosting platforms unless you build your own book of business and sphere outside of that.
What’s your perspective on folks who may be like getting in and trying to determine, do I go fix and flip? Do I go short term? I go long term, know, low and slow? Not boring, but something like that on the annual leases.
Paul Novak (10:55)
Yeah, you know, again, and you’re probably going to hear me use this term a lot, but I think it depends on where you are and what resources you have available to you. So we did buy our third. So I said that wrong before it was our fourth property that we had issues with our third property that we bought. We didn’t flip it, but we, well, we flipped it and rented it. We didn’t flip it and sell it. And I remember like when I go in, I tend to go all in.We closed on this house like June 6th, living in Wisconsin, summers are pretty precious. And I spent that entire summer, like eight hours a day after work, 12 to 16 hour days on the weekends, just getting that property ready to be rented out. I think we got done with it like late August. And my wife said, yeah, our kids are young. We’re not doing this again.
Right? So like we did it, we got it rented out. Hey, we got a good return on it. The appreciation has been really good, but just knowing our situation, two full-time careers with now nine and 13 year old, we don’t have that time, or at least we’re not prioritizing to stick all that time into renovating a property. So for us, because capital is our strong suit, we can buy properties that are more move-in ready, knowing the cashflow won’t be as good. The appreciation won’t be as good, but kind of like you said,
We’ve got stability. I think we’ve only turned over maybe two sets of tenants since doing this. Most of our tenants have stayed in the properties for multiple years. That works for us, right? If I was younger and we didn’t have the kids, I’d definitely be looking at finding the worst house on the best block in a B-class neighborhood. And I, just because of my background, I can do the electrical, I can do the plumbing. You know, I would definitely look to take those gambles.
I think it depends on where you are in life and how much capital you have. So I think, you know, I don’t necessarily think it’s going to be a one strategy fits all. If you’ve got more time, definitely by all means leverage that you’re going to make more money in the long run by doing these flips. But I think, you know, if you don’t have that, there’s nothing wrong with saying, Hey, I need to spend a little more on the property, put more down and then, you know, have a successful business doing that. You might not see these great returns.
But don’t let that be a mindset limiter to say, well, because I can’t do what all these strategies are saying online, I guess I can’t get in. No, there’s just different ways to get in.
Dylan Silver (13:27)
Now, when we talk about, you know, what suits, you know, the area and the person, I hear this a lot, but I think it gets understated, which is, you’ve got to fit what you got to find what works for you. I’ve heard from a ⁓ relatively successful Airbnb host who was a guest of the show, multiple properties, not just in one area, but in several. And these were coastal locations. And what struck me was the ability to be a like host.has to be something that you are comfortable with if you’re doing Airbnb. Now yeah, you could hire out property management and maybe they do a great job of that, but if you’re gonna be self-managing, you’ve got to enjoy really being a host. And if you’re gonna be doing fixing and flipping, you’ve got to enjoy managing crews. Because if that seems like a headache and if it’s just a numbers play for you and you’re like, okay, look in this, what’s gonna be the highest bottom line number, you might end up.
giving yourself a headache and maybe even another job that you don’t like.
Paul Novak (14:30)
Yeah, I don’t know. I definitely agree with that. think for us, mean, capital is one of our strengths. think the other strength is, you know, I’ve had a career working in, you know, leadership in corporate America, dealing with people, dealing with tough conversations, hiring and firing, managing KPIs, building work instructions and systems and processes. And I think the numbers, I mean, I can’t understate that, right? That is a big part of what you do with rentals, butAnd another huge part is like relationship management with people, right? Like if you didn’t want to have tough conversations or if you’re not willing to go in and you know, I think long-term rentals, you have the exact same thing you’re talking about on the Airbnb side. The Airbnb side just never goes away, right? Every week you’re getting a new set of tenants and a new, you know, person that you’ve got to give a good experience to. I think with the long-term rentals,
Dylan Silver (15:05)
Yeah.Paul Novak (16:08)
I might be interacting with the tenants once every couple of months, but you still gotta make sure you have a good experience. But I think if you do that right, you can set yourself up from a lot of other people to give yourself a competitive advantage, which helps with your rents.Dylan Silver (16:25)
Now, when we talk about tenants, you have a good track record. You mentioned, you know, tenants have been there for years. This gets understated as well, because if you pick the wrong tenant right off the bat, that’s going to put you in kind of a precarious spot. And this is now more important than ever, because tenants now have so many options. There’s more. I can’t speak for Wisconsin, but in so many places in Texas specifically, there’s more multifamily housing than like ever. And then also, too, you have homes that have been sittingyou know, single family homes on the market. So the sellers are now renting them out. people are having to make like concessions to renters, hey, we’ll give you the first month free, hey, we’ll give you the first month free plus a, you know, $200 Amazon gift card or something like this. And so when there’s all this happening, and when tenants maybe have the leg up in this this scenario, people might just say, hey, we’ll take someone who’s got, you know, the ability to pay us.
but then what happens when they don’t, right?
Paul Novak (17:24)
Yeah, yeah, do not do that. So we, we’ve been lucky, we found that out the hard way with the first tenant that we ever placed. We, to make a long story short, there were red flags on the front side, we ended up getting lucky four months in, we were able to move on, they were able to move out, we had limited damage, excess cleaning to do. But I think since then, like, that’s one of the core things that we do.And it’s more my wife than anybody. But she’s got
a very rigorous policy and process for how we vet tenants. And I think then to the other point that you made too, how you treat people is important, right? So we try to look at, you know, ways the traditional rentals are set up and then what could we do maybe a little bit differently to set ourselves apart. So, you know, even right out of the gates, we do not do year leases. We only do month to month right from the beginning.
And we tell our tenants, hey, if you find out this place isn’t a good fit, like you’re not locked in and boxed into staying here because we don’t want somebody to stay that doesn’t want to be here. And on the flip side, we’re not just looking for a tenant. We’re looking for a partner that’s going to take care of the property the way we would. If you’re not a good fit for us, we’re moving on. But we do lock in our rent prices for a minimum of two years. So we say as a sign of good faith, we don’t want people to leave, right?
We want to give people security. This is what the rent will be for a minimum of two years. So it’s little things that we do differently. We do similar to what you said, right? We do gift cards at the holidays, right? It’s like a thank you gift to the tenants. We do welcome baskets for new tenants. We do, you know, if something breaks, especially if a tenant’s been with us for more than a year, I’ve done now with multiple tenants, I’ll say, hey, the fridge broke, go to the store and pick out the fridge that you want.
Dylan Silver (19:02)
youPaul Novak (19:17)
Right? Instead of me trying to find, one on Craigslist that fell off the back of a truck and it’s all dented, but it works. Right? Like it’s those little things of making people feel valued and like the property is also partially theirs and they’ve got a part in it that allows people to stay. And I think, you know, people that have done this for a while know how painful vacancy and having bad tenants can be. So what if I spend an extra couple hundred dollars on an appliance, but then I get somebody to stay for, you know, three, four years.That’s well worth it versus, you know, what the alternative could be if I try and nickel and dime every repair, not take care of stuff.
Dylan Silver (19:54)
I mean, look, if you have bad tenants, that’ll make you a tired landlord faster than anything else. And that’s, course, a huge acquisition strategy for people is just looking for tired landlords and hey, they didn’t have the money to rehab the property because the tenant that you know, over $10,000 worth of damage with cats, dogs, whatever, what have you, you know, just the interior of the home can get destroyed, right? ⁓ When I mean so much right, a bad tenant can really justPaul Novak (20:00)
Yeah.Dylan Silver (20:20)
drive value down. We are coming up on time here though, Paul. Any new projects that you’re working on or anything you want to get out to our audience here today.Paul Novak (20:29)
Yeah, I think.This is again, this isn’t exciting, but this is something that I’m mentally working through. We’ve built ourselves up to a spot where if we paid off our entire portfolio, we’d be good. We could retire. We’d have enough cashflow. And I can’t begin to describe, I think for people that are out there that our investors will understand it. My wife definitely does not, but I’m trying to peel back and start taking debt off the table.
And we’ve been working, you know, we borrowed from HELOCs or 401k loans or things for down payments on these properties. And we’re getting to a spot where we’re back to zero. And it’s not as thrilling to pay off debt is what it is to go out and get the next deal and acquire the next property. So for me, I guess, which, like I said, isn’t exciting, but it’s just, it’s crazy how difficult it’s been for me to kind of throttle back all that energy and channel it towards.
kind of taking some debt off the table. And I don’t think that I’m done investing forever, right? We’ll be out and we’ll be getting different properties in the future, but just at least with the state of where things are right now, that’s kind of the moves that we’re making short term.
Dylan Silver (21:42)
Well, congratulations on that. mean, owning property debt free is a huge, huge accomplishment, right? Because that’s typically real estate investors are probably the most pro debt people that you’ll find to talk about good debt, right? So finding someone who’s like, Hey, you know what, I’ve got a bunch of real estate and no debt. That’s a huge accomplishment. But Paul, thank you so much for taking the time today. Thanks. Thanks for coming on the show.
